Financial Plan redux

have an assignment for my finance class that consists of going through a " money tree software financial planning" software account to learn about what my financial plan will entail. I did the first part of the assignment, which is using the software. I want from you to do the second part, which is to write the 2 page, double spaced, in which you will relate whatever you learned by performing the financial planning software. need you to go through the basic plan according to the teacher's instructions so you can find enough information to write the 2-page synthesis. Here are the professor instructions: OK, last big assignment due for the class. Those who haven't opened MoneyTree.com it's time to sign up for the Free Evaluation silver online. Once you're registered, simply go through the program using the "Next" button at the bottom right of the screen. It would be a good idea to use data from what you've discovered from your career path research and create a plan based on what you think your life will be after college. Do not use the estate planning section, and assume that you will have 2 times your salary in term insurance from your employer. Once you're through, I want you to submit ONLY the report page titled "Retirement Capital Analysis" along with 2 pages, double-spaced, in which you will relate whatever you learned by performing the financial plan software “moneytree.com”. • All reports will use Ariel type font, 12 pitch and double line spacing. All written reports will consist of 1 page plus separate citations sheet. • For all writing assignments the following shall apply: Completion of general requirements (above) - 50% / Grammar, spelling & sentence structure - 20% / Relativity of content - 20% / Format - 10%. **This will be checked on Safe assign, and multiple databases to prevent plagiarism. Please be careful.** databases to prevent plagiarism. Please be careful.** Personal Financial Plan For mohamed alzaabi November 21, 2015 Prepared by Silver Financial Planner 2430 NW Professional Dr Corvallis, OR 97330 541.754.3701 This presentation provides a general overview of some aspects of your personal financial position. It is designed to provide educational and / or general information and is not intended to provide specific legal, accounting, investment, tax or other professional advice. For specific advice on these aspects of your overall financial plan, consult with your professional advisors. Asset or portfolio earnings and / or returns shown, or used in the presentation, are not intended to predict nor guarantee the actual results of any investment products or particular investment style. IMPORTANT: The projections or other information generated by Money Tree's Silver regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Additionally, it is important to note that information in this report is based upon financial figures input on the date above; results provided may vary with subsequent uses and over time. About Your Personal Financial Plan We appreciate that you have questions and concerns as you work to attain and preserve financial security. Today's financial environment is complex and in many regards, uncertain. The decisions you make regarding work, spending, investment, and retirement, both now and in the future, will significantly affect your financial condition over the long term. In an effort to aid you in learning, understanding, and formulating a personal basis for decision making, this 'Personal Financial Plan' is offered to help enhance your knowledge of various topics and communicate some of the intricacies of the financial world. The plan represents a framework to clarify and structure your financial matters. This plan is based upon confidential information you provided regarding your present resources and objectives. While illustrations within this plan can be a valuable aid in the examination of your finances, it does not represent the culmination of your planning efforts. Financial planning is an ongoing process. This hypothetical illustration of mathematical principles is custom made to model some potential situations and transitions you may face in your financial future. Hypothetical assumptions used in this illustration are specifically chosen to communicate and demonstrate your current financial position and highlight for discussion with your advisor the complex future interacting effects of combined incomes, expenses, savings, asset growth, taxes, retirement benefits, and insurance. This document is not an advertisement or solicitation for any specific investment, investment strategy, or service. No recommendations or projections of specific investments or investment strategies are made or implied. Any illustrations of asset growth contained herein are strictly