Regular Assets Income doesnt match my portfolio

I need some guidance on how to correctly model my fixed income in monte carlo. In my case i have regular asset income in the current year that is twice with the total income report shows. how do i manage coupon yield?


dan royer's picture

You begin by entering your accumulated assets at the end of 2016 (since our current year is 2017). In the Assumptions area you should enter the assumed nominal rate of return. The report will show how much to save or dissave from that regular assets pool as well as the income received and then show the net balance at the end of 2017. When the end of 2017 arrives, you can adjust that balance to reflect better than assumed or worse than assumed rate of return. Of course the more "conservative" your asset allocation, the less variance from the expected return you should expect to see at the end of the year. But even when things are off because of unusual market, this difference often can make little difference in the 40+?? year model you are creating.

Does that help?


jsalino's picture

I understand that but here is a real situation with modified numbers for sake of privacy:

$1 million in regular assets is producing income of $50k/yr. Its all municipal bonds.

Why does the report return Regular Assets Income of $24k/yr in the first year?

Nominal rate of return is set at 5%

dan royer's picture

OK, sure. Take your hypothetical example.

The end of year 2016 balance is 1,000,000
The nominal return on that is indeed, 50,000 if return is 5%
I believe your inflation rate here is set to 2.6% so let's use that below.

But here's how it's calculated:

1. The 1M is converted from 2016 to 2017 dollars so that it's all denominated in the same "dollars." The 1,000,000 becomes 1,026,000 which is 1,000,000 * 1.026.

2. The real rate of return is .024 (.05 - .026) and .024 * 1M = 24,000

3. The 24,000 is your regular asset income on 2017 dollars

dan royer's picture

Actually, I guess #1 there is irrelevant to your question. But when you try to get to end-of-first-year assets, you need that 1,026,000 +/- saving.

jsalino's picture

So you are saying the inflation adjusted value of the assets is netted from the income column? To me that is too much of a "catch all" in that it overlooks tax and cash flow implications to a certain degree.

IMO, asset income should be separate from any expected gains/losses and the account balance adjusted for gains/losses/inflation.

I believe there needs to be an option to hold (municipal) bonds to maturity at face value (on a tax exempt basis). When i look at the results of ESP, i am convinced this critical aspect of retirement funding is overlooked.

i tried to use a reserve fund and found that led to inaccurate net worth and unnecessary life insurance requirements.

The nominal asset income is calculated based on the nominal rate of return.
In your example $50,000 of nominal asset income can be seen on the Federal Tax Report. However, as Dan explained the real value of that income in 2017 dollars is $24,000.

You pay taxes on nominal income, but you live on real income!

jsalino's picture

so the asset income is after inflation and after tax?

dan royer's picture

The asset income you see in the Total Income report, the $24,000 in this case, is current year dollars, today's dollars, which means inflation has been accounted for.

Behind the scenes, the amount that is taxed is $50,000, which is the nominal equivalent of the $24,000 that you see in the total income report. That's what Mike meant when he said you are taxed on nominal income and live on real income.

Perhaps Mike will comment if he has a better way of explaining things.

dan royer's picture

I might also add here, that if you want the asset income you see on the Total Income report to be taxed at the cap gain/dividend rate, you should indicate that in the Assumptions/Taxes area of the program. If you want 100% of that to be taxed at that cap gain rate, enter 100%, if you want 75% of it to be taxed at the cap gain/dividend rate, enter 75% (the other 25% will be taxed at ordinary interest rate), etc.

jsalino's picture

and if it is all municipal bond income (tax exempt)?

dan royer's picture

If that's the case, use the box there for municipal bonds and indicate the share of income that should be viewed as municipal bonds.

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