Rate of Return on Portfolio Value

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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dsa787
Posts: 3
Joined: Sun Jul 21, 2019 11:33 am

Rate of Return on Portfolio Value

Post by dsa787 » Sun Jul 21, 2019 4:38 pm

Hi,

I started a brand new tax deferred investment with $25k invested annually, with 7% growth rate and 4% inflation.

I would expect that at the end of the second year the portfolio value is $52,272.50 however the detailed view amount at the end of year 2 is $50,775.

Same applies for all other years.

Also I have tax free investment that is also not showing the correct portfolio value meaning adjusted for the rate of return.

Could you please let me know what is the exact calc that is being used to derive the portfolio value for each taxable, tax-free, and tax deferred accounts?

Thanks,

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

Re: Rate of Return on Portfolio Value

Post by jimr » Sun Jul 21, 2019 4:50 pm

The values in the detailed view year-by-year table are shown in present-value dollars, as are all other planner outputs.

So instead of seeing 7% nominal growth, the year-to-year growth rate will show as only 3% (7%-4% for inflation) because it's taking into account the lost purchasing power due to inflation each year.

dsa787
Posts: 3
Joined: Sun Jul 21, 2019 11:33 am

Re: Rate of Return on Portfolio Value

Post by dsa787 » Mon Jul 22, 2019 8:41 am

The numbers don't add up. You can calculate it and see that there is a big discrepancy.

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

Re: Rate of Return on Portfolio Value

Post by jimr » Mon Jul 22, 2019 8:00 pm

Sorry, I skipped part of the explanation when you first asked your question. I explained half of what you're seeing, but I left out half.

What you're seeing has to do with how the simulation handles the timing of various cash flow types. Logically, expenses are deducted from the portfolio on the first day of the year and savings (portfolio additions) are added to the portfolio on the last day of the year.

That means that the contribution made at the end of the first year doesn't earn any return in that first year. The contribution made at the end of the second year also doesn't earn any return, but in the second year, the first year's contribution earns a 3% real return (25k * .03= $750). So at the end of the second year, the balance is $50,750 (25k + 25k + 750).

At the end of the third year the balance would be $50,570 + $25k + $1,522 ($50,750*.03) = $77,272

Hopefully that makes more sense.

Jim

dsa787
Posts: 3
Joined: Sun Jul 21, 2019 11:33 am

Re: Rate of Return on Portfolio Value

Post by dsa787 » Wed Jul 24, 2019 10:28 am

Thank you!

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