Annual Retirement Spending/Inflation

[bcorser]

If I input my retirement spending number in today's dollars, but my retirement age is not for 5 more years, should I not adjust today's number for inflation since the plan does not begin for 5 years? I realize that the planner takes this in to consideration and lowers the value of the expenses each year accordingly once the plan begins, but what about today's number in future value before the plan starts? What am I missing? Thanks very much.

[jimr]

The planner begins adjusting all amounts for inflation from the start of the plan, not from the start of retirement. So there's no need for any manual inflation adjustments.

[bcorser]

Thank you for your quick reply Jim.

[TomS]

The planner begins adjusting all amounts for inflation from the start of the plan, not from the start of retirement. So there's no need for any manual inflation adjustments.

How about for Social Security. For instance, in our plan we have my wife holding off claiming for another 12 years or so. When we check her SSA.gov estimate for age 70 we get a number like $4000/month. Presumably this amount takes into account COLA, so if she had the same earnings record but turned 70 this year, the monthly amount would be a good deal less than $4000 for her because there wouldn’t be 12 years of COLA on it.

So in FRP, if we put in the amount that we get from SSA, does FRP assume it’s in today’s dollars and inflate it?

[jimr]

As long as you enter the COLA type (in additional inputs) as track inflation, it will adjust the value for inflation between now and when it starts.

I'm not positive exactly what that SS estimate reflects in terms of inflation. My guess is that the $4000 amount represents today's value dollars and the amount eventually paid out in actual dollars will be higher to reflect the cumulative amount of inflation between now and when the payment starts.

As long as that's the case, you'd just need to enter $4000 (times 12) in additional inputs as a tracks inflation cash flow. FRP will take care of adjusting it for inflation between now and when the payment starts (and after it starts as well).

[TomS]

Thanks, Jim. I went back at read through my SSA statement and found the information on there confirming what you said - the projected amounts SSA provides are in today's dollars. So inflating them through to the year you claim is correct. However I think I may plug in a custom inflation amount for the SSA payments that is lower than the 3% I'm using for the overall rate.

Loving FRP, Jim. Thank you!

[TomS]

Regarding SSA payments and COLA, in the After Tax Income in the detailed view I see my SSA show up in the year I chose, and then eight years later it jumps up when my wife starts claiming. None of the values are showing any inflation/cola increase - they're just held constant throughout all the years. So mine shows up as $X in year 1 of claiming, and stays at $X until wife starts claiming. I would've expected to see the amounts change each year by the COLA amount. Or?

[jimr]

The amounts in the detailed view table are all shown in present value dollars (adjusted for inflation). That means that if an amount stays the same from year to year, it is exactly keeping up with inflation. If the amount decreases from year to year, it isn't keeping up with inflation and is losing purchasing power. If an amount increases from year to year in that table, it's growing faster than the inflation rate.