Asset allocation and sources of income

Questions:

Looking at the Report I have a few questions:

Under Asset Allocation it states “The Investor Profile Questionnaire established that the following portfolio: Security might be the most …”  Do I assume that the RetireWare used a “Security” mix for my investments listed under Finances or will it use the “Selection of Rates in Economic Outlook?”  I deliberately left all RRSPs in the “Finances – Registered Investments – Market Value” as “Cash” so the projected growth would utilize a low return (2.25% as noted on the Assumptions and Disclosures).

Under the “Sources of Retirement Income” it has “yes” next to Personal Residence even though I indicated for both my wife and me “Never” under “Financial Information – Principal Residence – Sell Principal Residence.”  Are the income projections using the value of our personal residence or not?

Answer:

The calculations use the asset allocation basis selected on the 'Asset Mix for Projections' tab on the 'Options' page. You can select an asset allocation based on one of the profiles, the current asset mix, or your own custom allocation.

Since you selected 'Never', there will be no sale taking place. If you had selected a year for the sale but left the personal residence unselected in 'Sources of Retirement Income', then the funds would not be used for retirement.

By: RetireWare / Equisoft On 4:59 PM

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A few product questions

Question:

I have a few questions about some inputs that I cannot resolve on my own. I am a new subscriber but I think I have everything figured out now except the below.

Is there a way to model a spousal loan? for example, if I have lent my spouse $1 Million at 1% until death there is a $10,000 deductible interest expense for one and interest income for the other.

I don't quite understand the "dividend yield" and "increase in earnings" fields in the economic forecast. If I input all the nominal equity asset class returns as 7% for example, what happens when I manipulate the other two variables? it seems to effect the Monte Carlo simulation significantly so I want to be more certain as to their meaning.

For the Monte Carlo simulation, how conservative are the input volatility? I am trying to get more comfortable on the simulation and how I manipulate the variables to get an 85% chance of success or a 35% chance (or everything in between).

Answer:

To model the loan, you could add an 'Other Income; of $10,000 per year for you, and a $10,000 interest expense on her budget.

The "dividend yield" adds a constant dividend on the share of assets invested in equities (based on the profile selected in 'Asset Mix for Projections' on the 'Options' page. So if you select 2% and have $100,000 in equities, it will add $2,000 in the following year of dividend income taxed assuming they are eligible dividends. In future years, it will be based on the market value of equities, so as they grow, so does the dividends.

The "increase in earnings" field in the economic forecast is an assumption for annual wage increase. So if you are not retired and earn $100,000 per year with a 3% annual increase in earnings, the program will calculate earnings of $103,000 next year and increase it by 3% each year up to retirement. This is the only purpose of this assumption. In turn, your annual earnings are used to estimate the CPP.

The increase in earnings and dividend rate are not subject to volatility in the simulation. In other words they are assumed to be constant.

The default volatility for each asset class are based on historical experience adjusted to recent trends. In a nutshell, cash and fixed income are assumed to be less volatile than historically, and equities are in line with their historical volatility (based on the last 20 years), with International equities experiencing the most volatility. These are revisited annually.

By: RetireWare / Equisoft On 4:55 PM

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Functionality of RetireWare

Question:

I am interested in a subscription but before doing so wanted to know the extent of your program - is there a 30 day trial version.

I tried another product but the program was not detailed enough. Does your software allow you to enter your lifestyle needs item by item. e.g., housing expenses, living expenses including food, entertainment, travel , transportation expenses etc.

Then does it allow you to enter RRSP and TFSA balances and unregistered investment accounts separately for myself and my spouse and then set different returns for different investment products i.e. cash (1%), bonds (2%), Canadian equities (5%), foreign equities (7%).

Does to allow you to set annual contributions to the RRSP an TFSA and then set dates when withdrawals may or may not take place. What about personal residence and recreational property?

Answer:

Here are answers to your questions:

1. You can base your income goal on a detailed post-retirement budget that includes nearly 50 different items.

2. balances are separate by type of account and include RRSP, TFSA, non-registered and locked-in, also separated for each spouse.

