Entering Inflation in the Special window

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I've set inflation in the assumptions to 6%. However, my property tax is capped at 2%. To fix this discrepancy I removed property tax from the Primary Home field and entered it as a special expenditure. If I grew it at 0% it would increase by 6% so I grew it by a -4%. This should have resulted in a 2% annual growth rate. However, my 2020 future dollar amount is only 1.75% greater than my 2019 dollars. What am I doing wrong?
Thanks
James Mavrogenis

Comments

dan royer's picture

Well, the reports are all in 2019 dollars, so if you want to grow things 2% relative to inflation, then grow it at 2% (not -4%). It sounds like a nominal/real dollars issue. If you had $1000 and grew it at 0% relative to inflation, it would be represented as $1000 year after year after year in 2019 dollars regardless of what inflation is set at.

If on the other hand, you grew it at -4%, I would expect to see $960 in 2020 then $922 in 2021 etc.

I don't know if this helps. I would use today's dollars and grow it at 2% which is what's recommended for what you are doing.

Dan

Dan, I was hoping for a response to my Feb 12th post. Maybe you didn't see it. Should I have responded using the "reply" for you to be aware?
Thanks
James

Dan, I believe your response shows that I didn't explain the issue clearly.

If I enter $1000 as a special expenditure in 2019 in "today's Dollars" and enter 5 years in the "continue for" window the results shows $1000 in the "today's Dollars" column through 2023. In the "Dollars" column the $1000 increases by 6% each year because I entered 6% inflation in the "Assumptions/Inflation/Other" window.

What I need to do is modify the 6% default inflation rate for this special expenditure so that the "Dollar's" column only grows by 2%. My understanding is the "Dollar's" column shows the actual number of dollars I will need to payout in each future year. If that is correct, don't I need to modify the 6% default inflation rate with a negative entry in the "grow the selected entry by" window?

If I enter 2% in the "grow the selected entry by" window as you suggest then the "Today's Dollars" column grows by 2% but the future dollars column grows by 8%.
Am I understanding the future dollars column correctly?
Thanks for your help
James

James,
The relationship between the nominal rate of return, the real rate of return, and inflation rate is: 1 + nominal = (1 + real) * (1 + inflation).

Specifically, in your case: 1.02 = (1 + real) * (1.06)
so, 1 + real = 1.02 /1.06 = 0.9623.
Hence, the real growth rate is -3.77%

You should input $1,000 in today's dollars for 1 year starting in 2019, click on apply, and then grow it by -3.75% for 4 years.

Thanks Mike, That is the information I needed.
James

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