should annual retirement spending increase due to inflation?

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frp user
Posts: 65
Joined: Fri Feb 29, 2008 12:55 pm

should annual retirement spending increase due to inflation?

Post by frp user »

I have a question regarding your website.

http://www.flexibleretirementplanner.com

Shouldn’t the annual retirement spending, shown on the detailed view, grow with inflation? (rather than stay a constant value)

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admin
Site Admin
Posts: 79
Joined: Thu Feb 28, 2008 5:27 pm

Re: should annual retirement spending increase due to inflation?

Post by admin »

Thanks for writing about the planner. The quick answer to your question is that it should grow, and in fact it does. Let me explain....

Basically, all dollar amounts displayed in the planner are shown in "today's value" dollars no matter which year they occur. Internally, inflation is certainly taken into account, but for display purposes, all dollar amounts are normalized and shown in today's value dollars. The result of this normalization process is that the expenses look like they stay flat. Rest assured that the planner is taking inflation into account, and as proof, try increasing or reducing the inflation rate in the planner and watch what it does to your plan's probability of success.

Without normalizing amounts back into today's dollars, it's really hard to tell what a dollar amount really means. For example, if the planner reported and unadjusted ending portfolio value of $3,000,000, you'd have no way to tell how good that was in terms of how much you'll be able to buy with it in the future. On the other hand, by normalizing the amount and reporting that your ending portfolio balance could be worth $1,200,000 in today's dollars, you can get a better idea of how big (or little) of a windfall your heirs might get at the end of your plan.

jack

Re: should annual retirement spending increase due to inflation?

Post by jack »

Any thought, though, of including the "inflated" dollar numbers in some tab? I'm thinking about the detailed report for example. I fully understand the reason for using the adjusted numbers, for all the reasons you mention. But, in terms of making sure that I am keeping consistent on my accumulation side, it might be nice to see the inflation adjusted number of my contributions rather than just the present day number. (I'm nowhere near the retirement stage, but obviously a similar line of thought could be made about some value in seeing the annual inflation adjusted numbers for the distributions)

Great program, by the way, it is absolutely the best free-tool I've come across on the web.

jimr
Posts: 614
Joined: Thu Feb 28, 2008 6:48 pm

Re: should annual retirement spending increase due to inflation?

Post by jimr »

Jack,

Thanks for the kind words about the planner.

Your idea to include an option to show the inflated values is a good one. If I had included that, I probably would have gotten a lot less questions about whether I inflate the withdrawals automatically.

Now I just need to figure out a reasonable way to do show it :)

Thanks again for posting,

Jim

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