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Regular asset balance with upside investing seems to be balance of stock but earns safe asset return

Submitted by GregCarl on 1 July 2012 - 11:48pm

To reproduce what I’m seeing on ESP 2.20.45.
   1) Create a new profile
   2) Planning Method->Upside Investing
   3) On Assets& Savings->Regular Assets
     a. Other Assets: $1,000,000
     b. Percentage of regular assets investing in stocks: 10%
     c. Start converting stocks:
     d. Convert all stocks by :

Based on these inputs I expect that I have $900,000 in Safe Assets earning the default Safe Asset Real Return of 2% and $100,000 in stocks earning the Large Cap Stock Return over its distribution. Additionally no stocks will be converted to Safe Assets until the final year of the Profile.

I would expect to see $18,540 of income from the $900,000. I calculated that as $900,000 Safe Asset initial balance converted from first year begin dollars to first year end (Today’s) dollars by multiplying by the inflation factor of 1.03 giving $927,000, then earning the Safe Asset Return of 2%. I expect that calculation to work because a mathematically equivalent one works using the Regular Asset Nominal Return rate instead of the Safe Asset Real Return Rate when the planning method is Economics-Based Planning withOUT Upside Investing.

Based on what I expect noted above, I don’t understand the Regular Assets Report when Upside Investing is used. Running the Profile noted above, the Regular Assets Report shows a Regular Asset Balance of $103,474 for the first year. This leads me to believe the Regular Assets balance are the Stocks, not the Safe Assets, since $103,474 is much closer to the $1,000,000*10% =$100,00 stock initial balance than the $900,000 Safe Asset initial balance. Additionally the Regular Assets Total Income for the first year is $2,060, which is exactly the Stock initial balance $1,000,000*10% converted from first year begin dollars to first year end (Today’s) dollars by multiplying by the inflation factor of 1.03 giving $103,000, then earning the Safe Asset Return of 2%.

So please explain the Regular Asset Report Regular Asset balance and Total Income when Upside Investing is used. Is it supposed to be the Stocks balance, the Safe Assets balance or something else? And is the Total Income supposed to be the income on stocks, Safe Assets, of something else?

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Submitted by GregCarl on 2 July 2012 - 12:08am.
1

Note 3.c and 3.d above should be <highest year in list>.

In my initial post I used the < and > characters instead of &lt; and &gt; so the characters in between are being interpreted as an HTML tag and not being displayed.

Submitted by Laurence Kotlikoff on 2 July 2012 - 2:27pm.
2

Everything is working correctly. We report all values in end of the year dollars. Your initial assets are assumed to be in end of 2011 dollars. Hence, we use the nominal interest rate in the first year to determine how much real assets you'll have at the end of 2012. Call me at 617 834 2148 if this is unclear. best, Larry

Submitted by GregCarl on 2 July 2012 - 6:32pm.
3

Hi Larry,

I already understand what you said in your comment but it didn't address my questions. I'll try to clarify.

My point is that I start with $1,000,000 of Regular Assets with 10% in stocks, i.e. $100,000 in stock and so 90% ($900,000) in Safe Assets. Since the Regular asset balance starts out near $100,000, that leads me to believe the Regular Asset balance is reporting the stocks balance. But the Total Income reported ($2,060) is exactly what $100,000 would earn in real terms using the Rate of Return on Safe Assets (2%). But, since the balance appears to be that value of the stocks side of the portfolio, I would expect income based on the Large Cap Stock return, not the Sate Asset return.

I would expect the report to show one of three things 1) The Safe Asset balance, i.e., something near $900,000, and income based on the 2% Safe Asset Real Return, about $18,540; 2) the Stocks balance, something near $100,000 and income based on the Large Cap Stocks Return Distribution; or 3) the sum of 1 and 2. But the report seems to show the Stocks balance, something near $100,000, and income based on the Safe Asset Real Return applied to the stocks balance, $2,060.

So when using Upside Investing, what is the Regular Asset Report Regular Asset balance and Total Income? Is the balance supposed to be the Stocks balance, the Safe Assets balance or something else? And is the Total Income supposed to be the income on stocks, Safe Assets, of something else?

Thanks

Submitted by Laurence Kotlikoff on 3 July 2012 - 7:14am.
4

Hi Greg, I'm seeing the regular asset balance sheet in 2012 start out over $1 million, which is what I'd expect. So I'm confused. Are you sure you are looking at 2012's value? Call me at 802 888 2156, my number this week. Starting Friday night, use 617 834 2148. best, Larry

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