NAVIPLAN PREMIUM LEARNING GUIDE. Set retirement, education, major purchase, and emergency fund goals

NAVIPLAN PREMIUM LEARNING GUIDE Set retirement, education, major purchase, and emergency fund goals

Contents Set retirement, education, major purchase, and emergency fund goals 1 Learning objectives 1 NaviPlan planning stages 1 Identify goal assumptions 3 Define your clients retirement goal 4 Retirement page 4 Objectives details 6 Asset Allocation Details dialog box 7 Calculate Retirement Expenses details 9 Retirement Expenses details 10 Retirement Incomes details 11 Liquidation Strategies dialog box (Level 2 Plans only) 12 Define your clients education goals 13 Education page 13 Education Calculator button Search Education Costs dialog box 14 Details button Search Education Costs dialog box 15 Asset Allocation Details dialog box 16 Define your clients major purchase goals 18 Major Purchase Objective Details dialog box 19 Asset Allocation Details dialog box 20 Define your clients emergency fund goal 21 Emergency Fund page 21 Establish goal funding to assign specific accounts to goals 22 Goal Funding dialog box 22 Verify the data using stand-alone reports 24 Plan Analysis Synopsis report 24 Complete Asset Summary report 25 Current Savings for All Goals graph 26 i

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Conclusion 27 NaviPlan Premium resources 28 ii

Set retirement, education, major purchase, and emergency fund goals Set retirement, education, major purchase, and emergency fund goals This guide assumes that you have completed the Start planning learning guide and that you already know how to create a client file. This guide was created using the Average Tax method. This guide will help you define your clients needs in these areas. Learning objectives Upon successful completion of this module, you will be able to Identify goal assumptions. Define your clients retirement goal. Define your clients education goal. Define your clients major purchase goal. Define your clients emergency fund goal. Establish goal funding to assign specific accounts to goals. Verify the data using stand-alone reports. Note: Each learning objective is identified with a puzzle piece icon. NaviPlan planning stages The following diagram shows the planning stages you can follow in NaviPlan Select, from creating a client file to presenting results. The learning objectives in this module are part of the following stage: Set goals. Your clients have savings for retirement and education goals. However, they want to buy a motor home for vacations when their child starts university, and they also want to save for an emergency fund, in case something unexpected happens. After you have completed this module, you can start to analyze these various goals and make recommendations to your clients. 1

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals The Goal Funding page in NaviPlan shows how the clients assets are allocated to fund their goals. Figure 1: Set Goals section Goal Funding category Goal Funding page Note: This learning guide is based on using the Ibbotson Asset Allocation option, using actual Ibbotson return rates with NaviPlan calculations. 2

Identify goal assumptions Identify goal assumptions NaviPlan uses the following set of assumptions when calculating retirement, education, major purchase, and emergency fund goals: Goal Goal starts Goal ends Savings end Applicable account types Retirement First day of the month when the first client to retire retires Dec. 31 of the year the second client dies Last day of the month before retirement Qualified and Non-qualified accounts Education Jan. 1 of the specified year Jan. 1 of the last year of the goal Dec. 31 of the second-last year of the goal 529 plans, UTMA, Coverdell, and non-qualified accounts Major purchase Date entered Date entered One month before the date entered Non-qualified accounts Emergency fund Immediately N/A N/A Non-qualified accounts Key points In plans using the Detailed Tax method, qualified accounts can be allocated to education and major purchase goals. Savings for a retirement goal always end on the last day of the month prior to retirement. For jointly owned accounts, savings end on the last day of the month prior to the first retiree s retirement. If you selected the Client(s) are already retired check box when you created the plan, the retirement goal begins January 1 of the previous year. All education expenses are assumed to occur on January 1 of each year of the education goal. A major purchase goal can be both an asset and an expense, or just an expense (outflow). At the goal date, any assets funding the major purchase goal are sold. By default, an emergency fund equal to the clients average expenses for three months is included in the plan. 3

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Define your clients retirement goal You can define your clients retirement goal on the Set Goals section Retirement category Retirement page. Retirement page Figure 2: Set Goals section Retirement category Retirement page In the next few pages, we will examine the following: A. Objectives details B. Asset Allocation Details dialog box C. Calculate Retirement Expenses details D. Retirement Expenses details E. Retirement Incomes details F. Liquidation Strategies dialog box Liquidation Order tab Note: Goal funding for all goals is covered in a separate learning objective. Note: NaviPlan features the ability to incorporate a bucketed cash management 4

Define your clients retirement goal strategy during the retirement period. Bucketed cash management allows you to allocate a portion of your clients' retirement funds to a more stable asset mix. This "bucket" can then be used as the primary source to cover ongoing expenses during the retirement period. This approach allows you greater freedom in managing risk for your clients during their retirement while maximizing the efficiency of their asset allocation. For more information on bucketing strategies, see the Retirement Bucketing Quick Reference Guide (QRG). 5

