First year Retirement Assets calculation
I've been trying to get the current year Retirement Assets amount in the Details - Retirement Accounts report to look like what I actually expect to have at the end of this year. To do that, I have to fudge the actual amount I put in the Retirement Accounts - Assets form because the earnings/inflation this year aren't even close to the values I am using for long term projections.
To figure out what to put in for my 401k account balance, I had to figure out what ESP does with the amounts, and what I came up with confuses me. If you'll bear with me, I'll explain.
My assumption is that ESP treats the number in the form as a start-of-year amount for 2009 (actually, EOY for 2008). Here's what it appears ESP does with that number (call it "X"), assuming 5% nominal earnings and 3% inflation:
(1) multiply X by 103% to get X1
(2) multiply X1 by 5% to get earnings
multiply X1 by -3% to get inflation loss **
add earnings and inflation loss to get Asset Income (on report)
(3) add Asset Income and Contributions to get Retirement Savings
(4) add X1 and Retirement Savings to get Retirement Assets (on report)
The part of this that confuses me is step (1). Why is the account balance that I put in the form increased by the 3% inflation rate to start out with? It seems to me that the effect of inflation on the account balance is handled in step (2), where nominal earnings are added in and then inflation loses are taken on the balance. The effect is that I have to reduce the initial balances quite a bit in order to avoid the appearance that I have more retirement funds than I actually do.
Is this the way it actually works? Am I wrong to reduce the initial amounts?
** Inflation loss may actually be taken on X1 plus earnings, I'm not sure. I'm guessing at this and the numbers come out pretty close either way.
RSS
Hi, First the program is working perfectly correctly on this issue. Second, the program is displaying all figures in end of 2009 dollars (or end of 2010 dollars, once we are in 2010). So when you tell the program that you have, for example, $100,000 initially (end of 2008) in your 401(k), and that you are earning 6 percent nominal this year, it will say to itself, we'll, at the end of 2009, this person will have $106,000 in 2009 dollars before any additions to that pot due to his and his employer's contributions. Call me at 617 834-2148 with any residual questions. Another strategy is to just trust us. We are exceptionally anal on this stuff. This doesn't mean we don't make mistakes. It just means we check and recheck and are anything but sloppy in dealing with inflation and returns. best, Larry
I think I understand this now. What is actually happening is that the program treats the initial balance as being in 2009 dollars (which it is, of course), and so it makes no inflation adjustments at all. I assumed that the inflation factor would be applied to adjust the value of the holdings in every year, but it isn't applied in the current year, nor should it be.
I think what confused me is that, on all the other lines of the Detail - [My] Retirement Account report, the previous balance + income + contributions - withdrawals equals the new Retirement Assets balance. So I expected that equation to hold on the line for the current year as well. But it doesn't. Using the starting amount that I entered in the form as the previous balance, and adding and subtracting as before, results in a figure some 15,000 less than the new balance. This reflects the fact that the amount of income listed on the report is reduced for inflation, but the actual amount added to the previous balance is not.
It makes sense to calculate it the way you do, but it's confusing to see (hypothetical figures here) a Retirement Savings amount of 20,000 and resulting Retirement Assets of 550,000, when you know that your starting balance was 515,000. On the other hand, it would also be confusing to see the non-adjusted savings for the current year at 35,000, then see them drop to 20,000 the next year and thereafter.
I'm not sure there's any better way to do it, and now that I understand it I'm not concerned.
Thanks for responding so quickly...
David Shannon