Personal life choices

Retirement age is when the Life Event Planners will start withdrawing automatically from your savings to fund cash shortfalls. In the Life Event Planners, you may continue to work and save after retirement. But in general, the earlier you retire, the fewer years you save and invest for retirement and the more years of retirement you'll need to fund.

Life expectancy is how long you expect to live. The longer your life expectancy, the more years of retirement you'll need to fund.

What’s the big picture?


Salary expectations

Salaries are the money you and your spouse will make from working each year. You can earn a salary both before and after retiring. You always pay income taxes on your salary. You may also pay Social Security and Medicare taxes depending on your employee status. If your salary and other income do not cover your taxes, loan payments and living expenses in retirement, your plan will dip into savings by selling investments.

How does the Planner calculate taxes on salary?

What’s the big picture?


Benefits expectations

Retirement benefits are incomes you and your spouse will receive from Social Security and private or government pensions. Benefits commonly pay for less than 100 percent of your post-retirement living expenses. So you need to plan to save and invest to cover the rest of your expenses in retirement.

How does the Planner calculate taxes on benefits?

What’s the big picture?


Other income expectations

Other income is money you expect will come from sources other than salaries or benefits. Other income can allow you to save more in the years that you receive the income. It can also be used to pay expenses so you don't have to dip into savings for cash.

How does the Planner calculate taxes on other income?

What’s the big picture?


Tax rates

Tax rate before retirement is the percent of your income you will pay in taxes on average from now until you retire. Your before retirement tax rate is applied to your earned income from salaries and your unearned income from taxable realized investment gains. A higher average tax rate reduces the money you have to spend and slows the compounding of your taxable investments.

Tax rate after retirement is the percent of your income you will pay in taxes on average each year after retiring. Your after retirement tax rate is applied to your salaries, benefits, and taxable realized gains due to investment growth or withdrawals from investments. The higher your tax rate after retirement, the more investments you'll need to sell to net enough money to cover your expenses.

What’s the big picture?


Inflation

Inflation rate is the percentage you expect the cost of living to rise each year. The Life Event Planners increase your living expenses by this amount each year unless you specify a different rate of increase.

What’s the big picture?


Current and future savings

Current savings are the money in checking or savings accounts right now. Typically money in your checking account isn’t something you’ll use for retirement or other large future plans, but a savings account you contribute to regularily may be significant.

What’s the big picture?


Current and future investments

Current investments are the stocks, bonds, and mutual funds you own right now. They represent the investments you already purchased with past savings contributions, like the investments in your IRA or 401(k) account. Obviously, if you already own many investments from past savings, you have a better start on retirement.

Tax-deferred savings are the money you expect to save each year in tax-deferred plans. The more you save, the more investments you will likely have to draw from in retirement.

Taxable savings are the money you expect to save each year in taxable plans. The more you save, the more investments you will have available to sell to cover future expenses.

How does the Planner calculate taxes on distributions (withdrawals) from tax-deferred retirement plans?

How does the Planner calculate taxes on withdrawals from taxable investments?

What’s the big picture?


Investment returns

Before retirement return is the percent gain you expect to receive on your current investments and future savings between now and retirement. Tax-deferred investments gains are reinvested each year without being taxed, until you withdraw them. Taxable investment gains are taxed before being reinvested. To make your plan work, the annual return you select must permit your investments to grow enough to fund your retirement years.

After retirement return is the percent gain you expect to receive on your investments after your retire. To make your plan work, the annual return you select must permit your investments to grow enough to fund your retirement years.

Why aren’t returns from individual investments projected?

What’s the big picture?


Current homes and assets

A home is a primary residence you own. Home mortgage payments, property taxes, insurance, and maintenance costs are a large portion of your overall living expenses. Over time, the value of your home may appreciate which will add to your net worth. In addition, as you pay off your mortgage, your net worth also increases.

You can take advantage of your home equity if you sell your home or refinance it. If you don't sell your home or refinance, your mortgage payments will probably become a smaller and smaller portion of your expenses as you grow older.

An asset is an asset that you are willing to sell to finance your plan or that produces income for you. Assets do not have a “ready market” like investments. It may take months or years to sell them. If you are basing your plan on selling or receiving income from an asset, make sure you estimate that amount realistically.

How does the Planner calculate taxes on income from a home or asset?

How does the Planner calculate taxes on gains from the sale of a home?

How does the Planner calculate taxes on gains from the sale of an asset?

What’s the big picture?


Future homes and assets

Future homes and assets are just like current homes and assets, except that the time when you will own them is in the future.

When the time to purchase the future home or asset rolls around in real-life, if you do purchase the home or asset you need to enter them in Quicken. The Planners do not automatically create the home or asset account when the date comes.

How does the Planner calculate taxes on income from a home or asset?

How does the Planner calculate taxes on gains from the sale of a home?

How does the Planner calculate taxes on gains from the sale of an asset?

What’s the big picture?


Current loans

Loan payments are any type of loan, include money you borrow from other individuals. Loans decrease your net worth.

What’s the big picture?


Debt reduction

If you have a Debt Reduction Plan, the Live Events Planners take your plan into account.

What’s the big picture?


Future loans

Future loans are loans you anticipate taking the future. The Life Events Planners will not automatically add loans if your expenses are too great; you need to add future loans yourself.

Also, when the time to take out the future loan rolls around in real-life, if you do take out the loan, you need to enter it in Quicken. The Planners do not automatically create the loan when the time comes.

What’s the big picture?


Living expense expectations

Living expenses are the money you will spend each year on necessities like food, clothing, auto, entertainment, etc. Living expenses are necessary to your lifestyle, and you save and invest now so you can maintain a good standard of living in retirement. Living expenses increase each year by the rate of inflation, and can be adjusted.

What’s the big picture?


Living expense adjustments

Living expense adjustments let you adjust what you think your living expenses will be in the future, as a percentage of what you think they are on average.

For example, if you think you spend $50,000 on living expenses, but anticipate lower living expenses when your children leave home, you can enter an adjustment so the Planners would only spend $40,000 a year after the date you specify.

What’s the big picture?


College expense expectations

College expenses are the money you will spend on college education for your family. You may need to dip into your savings to pay for college. This could delay your retirement or other financial goals.

What’s the big picture?