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Objectives details Figure 3: Set Goals section Retirement category Retirement page (Objectives details) Key points The clients time horizon for the retirement goal is defined in these fields. These dates/ages are synchronized with the milestones entered on the Plan Management section Assumptions category Milestones page. When changes are made on one page, the other is automatically updated. Clicking the Asset Allocation button opens the Asset Allocation Details dialog box where you can view or edit the asset allocation details of the retirement goal s suggested asset mix for qualified and non-qualified retirement accounts. The clients would both like to retire at age 62. Their parents had long life spans, and they both believe their life expectancies could be 90 years. 6

Define your clients retirement goal Asset Allocation Details dialog box Figure 4: Set Goals section Retirement category Retirement page Asset Allocation button Asset Allocation Details dialog box Key points The asset allocation defined for a goal is originally based on responses to the questionnaire in the Plan Management section Asset Allocation category, and the resulting investor profile. Since all goals do not have the same time horizon, the risk tolerance is likely to vary from goal to goal. If necessary, you can click the Modify Questionnaire button, and then modify the questionnaire answers specifically for the retirement goal. 7

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals You can assign a different asset mix to the pre-retirement and the retirement periods. In addition, you can assign different asset mixes to qualified and nonqualified retirement accounts, and to annuity accounts. If you assign different asset mixes to qualified and non-qualified retirement accounts within the same period (Pre-Retirement or Retirement), Blended Mix appears under Investment Profile when All Retirement Accounts is selected as the asset mix you want to review. If you selected the Client(s) are already retired check box when you created the plan, avoid using the Pre-Retirement options under Investor Profile. The Suggested Asset Mix is applied as a strategy to alternative NaviPlan reallocates the assets in the current asset mix to the suggested asset mix at three different times: at the Plan Analysis Date, and at each client s retirement date. To customize the asset mix for retirement 1. Select the applicable period: (Pre-Retirement or Retirement). 2. Select All Retirement Accounts, Qualified Retirement Accounts, Non- Qualified Retirement Accounts, or Non-Qualified Annuity Retirement Accounts. 3. Select All Retirement Accounts, Qualified Retirement Accounts, Non- Qualified 4. Select the Override check box, and then Note: Clicking the Customize Asset Mix button allows you to further define the suggested asset mixes. 8

Define your clients retirement goal Calculate Retirement Expenses details Figure 5: Set Goals section Retirement category Retirement page (Calculate Retirement Expenses details) Key points When clients are unsure of their planned annual retirement expenses, you can quickly calculate a percentage of their current estimated after-tax salary or current lifestyle expenses using these fields. You can also enter a specific amount. If you want to use the resulting calculation, click the Add to Retirement Expenses button. The new joint expense appears under Retirement Expenses. Using this feature is generally more accurate than your clients guesses as to what their retirement goal or need will be. The clients estimate that their annual retirement expense will be about 65% of their current estimated after-tax salary, or $143,396. 9

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Retirement Expenses details Figure 6: Set Goals section Retirement category Retirement page (Retirement Expenses details) Key points The clients retirement need is defined in these fields. Only expenses that apply during retirement should be entered here. Clicking the Event Calendar next to the Start Age and End Age fields shows possible events (such as retirement and death) and event types (such as 1st to retire, and 2nd to die) that can be used to define the date. Use keywords like ret (retirement) or death with plus (+) or minus (-)values to offset the Start Age/End Age from the event, or enter specific ages to control the duration of expenses. If you selected the Client(s) are already retired check box when you created the plan, the Start Age field defaults to their current age rather than the event of retirement. The benefit of using keywords is that if the date of retirement or death is changed in any scenario, expenses will be adjusted automatically. Select Fixed Exp. for expenses like utilities and other bills that must be covered to meet your clients needs. For expenses that are discretionary, such as retirement travel, clear the Fixed Exp. check box. The clients estimated annual retirement expense (calculated as a percentage of the current estimated after-tax salary 65%) appears in the last row in Figure 6. They plan to travel during their retirement. They also want to plan for additional medical expenses late in life. These expense entries were added separately: Retirement Travel and Retirement Medical. Note the different entries in the Start Age and End Age fields for both of these expenses. 10

Define your clients retirement goal Retirement Incomes details Figure 7: Set Goals section Retirement category Retirement page (Retirement Incomes details) Key points Enter any additional retirement funding sources for the clients in this section (incomes that the clients expect to earn during retirement). Do not enter pension incomes, such as defined benefit pensions, or Social Security on the Retirement page; these are entered on the Cash Flow page. NaviPlan combines the income information entered on the Cash Flow page that applies during retirement (e.g., salaries, pensions, Social Security) with the additional retirement income information entered on the Retirement page. One of the clients creates and sells wooden knickknacks. She expects to earn $10,000 per year during retirement from her woodworking hobby. 11

