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2. Smoothing/Amortizing explained

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If you had to choose a new name for RRIFmetic, "Old Smoothy" would be appropriate. Calculating a plan is synonomous with 'smoothing'.

Smoothing is the essence of RRIFmetic's goal-based math.... you specify the net after tax income (ATI/disposable income/lifestyle) and the program 'smooths' by adjusting RRSP and nonReg investment (and withdrawal) levels in order to achieve that net income target. In a three second compute!

( Important.... unlike most tax-based programs, you will not find reference to 'shortfall/surplus or deficit' anywhere in a RRIFmetic report.)

Here is how to perform smoothing, the simplest RRIFmetic calculation...

We assume you have entered the subject's assets and liabilities.... salary and/or pension, current capital (RSP and nonReg), loan and insurance details.

Important... RRIFmetic requires everything to be entered. Remember, it is a single, integrated cash flow model, not a suite of disconnected programs.

And now, the object of the exercise.

We have determined we want to achieve a constant lifestyle of $30,000 (pre and post retirement). In other words, we need $30K to live on. Here's what we do.....

Bring down the 'compute' menu. {Alt C}

Select 'smooth'

The program will prompt "Enter net income target"

Type 30000.

After a slight wait (a second or two), one of two things will happen:

1. the result grid will display, or

2. A message "Net Income was not sustained to runout age" will pop up.

In the first case, our capital lasted out past our runout age (the smoothing target ATI was low enough). In the second case it ran out prior to the runout age (the ATI was set too high).

As a quick check, click on the "capital" graph at the bottom of the screen. You will see an overview of just how the smoothing level effected the capital.

The small yellow squares indicate just how your estate would fare -after tax- should you die at any time prior to the runout age. (you have just performed a sophisticated estate planning calc and you didn't do a thing!!)

Examine the second column in the result grid on screen......

$30,000! Just what we requested.

What exactly did the program do?

Print the "Retirement Projection report" in landscape and examine the 2 columns in the 'Regist (RSP/... Funds' section ('Withd' and 'Contrib') and the 2 columns in the 'Non Registered Funds' ('Withdr' and 'Deposit') These are the investment cash flows -what the individual must save- in order to get to the $30K goal.

       Regist (RSP..         Non Regist..
   Withdr Contrib         Withdr Deposit
          13,500                 5678
          13,500                 5001


All finished.

What if the target set was too low or high?

Simple.... just repeat the above process with another smoothing target different than the $30K.

After several 'smoothings' we begin to get the idea that it would be nice if we found an optimum net income target.... one which just ran our capital out at age 95 (or whatever our 'runout age' was set at)

Now, we could do this by repetitively smoothing, adjusting income up/down accordingly... but is there an easier way?

You bet.    Let's talk about....

Amortizing

Amortizing is finding the exact net income which just runs the capital out. In other words the "I want to (just) die broke" scenario.

Now, instead of 'smoothing' we choose 'amortizing' from the compute menu...

{Alt C}

This takes longer, though not a lot; maybe 5-10 seconds.

Result.... a 'computed' net income, optimized such that the ATI is maximized but the capital is just run down at age 95.

Now let's do some creative planning. Change the salary or move it back a few years. Change the interest rate or move to a new province. Amortize again. Cool eh?

This is the essence of the RRIFmetic math: the ability to change a parameter, take out an investment loan, buy term insurance, an RESP.... and immediately observe the change these financial undertakings make to those future cash flows and your all important lifestyle.

This is interactive, tax accurate, goal-based financial planning folks!

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