Special expense expectations

Special expenses are the money you plan to spend on unusual or infrequent expenses beyond taxes, loans, or living expenses. These are expenses such as a wedding or special vacation. A special expense reduces your ability to save. It also may require you to borrow money or sell investments to provide cash to pay for it.

What’s the big picture?


The Big Picture
Overview of the financial planning model

The Life Event Planners use a "model" to calculate your future financial situation. A model is a computer simulation of what may happen in real life.

You enter predictions for future financial events and the model adds up the cumulative effects of your decisions in each year of your plan. It calculates your future cash flow and net worth based on your predictions.

The outcome you want is to have enough money coming in each year to cover your expenses.

How is yearly cash flow calculated?

How is net worth calculated?

How does the whole thing work?

What determines success or failure?


Overview of the financial planning model
How does the model work?

It works like this:

Before retirement most of your money comes from your salary. Your money goes out to pay taxes, savings, loan payments and living expenses.

After retirement your social security and pensions replace your salary but probably don't cover all your expenses.

To make up the difference, you sell a portion of the investments you've built up with your savings.

If your investments last until the end of your plan, then your plan works.

If they don't, then your plan doesn't work and you need to adjust some of your decisions.


What determines success or failure?

The success or failure of your plan depends on the financial decisions that effect your income and expenses every year. The most important decisions are your savings rate, retirement age, life expectancy, and return on investments.

The other two large effects, taxes and inflation, are conditions you have to live with in the real world. You should be realistic and conservative in estimating values in your plan for these important forces. Don't try to make your plan work by decreasing the inflation or tax rate below what experts reasonably expect.

Is it real?

The answer you get in Results is accurate to the extent that your assumptions about the future match what really happens. For example, the answer is accurate only if you save what you predict you'll save and get the investment returns that you forecast.


Calculating yearly cash flow

Cash flow is income minus expenses. If the cash flow is negative, then the Planner “sells” investments to cover the shortfall.

To calculate the cash flow in any year, your income and expenses are adjusted based on the increase or decrease you forecast. For example, living expenses increase by the inflation rate you forecast.

The Life Event Planners perform the following calculations to determine your cash flow in a given year:

Start:

Start the year with $0 cash flow.

Add:

Any salary.

Any other income.

Any income from a home or asset.

Any proceeds from the sale of a home or assets.

Any college-related income.

Any income from a future loan.

Social Security benefits (usually after retirement).

Pension benefits (usually after retirement).

The minimum required withdrawal from tax-deferred savings (begins when savings holder has reached or surpassed age 70-1/2). The Life Event Planners use the “Term Certain” method to calculate the minimum required withdrawal.

Subtract:

Income taxes on all taxable income.

Social Security and Medicare taxes.

Loan payments, including balloon payments on loans.

Debt reduction payments.

Living expenses.

Property taxes and expenses associated with a home or asset.

Any planned downpayment on a home or asset.

Taxes on gains from sale of home or assets

Special expenses.

Any planned college expenses.

Your planned savings and investments contributions.

If your cash flow is $0 (or greater) in a year BEFORE you retire...

If your cash flow is $0 (or greater) in a year AFTER you retire...

If your cash flow is negative in a year BEFORE you retire...

If your cash flow is negative in a year AFTER you retire...


Cash flow positive before retirement
If cash flow is OK before retirement

If your cash flow is fine for a year before retirement, any surplus is reinvested in taxable investments.


Cash flow positive after retirement
If cash flow is OK after retirement

If your yearly cash flow is greater than $0 after you retire, then the Planner reinvests any portion of your minimum withdrawal that doesn't go to pay expenses. This surplus has to be reinvested in taxable investments.


Cash flow negative before retirement
If cash flow is negative before retirement

If the shortfall is due to uncommon expenses that you've anticipated, then the Life Event Planners sell taxable investments to pay for the shortfall. An uncommon expense is a special expense, downpayment, or college expense. The net amount withdrawn is added to your cash flow to cover these expenses.

“Selling” investments means that the Planners reduce the estimated value of your investments enough to cover the shortfall and pay any taxes incurred when you sell the investments.

However, if some or all of the shortfall is due solely to common, everyday expenses like taxes, living expenses, and savings, then your plan may be unrealistic. You could be living beyond your means and may not have enough money to both pay expenses and save for retirement.

In Results the Life Event Planners warn you about the shortfall. You may decide to ignore a shortfall because it is small enough that you feel you can cover it by reducing your living expenses.


Cash flow negative after retirement
If cash flow is negative after retirement

If your cash flow is less than $0 for years after you retire, the Life Event Planners sell taxable investments first to cover the shortfall.

If you don't have enough taxable investments, the Life Event Planners sell tax-deferred investments.

What about taxes?

Whenever the Planners sell investments they sell enough to cover the cash shortfall and the taxes incurred due to the sale. Note that your portfolios continue to grow due to the rate of return you receive on them, and due to any contributions you may make. The net amount withdrawn is added to your cash flow to bring it to $0.


Calculating yearly net worth

After the Planner determines your cash flow for the year, it calculates your net worth at the end of the year.

To do this, the Planners increase the value of your home and assets by the percent annual increases you've entered. They then increase the value of your investments by the percent of annual return you selected. Then they add the savings you plan to make during the year.

When the Life Event Planners add to your savings, they simulate saving monthly.

The Life Events Planners reinvest all gains each year. For taxable savings, they reinvest the gain after tax. You can set the percentage of taxable investment return that will be subject to taxes in the Rate of return option. There are no taxes for tax-deferred savings, so the entire gain from tax-deferred savings plans is reinvested.

The Life Event Planners then subtract the balance of any loans in effect that year to determine your net worth. So your net worth is simply investments plus home plus assets minus loans.

The Life Event Planners then calculate the cash flow and net worth for the next year.


What should I consider when choosing a rate of return?
Provided by the Financial Planning Association.

First, the rate of return will depend heavily on what types of investments you choose and what percentage of your portfolio you invest in each type of asset [image] that is, what percentage you allocate to common stocks, to bonds, and to cash, for example. The more conservative your overall portfolio, the more likely over time you will earn a lower rate of return compared with a less conservative portfolio.

Second, it’s important to select realistic rates of return. No one can forecast future returns with certainty. However, it’s usually more reasonable to choose a rate of return based on long-term averages from the past than guessing at the future.

Third, financial planners typically project a lower rate of return for clients who have entered retirement than for those still saving for retirement. In part, that’s because retirees tend to reduce their risk in retirement years.

