Normal annual growth or mid-year disruptions in the financial markets can raise questions about how to include sudden market gains or losses in your MaxiFi plan. You will also have normal growth changes as the year progresses. So you might assume a cautious 3-5% return, but the markets by mid-year or beyond may reveal, for example, a 12% return, significantly higher than you were assuming. 

If there is a change in your current-year labor earnings, you should go ahead and enter that change to your wages so that MaxiFi will accurately reflect your annual earnings come Dec 31st. 

  • If you receive an unexpected bonus in the middle of the calendar year, just add that to labor earnings if it does not involve FICA tax, create a Special Receipt taxable at ordinary rates.  

But in order to account for normal or dramatic market activity, up or down, you should use the following  approach to adjust for your updated expectation about a safe return assumption for the current year: 


Changing Return Rates

Use Settings & Assumptions to change the current year safe return expectations (for regular and/or retirement assets) to a percentage you think you will "for sure" earn for the entire current year. For example, if your current plan uses 4% nominal return, but by mid-year or later in the calendar year you feel confident that 8% will be your total return for the current year, you can change the return rates for regular and/or retirement assets in the current year and then use the change of return check box to set them back to the default safe return rate for the next calendar year. 



Remember, the return rate you enter using the approach above is for the entire current year, not just year-to-date, and it's not an assumption about "market return" (which often refers to the DOW or S&P index) but rather your assumption is about your personal return based on your asset allocation.  

Keep in mind the lessons of 2018 when the stock market lost about 10% of its value, most of it after October. One market observer wrote near the end of 2018, that "The vast majority of losses have come since October, when the stock market, which was experiencing the longest bull run in history, took a turn for the worst. The stock market is on pace for its worst December since 1931." So . . . are you sure that your YTD gains will still be there by the end of the year? In other words, keep in mind that even in October it's hard to know for sure how it's all going to shake out by year's end. Corrections in the market can be dramatic but reversals can be just as dramatic.

Ask yourself also, from a practical perspective: will your spending change if you go ahead and bake in now or commit to your optimism (or pessimism) about what your year-end returns will be by December 31? You can make a case for doing so, but one can also make a case for waiting for those return chickens to hatch. Only on December 31 will you know for sure what your return will be for the current year. 

Spending Behavior

The decisions we face as described above remind us that our rate of return assumption is as much, if not more, about our spending behavior than about reflecting accurately what our return rate will be by year's end. The return rate we use reflects how cautious or aggressive we are in the face of uncertain return rates. MaxiFi urges caution so as to not fall into the "sequence of return" trap whereby we spend too much or over withdraw and find ourselves having to cut back spending in the following years in order to dig ourselves out of a hole. Once our spending goes out the door, it's difficult to recoup it and get back to the spending levels we had before. 

In the middle of a year with good market returns, we may be itching to record that upside in the middle of the year. If you don't plan to spend that extra discretionary spending that a more optimistic return rate affords, there's little harm in doing so because at year's end, you'll know the actual return you received and update your assets accordingly. But if you are wanting to assume a higher return so as to justify spending higher amounts in the current year, well, be careful. 


See also: Two Approaches and Two Purposes to Planning (why be so cautious?)