"The Golden Albatross" Book - End of Chapter Resources: Chapter 9

Chapter Nine Refresh

Welcome to the “End of Chapter Resources Page” for Chapter Nine of The Golden Albatross book. In Chapter Nine, I taught readers how to calculate the Total Dollar Value (TDV) of their pension. TDV is different from the Initial Dollar Value (IDV) of a pension value that I addressed in Chapter Eight. The reason TDV is different is that it calculates the cumulative value of the pension over it’s projected lifetime.

TDV also takes the negative effects of inflation into account, if the pension doesn’t have an inflation paced Cost of Living Adjustment (COLA). Depending on the COLA circumstances of your particular pension, TDV calculations may range from easy to hard. TDV calculations for pensions with a full inflation-linked COLA are the easiest to make. TDV calculations for pensions with no COLA and a gap between the point at which the pensioner retires and the point at which payments start are the hardest calculations to make.

That said, there aren’t many extra resources required to effectively make the calculations required in Chapter Nine. In the chapter, I linked to two online calculators that can be used as shortcuts to calculate TDV for no COLA pensions. They provide an ability to take inflation’s devaluing effect into account on a no COLA pension over its entire lifetime. However, you must modify (or hack) the calculators to do so. I listed the hacks required below, under each link.

Chapter Nine Online TDV Calculators

Buy Upside’s “Growing Annuity Due Calculator – Future Value”

- https://www.buyupside.com/calculators/annuitygrowingduefuturevalue.htm

1. 1. Enter the annual pension amount (e.g. $56,778.47) into the “Payment” box
  2. Enter the projected annual inflation rate as a negative number (e.g. -2) in the “Discount Rate” box
  3. Leave a zero as the “Payment Growth Rate”
  4. Enter the projected ELS in years (e.g. 40) in the “Number Payments” box
  5. Hit the “Calculate” button
  6. When the grey “The following error(s) occurred: – rate must contain a number between 1 and 100” error box appears, hit “OK”, and then ignore it
  7. Look at the “Future Value” box and obtain your TDV (e.g. $1,542,141.87)

Omnicalculator’s “Future Value of Annuity Calculator”

- https://www.omnicalculator.com/finance/annuity-future-value#how-to-use-our-annuity-calculator

1. 1. Enter your IDV in the “Payment Amount” section
  2. Set the “Interest Rate” to a negative number to simulate inflation (e.g. -2).
  3. Punch in your Estimated Life Span (ELS) into the “Annuity Term” box
  4. Choose your “Compounding Frequency” for your interest rate/inflation number. Use “yearly” if the IDV you entered into the “Payment Amount” box was an annual amount. Choose “monthly” if the IDV amount you used was a monthly amount
  5. Choose the “Payment Frequency” for your IDV. Again use “monthly” or “yearly” depending on what you placed in the “Payment Amount” section
  6. In the “Type of Annuity” section a user can toggle between the “Ordinary Annuity” and “Annuity Due” if they want to play around with the difference between calculating inflation at the end of the period vs. the beginning
  7. The tool defaults to the “Ordinary Annuity” (i.e. the end of the “Compounding Period”) setting
  8. You must toggle the setting to “Annuity Due” to get the same results as the Billy the Kid supplied formula I use in Chapter Nine
  9. This is important! Remember I calculated a $31,472.28 difference in TDV just by moving the timing of my simulated inflation calculations!

Straight-stick Online Inflation Calculator

In Chapter Nine, I also linked to Buy Upside’s “Inflation Calculator”. The inflation calculator is good for devaluing single sums of money. For instance, I used it in Chapter Nine to devalue the IDV (i.e. the annual pension amount) for a no COLA pension with a seven-year gap between retirement age and pension payout. I did that before running that modified IDV through Billy the Kid’s TDV formula.

- http://www.buyupside.com/calculators/inflationjan08.htm

As a word of caution, do not try to use this calculator to calculate TDV! In other words, if you have a $60K a year pension that has no COLA, and you think the annual inflation rate will be 2% during your 40-year ELS, do not try this thinking it’s a shortcut:

Step1: $60,000 x 40 = $2,400,000

Step 2: Devalue $2,400,000 at 2% inflation for 40-years using Buysupside inflation calculator

Step 3: Result = $1,086,937.00

That method is wrong. It doesn’t devalue the pension payments annually and fractionally as I discussed in Chapter Eight, and like the formula Billy the Kid supplied in Chapter Nine. Using the same inputs as above that formula would have yielded:

60000*(((1-.02)^(40+1)-(1-.02))/-.02) = $1,629,641

That’s a 33.3% difference. Consider yourself warned!