Fourth, the pre- or post-retirement rate of return you select will also vary depending on your personal circumstances. For example, a young retiree might need to seek a higher rate of return than an older retiree because the younger retiree has more years of retirement to fund. This also means they probably have to accept more risk. Or as a single 30-year-old you might seek a higher rate of return than when you become a 40-year-old with three children and a mortgage. However, for purposes here, you’ll need to choose a single overall average pre-retirement rate of return and a single post-retirement average return.

Also keep in mind that the rate of return you choose does not take into account income taxes. What you earn in after-tax dollars will depend on the types of investments you choose and what portion of your portfolio is invested inside or outside a tax-favored retirement account.

Provided by the Financial Planning Association.


Should I consider a Roth IRA?
Provided by the Financial Planning Association.

Yes! The Roth IRA is definitely worth investigating!

The key advantage is tax-free accumulation The Roth IRA potentially offers decades of tax deferrals and tax-free income well beyond the time period of a traditional IRA.

You contribute after-tax dollars and then you don’t pay taxes on that money again. Your contributions are not deductible, but the money in your Roth IRA earns and compounds tax-free. You don’t pay current income tax on the interest, dividends, or capital gains earned in your Roth IRA. You are not taxed at withdrawal as long as you take qualified distributions.

There are eligibility limitations, tax implications, withdrawl rules and conversion considerations to Roth IRAs, so visit with financial, tax, and estate planning experts to be sure you are making the best financial decision for you, your spouse, and your heirs.

Provided by the Financial Planning Association.


Will Social Security be available for me?
Provided by the Financial Planning Association.

Most observers believe it will be available in some form well into the 21st century. How much you receive in benefits, however, is another issue.

Many financial planners are confident that people within 10 to 15 years of normal retirement will receive the benefits they are entitled to. However, planners often minimize their projections of Social Security benefits for younger people, preferring that they focus on building their own nest egg without relying on Social Security.

For one thing, Social Security benefits is “means tested.” That is, if you earn too much income in retirement from other sources, your benefits may be reduced.

Second, Social Security has never been intended to be anything more than a minimal safety net for people with small or modest retirement income from other sources. People who want to enjoy a comfortable standard of living during retirement generally need to rely on pensions, retirement accounts, and personal savings to provide the bulk of their income.

Provided by the Financial Planning Association.


What’s a good first guess at a retirement age?
Provided by the Financial Planning Association.

While many people dream of retiring in their 50s, most people can't realistically afford to retire until they are in their 60s, particularly their mid-60s or later. There are several reasons for this:

The earliest age at which retirees are eligible to collect Social Security benefits is 62, and those benefits will be less than what they would have received at their typical retirement age.

Medicare health benefits aren't available until age 65. People who retire earlier must pay for their own interim coverage.

Retiring early most likely means reduced company-funded pension benefits [image] perhaps a third or a half of what you might receive if you worked until age 65.

The earlier people retire, the less time they have to build their own nest egg.

Many healthy people in their 50s and 60s enjoy their work and have no desire to retire early. Some intend to work beyond normal retirement age.

The longer you're retired, the more inflation [image] even low inflation [image] can eat into the purchasing power of your nest egg.

If you still dream of retiring early, you'll probably be more secure if your home is paid off and you have no more debt.

Provided by the Financial Planning Association.


What are the key factors that impact my retirement plan?
Provided by the Financial Planning Association.

When you plan to retire. If you plan to work beyond normal retirement age, you’ll have more time to save and a smaller nest egg to save for. If you retire early, you’ll have less time to save and you’ll need a larger nest egg to fund the longer retirement period.

What kind of retirement you want to have. The higher your anticipated expenses in retirement [image] say, you plan to travel a lot [image] the larger your required nest egg.

Other sources of retirement income. For example, if you anticipate a generous pension, you probably won’t need to build as large a nest egg as you would if you expect no pension at all.

Your investment approach. How much you put toward retirement each month, how much you are able to save in a tax-sheltered retirement account, and how aggressively or conservatively you invest will impact the size of your nest egg, ultimately.

Inflation. This can be a major consideration for the amount of funds needed at retirement.

Provided by the Financial Planning Association.


Why include my spouse and children?

If you include your spouse, you’ll see a plan that includes both of your salaries, combined savings, living expenses, and retirement plans. It makes good sense to do this.  Who counts as a spouse?

If you include your children, you can see how their college costs will impact your retirement.


What are the rules for tax-deferred distributions?

At the age of 70 1/2, the law requires that you withdraw a minimum amount of money each year from your tax-deferred retirement plans. Quicken automatically calculates the minimum distribution at age 70 1/2, and makes sure you withdraw at least that much.

Quicken uses the same rules as the IRS (in IRS publication 590) to calculate the yearly minimum required withdrawal from your tax-deferred savings. It adds the minimum withdrawal amount to your cash flow in those years.

When Quicken calculates the minimum required withdrawal, it uses the life expectancy tables in IRS publication 590, and assumes that the beneficiary named in the publication is your spouse. The life expectancy may be different from the value you entered, but that should not make a difference to your plan.


What's the difference between marginal and average tax rates?
Provided by the Financial Planning Association.

Your “average” tax rate is simply equal to your total tax liability divided by total income. For example, a person who has $100,000 of total income and pays $30,000 of income tax has an average tax rate of 30%.

Your “marginal” tax rate [image] often referred to as your “tax bracket” [image] is the rate at which your last earned dollar is taxed.

Provided by the Financial Planning Association.


What's a reasonable guess for the inflation rate?

Consider using 3% inflation as a basic planning assumption. Three percent has been the average inflation rate over the past 50 years.

If you want to be conservative, use a higher inflation rate in your plan. If you want to be more aggressive, use a lower inflation rate.


How much should I save?
Provided by the Financial Planning Association.

As a rule of thumb, financial planners recommend that people put away at least 10% of their gross income toward retirement. However, you may need to bump this up to 15% or 20% if you’re nearing retirement and haven’t saved enough.

A more accurate method is to calculate how many dollars you’ll need to have saved by retirement in order to enjoy the kind of lifestyle you want. You’re in the process of doing that now!

The important thing is to start saving. If your income is low and you have difficulty making ends meet, save whatever you can. Even small amounts can grow into large amounts given enough time and wise investing. Once you get into the habit of saving, you’ll find that it’s easier to stash away a larger percentage of your income.

