Future income Future Dollars

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JoeyD
Posts: 5
Joined: Sun Aug 19, 2018 2:42 pm

Future income Future Dollars

Post by JoeyD » Sun Aug 19, 2018 3:20 pm

Just getting into it with the Flexible Retirement Planner. Very impressed with it generally speaking. Love the flexibility of inputs, overrides, the heat map scenarios....

One thing that is tripping me up is that the results are displayed in present day dollars. As a feature request...I would suggest that you allow users to toggle between future (inflated) and current dollars when viewing results as I think it would give more clarity. It makes it easier to comprehend "these are the estimates of the actual dollars that are coming and going..."

Since that's not available can someone assist with how to account for a couple different types of retirement income:

1) Social Security, when I know the estimate for the future dollar payment.

For example...I have used the official SS PIA calculator to estimate what my SS payment would be if I start taking it at 70 years old...in 2041. This estimate is about $75,000. Again, that amount is in 2041 dollars using SS "low" estimates for inflation. So if I want to add this to my simulation via additional inputs...how would I do that? It seems like I would need a COLA type that is effectiely "NO COLA, THEN TRACK". But that's not available.

Do I need to estimate what the $75,000 is in today's dollars and use that for the income, and use the COLA type "Track inflation?"

2) For a pension where I know the future annual payments (no annual cola)
My wife will begin receiving approx $60,000 annually in a pension when she's 65 in 2030. That's in 2030 dollars. Again, it seems like I have to figure out that that is in "today's" dollars, and then select COLA option to be "Track then no COLA" ?

jimr
Posts: 544
Joined: Thu Feb 28, 2008 6:48 pm

Re: Future income Future Dollars

Post by jimr » Sun Aug 19, 2018 4:49 pm

I was under the impression that anypia benefit estimates, like ss benefit estimates that you can get in the mail, are shown in today's value dollars, not inflated future value dollars.

I didn't think there was a way to get the calculator to show your benefits estimate in future dollars, but perhaps I'm confused.

If you have a link to some documentation that discusses this, I'm eager to read it.

Thanks,

Jim

JoeyD
Posts: 5
Joined: Sun Aug 19, 2018 2:42 pm

Re: Future income Future Dollars

Post by JoeyD » Sun Aug 19, 2018 5:23 pm

Hi Jim,
Here's my understanding:
The annual SS statements (or the estimate you get when you log into your account on the SS web site) are indeed in today's dollars. They also make the following assumptions with their estimate:

1) You work until your "full" retirement age (for me this is 67)
2) You start to take benefits at your retirement age
3) Your earnings stay constant from now through retirement.

However, the ANYPIA calculator (stand alone calculator that you download from the SS web site and install) can be configured to project the benefits in future dollars. You can both estimate Wage increases and SS benefit increases...both of which impact future dollars. This is on the "Forms....Assumptions" menu. There are 3 standard ranges of increases you can select: Alternative I, II, or III. (I Highest range, II is medium, and III is low). These estimates are updated every year. You can select ranges for both Wage Increases and / or for COLA (Benefit) increases.

If you run ANYPIA with assumptions that wages and benefits are increasing, the results will be in future dollars based on the inflation assumptions.

If you run ANYPIA without increasing wages or benfits, then you are in effect getting the results in today's dollars.

So to use my (and my Wife's) estimated SS benefits with FRP (and so require today's dollars) I ran ANYPIA without selecting any increases, and just adjusted the last year of earnings based on when I expect we will actually quit our day jobs. This turned out slightly less than the official SS estimate, because we expect to stop working before full retirement age.

I hope that all makes sense. I'll be happy to discuss further!
Joe

jimr
Posts: 544
Joined: Thu Feb 28, 2008 6:48 pm

Re: Future income Future Dollars

Post by jimr » Sun Aug 19, 2018 6:12 pm

Got it. Thanks for the detailed explanation. It's been a while since I've used that tool so I just re-downloaded it and now I can see how that it works exactly as you described. Sorry for the confusion.

A good way to enter a cash flow amount that's in future dollars is to manually discount the amount back to the present using excel. The formula in excel (or google sheets), using a 3% inflation rate, would be something like
=PV(0.03,2041-2018,0,-75000)

If I entered it right, that yields a present value cash flow of around $38k.

JoeyD
Posts: 5
Joined: Sun Aug 19, 2018 2:42 pm

Re: Future income Future Dollars

Post by JoeyD » Sun Aug 19, 2018 6:48 pm

Thanks, Jim. Understood. I decided to use the AnyPIA calculator to just calculate the SS benefit with today's dollars and use that.

Last question...for now anyway. :)

My wife will have the option to take a lump sum instead of the "annuity" type pension. I'm assuming I'll be able to roll the lump sum into an IRA with no immediate tax consequences, so that it effectively becomes a one time "deposit" into a tax-deferred account.

Let's say the current estimate for the lump sum option is 900,000...in 2030 dollars.

So I will be entering this in the the additional inputs as tax deferred cash flow starting and ending the same year. I assume I need to discount that lump sum for today's dollars as well? (Approx $631K assuming 3%).

Edit: I would choose "Track Inflation" as the COLA type.

Is that correct?

jimr
Posts: 544
Joined: Thu Feb 28, 2008 6:48 pm

Re: Future income Future Dollars

Post by jimr » Sun Aug 19, 2018 7:45 pm

Yes, that sounds about right.

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