|
|
Retirement in a Nutshell report has three major pages, one optional page, and four informational pages.
This is a brief description and things you should consider about the report and
pages.
|
|
|
It would be very helpful for you to print out the sample report to look at while
you are reading this overview.
|
|
|
|
|
|
Informational Pages
Cover Page - The cover page displays the names of the client and spouse;
the name, address, and phone number of the advisor; an area that the advisor can
edit to display the company or broker dealer's name and any compliance language
that is required.
Disclosures Page - This page contains standard disclaimer language to meet
regulatory requirements. It will insert the name of the advisor and the advisor's
company or broker dealer in the first paragraph, as appropriate.
Index Page - This page shows the indices used and the basis for setting investment
target returns. These indices are only able to be adjusted by the website administrator.
Assumptions Page - This page summarizes, in one place, all of the assumptions
used for that client's report. It is specific to the client and spouse's individual
investment accounts, as well as more general types of assumptions.
|
|
|
|
|
|
Major Pages
Income and Expense Page - This page shows information about the client and
spouse's current income and expenses. At the bottom of the page, it shows any defined
benefit types of income such as pensions and Social Security that will be available
in retirement.
At the top of the page is a summary of any current income for the client and spouse
with adjustments for Social Security and defined benefit plan contributions that
come out of the client’s or spouse’s paycheck. This adjustment is made because the
money comes out of the check and is, like savings, not available for current expenditures.
The program does not adjust for Medicare contributions because this is a medical
expense (not a savings item) that would be a normal expense for some type of health
coverage, such as supplemental, throughout a person’s lifetime.
In the middle of the page, there is a section where the client's actual current
monthly expenses are calculated for them. This is accomplished by taking the gross
income (adjusted for Social Security and defined benefit contributions) as shown
at the top of the page, subtracting income taxes, and subtracting any retirement
contributions and other savings (including college saving since it is not part of
everyday living expenses). The rest of the client's income is spent. If the money
is not going to taxes or savings, it is being spent. The program then takes one
further step. It subtracts any long term liability or debt payments. This is done
because these debt payments will come to an end someday and do not represent living
expenses that will continue throughout retirement.
What remains after liability payments are subtracted is "Net Monthly Living Expenses."
These are the ones that will be there all through retirement. They include such
things as food, utilities, property taxes, entertainment, etc. This is the most
important number in the program to get right. It establishes the current standard
of living to which inflation is applied and becomes the benchmark for evaluating
future cash flows. If clients have forgotten to tell you about an account that they
are adding to for savings, the program will calculate their current net living expenses
as being higher than they really are and the program will adjust that higher number
for inflation into the future and show compounding higher cash flow requirements
than really exist. So be sure clients are telling you the whole story if they want
an accurate assessment.
|
|
|
Assets and Liabilities Page - This page is a simple balance sheet that shows
a client's assets, liabilities, and net worth. It also shows monthly additions to
any of the investment accounts. This page is very helpful in quickly reviewing the
asset, investment, and liability items entered with the client and identifying any
errors or oversights.
|
|
|
Assets and Income by Year (Year by Year) Pages - This is the heart of the
program. It is a series of pages that shows the client and you, as the advisor,
how all the financial pieces come together, year-by-year to provide the cash flow
for retirement. It shows enough detail, item-by-item, and line-by-line that the
client can easily understand and follow the numbers. Color is also used to make
the pages easier to read and understand. Income items are shown in green, investment
items are shown in blue, and expense items are shown in red.
The years are layed out left to right with five years displayed on each page. The
client and spouse's ages are displayed underneath the year. The top portion of the
page shows income items, including when salary stops and when pensions and Social
Security kick in. All of these items are adjusted for cost of living increases.
Below that are lines for investment real estate items, if there are any.
In the middle of the page, the client's investment accounts are shown. They are
separated into separate sections for client and spouse. This allows for different
retirement years or to start drawing income in specified years. The investment real
estate and various investment accounts are displayed on two lines with the income
from those items shown in green on the second line for that item. In the year the
client or spouse reaches their retirement age, as entered by you, the investment
income will be shown, based on the withdrawal percentage you entered.
The target values shown for investments and real estate are the values as of the
month in the year, the report was prepared. This allows a full year’s return regardless
of when the plan is prepared.