Provided by the Financial Planning Association.


Is a savings account the right place for my money?
Provided by the Financial Planning Association.

That depends on what you want to do with your money.

A savings account might not be the right place for money you want to invest toward retirement or other long-term goals. Inflation will reduce a retiree's standard of living if the money does not earn a real rate of return over inflation. If you are comfortable accepting some risk, you may be able to earn significantly more by investing in mutual funds, individual stocks, bonds, or real estate. Also, a savings account, unlike some investment vehicles such as a company-sponsored retirement plan or individual retirement account, doesn’t allow earnings to grow tax-deferred.

However, a savings account or a money market mutual fund are good places for money you may want to get to soon and easily. This might include money for an emergency fund, Christmas, or perhaps a new car or computer [image] anything you want to buy in the next few months or even the next three or four years. The money earns a little interest and is virtually safe from loss.

Investors, particularly retirees, often are advised to keep some of their portfolio in a savings account or money market in order to weather market downturns. Savings accounts can also serve as temporary parking places for investment funds you plan to reinvest.

If you’re certain you won’t need the money for at least several months, alternatives such as short-term certificates of deposit or Treasury bills pay slightly higher interest.

Provided by the Financial Planning Association.


What are the advantages of tax-deferred investments?
Provided by the Financial Planning Association.

These plans, such as a 401(k) or SIMPLE plan, allow you to make pre-tax contributions from your wages, and the earnings on the contributions grow tax deferred in the account. The ultimate result is a much larger retirement nest egg than if you invest the money with after-tax dollars.

Here’s why. Let’s say you put $400 a month into a retirement plan at work and you are in the 28% marginal tax bracket. That saves $112 in federal income taxes you would have paid each month if you had not put the $400 into the retirement plan. (You also may save additional state income taxes.) In short, it actually only costs you $288 out of your wages to make the $400 contribution each month.

Because the entire $400 goes into the retirement plan, instead of only $288, and because the earnings on that larger pool of money also grow tax deferred, you build your retirement account faster than if contributions and earnings are taxed annually. For example, if you invested $4,000 on a pre-tax basis at the start of each year into a retirement plan for 20 years, and the account earned an average annual return of 8%, it would grow to $197,692. But in a taxable account, assuming a 28% tax bracket, the account would grow to only $142,338. The pre-tax contributions and tax-deferred earnings are taxed at ordinary income rates as you withdraw the money years later for retirement.

Another big advantage of a tax-deferred retirement plan is that some employers match part of the pay their employees put into their accounts. That’s like getting free money, and it builds your nest egg even faster.

Provided by the Financial Planning Association.


What rate of return am I currently getting?

1	Choose Reports menu > Reports and Graphs.

2	From the Reports and Graphs Center, select How are my investments doing?

3	Choose Investment Performance Report and click Show Report.

4	Your Average Annual Total Return is in the last column.


What’s important about risk and return?
Provided by the Financial Planning Association.

One of the basic concepts of investing is that risk is related to return. The greater the potential return, the greater the potential risk of loss. For example, if you put money into a bank savings account the money will be very safe, but you’ll earn very little interest. Investing in the stock of a small growing company or your own business can result in the loss of some or even all of your investment. Yet you have the potential of earning far more than you could ever earn in the bank savings account.

Investors can reduce the risk of higher-earning investments by spreading their investment money among several assets. You might invest in several stocks or stock mutual funds, along with investments in bonds, real estate, foreign stocks and bonds, and other types of investments. That way, if any single investment or type of investment declines in value, other investments may keep your overall investment portfolio gaining.

A second way to reduce risk, while maintaining a higher return, is to keep your money invested for the long term. A collection of diversified stocks, for example, can rise or fall dramatically over a few days, a few months, or even a few years, yet over the years they historically have had a much higher return than a savings account.

Provided by the Financial Planning Association.


How does a home affect retirement?
Provided by the Financial Planning Association.

That depends on whether your home is paid off when you retire. If it’s not, your retirement expenses may not be much lower than your pre-retirement expenses. That means you’ll need to have saved up more money for retirement.

On the other hand, a home that’s been paid off can be a source of income. For example, you can:

Rent out a room.

Sell your home, move into a less-expensive home or apartment, and invest the profit in assets that produce income.

Take out a reverse mortgage. A homeowner aged 62 or older can convert the equity in the home into a lump-sum payment, monthly income, or a line of credit. The money isn’t paid back to the lender until the owner sells the home or dies.

Arrange a sale-leaseback with your children. Sell the home to one of your children, then lease the home back from the child. To make financial sense, you must be able to earn more money than what your child charges in rent.

Take out a home-equity loan. This is a short-term solution if you need cash, not a long-term source of retirement income.

Maintenance is another factor to consider with a house that’s been paid off. An aging home requires upkeep in order to maintain its value.

Provided by the Financial Planning Association.


Can I use assets to fund retirement?
Provided by the Financial Planning Association.

Small business. When you retire you may want to sell your business to children or a third party for a lump sum, a note that pays you throughout retirement, or a stock ownership plan that you can cash out upon retirement. However, don’t overestimate the value you’ll get out of the business. You’ll have to pay taxes, outstanding debt, legal bills, and so on, as a result of the sale.

The risk is that many small-business owners have all their money tied up in their business. This is not unlike investing their entire retirement nest egg in a single public stock. The value of the business may be less than expected when it’s time to sell. Using a small business as a resource for retirement requires that you begin planning today for payment at a later date. Don't wait until you're ready to retire to make that decision.

Rental property. Rental property can provide income, but there is a risk that the rental market could be weak at the start of or during retirement. Furthermore, managing rental property may become difficult as you get older, especially if you move away. One option is to sell the rental property and invest the proceeds in easier-to-manage assets such as stocks and bonds.

Other assets. This might be a limited real estate partnership, raw land, ownership in a vacation home, or valuable collectibles such as antiques or paintings. Some of these investments won’t produce income, so you may need to convert them to liquid assets that will. It is valuable to know what an item is worth on the open market, but it should not be considered part of your retirement assets until it is liquidated.

Provided by the Financial Planning Association.


When should I borrow?
Provided by the Financial Planning Association.

In general, there are two situations in which you should consider borrowing:

A financial emergency such as unexpected high medical expenses, legal fees, or major car repairs.

If the money provides financial benefits. This might include buying a car to get to work, advancing your career skills through education, or buying or fixing up a home.

