Strange result - Investments

Q: See initial screen

INVESTMENTS

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Now, when I UNCHECK the TIAA line:

 

 

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The overall screen projection picture looks better by 1 year, which is totally wrong. Why?

A:  At first glance this does seem counter intuitive but it has to do with the way we do the calculations.

 

If you look at the screenshot of the investments page WITHOUT line 1 TIAA included, the aggregate investment return is 7.87%

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If you then look at the same screen WITH the line 1 TIAA included, you see the aggregate returns go down OVER 1% to 6.71%

Here is that screen:

 

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Now if you go to the Spreadsheet and look in two places….

The Qualified Tax Deferred Balance Start of Year and the Income Generated from Investments…

look at ages 70, 80, and 90 with and without line 1 TIAA checked.

 

You will notice that somewhere in there the version without TIAA ends up with higher balances.

Unchecking TIAA obviously starts with a lower beginning account value… but over time the 1% extra return

makes it surpass the one with TIAA included which has a lower return.  i.e. the compounding overtakes

the higher beginning balance at a lower rate at some point during the years)

And that is because there is a higher return being applied which is generating higher “investment income”.

 

Basically you are seeing that the 1% higher return makes a bigger difference over a long time period and overtakes

just adding in the extra dollars.

 

WHY?

 

Because in this case there are 4 tax-deferred qualified accounts and we have no way of knowing which one to tap first.

So program in order to run the calculations lumps all the accounts together into one total and then grows it at the “blended return”

of the entire bucket.   This simplifying assumption is lowering the overall return when adding the additional $43k at 3% which pulls

down the return of 8% on the other account.

 

Even though this is counter intuitive this is not a bug in the calculations but just the effect of compounding over a long time period.

 

One might say “well hey keep the 4 accounts separate and grow them at their own returns” and don’t aggregate them.

But then which account do we tap first?  If we need $10k where does it come from?  Do we pull it from the 3% bucket or the 8% bucket.

It gets really complicated fast and also someone could enter 10 or 20 qualified accounts and it gets even more complicated.

 

The aggregation of the tax types and then growing them at a “blended return calculated at the beginning of the simulation”

is what causes this.

 

If you want to verify that idea, set all returns to 8% or every return to 3% and then check and uncheck the first line and you will

not see this unusual effect.

 

My last thought is just why is this even an exercise.  Either you have the TIAA account and should include it or not.  

I don’t quite get comparing it included vs. not included.

 

My only other thought about reprogramming it might be to tap the lowest return bucket first but the if/then logic

would have to cover each bucket no matter how many there are and right now that would make the calculations

really complicated.

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