Goal Based Computing
The Burger Quotient
Reverse Tax Engine
Live Rich - Die Broke
Done your T-zero yet?
It's time to bring tax-accuracy and the "what-if scenario" to the financial planning process.
Whether you are interested in your own personal retirement plan or you provide planning information in
an advisor-client role, this message is of utmost importance.
Everyone agrees that personal financial planning has meaning in a 'lifestyle' context only. The subject,
whether in their forties or eighties has only one primary concern.... "are my assets going to provide me with a
desired lifestyle over a specific period of time?" By assets, we mean future as well as current assets... salary (our
career is an asset), a future inheritance or capital gain, a business, our pension or CPP status... each of these can be
counted as assets. Liabilities might include loan pmts, insurance premiums, etc. All other measurements are peripheral.... income tax, the size your RRSP will grow to,
... none of these matter to the client.
Lifestyle (cases of beer, bags of
groceries, gallons of gas....) is the reason we work, save, agonize over our investments, ..... in order to
secure a smooth predictable lifestyle out to a certain age, and (perhaps) provide an estate to pass on to our survivors.
Unfortunately, mathematically linking our assets with our lifestyle needs, is less than trivial. A salary
which will cease or dip, pension income, CPP, OAS, the effect of loan or mortgage pmts, an inheritance
or a capital gain happening out in time, income and/or proceeds from selling a business.... this income is lumpy and erratic, while we want our lifestyle to be
smooth, predictable and hopefully, sustainable.
The current generation of "shortfall/deficit" planning software can't solve the 'goal-based'
math. Plans are painstakingly created in the backroom -manually- and generally presented in printout form. There are no 'in front of the client', 'what-if scenarios'; data changes are effected on a 'come back next week' or a 'we'll fax it to you' basis.
Now, there is a new type of program available.....the Investment Cash Flow Scheduler. This program creates the cash flows automatically.... no
'shortfall', no 'deficit'. This is true 'goal based' computing.
The cash flows are driven by the client's net income need. In seconds!
The client, not the
planner, drives the program. Interactively!
The tax formula is preserved in complete detail..... provincial TONI calcs, capital gains, OAS clawback, interest expense deductibility,
charitable donations, dividend tax credit, the effect of indexing the tax brackets ..... the complete T1 computation is
projected out through time.
Tax (T1) treatment of nonregistered capital (equity and tax-accrued) is NOT approximated in any way.
Because of this unique "goal based" computational approach, you can examine the
exact bottom line effect (in less than 3 seconds on a Pentium 750) of the following real life financial decisions...
Notice that these aren't the traditional questions which come up in many advisor-client meetings such as...... 'what should I invest in?' or my personal favourite... 'how much can you afford to invest?'.
- should I continue to shelter/acquire RRSP capital? How about the TFSA?
- should I pay down my mortgage early, borrow to invest? (leverage)
- how does the future downsize/sale of my home in 10 years effect my lifestyle now?
- how does a reverse mortgage effect my estate -over time- when all cash flows are considered?
- what will my estate realize if I should die prematurely?
- what is the effect of Term/Whole/Universal Life insurance on my estate/tax plan?
- how will buying a new car every three years effect my cash flow?
- which pension/payout alternative should I choose?
- does my divorce settlement seem fair when looked at over time?
- how can I ensure my estate will net exactly $200K?, $500K?, $0K? (i.e. die broke)
- should I take early or late CPP?
- how does borrowing from my RRSP (and repaying) for a home purchase effect my overall retirement plan?
- what about LTC or disability insurance? capital needs?
- what is the real effect of a major charitable gift?
- how can the value in my UL be used to collateralize a future investment loan?
- can I afford to retire early? take partial retirement?
Remember, RRIFmetic creates a full 'live rich - die broke' plan in under 3 seconds (16 meg/pentium 750) The above questions can be tweaked and answered interactively. This is true "what-if?" computing.
If the software you are using has any report or reference which uses the word "shortfall, surplus, or deficit", then it is not goal-based, it is approximating the reverse tax calculation.
If you are a planner, finally, here is a fully tax-accurate interactive financial plan which your client can help create and which he can confidently take to his accountant. This is what 'goal-based' financial planning is all about.