Current dollar portfolio and current dollar expenses

[whopwood]

Hello Jim,

A very nice piece of software! Thanks for the great work.

I see that in all years the the portfolio value is discounted to current dollars using the assumed inflation rate. And I see that future expenses are also expressed in (unchanging) current dollars. I understand that this expressses portfolio values and expenses in current dollars.

My question is why not express both the portfolio value and expenses in nominal dollars, with expenses rising with inflation? Wouldn't this make it easier for users to see the impact of inflation? This could at least be a checkbox option. It might make it easier for many to understand the analysis.

With inflation adjusted tax brackets, it would seem that both approaches (real versus nominal) would produce the same ending portfolio in real terms.

Bill

[jimr]

Bill,

Thanks for the comment. I agree that having an option to show either nominal and real values might have been a better approach.

Personally, I like to think in real dollars. For me it's tough to understand the true value of a super high nominal dollar amount (like say a portfolio balance) that includes 10-20 years worth of inflation. It doesn't take many years for the huge values to lose all meaning.

OTOH, I notice that many of the other MC calculators out there give you the option of toggling between real or nominal dollars. If I had it to do again, I might choose that approach. Unfortunately, it'd be a pretty big rework to incorporate something like that into the planner at this stage.

Jim

[rcbrown04]

For my clarity and the avoidance of misunderstanding ... would the following statement be accurate:

Re: Portfolio value, the simulation shows today's mean portfolio value and the mean portfolio value in any given future year on a comparable basis in current dollar, i.e., the both today's and any future mean portfolio value represent accumulated wealth in terms of today's purchasing power (subject to the assumed average annual rate of inflation).

Assuming this is accurate, similar concepts would apply to annual inputs of sources and uses in current dollars showing how income and expenses vary from year to year on a comparable basis.

I've combed through many of the posts on the board and did not find a short, succinct explanation that I could explain to my 25-year-old niece who I am tutoring in financial planning with the use of this wonderful learning and planning tool!

Thanks so much for your consideration.

[jimr]

Re: Portfolio value, the simulation shows today's mean portfolio value and the mean portfolio value in any given future year on a comparable basis in current dollar, i.e., the both today's and any future mean portfolio value represent accumulated wealth in terms of today's purchasing power (subject to the assumed average annual rate of inflation).

Yes. This is basically correct except that the values shown are all medians, not means.

Assuming this is accurate, similar concepts would apply to annual inputs of sources and uses in current dollars showing how income and expenses vary from year to year on a comparable basis.

Yes.

I've combed through many of the posts on the board and did not find a short, succinct explanation that I could explain to my 25-year-old niece who I am tutoring in financial planning with the use of this wonderful learning and planning tool!

I'm glad you're finding the tool useful. This question has been answered a couple times before in different ways, but this is a constant source of confusion so I don't mind answering again at all. The way you framed your questions might help others to better understand this tough concept.

Thanks for posting!

Jim