Functional document: What are my options? for education: overview

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1 Functional document: What are my options? for education: overview NaviPlan Premium Level 1 R Level 2 R functions addressed in this document: What are the system-generated education options? How is the Cover % of Expenses percentage determined? What are the cash flow implications of implementing a strategy? What is the difference between Cover % of Expenses and Goal Coverage? If the percentages for Cover % of Expenses and Goal Coverage are both 100%, why does NaviPlan recommend additional savings? Plan Management section Assumptions category - Current Portfolio Setting tab What are the system-generated education options? On the Scenarios page (Results section Analyze Goals category), you can compare different education scenarios for the selected education goal and examine the ability of each scenario to achieve the goal. The Goal Coverage graph indicates the percentage of the goal that is achieved, given all variables. Click What Are My Options? to display three system-generated options for changing the scenario in order to achieve 100% education goal coverage. Other sources on this topic: Scenario Manager 1

2 What Are My Options? eliminates guesswork by presenting the following quick solutions to achieve the goal: What Are My Options? If selected, the following occurs: Cover % of Expenses By default, NaviPlan reallocates the clients education funding accounts to match the Investment Objective specified for the goal. Cover % of Expenses reflects the percentage of education expenses being met after this reallocation, without any other changes to the plan. The bracketed dollar amount is the annual education cost you could expect to cover, in today s dollars (not the portion of the Projected Cost that can be covered). The Expense Coverage slider bar for the Recommended Plan scenario is updated with the value recommended in What Are My Options?. Save Monthly NaviPlan creates a jointly owned, non-qualified account named <client s> Education Goal Fund linked to the education goal with a monthly savings strategy for the recommended amount. This account earns the rate of return specified by the investor profile. Savings start on the first day of the month following the Plan Analysis date, are not indexed to inflation, and continue until December 31 of the year prior to the end of the education objective. (The last year s education expense is taken out of cash flow on January 1 of the last year of the goal). The savings Amount, Start Date, and Inflation can be changed by clicking Details next to the Additional Monthly Savings slider bar. If the Investment Objective or Return Rates have been overridden in the Scenario Manager Recommended Plan tab Objectives subtab, the <client s> Education Goal Fund account will earn the rate of return associated with the override. Save a Lump Sum NaviPlan creates a jointly owned, non-qualified account named <client s> Education Goal Fund linked to the education goal with a one-time lump-sum savings strategy for the recommended amount. This account earns the rate of return specified by the investor profile. By default, the lump-sum savings strategy occurs on the first day of the month following the Plan Analysis date. The savings Amount and Start Date can be changed by clicking Details next to the Additional Lump Sum Savings slider bar. If the Investment Objective or Return Rates have been overridden in the Scenario Manager Recommended Plan tab Objectives subtab, the <client s> Education Goal Fund account will earn the rate of return associated with the override. 2

