Additional Inputs: Are inputs Pv or FV?

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jmk
Posts: 3
Joined: Tue May 21, 2019 9:08 pm

Additional Inputs: Are inputs Pv or FV?

Post by jmk »

With regard to the Additional Inputs screen, bottom half: If I have an additional income (like pension, social security) or expense (like college cost) to enter starting 10 years at age 65, do I use the value for today's dollars or the value in future dollars at age 65?

jimr
Posts: 596
Joined: Thu Feb 28, 2008 6:48 pm

Re: Additional Inputs: Are inputs Pv or FV?

Post by jimr »

The answer depends on whether that future payment is indexed to inflation. If the payment includes a cost of living adjustment, it's probably best to use a "tracks inflation" cash flow and enter the amount in today's value dollars. With this approach, you'll notice that the cash flow amount will likely stay constant from year-to-year in the detailed view output. The is an indication that the income stream is exactly tracking inflation and its purchasing power is staying constant.

If the future payment isn't adjusted for inflation, it'd probably make the most sense to use today's value of the payment and select the "No COLA" cash flow type. In this case, the cash flow amount in the detailed view table will decrease from year-to-year, indicating its declining purchasing power due to inflation.

jmk
Posts: 3
Joined: Tue May 21, 2019 9:08 pm

Re: Additional Inputs: Are inputs Pv or FV?

Post by jmk »

jimr wrote:
Tue May 21, 2019 9:24 pm
The answer depends on whether that future payment is indexed to inflation. If the payment includes a cost of living adjustment, it's probably best to use a "tracks inflation" cash flow and enter the amount in today's value dollars. With this approach, you'll notice that the cash flow amount will likely stay constant from year-to-year in the detailed view output. The is an indication that the income stream is exactly tracking inflation and its purchasing power is staying constant.

If the future payment isn't adjusted for inflation, it'd probably make the most sense to use today's value of the payment and select the "No COLA" cash flow type. In this case, the cash flow amount in the detailed view table will decrease from year-to-year, indicating its declining purchasing power due to inflation.
The "tracks inflation"/ "No COLA" I have figured out; it's the very first figure ten years or so from now that I'm trying to get right. It's sounding like you're saying use the present value (today's dollars) when inputting future incomes and expenses. Yet when I tested a scenario with 0% tax it looked like future values should be used: I entered my pension of $12,800 to start in 7 years with no COLA, which is the future value I'll get. The after-tax income figure in the results for year 7 was $11,143, which seems about right as reflection of that in today's dollars. (That figure went down each year thereafter, as it should, since it's not inflation adjusted.) So did I misunderstand your answer to my question?

jimr
Posts: 596
Joined: Thu Feb 28, 2008 6:48 pm

Re: Additional Inputs: Are inputs Pv or FV?

Post by jimr »

It sounds like you have the right idea with this. When I said "use today's value of the payment," I meant use the $12,800 amount and don't discount it yourself to $11,413 manually. I didn't word that very well.

So if I understand you correctly, you already know for sure the exact dollar amount of the payment you'll get ($12,800). In that case, entering the income stream as a No COLA cash flow of $12,800 seems like it's the right approach. So in 7 years, you'll get a payment of $12,800 in actual dollars, but the purchasing power of that $12,800 will be equivalent to $11,143 today.

jmk
Posts: 3
Joined: Tue May 21, 2019 9:08 pm

Re: Additional Inputs: Are inputs Pv or FV?

Post by jmk »

jimr wrote:
Wed May 22, 2019 6:09 am
It sounds like you have the right idea with this. When I said "use today's value of the payment," I meant use the $12,800 amount and don't discount it yourself to $11,413 manually. I didn't word that very well.

So if I understand you correctly, you already know for sure the exact dollar amount of the payment you'll get ($12,800). In that case, entering the income stream as a No COLA cash flow of $12,800 seems like it's the right approach. So in 7 years, you'll get a payment of $12,800 in actual dollars, but the purchasing power of that $12,800 will be equivalent to $11,143 today.
Thanks it's clear now. I assume this is the same for all additional income/cost entries on this screen. You might want to put something on the instructions to make that clear, e.g. "Use future values for entries; don't discount values yourself since FRP discounts if for you in the results table." The reason it's unclear in first place is that the results tables themselves show present values (which is great and exactly what one wants!).

Love your program by the way, it's become my favorite of all of them. So adaptable yet still relatively simple.

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