Borrowing to invest in something that potentially offers a higher rate of return than the cost of borrowing also can be a good idea. People often borrow to invest in a business, rental property, or land, for example. However, there is the risk that the investment’s return won’t be high enough for you to pay back the loan. Borrowing to buy a hot stock can prove to be very expensive.

Generally, it’s best not to borrow to buy things that have little or no return, such as clothing, vacations, or furniture.

Provided by the Financial Planning Association.


What are my borrowing options?
Provided by the Financial Planning Association.

You may have several options, such as:

Bank, credit union, savings and loan, or personal finance company

Installment loans from the company providing the service or product, such as a car loan

Home-equity line of credit or second mortgage

Government sources

Cash-value life insurance

Retirement accounts (penalties may apply for certain types of retirement accounts)

Margin loans against securities such as stocks

Friends and family

Credit cards

Carefully compare terms, finance charges, tax consequences, and, especially, total cost. Be aware of the pros and cons for each type of loan. For example, a home-equity line of credit can be a relatively low cost loan and it’s usually tax-deductible, but you’re putting your home at risk if you fail to pay off the loan. Borrowing from retirement accounts is inexpensive, but you’re shrinking your future retirement nest eggs. Margin loans are risky if your securities drop in value, and borrowing from family or friends can put your relationships at risk.

Provided by the Financial Planning Association.


What will my expenses be after retirement?
Provided by the Financial Planning Association.

That depends on many factors. A rough guideline is that people spend in retirement approximately 70% to 90% of the gross income they were making shortly before retirement. So if you were living on $60,000 annually before retirement, you would need $42,000 to $54,000 annually in retirement, adjusted for inflation, to live at the same level.

The assumption behind this rule of thumb is that expenses decline after retirement, which for many people is true. Costs associated with working, such as transportation and clothing, decline. Payroll taxes and 401(k) contributions are gone. The mortgage may be paid off, as well as the children’s college education.

However, overall expenses may not decline much if you travel a lot, spoil your grandchildren, or you have high medical costs. Income taxes also may not decline as much as you might think. You’ll have taxes on the money coming out of your pension or retirement accounts, and, perhaps, taxes on Social Security benefits. At the same time, you probably won’t have some of those deductions you took over the years, such as the mortgage and dependent children. It’s not uncommon for retirees to actually have a higher tax bill in retirement.

Provided by the Financial Planning Association.


How can I pay for college and retirement?
Provided by the Financial Planning Association.

It’s often difficult for families on limited budgets to save adequately for both college and retirement. If you’ve reduced your household expenses as realistically as possible to free up money for savings, and it’s still not enough to fund both goals, you’re going to have to make a choice. Many financial experts recommend that retirement should come first. That’s because children can find a way to pay for their college through financial aid, scholarships, work, or by attending a less expensive college. There is no financial aid or scholarships to take care of you in retirement.

Start by maximizing your contributions to your tax-deferred retirement accounts, either through an employer or on your own. At the very least, contribute enough money to an employer-sponsored plan to maximize any employer match. Money in tax-deferred retirement accounts generally won’t figure into the mix when the federal government and schools calculate how much aid your son or daughter is qualified to receive.

Once you’ve maximized retirement contributions, start putting money toward college. If you must borrow to help pay for college, experts generally recommend that you avoid borrowing from your retirement accounts. Borrow through the school or a tax-deductible home-equity loan. If you have trouble paying off college loans, continue making retirement contributions and keep trying to put at least something toward retirement.

Provided by the Financial Planning Association.


Does the average tax rate include taxes on capital gains?

Yes. The gains on your taxable investments are taxed at the rate you specify in the Taxes section.

The taxes will not show up on a yearly cash flow report.

How are capital gains calculated and taxed in the Quicken Planner?


How are capital gains calculated and taxed in the Quicken Planner?

Quicken calculates capital gains based on how much you paid for an asset or investment, and how much it's worth when you sell it. Quicken’s Planner also automatically figures and takes out taxes on the capital gains when the investments are sold. However, the Quicken planner’s projection only “sells” investments in the future when they are needed to cover expenses. Otherwise they grow at the rate of return specified in the Rate of Return section.

Quicken assumes you will pay the taxes on your portfolio gains out of the portfolio itself. For example, if you have a $1,000 investment in your taxable portfolio and you have set your taxable portfolio to get an average rate of return of 10 percent, then your gain for the year is $1,000 x 10 percent = $100.  However, if your tax rate is 25 percent, only $75 of that gain is reinvested ($100 x 25 percent = $25 tax, $100 - $25 = $75 reinvested).

How much of your taxable return will be subject to taxes is controlled by a percentage you set in the Rate of Return section.


When should I start receiving Social Security?
Provided by the Financial Planning Association.

The earliest you can receive Social Security retirement benefits is at the age of 62. However, benefits will be reduced gradually for each month that you take benefits before reaching your scheduled “full” retirement age. For example, if you retire at age 62, and your full retirement age is 65, you’ll collect only 80% of your full amount. The amount remains reduced for the rest of your retirement.

Collecting benefits early isn’t necessarily bad. You’ll collect benefits for a longer period of time. In fact, if you wait until you are 65 to start collecting, you will be 77 before you surpass the amount you would have collected by starting at age 62.

The age for collecting full retirement benefits is gradually being increased. For example, a person born before 1938 can start at 65. But for people born after that, the age for full benefit eligibility is slowly raised, until finally those born in 1960 or later must wait until age 67 to collect.

If you postpone collecting benefits beyond the full retirement age, your average earnings will probably be higher, and you’ll be entitled to a larger Social Security benefit. Furthermore, you receive a credit for delaying your benefits, depending on when you reach full retirement

By the way, you’ll have to ask Social Security to start giving you benefits, and you’ll have to prove that you qualify.

Provided by the Financial Planning Association.


What’s a moving average and when would I use one?

In security charts, the moving average is a curve that averages price fluctuations over 50-day or 200-day intervals.

Each point on a 50-day (or 200-day) moving average curve is calculated by averaging the closing prices from the previous 50 (or 200) days of trading.

The moving average is a way to compare long-term price trends with recent price changes. When the moving average line crosses the price history, it indicates a change away from the trend.


What if I have mutual funds?

It can be hard to rebalance.

Because mutual funds can be composed of a mixture of asset classes, it’s not easy to move dollar amounts between asset classes.

