From an email exchange:
It wasn't clear from the BB notes - are the adjustments from the income for SS and the 3 others done by adjusting the need or subtracting from the needed cash? It should make a difference as inflation adjustments should be applied to the need $$; for inflation adjusted income streams I guess there is no difference, but for non-inflation adjusted streams there is a difference.
The adjustments for income are as follows:
The current year amount for each withdrawal/income stream (and, if scheduled, lump sum) is individually calculated, and all are summed. The sum is subtracted from the portfolio.
If I follow your question, the difference and potential error would be as follows:
Both approaches would start the same:
1,000,000 Year x portfolio
-40,000 Year x w/d
+10,000 Year x income
970,000 Year x balance
The way FIRECalc works now:
1,060,000 Year x+1 portfolio, with growth
-41,000 Year x+1 w/d, with inflation at 2.5%
+10,000 Year x+1 income (not adjusted for inflation)
1,029,000 Year x+1 balance
With a spending reduction before application of inflation:
1,060,000 Year x+1 portfolio, with growth
-40,000 Year x+1 w/d, without inflation
+10,000 Year x+1 income (not adjusted for inflation)
-30,000 Year x+1 pre-inflation spending
-750 Year x+1 inflation adjustment to spending
1,029,250 Year x+1 balance
As you noted, this $250 difference (in this example) would only apply when the $10,000 additional income was fixed, not adjusted for inflation.
Of course, if the fixed income is substantial in comparison to the "normal" withdrawal and portfolio, the seemingly small difference can matter over decades, so my next time through the computation code, I will likely change the code to make the adjustments to the withdrawals before the effects of inflation are applied.
And in response to Moguls:
First the suggestion. I occassionally print the summary output page (and I assume others do as well) so it would be good to show on the summary page the selected interest rate for tips, if one was entered. Otherwise you have to remember and write it in.
Now the question. Does the model do anything special with Tips or is this just a way to specify a fixed interest rate?
Good idea on the summary page -- I'll do that next change.
On the TIPS, the Treasury pays a coupon (that you enter on FIRECalc, depending on what they are offering), AND they adjust for inflation. So a 3.5% TIPS bond might return 6.5% one year, 5.9% the next year, and so forth. But if inflation goes to 20%, the TIPS would return 23.5%. That's their attraction. There's a lot more to them than I can relate here, but that's the view from 10,000 feet.
By the way, I'm inclined to "close" this topic and move the continuing discussion outside of the "testing" subject and into a new topic. New readers would probably like to follow along without reading so much history. So if it is closed tomorrow, you'll know why!
Dory36
Yep -- as I mentioned a couple of days ago,
