How is inflation applied to figures in the report?
When inputting data (such as earnings) I can use the "grow" functions to extrapolate growth in my income. And I assume that future Social Security benefits are also computed based on a growth mechanism from assumptions. But are all other figures shown in "today's dollars" or are they automatically increased by inflation? This is really important because in the "consumption smoothing" the amount of consumption remains the same from year to year. But if inflation is eating away at our income, then our standard of living is actually declining if our spending level remains the same!
RSS
msowards at itstx.com wrote:When inputting data (such as earnings) I can use the "grow" functions to extrapolate growth in my income. And I assume that future Social Security benefits are also computed based on a growth mechanism from assumptions. But are all other figures shown in "today's dollars" or are they automatically increased by inflation? This is really important because in the "consumption smoothing" the amount of consumption remains the same from year to year. But if inflation is eating away at our income, then our standard of living is actually declining if our spending level remains the same!
It varies from place to place.
As I recollect (I'm writing this from my son's Mac on my way to walk the dog) the earnings growth rate is a real growth rate. Enter 0 here and your earnings should stay the same indicating that the growth rate include inflation. There's another column on that screen that indicates the nominal earnings.
SS is calculated on your nominal earnings, then reported in real terms.
Other places (special expenses come to mind) you can enter either today's dollars (real) or dollars (nominal). The growth rate will vary depending on the type of dollars you choose. Real dollars have real growth rates, i.e., adjust for inflation, then grow. Dollars have nominal growth rates, just grow.
Other places (mortgages/real estate) have some nominal inputs (mortgage payments) and some "real" inputs (expenses).
Best,
Dick Munroe
And just to add to Dick's comments, note that there is an input for *future earnings* is in the Social Security folder. You can simply copy the earnings from the Earnings folder, which is most common I guess. But in some cases, future earnings--or part of them--may not be "Social Security earnings."
And when it's all said and done, the Consumption and Living Standard columns in the reports always indicates today's dollars--so these numbers have already accounted for inflation as you set it in the Assumptions folder.
Dan
Dick, Did you misspeak when you said "... the earnings growth rate is a real growth rate." The economic assumptions input screen says "Nominal Rates of Return On:" So for the CD that's paying me 4% APR I've entered 4%. Is this correct?
Thanks
James
james300 at pacbell.net wrote:Dick, Did you misspeak when you said "... the earnings growth rate is a real growth rate." The economic assumptions input screen says "Nominal Rates of Return On:" So for the CD that's paying me 4% APR I've entered 4%. Is this correct?
Thanks
James
Nope, Look on the earnings screan. When you grow your salary it's a real growth rate. The assumptions deal with return on assets and are in nominal terms.
Best,
Dick Munroe