used to demonstrate mathematical concepts and relationships while presenting a balanced and complete picture of certain financial principles. Growth assumptions are applied to generalized accounts based upon differing tax treatment. Illustrations, charts and tables do not predict or project actual future investment performance, or imply that any past performance will recur. This plan does not provide tax or legal advice, but may illustrate some tax rules or effects and mention potential legal options for educational purposes. Information contained herein is not a substitute for consultation with a competent legal professional or tax advisor and should only be used in conjunction with his or her advice. The results shown in this illustration are not guarantees of, or projections of future performance. Results shown are for illustrative purposes only. This presentation contains forward-looking statements and there can be no guarantees that the views and opinions expressed will come to pass. Historical data shown represents past performance and does not imply or guarantee comparable future results. Information and statistical data contained herein have been obtained from sources believed to be reliable but in no way are guaranteed as to accuracy or completeness. The Assumptions page contains information you provided that is used throughout the presentation. The asset listing herein is not an account statement and does not necessarily include current or complete balances, holdings, and returns. Please review the information for accuracy and notify your Financial Advisor promptly if discrepancies in the assumptions are present; discrepancies may materially alter the presentation. Your actual future investment returns, tax levels and inflation are unknown. This illustration uses representative assumptions in a financial planning calculation model to generate a report for education and discussion purposes. Calculations and assumptions within this report may not reflect all potential fees, charges, and expenses that might be incurred over the time frame covered by these illustrations which, if included, would result in lower investment returns and less favorable illustration results. Do not rely upon the results of this report to predict actual future investment performance, market conditions, tax effects or inflation rates. Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 2 of 15 Assumptions Names : First Name 1 mohamed First Name 2 Birthdate / Age 1 21 Birthdate / Age 2 0 Retirement Age 1 65 Retirement Age 2 0 Life Expectancy 1 85 Life Expectancy 2 Alternate life exp. 1 Alternate life exp. 2 Risk Tolerance Level Somewhat Aggressive Life Insurance 1 Life Insurance 2 Term Insurance 1 Term Insurance 2 Insurance cash value 1 Insurance cash value 2 Pension & Social Security Data (Annual): Pension-Indv. 1 Pension start age Pension rate (pre ret.) Pension rate (ret.) Pension survivor % Pension-Indv. 2 Pension rate (pre ret.) Pension rate (ret.) Pension survivor % Soc Sec 1 Start age 65 Soc Sec 1 Rate 2.00% Earned income 1 $45,000 Soc Sec 1 Amt. (if known) Soc Sec 2 Start age 65 Soc Sec 2 Rate 2.00% Earned income 2 Soc Sec 2 Amt. (if known) Estimated Education Costs Total cost at 6% inf. Expenses & Inflation (Annual After-tax ): Expenses, (pre ret.) $50,000 Expenses, Survivor (pre ret.) Expenses at Retirement $80,000 Expenses, Survivor (ret.) Inflation, (pre ret.) 3.00% Inflation, Survivor (pre ret.) 3.00% Inflation at Retirement 3.00% Inflation, Survivor (ret.) 3.00% Asset Allocations: Current Cash & Reserves 0.00% 5.00% Income 0.00% 0.00% Income & Growth 0.00% 15.00% Growth 100.00% 40.00% Aggressive Growth 0.00% 40.00% Other 0.00% 0.00% Rate Assumptions (Before & After Retirement): Taxable Returns 8.00% 8.00% Tax-Deferred & Roth Returns 8.00% 8.00% Tax-Free Returns 4.00% 4.00% Return on Annuities 8.00% 8.00% Effective Tax Rates 20.00% 18.00% Cost Basis for Taxable Assets 100.00% Cost Basis for Annuity Assets 100.00% Additions Increase Rate: Taxable 3.00% Additions Increase Rate: Tax-Def 1 3.00% Additions Increase Rate: Tax-Def 2 3.00% Other Incomes After-tax Item Description Start Year Inc Rate Number of years Amount per year Other Expenses After-tax: mohamed alzaabi Pension start age Note: These assumptions are based upon information provided by you, combined with representative forward looking values intended to provide a reasonable financial illustration for education and discussion purposes. The investment returns, tax rates, benefit increase rates, inflation rates, and future expense values used in this report were selected based on your age, assets, income, goals and other information you provided. These assumptions do not presuppose or analyze any particular investments or investment strategy, or represent a guarantee