Using Planner to Present Results In Future Dollars Instead of Present Value Dollars

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Fortitude
Posts: 16
Joined: Sun Mar 28, 2021 8:53 pm

Using Planner to Present Results In Future Dollars Instead of Present Value Dollars

Post by Fortitude »

Hello Jim,

I'm in the middle of my annual year end financial plan review. You might recall that you and I communicated in a thread in April 2021 regarding the way the planner applies an inflation rate that's entered on the main screen in relation to inflation rates that are entered and applied as additional inputs. As a reminder, I had chosen not to enter an inflation rate on the main screen and only entered inflation rates for the additional inputs for income and expenses. No inflation rates are entered as additional inputs for each portion of the portfolio balance that would offset the growth rates that I've entered for each portion of the portfolio.

Your concern with this approach was that the portfolio growth was being overstated in the absence of applying any inflation to reflect the loss of purchasing power from inflation pursuant to the present value concept. However, in essence, isn't what I'm doing is using the planner to present results in future dollars rather than present dollars as I'm accustomed to when I'm evaluating financial/retirement plans? I know others have touched on this topic and I'm aware of your opinion on using present values as opposed to future values. I understand your position on the reliability of future values being highly dependent on the lack of predictability of inflation rates, but expressing the present value of results is equally as dependent on the same unpredictable rates. I certainly don't mean to imply that the present value concept doesn't have its place. However, in my experience, financial/retirement planning isn't one of them. I've always found that people generally find it much more intuitive to view retirement plan results in future value terms. Additionally, I've found present value to be most applicable when future cash flows need to be discounted to today’s' dollars when one has to make an immediate decision today when comparing investment/purchasing/leasing alternatives.

With that said, I believe I've sufficiently tested the planner by running simple simulations where I’ve used the planner to provide results in future values by using the above approach and then also used it to provide results in today’s dollars. I then used Excel’s FV function and applied it to the present value results provided by the planner and it tied to the planner’s future value results.

Therefore, it’s my belief that if one desires to use the planner to see results in future values, the inflation entry on the main screen should not be used. There’s one small caveat to this. Any of the additional inputs’ inflation choice (i.e. Track Inflation) that relies on the main screen’s inflation entry cannot be used since that value would be blank and therefore would apply a zero inflation rate. As with entering any data in the planner, careful attention must be given to selecting the appropriate inflation method in the drop down box in the additional inputs screen and entering the correct desired rate to ensure items are being inflated properly at the desired rate to arrive at accurate projections in future values.

I thought you'd like to be aware of this in case you already weren't. Previous posts seemed to imply that you weren't exactly certain if the planner would accurately present future value results using the above approach given all of its moving parts and complexities. My testing has given me the confidence that the planner allows the user to decide up front whether the results should be shown in present values or future values.

I’m interested in your thoughts on this.

Walt
jimr
Posts: 821
Joined: Thu Feb 28, 2008 6:48 pm

Re: Using Planner to Present Results In Future Dollars Instead of Present Value Dollars

Post by jimr »

Thanks for posting and yes, this makes sense to me.

My main concern with this sort of thing is that with all the moving parts it's easy to make a mistake along the way (as is the case with entering any other plan inputs).

Your idea to run it both ways and use Excel's FV/PV functions to verify you've captured all the nuances correctly seems like a great way to minimize the risk of mistakes from creeping in.
Fortitude
Posts: 16
Joined: Sun Mar 28, 2021 8:53 pm

Re: Using Planner to Present Results In Future Dollars Instead of Present Value Dollars

Post by Fortitude »

Thanks for your response. It’s a comfort to know that you also don’t see any problems using the planner in this manner to accurately project results in future dollars.

I also thought that this would be helpful to others that have expressed a desire to use the planner to project results in future dollars that there’s a way to easily do it without requiring a change to the planner’s underlying code.

Once again, thank you for such an amazing model. Over the years, I’ve tried more models than I can count and even developed my own and FRP is by far the best out there. I seriously doubt one would find one as thorough and well developed.

Happy holidays!
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