3. You can customize expected investment returns for the following asset classes: cash, fixed income, Canadian equity, US equity and international equity. The program suggests defaults as well. The expected return will depend on the asset mix selected for the calculations.

4. You formulate an annual savings goal and select one of several savings rules, such as maximizing the RRSP, then contributing to the TFSA. RRSP and TFSA limits are applied and carried forward.

5.  Withdrawals are driven by the retirement income goals. After taking into account annual income from public and private pensions, shortfalls are funded from non-registered assets, TFSAs, locked-in assets and the RRIF.

6. You can also include the disposition of the personal residence, other property, business or other future assets in your plan.

As opposed to a free trial, we offer a 30-day money back guarantee. If you're not satisfied with the product, we will refund your credit card in full - no questions asked. Simply email us and request a refund and we will oblige within 24 hours.

By: RetireWare / Equisoft On 4:51 PM

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Retirement income goal and rates of returns

Question:

As I am new to this program, I just have a couple of questions before I start rolling it out to  my clients.

When it asks for Annual retirement objective (total dollar amount), will this include all sources such as CPP , OAS , and then net of tax if indicated below? Or, is this just going to draw from one’s own savings?

Standard forecast rates of returns: what rates are used? How does that work ? The other two choices (Historical and Custom ) seem straight forward.

Answer:

The retirement income objective is how much you want to have each year during retirement. The income forecast tries to meet the goal with CPP, OAS, other income or company pensions, and make up any gap from invested assets. Note that the retirement objective is in terms of "today's dollars". So if you enter say $50,000, and retirement takes place in 10 years, and inflation is 2%, the actual retirement objective in the year of retirement will be 50,000 x 1.02 ^ 10 or $60,949.

The standard are the default values shown in the Custom Forecast.

• Cash and equivalents: 2.25%
• Fixed income: 6%
• Canadian equity: 7%
• US equity: 8%
• International equity: 8%

The above are exclusive of investment management fees.

The standard also has values for inflation, real estate and wage increase, also shown in the default values..

Note that these do change each year based on historical averages adjusted for current trends.

By: RetireWare / Equisoft On 4:48 PM

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Asset mix profiles

Question:

What are the asset mixes used in the historical returns application for conservative, moderate, balanced, growth and aggressive. I an an investment advisor and results are difficult to explain without some specific parameters. I've also found that the more I get into the program, the more questions I have. Is there any documentation dealing with assumptions etc rather than just data input. For example, I have been trying to determine how to input how to max out a TFSA in later years from the sale of a principle residence. Any help is appreciated,

Answer:

You will find the asset mixes on the Investor Profile tab on the Review page of the RetireWare application. There is also information in the help files.

The software automatically deposits part of the proceeds into a TFSA if there is contributions room, and any excess goes to the non-registered account.

There are a few tutorials you can view on our YouTube page:

https://www.youtube.com/user/retireware

By: RetireWare / Equisoft On 11:53 AM

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Asset Mix Changing Over Time

Question:

I would like to have more detail about the change in Asset mix when I select 'Move gradually to conservative portfolio until 80'.

Answer:

The amount held in fixed income will increase gradually each year until it reaches the amount of the conservative profile. Thereafter it will be assumed that the funds are invested in accordance to the conservative profile. You will find the asset allocation of the conservative and all other profiles in the help files.

By: RetireWare / Equisoft On 11:43 AM

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Viewing Detailed Cash Flows

Question:

On the future assets table in the report, the registered assets at age 94 (year 2054) for the surviving client are $240,979.

At that age the client is required to withdraw a minimum 20% which would be $48,200. The investment return is a net 5% or about $12,000 maximum yet the client’s registered assets at the start of the next year are $217,683, which is about $13,000 more than the math would indicate it should be.

The cash-flow forecast for age 94 (2054) shows only $31,711 being withdrawn from the registered assets of $240,979 which is 13% and not 20% as required by CRA. Is there an explanation for this?

