Hi,
How do I model expenses that grow faster than inflation rate? I would appreciate any guidance.
Example A: I plan to buy a car in 10 years. Its current price is $40,000, and it’s expected to increase 1% above inflation. Is there any way to model this besides manually calculating
40,000 × (1.01)^10
and entering the result in Phased Expenses?
Example B: My auto insurance costs $1,000 today and is expected to rise 2% above inflation. How would I model this expense?
For the car, I would just escalate it as you think appropriate since it is a single point in time expense that may cause a cash flow crunch in the year of purchase, so possibly worth thinking about how you would raise the money that year.
For insurance, I would ignore your expectation that it rises faster than inflation since it is an ongoing expense and the definition of the inflation rate you should input is your average. If one expense is above average, others must be below to balance it out.
By the way, not sure where you are getting this expectation of high auto inflation. I looked it up and historically they've gone up less than inflation.
For things we buy every day, we don't notice how quickly our money is being eroded in value, but since cars are less frequent purchases, it slaps us in the face. For instance, the CPI-W is up 25% since the end of 2020! So a a lot of those fat looking portfolio values these days are a mirage.
Thank you Richard for your thoughts. Those are just examples. In Pralana, how do I model expenses that grow faster than inflation rate? Is there a way to do that in Pralana?
There are several inflation rates that Pralana supports as they are common concerns, they are under Build-Scenario Assumptions-Inflation. Pralana supports separate entries for General, Medical, Long Term Care, College, Medicare and IRMAA Thresholds.
As I said, for special one time expenses that you project will inflate rapidly, track them separately. For miscellaneous things that you think might move faster than inflation, Pralana doesn't do that and I really don't see why they would be worth trying to track those guesses separately. If you think lots of important things are going to inflate rapidly, then increase the General inflation rate.
Beyond the great responses from @ricke, a couple of other subscribers have requested that we add support for an inflation adjuster for each of the Phased Expense categories and the Misc Expense items. We just haven't gotten around to adding it yet, though. We use the feedback feature for managing usability improvements and feature requests, so if this is important for you, please create a feedback item for it and that will be another 'vote' for getting this done.
@narcisotan There is a Feedback link at the top right of every page.
But, no need to add it. Based on your forum post, coupled with the prior requests of others, I am making the change to allow you to specify an inflation adjuster separately for each Phased expense category and each Miscellaneous expense item.
Thanks for the nudge to push this one over the finish line!
While I am at it, I will also modify the Phased and Misc Expense Projections to show a column for each of your expense items/categories as well as the totals.
These changes will be released in the next couple of days.
Charlie
@cstone. Thanks so much. It’s an important feature, I think. This way, one can decouple the ss cola with rate of inflation for expenses. Is the release just for online or for spreadsheet as well?