3 When one of the above options is selected, the corresponding field(s) in the Scenario Manager is updated with the value recommended under What Are My Options? and the Goal Coverage displays 100%. Each of the three options under What Are My Options? are mutually exclusive. NaviPlan does not present options in which some combination of these alternatives is offered. For example, NaviPlan will not provide the option to cover education expenses at 90% and save a lower amount per month than would otherwise be recommended to meet the goal at 100%. Combinations such as this can be analyzed by manually changing these variables in a scenario. DID you know? Options selected under What Are My Options? only apply to the selected scenario. However, if the scenario is selected as the Recommended Plan on the Scenarios page, the option will be adopted in the Recommended Plan scenario presented in client reports. How is the Cover % of Expenses percentage determined? Underfunded Goals: NaviPlan iteratively projects the education analysis and assumes different levels of education expenses in each projection. NaviPlan finds a decreased expense level where projected cash flow for the education goal period falls between the accumulated cash flow tolerance of $(1) and $100 (i.e., produces 100% Goal Coverage). That expense level is displayed as the Cover % of Expenses value. Overfunded Goals: NaviPlan iteratively projects cash flow until it finds an increased expense level where cash flow falls within the tolerance range. In this case, the Cover % of Expenses amount is adjusted to more than 100%, which illustrates that the clients can increase the planned education expenses for that education objective. It is assumed that all education expenses will decrease or increase proportionately. However, if the Expense Coverage slider bar is adjusted to less than 100% in the Scenario Manager Recommended Plan tab, the Cover % of Expenses option no longer appears under What Are My Options?. In this case, expense levels are user-controlled only. What are the cash flow implications of implementing a strategy? It is important to remember that the options presented under What Are My Options? are independent of cash flow. Cash flow should be monitored to identify possible issues and evaluate whether projected surpluses could realistically be saved toward a goal. After selecting an option under What Are My Options? and returning to the Scenario Manager Recommended Plan tab, Cash Flow details (under Modify Financial Data) provides an indication of whether the recommended changes are affordable. The Surplus/Deficit amount is indicated with a deficit represented by a minus (-) sign inserted before the amount; the Pre-retirement and Retirement amounts are indicated by either a green check mark and relevant percentage of coverage if no deficits occur during the stated period, or a red X and relevant percentage of coverage if deficits occur. The Cash Flow Surplus/Deficit graph, which is available by clicking Cash Flow, displays the Cash Flow details on the right in each applicable year. Zoom options available are Next 5 Years, Pre-retirement, Retirement, and All Years. How does NaviPlan test cash flow tolerance? Three basic situations are possible when analyzing an education goal, namely: the goal is underfunded, adequately funded, or overfunded. NaviPlan performs cash flow projections and applies a surplus/(deficit) tolerance test to determine the recommendations that are displayed under What Are My Options?. Cash flows are projected for each individual education goal from the start date to the end date of the goal. The cash flow projection only includes education expenses and education account redemptions associated with the goal being examined. If projected education cash flow results in accumulated deficits greater than $1, the goal is underfunded and recommendations such as those in the Underfund screenshot on the following page appear under What Are My Options?. If projected education cash flow results in accumulated surpluses/(deficits) between ($1) and $100, the goal is adequately funded and no further strategies are recommended under What Are My Options?, as illustrated in the Adequately funded screenshot below. If the projected education cash flow results in accumulated surpluses are greater than $100, the goal is overfunded and recommendations similar to those in the Overfunded screenshot on the following page appear. 3

4 UNDERFUNDED ADEQUATELY FUNDED OVERFUNDED What is the difference between Cover % of Expenses and Goal Coverage? There are three ways in which the Goal Coverage percentage displayed in the Scenario Manager under the Recommended Plan tab differs from the Cover % of Expenses percentage displayed under What Are My Options?: Goal Coverage Indicates the goal coverage percentage of the strategies already included in the plan at a high level. Percentage of all education expenses that can be covered, given all available education account redemptions. Never displays more than 100%, even when the goal is overfunded. Cover % of Expenses Recommends how to change education expenses so that the goal can be covered. Projection of cash flow that determines by how much clients need to reduce education expenses in order to meet the goal. Can display in excess of 100% if the goal is overfunded. If the percentages for Cover % of Expenses and Goal Coverage are both 100%, why does NaviPlan recommend additional savings? Since the two values are determined by different methods, it is possible to see unanticipated results in scenarios where the goal is adequately covered. For example, a scenario may show 100% for both the Goal Coverage in the Scenario Manager and the Cover % of Expenses value under What Are My Options?, but still recommend a small amount of additional What Are My Options? savings. Since Cover % of Expenses is derived iteratively, NaviPlan displays the results from the first iteration that meets the cast flow tolerance test. DID you know? For both Cover % of Expenses and Goal Coverage percentages, NaviPlan rounds down the percentage to the nearest whole number except when the percentage is greater than or equal to 99.9%, in which case NaviPlan rounds the number up to 100%. 4

5 Results section - Analyze Goals category - Scenarios page - Scenario Manager (Education Goal link clicked) - What Are My Options? showing In the image above, an annual education expense amount of $14,987 is the first value during the iteration process that meets the cash flow tolerance criteria; however, it is not the only value that could meet the criteria. Goal Coverage, on the other hand, is a calculated value based on the actual projected education expenses and education account redemptions based on plan data. 5