Confused about future value, inflation etc

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Topic Author
confused1
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Joined: Mon Jul 27, 2015 12:03 am

Confused about future value, inflation etc

Post by confused1 »

Hi all

Hope you can help what is probably a very simple question thats confusing me. As it is the end of the year we are looking at our overall financial position etc and getting confused when trying to understand the future value of investment and inflation.

Here is an example
We currently have $106k in a 401k and will contribute $23,680 each year (including employer match). I am simply trying to estimate what this will be worth in 15 years time - but would like to express that in todays value to understand what type of life it would afford us.

In order to do this I have assumed 3% growth each year after inflation is taken into account
Using a simple Future Value formula in Google Sheets and 3% growth this gives a value in 15 years time of $614,137 - Actual figure would obviously be higher but we have allowed for inflation.
Which if we were to be happy with a 4% withdrawal rate would equal $24,565 per year - Again in todays value

Does this all sounds right or are we looking about this completely wrong?

Thanks so much
Confused!
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Sandtrap
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Re: Confused about future value, inflation etc

Post by Sandtrap »

Welcome :D
These tools may be helpful to you if you haven't tried them already.

PORFOLIO VISUALIZERS, PROJECTIONS, AND ANALYSIS
https://www.portfoliovisualizer.com

Firecalc. Retirement. How long will your money last?
https://www.firecalc.com

j :D
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Topic Author
confused1
Posts: 56
Joined: Mon Jul 27, 2015 12:03 am

Re: Confused about future value, inflation etc

Post by confused1 »

Let me take a look and see where I get. Thanks!
Sandtrap wrote: Mon Dec 25, 2017 9:28 pm Welcome :D
These tools may be helpful to you if you haven't tried them already.

PORFOLIO VISUALIZERS, PROJECTIONS, AND ANALYSIS
https://www.portfoliovisualizer.com

Firecalc. Retirement. How long will your money last?
https://www.firecalc.com

j :D
JBTX
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Re: Confused about future value, inflation etc

Post by JBTX »

confused1 wrote: Mon Dec 25, 2017 9:26 pm Hi all

Hope you can help what is probably a very simple question thats confusing me. As it is the end of the year we are looking at our overall financial position etc and getting confused when trying to understand the future value of investment and inflation.

Here is an example
We currently have $106k in a 401k and will contribute $23,680 each year (including employer match). I am simply trying to estimate what this will be worth in 15 years time - but would like to express that in todays value to understand what type of life it would afford us.

In order to do this I have assumed 3% growth each year after inflation is taken into account
Using a simple Future Value formula in Google Sheets and 3% growth this gives a value in 15 years time of $614,137 - Actual figure would obviously be higher but we have allowed for inflation.
Which if we were to be happy with a 4% withdrawal rate would equal $24,565 per year - Again in todays value

Does this all sounds right or are we looking about this completely wrong?

Thanks so much
Confused!
Without recomputing the numbers this seems about right. Over that time period you have $450k in contributions. That is about 40% net growth in 15 years which seems about right for 3%.

And 4% calc is pretty straightforward.

You are on the right track.
Topic Author
confused1
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Joined: Mon Jul 27, 2015 12:03 am

Re: Confused about future value, inflation etc

Post by confused1 »

So I very simple terms I am modeling that my return on investments will be 3% higher than inflation.
dbr
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Re: Confused about future value, inflation etc

Post by dbr »

confused1 wrote: Tue Dec 26, 2017 9:20 am So I very simple terms I am modeling that my return on investments will be 3% higher than inflation.
Yes, but you are ignoring that your ability to estimate returns is nil and that returns are highly variable from year to year. That is why someone suggested a more comprehensive model such as FireCalc. That model uses historical returns over the last 120 years or so and displays a range of possible outcomes. It is still a discussion to what degree the past 120 years is a good estimate of the behavior of the markets starting today. The most important of these issues is realizing that you can't expect to get the expected return (even if you knew what the expected return would be).
Topic Author
confused1
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Re: Confused about future value, inflation etc

Post by confused1 »

dbr wrote: Tue Dec 26, 2017 10:26 am
confused1 wrote: Tue Dec 26, 2017 9:20 am So I very simple terms I am modeling that my return on investments will be 3% higher than inflation.
Yes, but you are ignoring that your ability to estimate returns is nil and that returns are highly variable from year to year. That is why someone suggested a more comprehensive model such as FireCalc. That model uses historical returns over the last 120 years or so and displays a range of possible outcomes. It is still a discussion to what degree the past 120 years is a good estimate of the behavior of the markets starting today. The most important of these issues is realizing that you can't expect to get the expected return (even if you knew what the expected return would be).
OK thats a very fair point, I guess I wanted to check my overall model (while simple) was not incorrect and correctly modeled the future value etc. Fully understanding that both returns and inflation could/can drastically change the outcome in positive or negative ways

Thanks
MotoTrojan
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Re: Confused about future value, inflation etc

Post by MotoTrojan »

Also don’t forget that withdrawals will be taxed.
KlangFool
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Re: Confused about future value, inflation etc

Post by KlangFool »

OP,

A) A more important question would be why do you need to estimate the future value?