Is there something else in ‘registered’ other than a RRIF or a LIF that might distort the figures, like a TFSA?

Answer:

For each spouse on the 'Accumulations' tab on the 'View' page there is at the bottom under 'Your Future Assets - Detailed Data Table' links to pop-up tables that provide the detailed cash flow. You will see that the withdrawals are 20% at age 94.

For investment income, it will be based on the rates of returns selected in the 'Economic Forecast' page (less investment fees), weighted in accordance with the basis selected in 'Asset Mix for Projections' on the 'Options' page.

The summary tables on the results page combine TFSA, LIFs and RRIFs.

The Accumulations and Income Forecast tabs have detailed pop up cash flow tables that show all cash flows.

By: RetireWare / Equisoft On 11:41 AM

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Future Income Tax

Question:

I ran the model and the level of income taxes seem low for the amount of income each year in the future.

With a  gross incomes of around $80,000, it shows about $10,000 in taxes for example.

Answer:

Income taxes may seem low but remember these are "future dollars", and the income mix may be from capital withdrawals from a non-registered account, investment income which is taxed a lower rates if it's from realized capital gains and dividends.

By: RetireWare / Equisoft On 11:38 AM

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Expected Investment Income

Question:

How are investment income calculated for the projection?

Answer:

Registered funds are projected in the future based on the rates selected in the Economic Forecast on the Forecast page, and the asset allocation selected on the Options page.

If you base your projection on the current asset mix, then you should enter the asset allocation of registered assets by clicking the blue icon next to the 'Registered' balance on the second tab of the
Financial Information page. In setting your rate for fixed income consider that part of the assets will earn 8% on the mortgages and part will earn a lower rate for mutual fund investments, bonds, etc.

Also recognize that the expected rates may apply for 30 to 50 years in the future, so it is best to use a conservative approach and consider that rates that may be guaranteed for
the next few years may not apply for the entire life expectancy.

By: RetireWare / Equisoft On 11:37 AM

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Tax Brackets and Marginal Tax

Question:

How do you determine the tax bracket/marginal tax many years in the future?

Answer:

The program assumes brackets, credits and other amounts will grow each year by the rate of inflation.

Most provinces automatically index these amounts each year. We assume brackets are indexed for provinces who don't automatically index because they eventually update them, and it would not be realistic to have a model using fixed brackets in 20 or 30 years.

Note that for RRSP limits and YMPE increase in line with the average wage.

By: RetireWare / Equisoft On 11:34 AM

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Spending Projections in Retirement

Question:

When doing long term income projections, is it possible to drop spending by say 25% at age 75 and then continue adjusting that revised spending by inflation rather than having spending continue along the same rate?

Answer:

Yes, go to the 'Forecast' page and on the 'Retirement Income Target' tab, and click 'Advanced'.

You can increase or decrease retirement income at three points during retirement and income continues to be adjusted with inflation throughout.

You can also add one-time or recurring special expenses in your retirement income goals (such as car purchase every few years, trips, weddings, etc.).

By: RetireWare / Equisoft On 11:32 AM

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Multiple Rental Properties

Question:

I own several rental properties, each with a market value, purchase price, and mortgage. Is it possible to control the timing of sale of each property?

Answer:

There are two things you can do.

Combine the value of the properties into one and enter the average year of disposition. This will work if the disposition of the properties will occur over a few years in the future. For example of you plan to dispose of the properties within a 5 year window, say 2020 to 2024, you can use 2022 as the average year of disposition. This will not make a material difference in your retirement plan.

The other way is to enter the after-tax disposition of each property as 'Other Assets' on the Financial Information page. The disadvantage is that you won't see the full value of these assets in the net worth until the years of disposition.

By: RetireWare / Equisoft On 11:20 AM

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Asset Projections

Question:

Why is the amount shown on the summary for poor returns is less than that shown for normal returns?

Answer:

If you use a custom forecast that's very conservative, it may result in the main projection having lower values than the poor returns.