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Liquidation Strategies dialog box (Level 2 Plans only) Figure 8: Set Goals section Retirement category Retirement page Liquidation Strategies button Liquidation Strategies dialog box Liquidation Order tab Key points On December 31 of each retirement year, NaviPlan automatically reallocates surpluses first, and then redeems accounts in the most tax-efficient manner to cover current deficits. To reallocate surpluses, the deficits owned by one client are covered by the co-client s surpluses (and vice versa). All remaining deficits are divided equally between the client and co-client to ensure that the assets belonging to each client are redeemed evenly in retirement. NaviPlan automatically liquidates accounts in a specified order. In a Level 2 Plan, you can change the order in which accounts will be liquidated by selecting one of the predefined orders from the list. Note: Your changes in this dialog box affect the clients current financial plan and, unless overridden, any alternative scenarios in this plan. In a Level 2 Plan, you can add specific redemption strategies for accounts in the retirement period on the Redemptions tab. 12

Define your clients education goals Define your clients education goals You can define your clients education goals on the Set Goals section Education category Education page. On this page, you can define when the education goal is likely to begin (establish the time horizon), calculate the projected cost (determine the need), and allocate funds to the goal. Education page Figure 9: Set Goals section Education category Education page In the next few pages, we will examine the following: A. Education Calculator button Search Education Costs dialog box B. Details button Search Education Costs dialog box C. Asset Allocation Details dialog box Note: Goal funding for all goals is covered in a separate learning objective. 13

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Education Calculator button Search Education Costs dialog box Figure 10: Set Goals section Education category Education page Education Calculator button Search Education Costs dialog box Key points Clicking the Education Calculator button opens a search tool connected to the Peterson s Undergraduate Database (Data source: Peterson s Databases, copyright (2011). Peterson s, a division of Thomson Learning. All rights reserved.) that you can use to search for the cost of tuition and rooming expenses for universities and colleges. See the Help for more information. 14

Define your clients education goals Details button Search Education Costs dialog box Figure 11: Set Goals section Education category Education page Details button Search Education Costs dialog box Key points Use this dialog box when you want to create one education goal with multiple expenses (e.g., more than one child, or multiple degrees). To define education goals using this dialog box 1. From the State list, select the state where the educational institution is located, and then click Search. 2. Under Search Results, select the educational institution you want. 3. Select the applicable expense option (e.g.,in State Tuition, Out of State Tuition/Room). 4. Click Populate. The Projected Cost field updates with the relevant data. 5. To add another education expense, click Add Education Expense. 15

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Asset Allocation Details dialog box Figure 12: Set Goals section Education category Education page Asset Allocation button Asset Allocation Details dialog box Key points The asset allocation defined for a goal is originally based on answers to the questionnaire in the Plan Management section Asset Allocation category, and the resulting investor profile. The risk tolerance for an education goal is likely to vary from a retirement goal, which has a longer time horizon. If necessary, you can click the Modify Questionnaire button, and then modify the questionnaire answers specifically for the education goal. 16

Define your clients education goals Clicking the Override Investor Profile button allows you to assign different asset mixes to 529 plan education accounts and non-qualified education accounts. Clicking the Customize Asset Mix button allows you to manually override the default asset class weightings, view the Efficient Frontier graph (the Optimize option), and revert to defaults. Major purchase and emergency fund goals have very similar asset allocation functionality. 17

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Define your clients major purchase goals You can define your clients future major purchase goals, such as a planned vacation, wedding, cottage, or new vehicle, on the Set Goals section Major Purchase category Major Purchase page. On this page, you can define when the major purchase goal is likely to begin (establish time horizon), calculate the projected cost (determine the need), and allocate funds to the goal. A major purchase can be entered either as an expense or as an asset. You can allocate funds from various sources to pay for the major purchase. Major Purchase page Figure 13: Set Goals section Major Purchase category Major Purchase page If you want the major purchase to be strictly a cash outflow (not an asset), click Add Major Purchase Objective, and then select the Expense option. If you want the major purchase to be one of the clients assets, select any of the options except Expense. When an option other than Expense is selected, NaviPlan includes that asset as part of the clients net worth beginning the year of the goal target date. In the next few pages, we will examine the following: A. Major Purchase Objective Details dialog box B. Asset Allocation Details dialog box 18