of future results. Client Information: Suggested 10/28/1994 Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 3 of 15 Net Worth Statement November 21, 2015 mohamed alzaabi ASSETS Savings And Investments Municipal Bonds and Funds $1,000 $1,000 Other Assets Residence $200,000 Personal Property 40,000 car loan 30,000 $270,000 TOTAL ASSETS $271,000 LIABILITIES Residence Mortgage $100,000 Credit Card Debt 10,000 car loan 15,000 $125,000 Net Worth (Assets less Liabilities) $146,000 Note: Potential taxes due on unrealized gains or assets in tax-deferred retirement plans are not accounted for in this Net Worth Statement. statement and does not necessarily include current or complete balances, holdings, and returns. Please review this information for accuracy. This asset information is based upon information you provided and sources believed to be reliable. The asset listing herein is not an account Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 4 of 15 Account Class Taxation Addition Asset Period Annual Amount Additions Current Type Asset Description Asset Worksheet retirement 1,000 Growth Tax-Free (1) Muni Bonds & Funds Totals: $1,000 Note: This asset information is based upon information you provided and sources believed to be reliable. The asset listing herein is not an account statement and does not necessarily include current or complete balances, holdings, and returns. Please review this information for accuracy. Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 5 of 15 Retirement Summary Retirement Spending Needs* $80,000 Retirement Capital Illustration Inflation - Current Inflation - Retirement 3% 3% Retirement Age mohamed - 65 The analysis begins at your current age and extends through your life expectancy. It includes all assets, both tax advantaged and taxable, all expenses, including education funding if applicable, other income and expense estimates, defined benefit pensions, and Social Security benefits. The graph illustrates the growth and depletion of capital assets as seen in Retirement Capital Analysis. The line within the graph illustrates the value of future retirement assets in today's dollars. General Assumptions: * Spending needs are stated in today's after tax-dollars. See Assumptions page for complete listing of assumptions. Actual future returns, taxes, expenses, and benefits are unknown. This illustration uses representative estimates and assumptions for educational and discussion purposes only. Do not rely on this report for investment analysis. Tax Rate - Current Tax Rate - Retirement 20% 18% Rates of Return Before and After Retirement Used in Illustration: Taxable RORs: Tax Def. RORs: Tax Free RORs: Annuity RORs: 8% 8% 8% 8% 4% 4% 8% 8% Retirement Capital Illustration Results: It appears you may run out of money before your age 76. The range of possible options you might consider to improve your situation include the following: Increase the rate of return on your investments. Increase your annual savings by $7,400/year ($617 month). Reduce your spending needs. Defer your retirement by about 11 years. Combine any of the above and lower the requirements for each. Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 6 of 15 Retirement Capital Analysis *R=Retirement age, L=Life expectancy.** Pensions & 85% of S.S. reduced 18.00% for income taxes. *** Includes life insurance and education costs. Retirement Capital Annual Additions To Assets Education & Other Inc/Exp*** Sources of Annual Income ** Indv. 1 Retirement Spending Needs Ages* Indv. 2 Indv. 1 Indv. 2 Social Security Pension Income Net Surplus or (Shortage) Note: This report is based upon assumed inflation rates of 3.00% and 3.00% (before and after retirement). Actual future inflation rates are unknown. $1,000 21 1,040 22 1,081 23 1,124 24 1,168 25 1,214 26 1,262 27 1,312 28 1,364 29 1,418 30 1,474 31 1,532 32 1,593 33 1,656 34 1,722 35 1,790 36 1,861 37 1,935 38 2,012 39 2,092 40 2,175 41 2,262 42 2,352 43 2,446 44 2,543 45 2,644 46 2,749 47 2,858 48 2,972 49 3,090 50 3,213 51 3,341 52 3,474 53 3,612 54 3,756 55 3,906 56 4,062 57 4,224 58 4,392 59 4,567 60 4,749 61 4,938 62 5,135 63 5,340 64 5,553 65 R (293,678) 34,836 (258,842) 66 (302,488) 35,533 (266,955) 67 (311,562) 36,243 (275,319) 68 (320,908) 36,968 (283,940) 69 (330,535) 37,707 (292,828) 70 (340,451) 38,462 (301,989) 71 (350,664) 39,231 (311,433) 72 (361,183) 40,015 (321,168) 73 (372,018) 40,816 (331,202) 74 (383,178) 41,632 (341,546) 75 (394,673) 42,465 (352,208) 76 (406,513) 43,314 (363,199) Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 7 of 15 Taxable Savings & Investment Accounts Ages Account Additions From Tax-Advantaged Assets Account Balance** * Estimated taxes include tax due on income and on sales of assets. Starting cost basis is estimated at 100.00%. Annual Growth Income Tax On Account* Distributions Income Tax Paid out or received for cash flow ** This report is based on assumed growth rates of 8.00% and 8.00%, and inflation rates of 3.00% and 3.00% (before and after retirement). $0 Account additions are calculated to increase at 3.00% per year for each individual. 