Calculation of real rate of return on investment assets

We have an assumed rate of return on our investment assets at 4% (inflation at 2.5%). How does the software compute our investment balances moving forward? Is it compounded annually? We re-enter our balances at the beginning of each year. Note too that Monte Carlo is turned off. This question is less about RRR more so about how the calculation is handled by the software. Thank you.


dan royer's picture

I believe it's just called simple annual compound interest. So if you leave 50K in a 3.5% nominal account, you wind up with 126,578.35 in the account (compound interest calculation is: 50K * ( 1.035 ^ 27 )).

dan royer's picture

Mike responds this way:

ESPlanner uses simple annual compounding of the nominal rate of return and reports the end of year balances in constant 2016 dollars.

For example. if you start with an initial balance of $100,000 and your nominal rate of return is 4% with inflation at 2.5%, then the balances are as follows:

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Does changing the rate of inflation at a future year alter the real rate of return of retirement and non-retirement accounts in the years after the change?

dan royer's picture

Yes, changing the rate of inflation in a future year does alter the real rate of return on both regular and retirement assets.

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