More Information on Nominal Rates of Return in Assumptions

Can you help me understand what nominal rates of return control in the assumptions tab? It doesn't seem to be the total rate of return, but the 6% default value makes me think it isn't income generation.

Comments

Assuming you are not in Monte Carlo mode, this is how I see it:

Regular assets rate of return (RoR) impacts all assets in "Assets and Saving" tab. This includes new assets that are placed in the regular assets category such as from special receipts or 401k/IRA withdrawals that are in excess of a given year's spending requirements or selling a house, etc.

The RoR for retirement accounts covers those assets.

The nominal RoR gets converted to the equivalent "real" RoR for calculations and reports. For example, if you have a 6% rate of return and 3% inflation, your "real" or inflation adjusted dollars grow by around 3% annually in "real" terms (actually 2.913%).

Best,
Brian

Dan Royer's picture

Yes, and furthermore, it calculates from Jan. 1 through the end of the year. So when starting out, you don't want to enter you May balance (for example) in those accounts balance areas. We enter nominal rates of return (since that's how we all normally think about interest earned) but it's all presented in today's dollars, current year dollars.

Thanks, very helpful. Just to clarify, I would put my expected nominal return of weighted interest/dividend yield in the nominal RoR assumption? In a simplified scenario if I have 50% of regular assets in CD's yielding 1% and 50% in equities with a dividend yield of 2% my nominal RoR assumption should be 1.5%?

You are on the right track, but I would use the total equities rate of return and not just dividend yield.

Meaning if the stock/mutual fund/other equity is expected to increase by 9% annually, then use 1% for CDs and 9% for equities. With 50% of assets in each, this averages out to 5% RoR.

However, this assumes you rebalance annually back to 50% levels and repeat. If you never rebalance, your CDs eventually become a smaller percentage of assets. Something to consider.

Best,
Brian

Including total equities rate of return seems to contradict this exchange from last October...any thoughts on reconciling the two?

gregstewart1952: Does the regular assets income column of the total income report include unrealized growth of assets (such as increase in a stock or fund price), or only interest and dividends generated by the asset?

Dan Royer: Regular asset income is just the interest earned on the regular assets--in normal economics mode it is set in Assumptions. It does not refer to any unrealized gains if those assets happen to be invested in stocks or bonds.

Hopefully Dan can clarify.

Here's my view:

Regular assets rate of return (RoR) impacts all assets in "Assets and Saving" tab. This includes new assets that are placed in the regular assets category such as from special receipts or 401k/IRA withdrawals that are in excess of a given year's spending requirements or selling a house, etc.

This includes mutual funds, individual stocks, CDs, savings, etc. The program lumps all types of regular assets into a common "resource pool" and uses them as needed.

If you have $1,000 in a regular asset mutual fund and the value of this asset increases by 10%, you now have $1,100 after 1 year (excluding taxes, withdrawals, all other factors) in nominal dollars.

To test this, I created a profile and only added 1 item - $100,000 in regular assets (mutual funds although it could be any field). The results show a real return of 2.913% as expected. Change the input to "savings and checking accounts" and you get the exact same results.

Best,
Brian

Dan Royer's picture

Yes, perhaps I was confused by the question. Brian is correct. It's what everyone would naturally assume about a reported nominal return except that that the reports adjust for inflation and show the return denominated in current year dollars. I guess the best way to get at the meaning is to do as Brian did and enter an amount in any of the fields under regular assets. You don't even need to run a report: you can look at "current year saving" in the tab you see there. It will show Real Asset income (i.e., inflation adjusted) which it further defines this way: (dividends, interest, and other income earned on regular assets).

Thanks guys, appreciate the help!

Looking at this further and another question on this thread. I took Brian's advice to model just a couple of data elements and realized that the program applies taxes to the entire amount of the real (not nominal) RoR on regular assets (treating it as actual income vs. income + unrealized gains). Is that just the way the program works or should I be doing something to distinguish between unrealized gains & actual income?

Dan Royer's picture

If for tax purposes you need to indicate that some of this income is cap gains or dividends or long term cap gains/losses, there is a place to do that for regular assets in Assumptions under the Taxes tab.

As an example of how to set this up, look at Dick Munroe's 2009 comment in the link for more info:

https://www.esplanner.com/question/dividends-and-capital-gains

Best,
Brian

Very helpful, thanks for all the support