future dollars?

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albireo13
Posts: 2
Joined: Wed Jan 10, 2018 10:37 pm

future dollars?

Post by albireo13 »

New user here but, I'm getting the hang of it I think.
Anyway, for yearly results ... are they in terms of future dollars? .. or are they in terms of today's dollars?

If they are in today's dollars, I would have to correct them by they inflation rate, correct?



Thx.

jimr
Posts: 634
Joined: Thu Feb 28, 2008 6:48 pm

Re: future dollars?

Post by jimr »

The short answer is that all values are shown in today's dollars AND are corrected for inflation.

Values shown for future years are shown based on the value of a dollar today.

So an amount that exactly tracks inflation will stay constant from year to year.
An amount that grows at a rate greater than inflation will increase from year to year
An amount that grows at a rate less than inflation will decrease from year to year.

One good way to understand this is to create some experimental cash flows in additional inputs that use the "No Cola" option and the "Track Inflation" option and look at the results in the detailed view.

For example, as a test you could start a new plan to reset the inputs to their defaults and set the taxable portfolio value to $500,000. Next, go to the bottom table in additional inputs and create an "Other income" cash flow of $20,000 with the track inflation cola type. Run the planner and go to the detailed view. You'll see that the income remains the same from year to year which reflects that it's exactly tracking inflation. Next, edit the additional inputs entry you just created to set the cola type to "no cola" and run the planner again. Now you'll see that the income amount decreases in the detailed view from year to year. This shows the impact of inflation on the income amount (in terms of a decreasing "today's dollar value" purchasing power).

gg80108
Posts: 9
Joined: Sat Oct 18, 2014 3:07 pm

Re: future dollars conversion

Post by gg80108 »

How do I convert the values back to future inflated dollars? I want to reconcile some numbers from some outside calcs, but they are in future inflated dollars.

jimr
Posts: 634
Joined: Thu Feb 28, 2008 6:48 pm

Re: future dollars?

Post by jimr »

One easy way to do the conversions is to use excel's FV() function.

As an example, to convert $100,000 in today's value dollars that you expect receive 30 years in the future, assuming 3% inflation, you'd use =FV(0.03, 30,0,-100000) in excel, which yields the result $242,726.

So that means to match $100,000 worth of today's purchasing power in 30 years, with 3% annual inflation, you'll need a nominal dollar amount of around $243k.

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