Inflation assumption for extra spending

projection
Posts: 5
Joined: Thu Dec 18, 2014 11:35 pm

Inflation assumption for extra spending

Postby projection » Sat Jan 03, 2015 1:37 am

This is a very powerful calculator. I love the granularity of possible inputs.

At the bottom, there is an option for "extra spending" There you can select an inflation adjustment by a constant percentage. Let's say we'd like to project retiring in 2035, however from 2038-2041, you plan on making an annual contribution towards college of $50K in today's dollars for those four years. If college inflation is assumed to be 6%, does entering 6% inflation adjustment by a constant percentage reflect this plan? Do I have that right?

Or, alternatively, does the 6% inflation entered into the simulation only start in the first year of "extra spending -- which is 2038 in this case (rather than 6% inflation starting now, in 2014, reflecting 2014 dollars)?

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bo_knows
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Re: Inflation assumption for extra spending

Postby bo_knows » Mon Jan 05, 2015 5:04 pm

Or, alternatively, does the 6% inflation entered into the simulation only start in the first year of "extra spending -- which is 2038 in this case (rather than 6% inflation starting now, in 2014, reflecting 2014 dollars)?


This is the correct answer. The "inflation" for any given Spending input is only added during that period of time. It reflects 2015 dollars until that point (which can be frustrating if you are using CPI for your whole simulation to simulate inflation, but otherwise want to use a constant rate for spending inputs. Mixing and matching doesn't work here.)
-Bo (Creator and Admin for cFIREsim)

projection
Posts: 5
Joined: Thu Dec 18, 2014 11:35 pm

Re: Inflation assumption for extra spending

Postby projection » Wed Jan 07, 2015 12:13 am

Thank you Bo.

Is there a way, using your inputs, to simulate 6% inflation for those anticipated college expenses only (not for the portfolio itself), starting now in 2015?

I suppose if not, the best strategy is to calculate manually the $50K/year expenses in 2014 dollars to the first year of paying for college (2038... so I believe that would be =FV(6%,23,,-50000) = $190,987.48 for the first year of college), and then entering 6% inflation for "constant spending" option for that recurrent "extra spending expenses" in your model for those four years? [start year = 2038, end year = 2041, inflation adjusted by constant percentage, value entered in first year = $190,987] (while entering for "retirement year" in the main simulation input whatever year you plan on retiring & keeping CPI as the inflation assumption for the main simulation)?

cyangspark
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Joined: Tue Nov 17, 2015 10:21 pm

Re: Inflation assumption for extra spending

Postby cyangspark » Fri Jul 22, 2016 4:53 am

I'm not entirely sure I understand how to handle future expenses that will be subject to inflation.

If I were to put an expense that won't start until 2020, and I think it will be $10,000/yr in 2020 and will grow with the CPI. Should I (1) put an inflation adjusted value (e.g. $10000/(1.02)^4 = $9238) in so that it will be the correct value ($10000) in 2020? Or can I just (2) put in $10000?

I had been putting in $10000, but now I think it might be inflating that value.

Thanks in advance for answering the question and thanks for putting together a great tool.


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