It can be impossible to achieve your target allocation.

Mutual funds may hold investments in asset classes that are not part a of your target allocation. For example, mutual funds often have a money market component. As a result, you may never be able to achieve an allocation comprised of stocks and bonds only.

This does not mean you cannot achieve an acceptable allocation with your current holdings.


When should I rebalance?

Financial experts suggest that you consider rebalancing in the following ways:

Periodically.

Different classes of investments will probably grow at different rates. As a result, your asset allocation may drift out of balance over time, and you'll need to consider rebalancing your investment holdings.

Many investment experts recommend that you examine your asset allocation at least once a year to determine if you need to rebalance. If you are close to your target allocation, you may not need to adjust your portfolio.

Another strategy for periodic rebalancing is to monitor your portfolio and rebalance when one asset class has risen or fallen roughly five to seven percent in value. However, experts also advise against making major shifts in your portfolio in response to fluctuating markets.

As your goals change.

As your financial goals change throughout your life, you'll need to revisit your asset allocation to ensure that it is aligned with your goals.

As you approach your goals.

In general, the closer you are to your goals, the more conservative your asset allocation strategy should be.

The Newport Group, for example, recommends the following time-horizons for model portfolios:

Less than 3 years	Low risk
3-5 years	Medium risk
More than 5 years	High risk
Whenever you rebalance, keep in mind that any changes to your portfolio may involve brokerage or mutual fund fees and may have tax consequences. As a result, you may not want to execute trades to adjust for small deviations from your target allocation.


Asset class

These are the asset classes Quicken uses.


Current Value

This is how much you have in an asset class, rounded to the nearest dollar.

You can select the accounts and securities you include and exclude on the Investments page. You might want to exclude accounts if you don’t want them considered for a particular asset allocation goal. For example, you might not want to include an account holding college funds when rebalancing your retirement asset allocation.


Current %

This is the percentage of your assets in the various asset classes, rounded to the nearest tenth of a percent. It is the amount in a single asset class divided by the total holdings in all asset classes.


Target %

This is the target allocation that you have set.


Off by % points

This represents how far “off” you are from your target. It is the difference between your target percent and the current percentage of your investments in an asset class.

You may not want to rebalance unless the difference is significant.


Adjustment

This represents the amount of money to remove (LESS) or add (MORE) to an asset class to reach your target asset allocation.

Use this as a guideline only!  If you are close to your target allocation, there may be no need to adjust your portfolio.

Always consider brokerage fees and tax consequences before selling or buying investments!

My percentage difference is zero, but I still have an adjustment. What’s going on?


My percentage difference is zero, but I still have an adjustment.

The Adjustment amount is accurate, but the table is deceiving.

An adjustment when you have no visable percentage difference can occur when your current percentage and target percentage differ by less than .05 percentage points. Anything less than .05 percentage points is rounded down to nothing in your current percentage, even though it can represent money (depending on how large your assets are).

For example, say you have $100,000 in Global Bonds, and that represents 10.040 percent of your portfolio, and your target is 10 percent Global Bonds. Your difference would be .04 percentage points, which would round to 0. However, .04 percent of your entire portfolio (around $1,000,000) would be $400.


What is a market index?

A market index represents a particular group of stocks such as the S&P 500 or the NASDAQ Composite Index.


What difference does Gross or Net make?

Whether you use Gross or Net for your income determines how you should handle deductions from your paycheck (taxes and transfers to other accounts from your paycheck) when figuring your expenses, next.

If you think you’ve entered deductions correctly for the past year, use Gross. When figuring out your expenses, use the values that Quicken reads from your data for deductions.

If you aren’t confident of the accuracy of your deductions, or just want to start calculating expenses from what you bring home in cash each month, use Net. When figuring out your expenses, set the amount to zero for paycheck deduction categories and transfers.

Budget users note! If you use Quicken’s budgeting, the expense amounts you figure on on the next page are saved to your current budget. So, if you use Net for your income and zero out some expense amounts, those zero values are saved to your budget.


Where do the amounts come from?

If you have a budget set up, the amounts in the Category/Transfer area are from your current Quicken budget.

If you don’t have a Quicken budget, the amounts are monthly averages from your previous year’s transactions. (However, Quicken filters out categories with a single transaction of less than 100 dollars.)

How do I get more recent amounts?

What if I don’t see anything?


What about transfers?

For transfers that are part of your paycheck:

If you used Gross for your income, keep these numbers the way Quicken calculated them.

If you used Net for your income, set them to zero.

For transfers to credit card accounts, if you aren’t reducing debt:

Set to zero, if you have transactions categorized in your credit card account. The amounts of the credit card transactions are included in category amounts.

For transfers to credit card accounts to pay off debt:

A transfer to pay off debt isn’t represented in categories anywhere, so this amount should be what you pay each month on average.

For savings transfers you may already be making, set to the amount you save.

For loan payment transfers, set to the amount you pay.


How do I figure my monthly expenses?


To get more current amounts

1	Choose Planning menu > Budget.

2	Click the Setup tab, and then choose Create Budget.

3	Complete the Automatically Create Budget window. (Click the Help button for assistance.)

4	In the budget window, click Options on the tool bar, and then choose Save Budget.


Don’t see anything in Categories/Transfers?

You don’t have enough Quicken transactions to list any existing amounts.

Instead, for each category in the Propose a New Amount area, enter an amount that sounds right to you. How do I enter new amounts?


Propose a New Amount

1	In the Propose a New Amount area, select a category or transfer from the Category list.

2	Enter a new amount and choose a period.

Quicken calculates the amount over a year and divides by 12 to get a monthly amount.

3	Click Change to enter the new amount in the Categories/Transfers area.

4	Repeat for all your categories and transfers.

To “undo” an amount and period for a single category or transfer, choose it in the Propose a New Amount area and click Restore.

To “undo” all your changes, click Restore All.


Where is the Proposed Total?


Should I save for college in my child’s name?
Provided by the Financial Planning Association.

The answer to this boils down to two major issues: taxes and control.

Saving in your child’s name will likely save taxes if your child is in a lower tax bracket than you are. The first $750 (indexed for inflation) of unearned income by the child is not federally taxed, and the next $750 is taxed at the child’s rate. Additional earnings are taxed at the parent’s rate. When the child turns 14, any unearned income above $750 is taxed at the child’s rate. Also, the tax rate on capital gains earned by the investments can be lower for the child than the parent.

