Planit:Retirement Goal Needs Analysis

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Planit: Retirement Goal Needs Analysis

The Retirement Goal Needs Analysis calculator is a valuable tool that identifies if your client can achieve their retirement income goals. Below are highlights of some of the key features in this calculator.


1) Average Tax Rate vs. Full Tax Calculation Methods

One valuable feature in this calculator is the ability to choose whether you wish to use an average tax rate methodology or a graduated tax calculation for your retirement analysis. For sites where this feature is active, you'll see a check box called Full Tax Calculation. When this box is NOT checked the analysis will use an average tax rate approach. When this box IS checked, the analysis will use full graduated tax rates for the client and spouse starting in the year of retirement. Note that both the average tax rate and graduated tax rate versions will use the tax rate you enter on the Assumptions and Client Information area for the pre-retirement period. This means that this manually entered tax rate will be used when calculating the tax on investment income pre-retirement since in the pre-retirement period the calculator has no information about the client's other taxable income so cannot apply graduated tax rates.

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2) Tax Rate (Pre-Retirement)

As just explained above, the number that you enter in the Tax Rate field, will be used to determine the taxes payable on any investment income earned during the pre-retirement period. This will be the case for both average tax rate and full tax rate calculations. So if you have a client who is currently 45 and they are retiring at age 55, this tax rate will be used between now and age 55.

So what is the right tax rate to assume? Since clients in their earning years have taxable income from employment, generally their investment income is taxed at their marginal rate. Thus it would usually be appropriate to use the client's marginal tax rate. However there may be cases where you elect to use a lower tax rate, perhaps when the client is paying the taxes on their investment income out of their cash flow.

Here's an example. Your client has a $100,000 taxable portfolio earning 4% interest. The taxes on that interest income using a marginal rate of 43% would be $1,720 ($100,000 x 4% x 43%). If the client made withdrawals from the investment to pay these taxes they would have $102,280 after one year ($104,000 - $1,720). But if this client actually pays those taxes out of their cash flow, and thus won't make any withdrawals from the investment, after 1 year their investment will be worth $104,000, not $102,280. Yes, the taxes will be paid, but the portfolio will actually grow with no tax impact in this situation.

So what is the right tax assumption to use? For one client who is paying their taxes out of cash flow the right tax rate would be 0%. For another client who is paying their taxes out of their portfolio the right rate would be 43% (MTR) to recognize that the $1,720 of taxes will come from the portfolio.

The Tax Rate field allows the advisor to decide the appropriate assumption for the client given their situation. If you want some help with this, you’ll notice a Suggestions link is provided. This will open a window where we provide both average and marginal tax rates for various income levels.

Best Practice: Enter the client's marginal tax rate. This assumes full taxation in their taxable investment income which is the most conservative assumption.


3) CPP Start Age

You can specify when you want to assume CPP will start. The default will be age 60, or your client's retirement age, whichever is later.


4) Requirement

The retirement income goal can be done in 1, 2 or 3 tiers. This lets you recognize a need for higher income during the client's young and healthy retirement years scaling their income down as they age and have smaller requirements.


5) Average Tax Rate

An Average Tax Rate assumption is set for each tier of your retirement goal. This allows you to recognize that taxes may be lower in cases where smaller withdrawals are being made from tax sheltered accounts. Note that the need to identify tax rates on the retirement lifestyle will disappear if you are using the Full Tax Calculation since the full tax calculation version will calculate the taxes dynamically for the client and spouse during the retirement period.

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This table will provide you with some suggestions for identifying the tax rate.

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6) Portfolio Selection and Rate of Return

Using the drop down list provided, you can select the client's current portfolio, their target portfolio, or any of the standard portfolios available on your site which will determine the rate of return and the standard deviation to be used in the analysis. In the example below the "Conservative" portfolio was selected which has a return of 6.96%. You also have the option to select a custom rate of return which will let you manually set the rate of to any number you choose.

