Retirement Goal Needs Analysis 53
From Planipedia
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Changes have been made to the Retirement Goal Calculator
- NEW LOOK AND FEEL
- GRADUATED TAXES
Contents |
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 with the NEW tabs.
Client Information
This is the area where you would enter the personal information about your clients like name and date of birth.
Please Note that all date fields should be entered using the YYYY-MM-DD format.
TIP: By using the tab key you can move from one field to the next.
NEW to version 5.3 is the new save successful message!
Assumptions & Notes
On this tab you can identify the various different assumptions like, CPP/QPP eligibility, and OAS benefits are just some of the assumptions you can capture here.
1. Retire By and Mortality - Enter in the Retire By and the Mortality age or you can leave the default. You can enter this information for both the client and the spouse.
2. CPP and OAS - You can specify the percentage of CPP your clients are eligible for and also specify the start age for both your client and spouse. The next field is with regards to Old Age Security benefits. Eligibility for OAS benefits is a bit more straightforward than CPP eligibility since it’s based primarily on residency. All you have to do is select from this drop down list the number of years of residency your client will have in Canada by the time they reach age 65.
3. Inflation - The impact of inflation is felt in all aspects of planning for the future. Set an inflation rate that reflects a reasonable level for long term planning. We base our default on the historical long-term rate of inflation in Canada over the past 40 years.
4. Notes is a place where you can gather any other assumptions or information regarding your clients.
Please note: What you actually see within this screen will depend on your jurisdiction so don’t be concerned if you don’t see all of the same things on your deployment.
Goals Tab
Goals Tab is where you will identify the goal along with the inflation rate, tax rate and length of the goal. Also we are now integrating the Marginal Tax Calculation into this calculator. No more trying to guesstimate an appropriate average tax rate!
5. 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.
To read more on the Full Tax Calculation and the differences click here.
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.
6. Requirement - The retirement income goal can be done in 1, 2 or 3 tiers. This let’s 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.
7. Save Successful message is on each and every tab.
Investments & Savings Tab
This is where you can identify any investments your clients currently have or savings that they are currently doing.
8. 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.
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.
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.
9. % 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.
10. 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.
11. New Account - You also have the ability to add in additional accounts for your clients.
PLEASE NOTE 
You may come across a "Reset ACB" button on the screen. What this button will do is set the ACB (Adjusted Cost Base) to the Market Value of the assets.
EXAMPLE: When you enter in your account with a “Principal” of $100,000 but by mistake entered a value of $10,000. The ACB gets set when you enter the first value for the account and thus you’ll end up with an ACB of $10,000 on an account with a FMV of $100,000, when you change your account from $10,000 to $100,000 this button will appear making sure you do reset the ACB back.
However there will be cases where you have already set an ACB on the Assets and Liabilities screen and have more than one asset in any given account, if this is the case then it will use any of the ACB's from that screen. See screen below where the ACB does not match the total market value and a screen shot from one of the detailed assets from the Asset and Liabilities screen where the ACB is different.
Pensions & Other Revenues Tab
The Pensions and Other Revenues section is where you can identify any revenues the clients will receive.
12. You will notice that the CPP and OAS are already created for you. There is also room to add in a couple of more revenue records.
13. When creating new revenue records it is important to input the start and end year of these records.
Results
14. The results tab shows you at a quick glance the total net present value of all investments, revenues, taxes and goal that you have identified. Finally it will subtract the goal from the after tax income to determine whether there is a shortfall or a surplus. In this case there is a shortfall of $220,821. That’s a today’s dollar number.
15. It also shows you a new graph showing you the percent of the goal that is achieved.
16. There is many Enhanced Reports you can generate 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:
- Client Summary Report
- Summary Analysis
- Analysis of Investment Accounts
- Other Revenues Analysis
- Tax Summary
- Client Consolidated Report
Planning Alternatives Tab
The “Planning Alternatives” identifies a variety of actions that could eliminate the shortfall that’s been identified.
NEW exciting feature of the Planning Alternatives is the interactive scroll bar. This scroll bar allows you to change the different planning alternatives and see the results of the graph right on the screen interactively.
17. You would choose the Planning Alternative you wish to view by choosing the radio button then you would click "Calculate"
18. Once you hit calculate it takes a moment to calculate this planning alternative. When it has completed you are presentented with an Interactive Target scroll bar which allows you to change the alternative to see the difference. In the example shown you will see that we adjusted the scroll bar to a lower income.
20. The screen also provided you a Cash Flow Analysis graph and an Investment Capital graph. Both of these graphs change when you move the scroll bar.
Definitions
Below is a definition 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.
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 %: What percentage of the money is taxable