The catch is whether the tax savings outweigh the loss of any financial aid the child might receive, particularly if that aid would be in the form of grants or scholarships. This may occur because the aid formula taxes the student’s income and assets more heavily than the parents. Generally, the higher the tax bracket you are in, the more beneficial it is to save in your child’s name. You may need the help of a financial professional like a Certified Financial Planner professional to calculate which option is potentially the better one from a tax standpoint.

A common way to set up a college account in a child’s name is under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), depending on the state you live in. The account is managed by a custodian, typically a parent or guardian.

Funds placed in a UGMA or UTMA account will eventually be controlled by the child. Typically this is either age 18 or 21, depending on the state. Parents must decide whether there is a risk that the child will use the money to buy a new car or head off India instead of college.

Provided by the Financial Planning Association.


What options should I consider if I can’t fund this college goal?
Provided by the Financial Planning Association.

Apply for financial aid. In theory, a college should offer enough financial aid to make up the gap between the cost of the school and what the federal government determines your family can afford to pay. For most students, this aid will be in the form of loans, along with a limited amount of work study. Private schools often can offer some aid in the form of grants and scholarships.

Borrow. Home-equity loans in particular tend to be affordable and the interest you pay is tax deductible. Commercial lenders also are a source of funds. However, don’t forget that you are putting your home at risk.

Reduce expenses. Cutting costs at home boosts income that’s available for school. Your child can work in the summers and during school, or you might seek ways to boost your own income. Some schools allow monthly payments, which help cash flow. It’s usually less expensive to pay as you go along instead of paying off loans later.

Tap your relatives. Relatives can pay the child’s tuition directly to the school and it won’t count against their $11,000 annual gift-tax exclusion. This allows relatives facing estate taxes to shift income free of tax.

Attend a less expensive school. Consider an in-state public school instead of an out-of-state school, a public school instead of a private school, or a less-expensive two-year school for the first two years, then transfer to a four-year school. Costs vary from region to region. Compare similar-quality schools. Often you don’t have to give up quality to attend a less expensive school. Many public schools, for example, are excellent alternatives to private schools.

Don’t cut into retirement funds. It’s best if you don’t reduce your retirement plan contributions or borrow from your retirement plans for college.

Delay attending college to work. Your child can work and save money to offset college expenses. This also gives parents more time to save and allows their investments more time to potentially grow.

Provided by the Financial Planning Association.


What are good investment vehicles for saving for college?
Provided by the Financial Planning Association.

Some of the best options include

State-sponsored college savings plans. Earnings grow tax-deferred and in some cases tax-free. The plans are not available in every state, but several plans welcome contributions from nonresidents.

State prepaid tuition plans. A way to buy future state school tuition at today’s prices.

Taxable mutual funds. Growth mutual funds in particular create earnings without producing significant current taxes. Good if college is not for many years.

Zero coupon bonds. You can time these discounted bonds to mature when your child is scheduled to enroll, although the “imputed interest” each year is subject to tax.

U.S. Savings Bonds. Interest income often can be tax free if used for college expenses.

Education IRA. Contributions are limited, but the earnings are not taxed if used for school.

Roth IRA. Earnings are not taxed if the account has been open five years and you are over the age of 59 ½ at the time earnings are withdrawn. However, generally IRAs should be left for retirement purposes.

NOTE: If you think your child will qualify for financial aid, it’s usually best to keep your investments in your name, rather than the child’s.

Provided by the Financial Planning Association.


Are there accounts I should avoid using to fund college?
Provided by the Financial Planning Association.

Most college experts recommend that families avoid dipping in to any accounts they’ve designated for retirement. These accounts should be allowed to grow as much as possible. A child can usually find financial aid, work, or seek other financial alternatives. Remember, there is no financial aid for retirement.

This advice especially applies to tax-favored retirement accounts such as 401(k) plans, annuities, and individual retirement accounts. Withdrawing money from these accounts to fund college not only diminishes the size of your future nest egg, but might trigger income taxes and possibly penalties on the withdrawals.

Provided by the Financial Planning Association.


College Inflation
Provided by the Financial Planning Association.

During the 1970s and 1980s, college costs increased at an average pace of 8 to 9 percent a year. That’s slowed in recent years. Based on more recent trends, the College Board recommends you plan on an average cost increase of 5 percent a year.


Advantages of fixed rate mortgages
Provided by the Financial Planning Association.

Assures a consistent payment amount.  You won’t have to worry about an increase in the payment amount.

Avoids the mortgage being ”called,” meaning that the full loan amount would have to be paid immediately.

Locks your money in an interest rate in the event of increasing rates.

Provided by the Financial Planning Association.


Advantages of adjustable rate mortgages
Provided by the Financial Planning Association.

Enables you to take advantage of declining interest rates.

Monthly mortgage payments can go down in the event of declining interest rates.  But be cautious!  Your monthly mortgage payments will increase if interest rates go up.

It is an appropriate financing method if you expect your income to increase and you can handle increased payments due to rising interest rates.

It is a good type of loan for first-time home buyers who need to keep initial mortgage payments as low as possible.

Provided by the Financial Planning Association.


Some useful hints
Provided by the Financial Planning Association.

You can always capitalize on the lower initial mortgage rate that an adjustable rate mortgage (ARM) provides.  When the ARM proves to be too expensive, you can always refinance it to a fixed rate mortgage.

Look for a feature called “Interest Rate Cap” if you decide to go with an adjustable rate mortgage.  An interest rate cap limits the amount by which interest rates can change.

Provided by the Financial Planning Association.


Mortgage interest
Provided by the Financial Planning Association.

The interest paid on the mortgage is an itemized deduction, and is subject to the limitations based on the amount of the loan.

Provided by the Financial Planning Association.


Real estate or property taxes
Provided by the Financial Planning Association.

Property taxes paid for the residence are allowed as an itemized deduction.

Provided by the Financial Planning Association.


Loan origination or points fees
Provided by the Financial Planning Association.

Points for a loan initiated to facilitate the original purchase of a residence are deductible as mortgage interest.

Provided by the Financial Planning Association.


Some useful hints
Provided by the Financial Planning Association.

You are not required to reinvest your profits into another home of equal or greater value within the next two years.  You are no longer pressured into buying a new home right away.  You may find it advantageous to sell your home, rent for three or four years, and then buy a new home. You may even “trade down” to a smaller, less expensive home.

