Planned Expenses Not Adjusted for Inflation

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dantorm
Posts: 2
Joined: Sun Apr 06, 2014 10:59 pm

Planned Expenses Not Adjusted for Inflation

Post by dantorm »

Hi, I am using the downloaded Flexible Retirement Planner. When I set Planned Expenses in the Additional Inputs window section "Specify additional Cash Flows such as Retirement Savings, Retirement Income, and Expenses", and set the amount to "Track Inflation", the results in the Planned Expenses shows a constant value. I saw in the FAQ that spending should be adjusted for inflation, but I'm not seeing the future value in the Planned Expenses column. Is there another way to set this? Thanks.
jimr
Posts: 711
Joined: Thu Feb 28, 2008 6:48 pm

Re: Planned Expenses Not Adjusted for Inflation

Post by jimr »

This is confusing for many users, so I appreciate that you took the time to post your question here.

All of the planner's results are shown in today's value dollars and that's why you don't see the amount increasing as the years go by. The real or inflation adjusted value of the expense stays constant over the years as it exactly keeps up with inflation.

A good way to understand this is to temporarily make the expense item a 'no cola' expense. After you run the planner and view the year-by-year results, you'll notice that each year the amount will decrease by the inflation rate.

This is because the no-cola cash flow doesn't keep up with inflation and loses some real purchasing power each year.

Please don't hesitate to follow up if this is still confusing or if you have questions about another part of the planner.

Jim
oiler_no11
Posts: 1
Joined: Wed May 07, 2014 9:31 am

Re: Planned Expenses Not Adjusted for Inflation

Post by oiler_no11 »

This was confusing to me, so thanks for clarifying.

But I do have a follow-on question. If I specify an annual expense that starts 10 years from now, will it start at the exact dollar amount I specify on that date, or will the starting amount be adjusted for inflation given the fact that it doesn't start today?

As a comment, it would be nice to be able to click a box to display the adjusted for inflation values in the detailed view - as it would provide a way to visualize the answers to some of these types of questions (and to see the real impact of inflation).

Thanks for a great app.
jimr
Posts: 711
Joined: Thu Feb 28, 2008 6:48 pm

Re: Planned Expenses Not Adjusted for Inflation

Post by jimr »

No-cola cash flows that start in the future maintain their purchasing power until they start. That's also true with cash flows with fixed colas. I may add an option in additional inputs to control this behavior because some times you want it to work one way and other times you don't.

If you want the cash flow to start losing purchasing power right away, you have to pre-calculate the reduced value and enter that into additional inputs. The easiest way to do this is with excel, although there are online calculators that can do this also.

As an example, if your plan has a fixed $20,000 pension cash flow that starts in 15 years and there's a 3% inflation rate, the manual reduction in purchasing power can be computed in Excel using the formula =FV(-0.03, 15, 0, -20000). The formula result is $12,665 and this would be the amount of the cash flow to enter. In this case, the $20,000 pension payment will lose purchasing power and only be worth $12,665 when it starts in 15 years. From there on, the planner will deduct 3% in purchasing power from the cash flow each year.
dantorm
Posts: 2
Joined: Sun Apr 06, 2014 10:59 pm

Re: Planned Expenses Not Adjusted for Inflation

Post by dantorm »

Sorry it took me a while to get back to this. Thanks Jim for both of your answers and thanks oiler for the additional question, all of these helped me with my project.

Dan
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