basic calculation question

A retirement planning tool is only as good as its assumptions and inputs. Share your thoughts or ask questions about the internals of the simulation, built in planner assumptions, or planner inputs.
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beach58
Posts: 7
Joined: Fri Feb 20, 2015 6:53 pm

basic calculation question

Post by beach58 » Fri Feb 20, 2015 7:30 pm

Thank you for providing such a flexible tool. I experimented with a number of scenarios to get a feel for the output and am now back to basics to make sure I understand how the planner works. My approach was to start simple and add complexity/variables one at a time to see the effects.

Unfortunately, I am stuck at square one and do not understand the output. I have read the documentation as well as this forum, but am obviously misinterpreting something and could use your help.

I tried to create something I could easily duplicate with a hand calculation. Below are the inputs I used:
Investing style is set to custom with a 10% return and a standard deviation of 0. Inflation is set to 0 as well. My taxable portfolio is $1,000,000 with zero entered for all other other portfolios or income. Annual retirement spending is $50,000 and the investment tax rate is set at 15%. Income tax rate is 20%, but I do not believe it matters since retirement income is zero. (changing this parameter yielded no change, confirming my expectation).

Using the above inputs yields a portfolio value at retirement of $1,030,750.

What I expected to see was $1,035,000. i.e. the result of $1,000,000 + 10% return ($1,100,000), less the 15% investment tax on the 10% of growth ($15,000), less $50,000 of annual retirement spending, giving a final total of $1,035,000.

What am I missing? I tried a number of variations on he above, but try as I may, cannot come up with $1,030,750 as a result.

Thanks for any and all help.

beach58
Posts: 7
Joined: Fri Feb 20, 2015 6:53 pm

Re: basic calculation question

Post by beach58 » Fri Feb 20, 2015 8:00 pm

I neglected to mention that the spending policy was set to "stable".

I tried setting retirement spending to zero, and the portfolio value at retirement then shows $1,085,000, which is what I expected. Guess that narrows my question down to how the $50,000 annual retirement spending is handled. If I "tax" my $50,000 withdrawal at 8.5%, I can make my result match the FRP number, but feel that now I'm just forcing things. Hoping someone can set me straight.

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: basic calculation question

Post by jimr » Fri Feb 20, 2015 8:25 pm

My off the cuff guess is that what you're seeing is because the model processes withdrawals first (logically at the beginning of the year), then portfolio growth after that (logically at the end of the year).

Some quick calcs show 10% of $950,000 is $95k. 15% taxes on $95k is $14,250, which leaves $80,750 for portfolio growth. Add that to the $950k and if I did the math right, you end up with $1,030,750.

beach58
Posts: 7
Joined: Fri Feb 20, 2015 6:53 pm

Re: basic calculation question

Post by beach58 » Fri Feb 20, 2015 9:08 pm

doh! That's embarrassing. I actually did that calculation, but went too quickly and did not catch a (now) obvious mistake.

Thanks so much for your help, and the wonderful tool. Will proceed more deliberately from this point forward.

hookster23
Posts: 3
Joined: Sat Jan 30, 2016 7:09 pm

Re: basic calculation question

Post by hookster23 » Sat Jan 30, 2016 9:38 pm

I too also love the program and am trying to figure out where the numbers come from using a simple example

My question is what is the discount rate that the program uses to calculate the Present Value for the ending value each year.

Using the example in this thread; $1,000,000 balance at retirement; a $50,000 / year spend (0% inflation;0% Standard Dev) and a 8.5% net investment income ( 0% Standard Deviation) simulates to an ending value after 20 years to $2,487,593. How was this Present Value (and all the years in between calculated)?

Thanks

Howard

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: basic calculation question

Post by jimr » Sat Jan 30, 2016 9:43 pm

The inflation rate is used to discount the value of all cash flows and portfolio values each year.

hookster23
Posts: 3
Joined: Sat Jan 30, 2016 7:09 pm

Re: basic calculation question

Post by hookster23 » Sat Jan 30, 2016 10:29 pm

Thank you!

But what inflation rate is used to calculate PV if inflation rate is entered as 0 and Std Dev = 0?

I am using the standalone version

Thanks
Howard

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: basic calculation question

Post by jimr » Sat Jan 30, 2016 11:56 pm

If inflation is 0 the discount rate is 0. In that case, a dollar in 10 years will be worth the same as a dollar today.

hookster23
Posts: 3
Joined: Sat Jan 30, 2016 7:09 pm

Re: basic calculation question

Post by hookster23 » Sun Jan 31, 2016 11:57 am

Thanks Jim. I got it working now.

Appreciate your help

Howard

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