What is the general interrelationship between my assumed inflation rate and the asset probability distributions used in MC calcs? Are they additive in some fashion?
Why is the MC cash asset mean real return negative? If I set inflation to zero and have an all cash portfolio, the 5%-95% living standard trends downward over time. Can you help me understand this behavior?
Disclaimer: ESPlannerBASIC, ESPlanner, ESPlannerPLUS and ESPlannerPRO, are educational calculators designed to give users input in mapping out financial futures, but should not be acted upon as a complete financial plan. The creators of these programs are not certified, registered, authorized, or any other type of financial planners. These programs are simply tools for helping you think through economic futures. Its "recommendations" should be viewed as informative inputs into your own decision-making with respect to saving and the purchase of life insurance. ESPlannerBASIC, ESPlanner, ESPlannerPLUS and ESPlannerPRO provide neither economic, financial nor tax advice, which can only be delivered to you by authorized professionals.
RSS
It has to do with the difference between the mean and median of the probability distributions. The median is, if I remember correctly, below the mean in all cases. Since draws are centered around the median, they well underperform the mean and your standard of living, by comparison to that calculated by the basic run based on the mean rates of return, will drop over time.
The rate of return for cash shows that the value of cash erodes over time (by inflation).
Best,
Dick Munroe
Dick,
Thank you. Mathwise, I think I understand the results. However, I'm having trouble accepting the reality that, if I set inflation to zero, the 5% through 95% SOL's trend downward. How does the value of cash erode if inflation is zero percent?
Also, I would be very interested in comments on the first question regarding how in MC inflation and asset performance interrelate.
Regards,
Mike
Cash has a historic real rate of return of about -3% real/year. If you're using the cash canned asset, that doesn't change. The MC knows that the rate of return for "Cash" is -3% REAL. Inflation factors in only when converting from real interest rates to nominal interest rates and back. If you set inflation to 0%, then real and nominal interest rates are the same, but that doesn't change the REAL return for the Cash asset. That real return is still -3%.
Best,
Dick Munroe