Compare Alternatives

Provide a side-by-side comparison of the effects of differing initial assumptions on both conserve and consume principal strategies.

So, when you compare the two alternatives side-by-side, you can see the impact of trying to live off of the interest versus being able to consume principle.  

On the left, the person is living off the interest that is generated by the nest egg.  But, he has to pay taxes so his net income is the difference.  When we look at the impact that inflation has on the money we can see the real purchasing power and how it is decreasing over time.

On the right, the person is consuming the principle and interest of his nest egg and you can see the difference in true spendable income that this provides.

Now, one might argue that the insurance policy costs you some of your nest egg to purchase.  So, let’s see what happens if the nest egg on the right is reduced by 25%.  As you can see, the person who has the ability to consume principle AND interest, still has a greater lifestyle.

Documentation Worksheet:

Conserve Principal Columns:

Gross Withdrawal = Total Assets * Interest Rate  (Total Assets remains constant since all growth is withdrawn at the end of each year.)

Tax Rate = Annual Taxes Paid / Annual Gross Withdrawal (Tax Rate remains constant since the withdrawal is all taxable growth.)

Taxes Paid = Annual Taxable Growth * Tax Rate

Purchasing Power = Present Value Calculation with the following inputs: Rate = Inflation Rate, Periods = Year - 1, Pmt = 0, FV = Gross Withdrawal - Taxes Paid.

Consume Principal Columns:

Gross Withdrawal = TVM Payment Calculation with the following inputs: Rate = Interest Rate, Periods = # Years in projection, PV = Initial Total Assets, FV = 0, Mode = Payments at End of Period.

Tax Rate = Annual Taxes Paid / Annual Gross Withdrawal (Percentage of tax will reduce because of the changing ratio between taxable growth and return of principal).

Taxes Paid = Annual Taxable Growth * Tax Rate

Purchasing Power = TVM Present Value Calculation with the following inputs: Rate = Inflation Rate, Periods = Year - 1, Pmt = 0, FV = Gross Withdrawal - Taxes Paid.

Percent Change (Δ%) = (Consume Purchasing Power - Conserve Purchasing Power) / Conserve Purchasing Power.

Documentation Summary Line:

For Both Strategies:

Gross Withdrawal = Sum of all Gross Withdrawals in projection.

Tax Rate = Sum of Tax Rates / number of years in projection.

Taxes Paid = Sum of all Taxes Paid in projection.

Purchasing Power = Sum of all Purchasing Power results in projection.

Percent Change (Δ%) = Sum of  Percent Change / number of years in projection.