Annual Retirement Spending Figure

[bsmith9788]

Hi,

We have a 39 year old client who spends $90,000/year net currently. He plans to retire at age 60. We have input 3% inflation in the summary view page and when we project the age 60 retirement I believe it factors in inflation and would inflate his expenses at 3% a year. He thinks we should do a future value calculation to take 90k for 21 yrs at 3% inflation and use the future value number of $167,426 for his annual expenses as he believes that will be the purchasing power of $90,000 today. I don't want to duplicate inflation on his living expenses. Could you please advise which dollar figure we should use?

Also, he asked about return. If we use the number of 10% annual return - is that gross or net return. Would it be 10% gross then the plan would subtract 3% for inflation and his portfolio would be growing at a net of 7% a year if those numbers were hit?

Thanks so much

Brent

[jimr]

Brent,

Your understanding of how the planner handles inflation is correct. In this example, $90k would be the appropriate value to use.

One thing that may cause confusion is that all amounts shown in the detailed view tab are displayed in present value (2020) dollars. That's why they don't show the inflation adjustment.

A simple way to demonstrate this is to set up the annual retirement expenses in additional inputs using the "NO Cola" option, instead of track inflation (the default). With this approach, you'll see the annual spending amount in the detailed view tab decreasing each year, reflecting its declining real (inflation adjusted) value.

Finally, the portfolio return that the planner uses is a nominal return. The real rate of return (after inflation) will be roughly the return you enter minus the inflation rate.

Jim