Inflation Adjusted Home Profits Means ??

[astroboy]

Could someone please clarify what it means when FIRECALC says your portfolio increase, like profits from the sale of your home, is inflation adjusted? I would expect that these types of profits would be added to your portfolio and earn a historical rate like your indicated equity/bond mix - not at just inflation rate. Or am I missing something obvious?

 

[dory36]

Sorry -- the description may be a bit misleading.

Your portfolio is assumed to grow (or decline) based on the historical results of the stream that is being calculated. No inflation gets figured in separately, because that is already embedded in the historical returns.

Your withdrawals normally ARE inflation adjusted. The idea is that your spending power remains stable throughout. So if you started taking 4%, and inflation was rampant, you might wind up taking 6-7% of the original portfolio balance at retirement after a number of years.

Changes to your portfolio might be in the form of a future sale of a house. Say the house is worth 250k today, but you won't sell it until 10 years from now. The (optional) adjustment for inflation means that the sale will be based on what a 250k house today would sell for in 10 years, assuming real estate prices tracked inflation.  (You might elect a non-inflation-adjusted increase instead, as with the maturing of a large CD, or any other lump sum where the future amount is not dependent on changing values.)

Once the sale is made, then the inflation adjustments stop, and the now-larger portfolio continues to change with the historical results.

Does that help?

Dory36

 

[astroboy]

Thanks for the explanation. But if you know the lump sum in a future year, how do you adjust the calculations to not have this amount adjusted for inflation?

 

[dory36]

Err, uhh, well, umm...

I guess I forgot that one. I was thinking about fixed pensions, which can be non-inflation adjusted.

You can work around this by having a withdrawal change in year n and an offsetting change in year n+1.

 

[astroboy]

Now I'm confused again. For example, if I know that I will be getting $200K in year 24, would I just add that amount in that year to calculations, or would I have to adjust that amount down by say an average of 3%/yr inflation factor to just $100K and keeping the inputted year the same as 24. I am fairly confident of the amount I'll be getting then but want to make sure it's represented in the calculations accurately. Thanks again.

 

[dory36]

Make a non-inflation-adjusted DECREASE in your withdrawals in year 24 of -200000. Then make a non-inflation-adjusted INCREASE in year 25 of 200000.

Use withdrawal change1 and 2 for this.

This has the effect of sticking $200,000 into your portfolio in year 24.