Is investment growth one year premature?

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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GDK
Posts: 12
Joined: Wed Jun 07, 2017 10:29 pm

Is investment growth one year premature?

Post by GDK » Fri Jun 09, 2017 12:54 am

First -- thanks for developing this tool! Truly a great tool and I've used lots of them.

Question: I've noticed in the detailed output the in the first year of my plan, that the investment growth is advanced by a year already. I expected that would be year zero of the plan, and that my inputs in the input fields for investment values would simply be echoed back for the first year of the detailed output.

Only one year's premature growth can increase probability of success substantially and give a person the idea that they are better prepared financially than they are. But let me know if my conclusion is wrong -- perhaps I'm simply confused by the data I'm seeing.

Example: plan start age is 60. Retirement age is 61. Life expectancy is 92. Growth input is 5%. After entering $1,000,000 for total investments as of birthday at age 60, the detailed output shows $1,000,000 + 5% growth at age 60 -- not just $1,000,000. Seems like the tool has initialized on the value of investments at age 61, not 60. Should I then presume that the computed probability of success is for age 93, not 92?

I have used the additional inputs page to force growth in the first plan year (e.g. 60) to 0% to avoid what I see as an issue. But am I just misunderstanding what the tool is doing?

Thank you and again than you for building this tool!

Gene

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

Re: Is investment growth one year premature?

Post by jimr » Fri Jun 09, 2017 7:06 am

Conceptually, the planner assumes that the plan starts on your birthday, and that day is also the first day of the plan year. So if you say you're 60, the planner thinks you just turned 60 today. The first full year of the plan will be the year when you're 60. At the end of the first year (your age 60 year), the planner will add in a full year of portfolio returns. Then, at the start of the next year, you'll be 61 and the planner will consider you retired for the year. That means on the first day of the year it'll deduct your expenses for the year and on the last day of the year it'll calculate portfolio growth for the year.

If you'd like to be a get more precise than that, especially in your case where you're retiring soon, you could project everything ahead to your 61st birthday and start your plan from there.

GDK
Posts: 12
Joined: Wed Jun 07, 2017 10:29 pm

Re: Is investment growth one year premature?

Post by GDK » Fri Jun 09, 2017 10:59 am

Thank you for the response! Does that mean that the probability of success that is computed is based on the last day of life expectancy (92), which to me is effectively 93?

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

Re: Is investment growth one year premature?

Post by jimr » Fri Jun 09, 2017 11:12 am

Basically yes. In this case, the planner assumes that you die the day before your 93rd birthday.

So the day you turn 92, your expenses for that year are deducted all at once from your portfolio. If you have enough, the plan succeeds, otherwise, it fails. Next, conceptually at the end of the year, your final portfolio balance is updated to give you credit for the portfolio growth that happens during your last year of life. That balance is reported as your ending portfolio balance.

GDK
Posts: 12
Joined: Wed Jun 07, 2017 10:29 pm

Re: Is investment growth one year premature?

Post by GDK » Fri Jun 09, 2017 11:40 am

Got it, thank you!

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