By: RetireWare / Equisoft On 11:19 AM

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Investor Profiles

Question:

Where can I view the asset mixes for the various Profile portfolios?

Answer:

it's in the help files under 'Investor Profile':

https://secure.retireware.com/web/mc_help.aspx?language=en-CA&node=102&id=view_asset.htm 

By: RetireWare / Equisoft On 11:18 AM

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Custom Rates of Return

Question:

Why can't the custom rates of return be set to negative values to match some current YTD performances?

Answer:

You can see the effect of negative returns that will occur in some years with the Monte Carlo simulation.

We don't allow negative rates since making such an assumption over the long-term does not make sense. If it was a possibility, we might as well keep our assets in a 0% interest bank account.

You could put 0% for some or all asset classes and with investment management fees it would essentially be negative returns. For example, with a 0% return assumption for say Canadian equities and 2% fees, your return would be -2%.

By: RetireWare / Equisoft On 11:14 AM

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Rates of Return

Question:

In the economic outlook when I enter my own custom rates of return and in advanced you include investment management fees does that reduce the rates of return by the investment fee?

Answer:

Yes it does, whether you select the standard forecast or enter your own custom rates of returns.

By: RetireWare / Equisoft On 11:09 AM

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Asset Allocation Used for the Calculations

Question:

Under Asset Allocation it states “The Investor Profile Questionnaire established that the following portfolio: Security might be the most …”

Do I assume that RetireWare used a “Security” mix for my investments?

Answer:

The calculations use the asset allocation basis selected on the Asset Mix for Projections tab on the Options page. You can select an asset allocation based on one of the profiles, the current asset mix, or your own custom allocation.

By: RetireWare / Equisoft On 8:09 PM

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Asset Allocation

Question:

Under Asset Allocation it states “The Investor Profile Questionnaire established that the following portfolio: Security might be the most appropriate etc…”

Do I assume that the RetireWare used a “Security” mix for my investments listed under Finances or will it use the “Selection of Rates in Economic Outlook?”

Answer:

The calculations use the asset allocation basis selected on the 'Asset Mix for Projections' tab on the 'Options' page. You can select an asset allocation based on one of the profiles, the current asset mix, or your own custom allocation.

By: RetireWare / Equisoft On 4:29 PM

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Investment Income Calculation

Question:

It seems the program may be treating withdrawals from a TFSA as "income" for purposes of the OAS "clawback" test.

Answer:

No, TFSA investment income is never included in taxable income.

The OAS clawback is based on all income plus realized investment income. Investment income for the year shows on the cash flow table. The portion that is interest, dividends is taxed. But there is also realized income based on the selected 'Percentage of gains realized annually' in 'Economic Outlook' on the 'Forecast' page.

For example, assume all your non-registered assets are in fixed income that has a cost base of $250,000, a market value of $300,000 and you earn 4% per year.

Your market value is $312,000 at the end of the year, with interest of $12,000. If you sell and reinvest 20% of your portfolio each year, you will sell $60,000 of bonds and have a realized gain of $10,000. This amount is added to income to figure out the tax payable and assigned to the non-registered account.

This in turn affects the clawback on Old Age Security.

By default, this portfolio "churning" is 20%. You can control this (and set it to 0%) in the 'Advanced' section on the 'Economic Outlook' tab on the 'Forecast page'.

By: RetireWare / Equisoft On 9:50 PM

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Calculation of Dividends

Question:

In 'Economic Outlook', what’s the difference between the Annual Expected Return and Dividend Yield in the “Economic Basis for Projections"? 

For example if I input 3% for Equities – Canada and an expected Dividend Yield of 3% does that mean a total expected annual return of 6%?

Answer:

The dividend yield will apply to assets invested in equities based on the asset allocation model in 'Asset Mix for Projections' (on the Options page). 

The dividend yield is on top of the appreciation of assets for each class of equities.

By: RetireWare / Equisoft On 9:49 PM

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