B) And, even if you have an estimate, how would that help you at all?

C) What is it that you really want to know? Perhaps, you should ask a different question.

KlangFool
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Re: Confused about future value, inflation etc

Post by nisiprius »

confused1 wrote: Mon Dec 25, 2017 9:26 pm Hi all

Hope you can help what is probably a very simple question thats confusing me. As it is the end of the year we are looking at our overall financial position etc and getting confused when trying to understand the future value of investment and inflation.

Here is an example
We currently have $106k in a 401k and will contribute $23,680 each year (including employer match). I am simply trying to estimate what this will be worth in 15 years time - but would like to express that in todays value to understand what type of life it would afford us.

In order to do this I have assumed 3% growth each year after inflation is taken into account
Using a simple Future Value formula in Google Sheets and 3% growth this gives a value in 15 years time of $614,137 - Actual figure would obviously be higher but we have allowed for inflation.
Which if we were to be happy with a 4% withdrawal rate would equal $24,565 per year - Again in todays value

Does this all sounds right or are we looking about this completely wrong?

Thanks so much
Confused!
You are looking at it correctly, as far as it goes.

Without getting into any questions about the reliability of future predictions or the safety of a 4% withdrawal rate:

Doing an actual year-by-year calculation in Excel,

If you start with $106,000 at the beginning of year 1, and during each year it grows by 3%, and at the end of the year you add $23,680 to it, then at the end of year 15 the total will be $605,566.83.

If you start with $106,000 at the beginning of year 1, and during each year you first add the 23,680 at the beginning of the year, and then it all grows by 3%, then at the end of year 15 the total will be $618,779.50.

Frankly, I don't think the difference between these values matters, or the discrepancy between either of them and your $614,137. My guess is that you have somehow done your calculation in a way that implies that the $23,680 is paid in monthly installments throughout the year... but I can't get to your exact number. It might help if you would give the exact formula you're using--that is to say, the value of the five arguments you're using for FV.

About $24,000/year purchasing power (i.e. year-2017 dollars) is definitely in the right ballpark, given your assumptions.

P.S. I still can't quite account for the discrepancy. I went into Google Sheets, just to be sure that Google calculates the same way Excel does, and I am seeing:

FV(3%, 15, 23680, 106000, 0) = -$605,566.83
FV(3%, 15, 23680, 106000, 1) = -$618,779.50

These are the exact numbers I got doing line-by-line calculations in Excel, at year at a time, for fifteen years.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
confused1
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Joined: Mon Jul 27, 2015 12:03 am

Re: Confused about future value, inflation etc

Post by confused1 »

KlangFool wrote: Tue Dec 26, 2017 5:22 pm OP,
A) A more important question would be why do you need to estimate the future value?
B) And, even if you have an estimate, how would that help you at all?
C) What is it that you really want to know? Perhaps, you should ask a different question.
KlangFool
:-) My question was simply am I correctly accounting for inflation etc in my model. You are right, I don't really care about future value. I have been trying to work all of my calculations at todays value as this is a baseline we understand ie I know what $24k per year allows me to purchase today etc.
KlangFool
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Re: Confused about future value, inflation etc

Post by KlangFool »

confused1 wrote: Tue Dec 26, 2017 6:43 pm
KlangFool wrote: Tue Dec 26, 2017 5:22 pm OP,
A) A more important question would be why do you need to estimate the future value?
B) And, even if you have an estimate, how would that help you at all?
C) What is it that you really want to know? Perhaps, you should ask a different question.
KlangFool
:-) My question was simply am I correctly accounting for inflation etc in my model. You are right, I don't really care about future value. I have been trying to work all of my calculations at todays value as this is a baseline we understand ie I know what $24k per year allows me to purchase today etc.
confused1,

Why do you need to account for inflation at all? Why do you think that it is necessary and useful?

I do not think that it matters at all. In fact, as per personal finance, the generic concept of inflation does not apply to us at all. Our own personal expense does not rise and fall as per the official inflation rate.

My household expense is essentially stayed the same for the last 10+ years. So, my personal inflation rate is 0%. The official inflation rate does not describe the true impact of inflation on my household expense.

KlangFool
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