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Growth, percentage change, appreciation rate & inflation

Submitted by mertens@fas.har... on 17 November 2008 - 1:13am

In Assumptions, we can set & change the "Current Inflation Rate." Then throughout the progam there are several other similar entries like appreciation rates, growth etc. Are all of these entries over and above the inflation rate entered in assumptions. If I enter 5% inflation, then 3% for Growth in Retirement Accounts, would this equal 8% total retirement account growth. Is this the same in all sections, or does some add to the inflation index and some not?

Thanks,

‹ Forecasting Argentina-like Devaluation Inflation and other variables keeps resetting to some type of default value. ›
Submitted by Dick Munroe on 17 November 2008 - 6:59am.
1

Unfortunately it's not done consistently in the user interface (I think).

In general if you are asked for a "real" rate of return, that will be on top of inflation, i.e., the nominal rate of return will be the product of whatever you've set inflation to and the rate of return you enter:

nominal rate of return = (1 + inflation) * (1 + real rate of return)

Otherwise the rate of return should be considered to be nominal and to include inflation. Simple algebra gets you the real rate of return, given a nominal rate of return:

real rate of return = ( nominal rate of return / ( 1 + inflation ) ) - 1

For example, savings (regular assets) are typically held in accounts with a nominal rate of return (the return is constant independent of inflation).

Best,

Dick Munroe

Submitted by mertens@fas.har... on 17 November 2008 - 11:30am.
2

Can I assume the following are not affected by the inflation entry . . .
Earnings Growth
Special Expenditures, Receipts & Reserves Growth
Retirement Account Growth
Real Estate Expenses & Receipts Growth
Social Security Future Covered Earnings Growth Rate
Assumptions - Nominal Rates of Return

While the following are computed using the entered inflation rate:
Special Reserves Nominal rate of return
Annuity Rates of Return
Primary Home, Vacation Home & Real Estate - Annual Real Appreciation

In our area, rental property has appreciaated in value for the past 25 years at a rate of 5%, while inflation has averaged 3%. If I have inflation set at 3% in ES Planner, and I enter 2% as the Annual Real Appreciation Rate, that equals (1 + .03) * (1 + .02) or close to 5%.

Thanks, I think I have it correct??

Submitted by Dick Munroe on 19 November 2008 - 5:46am.
3

mikereed6 at sbcglobal.ne wrote:Can I assume the following are not affected by the inflation entry . . .
Earnings Growth
Special Expenditures, Receipts & Reserves Growth
Retirement Account Growth
Real Estate Expenses & Receipts Growth
Social Security Future Covered Earnings Growth Rate
Assumptions - Nominal Rates of Return

While the following are computed using the entered inflation rate:
Special Reserves Nominal rate of return
Annuity Rates of Return
Primary Home, Vacation Home & Real Estate - Annual Real Appreciation

In our area, rental property has appreciaated in value for the past 25 years at a rate of 5%, while inflation has averaged 3%. If I have inflation set at 3% in ES Planner, and I enter 2% as the Annual Real Appreciation Rate, that equals (1 + .03) * (1 + .02) or close to 5%.

Thanks, I think I have it correct??Mike,

All growth rates are affected by inflation (see the math in my previous reply). I think you're asking "are these growth rates the user interface (UI) requests in real or nominal terms", so that's what I'll answer.

  1. Earnings Growth: Real (the UI multiplies by inflation before growing)
  2. Special Expenditures, Receipts: Depends if you enter values in today's dollars (in which case the growth rate is real) or dollars (in which case the growth rate is nominal).
  3. Special Reserve Fund: Real growth rate for growing the value of the fund year to year in terms of the desired balance. Nominal rate of return year to year on the balance in the fund.
  4. Retirement Account Contribution Growth: Real
  5. Retirement Account Asset Growth: Nominal (from the assumptions page)
  6. Real Estate Expenses & Receipts Growth: Depends if you enter values in today's dollars or dollars (see above).
  7. Social Security Future Covered Earnings Growth Rate: Real
  8. Assumptions: Nominal
  9. Annuity Rates of Return: Nominal
  10. Primary Home, Vacation Home & Real Estate Annual Appreciation: real

The UI displays all dollars in real terms (today's dollars). Report values are all presented in real terms. Where we thought you would like to see the real/nominal difference in the UI, we have two columns, the first is real, the second nominal.

Yeah, 2% real growth is about right with inflation set at 3% to get 5% nominal growth. Although given the current climate and especially if you're planning on holding your house for a while, you might consider holding your growth rate well under the historical average.

Best,

Dick Munroe[/]

Submitted by dsbrandt on 20 February 2010 - 8:23pm.
4

Housing property taxes and insurance expenses show up in the reports in nominal terms. Shouldn't I be able to enter them in real terms, similar to the maintenance and condo fee input? The latter expense appears on the report in real terms. Apples and oranges here?
Thanks.

Submitted by Dick Munroe on 20 February 2010 - 9:48pm.
5

No, all number in the reports are in real terms.

Best,

Dick Munroe

Submitted by dsbrandt on 22 February 2010 - 2:51pm.
6

I entered housing insurance as $915. In the Housing report, this number appears to grow each year ($933 in year two, $952 in year three, etc.). The same happens with property taxes. However, maintenance and condo fees are shown as a constant ($12,000 in my case). Why the difference?

Submitted by Dick Munroe on 23 February 2010 - 11:12am.
7

The difference is that the real appreciation increases the real value of your house and, presumably, the cost of insurance and the property taxes. The condo fees are a constant because they increase only with inflation, not the appreciation of your condo.

Best,

Dick Munroe

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