The lower part of the page shows expense items in red. Retirement contributions
are shown for both client and spouse. The contributions to retirement plans are
increased by the inflation amount on the theory that actual contributions and contribution
limits will increase over time to keep up with inflation. It would not be accurate
to assume they would stay the same over time. Retirement contributions are subtracted
from total income to determine taxable income for that year. The client's tax rate
is then applied to that number to calculate income taxes for that year. If the client
has tax free income, it is included in total income but not in calculating taxable
income. If the client is making contributions to non-qualified annuities that are
not deductible, the contributions will be included on the investment contribution
line but not deducted in arriving at taxable income. The bottom line, however, is
that the taxes and the net income numbers will be correct.
The Annual Living Expenses are shown on one line and are adjusted each year by the
inflation rate, as provided on the Expense entry page. Immediately below that, on
separate lines are the annual payments for various liabilities. The liabilities
will continue to display until the year they are fully amortized.
The bottom line on the page shows net cash flow by subtracting total annual expenses
from net income. Surpluses are shown in green and shortfalls are shown in red. Normally,
the current year will show a zero cash flow. This is because the program calculates
the expenses based on the assumption that every dollar that does not go to savings
or taxes is spent. If you want to override the expense calculation and put in another
number based on client information or to see how a change in expenses would affect
future cash flows, it may be entered in the optional entry fields on the Expenses/Taxes
entry page. The cash flow will normally begin to show small but increasing surpluses
until retirement because the income items are increasing by cost of living adjustments
while liability payments are not increasing and are staying flat during that same
time frame. If, however, you entered cost of living increases for income that are
lower than the inflation rate for expenses, you may see slight shortfalls each year
until retirement.
The last page of the year-by-year pages calculates whether there is a surplus or
deficit either before or after retirement. If there is a surplus, it simply displays
the word surplus in green. If there is a shortfall, the program calculates the present
value of the shortfall and the lump sum contribution needed today, annual contributions
needed, or monthly contributions needed, starting this year, to provide sufficient
funds to cover the shortfall from now until retirement. The shortfall numbers are
shown in red. In calculating the present value of the shortfall, the program only
looks at the red shortfall years and does not offset this with surplus amounts in
other years. This is done for two reasons. It gives the advisor a pure view of just
the shortfall requirements and, secondly, it is usually unrealistic to assume that
all surpluses will be saved and not spent. Also, once the advisor knows how much
is needed annually to fill the shortfall, they can look across the years at the
surpluses with the client and show them where they might be able to capture a portion
of that surplus to add to investment accounts to address the shortfall.
With the entire cash flows for several years shown on one page and the ability to
focus on the retirement years, it should make it easier for the advisor to identify
available cash flow generators and strategies for addressing shortfalls. Once the
client agrees the report is accurate and the strategy for addressing shortfalls
is realistic, the entire plan should be printed and bound. This report can then
be used each year when the client comes in to see if the numbers in the plan are
being realized. If not, or the client's situation changes significantly, a new plan
can be done to replace the prior one.
|
|
|
|
|
|
Optional Page
Options for the Next Generation - This page is designed to show a client
or family members the importance of considering retirement account payout options
for the next generation of beneficiaries. Specifically, it shows tax advantages
of "stretching" out payments over life expectancy of the beneficiary, rather than
taking a lump sum payout. Some annuity and mutual fund companies will allow the
client and spouse to specify on the beneficiary forms how they want beneficiary
payments to be made after death. This page is intended to give them information
on the importance of that decision in considering whether to place restrictions
on the payout or not.
This page takes the total balance of the client and spouse's investment accounts
in the last year of the year-by-year pages and shows the amount that would go to
taxes and the after tax amount remaining. It assumes all of the investment assets
are tax deferred and would be fully taxable at retirement. It does not include the
value of investment real estate since that would not be a tax deferred asset. In
most cases, most of the investment assets would be from tax deferred accounts. If
this is not true, you may have to interpolate the percentage of assets that are
not tax deferred as a percentage of the total and point this out to the client.
The purpose of this report is not to calculate the exact amount of assets a beneficiary
will receive, but to point out the huge impact of life expectancy withdrawals (stretch)
versus taking a lump sum.
To keep the information on one page and preserve the impact of the comparison, the
page shows the growth of the account over 35 years (in five and then ten year increments)
of a beneficiary or beneficiaries taking life expectancy withdrawals and the total
amount that would be withdrawn. For simplicity of calculation, all of the options
assume a 40% federal and state income tax on the lump sum taken in the first year,
a 10% before tax return on remaining funds invested, and a 7% after tax return on
funds invested after tax. In other words, it represents a 30% income tax on the
before tax return. The page compares three options; lump sum payout of the entire
balance; 25% lump sum payout with the balance over life expectancy; and the entire
amount taken out over life expectancy of the beneficiary. In the far right column
for each option, it calculates the total income over 35 years assuming all the money
would be withdrawn over that period.
|