1 & 2 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 R 5,662 (258,842) 66 (266,955) 67 (275,319) 68 (283,940) 69 (292,828) 70 (301,989) 71 (311,433) 72 (321,168) 73 (331,202) 74 (341,546) 75 (352,208) 76 (363,199) Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 8 of 15 Withdrawals Tax-Free Accounts Additions Indv. 1 Additions Indv. 2 Annual Growth Balance* * Roth growth rates: 8.00% and 8.00%, Tax-Free: 4.00% and 4.00%, inflation rates: 3.00% and 3.00% (before and after retirement). Account deposits are calculated to increase 3.00% and 3.00% per year (Individual 1 and 2). Indv 1 Combined ROTH IRA Accounts Other Tax Free Assets Account Additions Annual Growth Withdrawals Balance* Indv 2 $1,000 Age $0 21 40 1,040 22 42 1,081 23 43 1,124 24 45 1,168 25 47 1,214 26 49 1,262 27 50 1,312 28 52 1,364 29 55 1,418 30 57 1,474 31 59 1,532 32 61 1,593 33 64 1,656 34 66 1,722 35 69 1,790 36 72 1,861 37 74 1,935 38 77 2,012 39 80 2,092 40 84 2,175 41 87 2,262 42 90 2,352 43 94 2,446 44 98 2,543 45 102 2,644 46 106 2,749 47 110 2,858 48 114 2,972 49 119 3,090 50 124 3,213 51 129 3,341 52 134 3,474 53 139 3,612 54 144 3,756 55 150 3,906 56 156 4,062 57 162 4,224 58 169 4,392 59 176 4,567 60 183 4,749 61 190 4,938 62 198 5,135 63 205 5,340 64 214 5,553 65 R 109 (5,662) 66 67 68 69 70 71 72 73 74 75 76 Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 9 of 15 Monte Carlo Simulation Explanation Monte Carlo Simulation Technique: The financial planning process can help you evaluate your status in relationship to your financial goals and objectives. In preparing a hypothetical financial illustration for discussion, a series of representative fixed assumptions are made, such as inflation rates, rates of return, retirement benefits and tax rates. While such static hypothetical illustrations are still useful for education and discussion purposes, they are based upon unchanging long-term assumptions. In fact, economic and financial environments are unpredictable and constantly changing. Monte Carlo Simulation is one way to visualize the effect of unpredictable financial market volatility on your retirement plan. Monte Carlo Simulation introduces random uncertainty into the annual assumptions of a retirement capital illustration model, and then runs the model a large number of times. Observing results from all these changing results can offer a view of trends, patterns and potential ranges of future outcomes illustrated by the randomly changing simulation conditions. While Monte Carlo Simulation cannot and does not predict your financial future, it may help illustrate for you some of the many different possible hypothetical outcomes. Based upon the trends, changes, and values shown in your hypothetical financial program, the simulation process uses a different random rate of return for each year of a new hypothetical financial plan. Ten thousand full financial plan calculations are performed utilizing the volatile annual rates of return. The result is ten thousand new hypothetical financial plan results illustrating possible future financial market environments. By using random rates from a statistically appropriate collection of annual returns, and repeating the process thousands of times, the resulting collection can be viewed as a representative set of potential future results. The tendencies within the group of Monte Carlo Simulation results; the highs, lows and averages, offer insight into potential plan performance which may occur under various combinations of broad market conditions. The simulated level of volatility in future financial markets is represented by a Standard Deviation value. This statistical measure of variation is used within the Monte Carlo Simulation to indicate how dramatically return rates can change year by year. The Standard Deviation controls the magnitude of the random changes in each annual rate of return as it is varied each year above or below the average annual rate to simulate market volatility. Standard Deviation: Note: No investment products, investment strategy or particular investment style is projected or illustrated by this process. Simulation results demonstrate effects of volatility on rate of return assumptions for education and discussion purposes only. The simulation model uses a Standard Deviation based upon the rate of return assumptions used in the Retirement Capital Illustration, and limits the rate of return variation to plus or minus five standard deviations in