Define your clients major purchase goals Major Purchase Objective Details dialog box Figure 14: Set Goals section Major Purchase category Major Purchase page Details button Major Purchase Objective Details dialog box Key points The fields available vary based on the selections made from the Type list. If you know when the asset is going to be sold, you can enter sale information details and projected values by clicking the Sale Information link, where additional fields appear. For residential purchases, a Property Taxes section is available where you can enter property tax information. Clicking Return Rates displays additional fields where you can change the growth rate for major purchase goals (assets). You can also use these fields to show depreciation. For example, to show a vehicle s depreciation, you could enter -20% in the Deferred Growth field(s). 19

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Asset Allocation Details dialog box Figure 15: Set Goals section Major Purchase category Major Purchase page Asset Allocation button Asset Allocation Details dialog box Key points This dialog box is very similar to the Asset Allocation Details dialog boxes for retirement and education. Clicking the Customize Asset Mix button allows you to manually override the default asset class weightings, view the Efficient Frontier graph (the Optimize option), and revert to defaults. 20

Define your clients emergency fund goal Define your clients emergency fund goal You can define your clients emergency fund goal on the Set Goals section Emergency Fund category Emergency Fund page. On this page, you can define the amount of money clients want to have available (goal value), how long the emergency fund will be required (time horizon), and the sources that will fund the goal. Emergency Fund page Figure 16: Set Goals section Emergency Fund category Emergency Fund page You can select one of the following: Calculate target amount (by default, NaviPlan calculates this as 3.0 Average Monthly Fixed Expenses, but you can change the multiple amount) Specify target amount Under Reserve asset for Emergency Fund until, you can select how long the assets funding the emergency fund will be reserved for that purpose. If you select Retirement The emergency fund assets will be released from the emergency fund when the clients retire and will be used to fund the clients retirement. End of Plan The assets are reserved for emergency fund usage for the duration of the plan. Note: Goal funding for all goals is covered in the next learning objective. 21

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Establish goal funding to assign specific accounts to goals Clicking the Goal Funding button on the Retirement, Education, Major Purchase, and Emergency Fund pages opens the Goal Funding dialog box, where you can allocate accounts to specific goals. Goal Funding dialog box All accounts and goals that have previously been set up appear in the Goal Funding dialog box. Figure 17: Set Goals section <goal> category <goal> page Goal Funding button Goal Funding dialog box Key points Non-qualified accounts can be used to fund one or more goals. Qualified accounts, such as IRAs, 401(k)s, Roth IRAs, and other annuities, are automatically 100% allocated to the retirement goal. However, in plans using the Detailed Tax method, qualified accounts can be reallocated to other goals. Coverdell accounts and 529 plans can only be allocated to education goals. You can enter a mix of percentage and dollar amounts in the applicable fields. You can also enter the keyword balance instead of a value to direct the remainder from the account towards the goal. The Unallocated column can be used to keep money aside for heirs. At death, the remaining balance of any assets assigned to the retirement goal is available for testamentary trusts and becomes part of the deceased s estate. 22

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Verify the data using stand-alone reports There are numerous NaviPlan reports that you can review to confirm data entry for goal details. We will take a look at just a few of these. Plan Analysis Synopsis report Figure 18: Reports menu Summary Synopsis Report Plan Analysis Synopsis report The Plan Analysis Synopsis report shows a complete overview of the incomes, expenses, assets, liabilities, and strategies that have been entered. Near the end of the report, you will find a summary of goal expenses and assets allocated to the expenses. 24

Verify the data using stand-alone reports Complete Asset Summary report Figure 19: Reports menu Goals Goal Funding Summary Complete Asset Summary Complete Asset Summary report Use this report to confirm goal funding amounts. The Description column shows what percentage of each account is funding various goals. The clients have allocated 35% of their Joint Savings Account to retirement (shown in Figure 19), while 25% is allocated to education, and 40% is allocated to the major purchase goal. If we scrolled down in this report, we would see how the Joint Savings Account (and other accounts) are allocated to the other goals. 25

NaviPlan Premium Learning Guide: Set retirement, education, major purchase, and emergency fund goals Current Savings for All Goals graph Figure 20: Reports menu Goals Savings Current Savings (All Goals) Current Savings for All Goals graph This graph provides you with a visual representation of where the clients savings are directed and when the savings begin and end. If a goal is underfunded, this graph will help you decide whether the clients might use savings allocated to another goal to meet this need. Clicking a bar on the graph reveals the related savings goal, the year the bar represents, and the total savings for that goal in that year. Our example shows that the clients are saving money for retirement until the year 2032. Their savings for education end in 2019, and their savings for the major purchase goal end in 2014. 26

Conclusion Conclusion Upon successful completion of this module, you are now able to Identify goal assumptions. Define your clients retirement goal. Define your clients education goal. Define your clients major purchase goal. Define your clients emergency fund goal. Establish goal funding to assign specific accounts to goals. Verify the data using stand-alone reports. 27