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7) Income Distribution Pie Chart

You'll notice a small pie chart beside the rate of return. When you click on this pie chart, it will open a pop up window where the investment income distribution is identified. If you have selected the client's current, target or one of the other standard portfolios from the drop down box, then this pop up will be populated with the income distribution that would result from a typical portfolio of that asset allocation. For example, if the portfolio was invested 100% in cash, then 100% of the income distribution would show up under Interest. If the portfolio was invested across multiple asset classes, then the distribution will cross the different income types (interest, dividends and gains). In this example we see 61% is interest, 6% dividends and 33% capital gains. These income distribution assumptions will affect the taxation of the investment income in the analysis recognizing the preferential tax treatment applicable to dividends and gains.

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Because the defaults used in this pop up are typical for the asset allocation of the standard portfolios, there is no need to even go into this pop up for most situations. The only time you need to edit these distributions is if you wish to make assumptions that are different from the defaults or if you if you are using a custom rate of return and you want to identify the income distribution for that assumption. If you edit these values and then save, the income distributions will no longer be adjusted when you select a different portfolio. Thus you should only edit and save new values if you wish to have total control over these assumptions.


8)  % of Account

You can specify how much of any account is to be used for retirement. In the example above, we are using 100% of the money in all three accounts; however, we could have changed the Non-Registered investment to only use 75% of $100,000 in this account. This lets you recognize certain funds are earmarked for other purposes.


9) Annual Savings

Under the Annual Savings for any account you can tier the savings to recognize changes. You can also recognize any employer match amount right on the calculator screen.


10) Revenues

The Pensions and Other Revenues section is where you can identify any revenues the clients will receive. You will notice that the CPP and OAS are already created for you. There's room to add in two additional revenue records.

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11) Summary

Under the Summary section the calculator will identify if the client has a shortfall or an estate. In this example you'll see there is a shortfall of $235,589.

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12) Planning Alternatives (Income Available)

This section is normally collapsed out of view in order to not launch any calculations until you are ready to do so. You can use the + sign to expand the section when you want to identify actions that will eliminate any shortfalls that’s been identified.

The radio buttons beside each of these alternatives allows you to select which one you wish to view. The example above shows you that if you were to reduce the two tiered goals from $55,000 and $45,000 down to $46,310 and $36,310, it will eliminate the shortfall.

You can view each of the planning alternatives by clicking the on radio buttons and clicking on calculate.

Often you'll find that it's not any single alternative that will be used but rather a combination of several that will be appropriate for your client.

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13) Planning Alternatives (Rate of Return)

Here you'll see an example of using the Rate of Return planning alternative. The calculator has determined that the rate of return that would be needed in order to eliminate the shortfall would be 12.59%. This illustrates the magnitude of the problem! If the rate of return is unrealistic then you know that you can't depend on this single option to eliminate the shortfall.

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Definitions

Below are definitions of some of the various fields within the calculator and what those fields are looking for as per information.

Requirement: The total amount of money needed annually to meet the objective expressed in current dollars after tax, or how much it would cost today.

Inflation %: The requirement dollars will be indexed or increased annually by this rate.

From Year: The first year, or the age, when funds are required to be paid out. It must be at least one year from the current date.

To Year: The final year or age when funds are required. In a retirement calculation this would be an assumed mortality age.

Principal: The current amount of capital in the Registered or Non-Registered investment portfolio. Rate of Return %: The annual rate of interest on the investments. For a pretax portfolio use a nominal or pretax rate, otherwise an after tax rate of return should be used.

Savings: Annual savings between now and the last year before you start paying out the funds.

Index: Will allow you to specify an index rate for savings.

Taxable %: Identify the percentage of the revenue stream will be taxable upon receipt.


Enhanced Single Need Reports

A series of reports are generated by the Goal Calculators that are easy to understand and to present to your clients. You can choose on a client by client basis which report to use and when. These include:

  1. Client Summary Report
  2. Summary Analysis
  3. Analysis of Investment Accounts
  4. Other Revenues Analysis
  5. Tax Summary
  6. Reliability Forecast
  7. Client Consolidated Report

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