Goal Based Computing
The Burger Quotient
Reverse Tax Engine
Live Rich - Die Broke
Done your T-zero yet?
We all want to get the most out of life and have our capital just run out at death. (or just leave a specified
estate) Imagine a term annuity where the income wasn't comprised of annuity pmts, but groceries. (after-tax,
inflation-adjusted income) The problem in trying to plan even the simplest retirement strategy is that it
is impossible to look at any financial/mathematical rule on its own.
The rules which govern the retirement math are:-
- Income tax. Tax is the most complex algorithm. This includes the progressive
nature of the tax rates, the fact that provincial (TONI) rates and surtaxes vary from province to province,
and that the federal and provincial tax calculations are not consistent over time.. the tax brackets and clawback thresholds are now fully indexed. Most important is that RSP and non-Reg capital
are taxed differently and, non-Reg capital is taxed according to its
content (interest, dividends, or capital gains). To complicate matters, some non-Reg (equity) capital can be tax deferred. You cannot simply
approximate tax using a marginal rate!
- RRIF minimum/ RSP/LIRA maximums. Each RSP/RIF/LIF/LRIF withdrawal and/or deposit are
subject to their own set of rules based on salary, principal, etc.
- CPP/OAS/GIS. The effect of early/late CPP and the effect of OAS clawback and the Guaranteed Income Supplement are subject
to another set of rules.
- Compound interest and inflation. Important... the mathematics of the
'time value of money' is still very much in play. Questions such as, "should
I continue to shelter my RSP and pay higher taxes in my later years, or is
it better to cash in my RSP early and pay higher taxes now?", are not easy to answer. It is the present value of all those future taxes which determine the value of the plan.
- Salary Strategy. Salary is not a fixed amount.
It may grow, stay level or you may plan to reduce it at some future time,
take a sabbatical, etc.... Retirement planning means being able to
adjust your working life over time.
Additional financial undertakings. Insurance (term/disab/UL/LTC), loans, RESP, real estate, reverse mortgage, DB pension, an anticipated future sale of your business, an inheritance... each of these directly effect your overall plan. RRIFmetic incorporates and integrates all these entities in one single model, not as separate calculations.
These concepts are fairly simple, however.....
.... in order to plan retirement, ALL of the above rules must be incorporated in a
single computer model, and the calculation must relate to that issue of primary importance to
.... LIFESTYLE .....
Lifestyle ('beer & groceries') is what 'goal-based' planning is all about.
This is the only measure which
allows you to determine whether one plan/strategy is better than another.... it is the essence of 'the RRIFmetic math'. In addition to itemizing assets (capital, salary, rental property, future inheritance, pension
....etc) and liabilities (loan pmts, insurance premiums...) the subject chooses a 'horizon age' (the most optimistic
estimate of life expectancy). The model takes this data, along with a
rate/cpi estimate, and computes a cash flow schedule which exactly optimizes/fixes a
lifestyle over the time frame, with nothing left over.
Here is a simple question.... Given the same investment (rate) environment
and same life span, who is better off?....
- The 55 year old retiree with a $400,000 RSP in the bank who plans to sell part of
his home ($100,000 at age 65) or
- The same person with only $100,000 in his RSP, no future capital gain,
but expects to keep working (salary $65,000 until 64)
Answer... number 2 is better off than number 1!
Number 2 can expect a $26,000 net income out to age 95 and number 1
will enjoy a $24,430 lifestyle. Determing this was straightforward using
RRIFmetic, however the math required to perform the calculation was decidedly
The program is 100% client-driven. Given a
client's current and future assets, RRIFmetic creates a 'goal-based' plan
which incorporates all the mathematical rules... income tax, compound
interest, RRIF/LIF/LRIF rules, CPP, OAS, leveraging, charitable donations, dividends, capital gains, inflation..... in one single
cash flow model. Most importantly, it converges in seconds.... allowing true interactive 'what-if' planning to be done on the spot.
No more"come back next week!"
or, more importantly... no more "my accountant says this plan is wrong!"
Here are some real life financial problems which the program can solve...
- What does the effect of me selling, downsizing or reverse mortgaging my
home sometime in the future have on my retirement lifestyle?
- I plan to sell my business at a future time. Should I take the proceeds as dividends over a time frame or as one lump sum?
- How can I ensure that my estate nets $300K? $500K? $0K?
- How does the purchase of Universal life insurance effect the value of my estate?
- Can I afford to retire early? take partial retirement? a sabbatical?
- How does contributing to a spousal RSP enhance our combined retirement net income?
- What advantage is the RESP over the normal RSP savings regime?
- How does a reverse mortgage effect my plan? effect my estate?
- Which pension/payout alternative is better for my financial situation?
- What if CPP goes away sometime in the future? Should I elect early CPP?
- Should I continue to invest in RRSP capital, pay down my mortgage, or switch to non-registered investments?
- When retired, should I continue sheltering my RSP (i.e. pull down my non-reg funds
first), or start cashing in my RSP early?
- How does Universal Life work? How do I use the future value of my UL to collateralize a future investment loan?
- My lifestyle need is greater now, while I am still working. How can I project a
retirement plan which allows me to vary my net income over time? What about a
major purchase/expenditure sometime in the future? a new car every three years?
Each of these scenarios are three seconds away from a full 'goal based' cash flow solution. No more 'come back next week!