Provided by the Financial Planning Association.


Monthly loan & debt payments

You should include the following items in your monthly loans and debt payment:

Auto loans

Student loans

Credit card payments (the required minimum monthly payment)

Mortgage payments (if you intend to keep your current house and its associated mortgage)

You should not include the following items in your monthly loans and debt payment:

Rent you’re currently paying

Living expenses (including groceries, utilities, transportation expenses, and so on)

Special expenses (including vacations, weddings, and so on)

Mortgage payments (if you intend to sell your current house to purchase this home)


Spouse (definition)
Spouse

Your legal partner in marriage. Since legally married couples receive special tax and retirement benefits treatment, it can be advantageous to base your plan on your combined taxes, income, benefits, and expenses.

Quicken assumes that your spouse is your legal partner in marriage. If this is not the case, you may have to adjust your tax rate and survivor benefits for government pensions.


Taxes on salaries and benefits

Each year you can normally expect one or more of these types of income:

Salaries

Social Security benefits

Pension benefits

If this "common" income occurs before your retirement date, it is taxed at the average tax rate before retirement that you specify in the Average Tax Rate window. If it occurs after retirement, it is taxed at the average tax rate after retirement.


Taxes on distributions from tax-deferred retirement plans

After retirement, you begin taking distributions from your tax-deferred investment plans. With the exception of Tax-deferred Annuities and some IRAs, most tax-deferred plans defer taxes on both the original savings you contribute and the gains you make. Because of this, the Life Events Planners treat all distributions from tax-deferred plans as 100 percent taxable.

The income is taxed at the average after-retirement tax rate you specified in the Average Tax Rate window. For example, if you make a $10,000 withdrawal from your tax-deferred savings plan and your post-retirement average tax rate is 10 percent, your taxes on the withdrawal are $1,000 (10 percent x $10,000).


Taxes on withdrawals from taxable investments

When you sell taxable investments, you must pay taxes on any unrealized gains that you have on the investment.

Unlike tax-deferred investments, the original purchase price for the investments is not tax-deductible, so it becomes part of your basis. As your taxable investment grows, the gain is usually realized and taxed each year. (You can determine the percentage of taxable gain that is realized each year in the Rate of return window. The default is 100 percent or all of the gain realized each year). So when you sell taxable investments, you usually have a small unrealized gain to declare.

To determine your unrealized gain, the Life Event Planners calculate an "average basis" for your taxable investments. That is, the Planners determine the original purchase price and reinvested gain for all the investments in your taxable portfolio. This is the portfolio's total basis.

The Life Event Planners divide that total basis by the value of your portfolio to find the average basis for any one investment. For instance, suppose you have $100,000 in taxable investments and your total basis is $80,000. This makes your average basis 80 percent ($80,000 / $100,000) and means an average of 20 percent of the portfolio's value is unrealized gain.

When you sell $10,000 worth of stock, your gain is estimated to be $2,000 (20 percent x $10,000). If your post-retirement tax rate is 10 percent, your taxes on the withdrawal are $200 (10 percent x $2,000). It is usually cheaper to withdraw from taxable investments whenever possible.


Taxes on other income

Other income is taxed at the individual tax rate you specify for that other income.

The taxation of other income differs because other income is added to your other income. It is likely to be taxed at your highest marginal rate. You select the tax rate for each other income in the Other income window.


Taxes on income from a home or asset

Income from a home or asset is taxed at the tax rate you select for that income.

This is because this income is on top of your common income and would therefore be taxed at your highest marginal rate. You set the tax rate for this income in the Asset Accounts or Planned Assets window.


Taxes on gains from the sale of a home

When you sell a home after May 6, 1997, you are taxed on any realized gain that cannot be excluded under the IRS rules for exclusion of gains on the sale of a home. If you have a home in your plan that is sold before May 6, 1997, you are only taxed on the gains you do not roll over into another home.

In the Asset Accounts or Planned Assets window, the Life Event Planners show you how they calculate the gain you realize on the sale. The Planners tax the realized gain at the tax rate you specify for that home.


Taxes on gains from the sale of an asset

The gain on assets is calculated as sale price minus basis, where basis consists of purchase price + improvements + selling costs - depreciation (if any).

The Life Event Planners tax the gain at the tax rate you specified in the Asset Accounts or Planned Assets window.


Calculating whether or not your plan works

If in any retirement year you have a cash shortfall and you don't have enough investments to cover the shortfall, your plans fails. If you are covering pre-retirement cash shortfalls by selling investments, a lack of investments to cover a shortfall in any year constitutes a plan failure. You are told so in Results.

If you reach the last year in your plan with $0 or greater in investments, your plan is successful. To make your plan work, you must actually save the money and invest it wisely to produce the anticipated target rate of return you selected.


Why aren't individual investments projected?

The Life Event Planners don't project each individual investment. Instead, the value of your entire portfolio is projected.

For example, you may have a bond that returns 8 percent per year and it will mature in 12 years. You know that this bond gets 8 percent, so why can't you enter 8 percent for this particular bond? One reason is that you may not be able to get another bond for 8 percent when this bond matures.

Since your plan is a projection over 40 to 50 years, it wouldn't be prudent to assume that you can get another bond for 8 percent, let alone assume that you will even reinvest the proceeds from this bond into another bond. Bond returns might be down at the time the bond matures and it would not be good planning for you to expect to be able to get another bond with the same rate of return.

Stocks are even more volatile. Just because one stock might be consistently giving you a 10 percent dividend doesn't necessary mean that it will give you 10 percent over the next 40 years. Dividends, like prices, are subject to change.

The most important consideration for long-term planning is predicting the rate of return that you think all of your investments will average.

The Life Event Planners take this more consistent long-term planning approach by helping you determine what rate of return all of your investments will average, and then using that return rate in your plan.

Once your plan works at a given rate of return, you need to try to achieve that average rate of return on all of your investments. If one investment fails, and you are well-diversified, you don't necessarily need to worry. You'll still be able to retire because that investment will merely bring the average rate of return down. You may have another investment that brings it back up.

This approach provides a better long-term prediction of how your plan will work because it doesn't assume that one particular investment will continue to perform as it has in the past. It assumes that, on average, all of your investments will provide a particular rate of return. If one investment does very well while another does poorly, your plan might still work if you average your predicted rate of return.