Lifetime Planner: Inflation Computation

It is not clear how the Lifetime Planner in Money 2004
converts current dollars into future dollars. Consider a
test case of $1,000 of "other income" received just once
in August, 2009 (i.e., five years from now), growing
at "inflation minus 1%" (i.e., at 2.5% where inflation is
set to 3.5%).

The $1,000 is loosing purchasing value at the rate of 1%
per annum. Compounded for five years, the percent
decline should be equal to (1+0.01)^5 - 1 = 5.101%.
Therefore, the value of the income in current dollars (in
August, 2009) should be = $1,000 - 5.101% = $949.
However, the Lifetime Planner reports the inflow income
amount in the "Yearly Snapshot" in August, 2009 as $958 -
almost a 1% error. (For longer durations or larger
amounts, of course, the error is magnified.)

Having experimented with other test cases, I am confident
that the issue is NOT "rounding error." How, therefore,
does the Lifetime Planner compute the impact of inflation
on a future income amount?

Your assistance will be appreciated.

sjcohen730
Thu Aug 12 19:23:35 CDT 2004

>Subject: Lifetime Planner: Inflation Computation
>From: "Tom" anonymous@discussions.microsoft.com
>Date: 8/12/2004 4:51 PM Eastern Daylight Time
>Message-id: <523701c480ae$2bb5dc20$a501280a@phx.gbl>
>
>It is not clear how the Lifetime Planner in Money 2004
>converts current dollars into future dollars. Consider a
>test case of $1,000 of "other income" received just once
>in August, 2009 (i.e., five years from now), growing
>at "inflation minus 1%" (i.e., at 2.5% where inflation is
>set to 3.5%).
>
>The $1,000 is loosing purchasing value at the rate of 1%
>per annum. Compounded for five years, the percent
>decline should be equal to (1+0.01)^5 - 1 = 5.101%.
>Therefore, the value of the income in current dollars (in
>August, 2009) should be = $1,000 - 5.101% = $949.
>However, the Lifetime Planner reports the inflow income
>amount in the "Yearly Snapshot" in August, 2009 as $958 -
>almost a 1% error. (For longer durations or larger
>amounts, of course, the error is magnified.)
>
>Having experimented with other test cases, I am confident
>that the issue is NOT "rounding error." How, therefore,
>does the Lifetime Planner compute the impact of inflation
>on a future income amount?
>
>Your assistance will be appreciated.
>
>
>
>
>
>

Tom,
Quite seriously, I think you are expecting way too much from the Money program.
The fact that the Lifetime Planner is able to project back future income amazes
me in the first place. This is a program that costs less than $50 and is meant
for general use by people managing their money. If your purpose is to test out
the abilities of the program, I think you have found out it is doing pretty
darn good! Steve

J
Sun Aug 15 09:42:29 CDT 2004

I played with your scenario a bit and believe I found how it is calculated.
It is a rounding error of sorts.

If you change the date the income is received to any month in 2009 you get
the same result ($958), which means that Money isn't calculating by the
month, but rather by the number of years. If you instead make the income
come in January of 2010, you'll see a result of $948 (which is a rounding
error of the expected result of $948.90 but is much closer to your
calculated result).

Money is apparently calculating that 2009 is about 4 years from August 2004
(when you made the calculation) regardless of the month in 2009 that the
income comes in.

If you run your calculation below for 4 years rather than 5, you'll come out
close to the $958 number that money is calculating.

I found your question interesting as a math problem but agree with the other
response from SJCOHEN730 that the Lifetime Planner is a great tool for it's
purpose. Remember that the calculations in the Planner are also limited by
the assumptions that are made and so expecting it to calculate every number
down to the exact day I believe would be wasted effort.

Thanks for pointing this out and enjoy using the Planner. I find it to be
the best tool around to plan for retirement.

Jeff

As with the other response, I believe for it's purpose the way money is
calculating is fine.
"Tom" <anonymous@discussions.microsoft.com> wrote in message
news:523701c480ae$2bb5dc20$a501280a@phx.gbl...
> It is not clear how the Lifetime Planner in Money 2004
> converts current dollars into future dollars. Consider a
> test case of $1,000 of "other income" received just once
> in August, 2009 (i.e., five years from now), growing
> at "inflation minus 1%" (i.e., at 2.5% where inflation is
> set to 3.5%).
>
> The $1,000 is loosing purchasing value at the rate of 1%
> per annum. Compounded for five years, the percent
> decline should be equal to (1+0.01)^5 - 1 = 5.101%.
> Therefore, the value of the income in current dollars (in
> August, 2009) should be = $1,000 - 5.101% = $949.
> However, the Lifetime Planner reports the inflow income
> amount in the "Yearly Snapshot" in August, 2009 as $958 -
> almost a 1% error. (For longer durations or larger
> amounts, of course, the error is magnified.)
>
> Having experimented with other test cases, I am confident
> that the issue is NOT "rounding error." How, therefore,
> does the Lifetime Planner compute the impact of inflation
> on a future income amount?
>
> Your assistance will be appreciated.