any year. Low assumed return rates generate low Standard Deviation values, higher returns relate to higher Standard Deviations. IMPORTANT: The projections or other information generated by the Personal Financial Plan regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Each Monte Carlo Simulation is unique; results vary with each use and over time. The Bold Line Percentage of Monte Carlo Results Above Zero at Selected Ages The bold line in the Monte Carlo Simulation Results graph tracks the value of assets over the length of the illustration if all rates of return are held stable at the assumed rates of return (see Assumptions). The estimate uses annual expected portfolio rates of return and inflation rates to model the growth and use of assets as indicated under Assumptions. The bold line represents the values shown in the Retirement Capital Analysis. These results represent the percentage of Monte Carlo simulation outcomes that show positive retirement asset value remaining at different ages. A percentage above 70 at last life expectancy is an indication that the underlying retirement plan offers a substantial probability of success even under volatile market conditions. Additional ages shown give the percentage of simulation outcomes with positive asset amounts at various ages. IMPORTANT: The projections or other information generated by the Personalized Financial Plan regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Each Monte Carlo Simulation is unique; results vary with each use and over time. Monte Carlo Simulation Minimum, Average and Maximum Dollar Results These values indicate the best, worst and average dollar results at the end of the ten thousand Monte Carlo Simulations. These show the range of results (high and low), and the average of all Monte Carlo results. All values are based on results at the life expectancy of the last to die. Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 10 of 15 Monte Carlo Retirement Simulation * The bold line is the estimated retirement capital value over time using fixed rates. Results from 10,000 Monte Carlo Simulation Trials IMPORTANT: The projections or other information generated in this report regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each report and over time. Results of this simulation are neither guarantees nor projections of future performance. Information is for illustrative purposes only. Do not rely upon the results of this report to predict actual future performance of any investment or investment strategy. Retirement Capital Analysis Results, at Life Expectancy, of 10,000 Monte Carlo Simulations: Percent with funds at last life expectancy 0% Retirement Capital Estimate $0 Percent with funds at age 35 Minimum (Worst Case) result $0 > 95% Percent with funds at age 49 > 95% Average Monte Carlo result $0 Percent with funds at age 63 Maximum Monte Carlo result $0 > 95% This Monte Carlo Retirement Simulation illustrates possible variations in growth and/or depletion of retirement capital under unpredictable future conditions. The simulation introduces uncertainty by fluctuating annual rates of return on assets. The graph and related calculations do not presuppose or analyze any particular investment or investment strategy. This long-term hypothetical model is used to help show potential effects of broad market volatility and the possible impact on your financial plans. This is not a projection, but an illustration of uncertainty. The simulations begin in the current year and model potential asset level changes over time. Included are all capital assets, both tax advantaged and taxable, all expenses, including education funding if applicable, pension benefits, and Social Security benefits. Observing results from this large number of simulations may offer insight into the shape, trends, and potential range of future retirement plan outcomes under volatile market conditions. Illustration based on random rates of return which average 4%, with a std. dev. of 4% (95% of values fall between -4% and 12%). Life insurance proceeds are not included in the final year balances of these calculations. Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 11 of 15 Introduction to Dynamic Behavior Analysis A key question for most people is, “What does it really take to retire with security?” Financial professionals have developed a number of ways to understand and address uncertainties to prepare a secure financial future. Dynamic Behavior Analysis is an advanced technique that builds on earlier methods of retirement success analysis. The “Dynamic” part of the analysis allows both retirement age and retirement spending to change based on investment performance. The “Behavior” part is the set of rules, or logic, that dictates the responses in particular situations. Applied together in a Monte Carlo Simulation, this active method compensates for some of the limitations of other illustration methods. Traditional retirement illustrations are static – that is, they assume inflation rates and investment returns are consistent throughout the calculations. Static illustrations offer a good picture of general retirement concepts, and are representative if every year is close to average. Of course, in real life, rates of inflation and returns may fluctuate significantly. Introducing the effects of market uncertainty, Monte Carlo Simulation does all the calculations for a retirement illustration, but randomly varies rates of return on investments every year. Thousands of these trials are run, each represents a potential retirement with a unique set of investment returns. The greater the percentage of successful Monte Carlo trials, the better the retirement plans stands up to variable financial market conditions. In the real world, changing financial markets are not the only factors affecting retirement security. Individuals can and do respond intelligently to financial market conditions as they occur. When retirement investments don’t grow as planned, reasonable people may change their plans and actions to protect their security, perhaps by retiring later or by temporarily spending less at some point in retirement. Dynamic Behavior Analysis introduces reasonable responses by using active Monte Carlo Simulation. Thousands of randomized trials are run, and in trials that develop adverse conditions, the retirement age and/or spending levels change to model reasonable financial decisions. The resulting illustrations show success rates for different retirement ages and the associated spending levels. These analysis results can help indicate how robust a retirement plan is when adjustments are made in response to financial changes. Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 12 of 15 Dynamic Behavior Analysis - continued Rational people will respond to changing financial conditions to protect their financial security. Thorough education and preparation for a secure retirement requires seeing the potential effects of future market uncertainty and being prepared to respond appropriately. Dynamic Behavior Analysis is a method that factors in reasonable adjustments to retirement age and spending levels in response to investment returns. Dynamic Behavior Analysis results offer a more complete picture of various effects market variability may have on retirement decisions. The Retirement Decision Evaluating a retirement age, to see if it is financially reasonable, starts with three questions designed to assure retirement savings last throughout a lifetime. How much in savings will need to be spent in each year of retirement? What percentage of retirement investments need to be withdrawn in the first year of retirement? What is the latest acceptable retirement start age? First-year spending is used to determine if there are sufficient investment assets to safely sustain withdrawal throughout retirement. Income from sources such as Social Security or pensions is subtracted from the retirement spending need. The remainder will be withdrawn from savings and investments. This withdrawal, when viewed as a percentage of total assets, may indicate readiness to retire. Percentages below a certain number (usually around 4.5%) might be considered a safe initial withdrawal rate. For example, if at retirement age total assets are $1,000,000, then a withdrawal of $45,000 would be acceptable in the first year of retirement ($45,000 is 4.5% of $1,000,000). To evaluate a retirement age in a trial, that year’s withdrawal amount is compared to accumulated retirement assets. If the ratio is less than the maximum acceptable withdrawal percentage, the trial lets retirement occur. If not, the model defers retirement until the withdrawal ratio is acceptable or the maximum acceptable retirement age is reached. Determining annual retirement spending levels starts with three questions. How much retirement spending is desired? How much is required, that is, what is needed to cover necessities? Finally, what is the maximum percentage of assets that can be withdrawn in a single year? The calculation model always tries to maintain the desired spending level. If however, assets will not sustain that level, withdrawals will be reduced, subject to these limitations: That last point needs a little more explanation. As a person comes closer to life expectancy, it’s reasonable to spend down some of the assets, if needed. Because of this, the percentage of assets that can be withdrawn is also increased with age: in the first year of retirement, it’s the “safe” rate; by life expectancy, it’s reached the selected maximum. Spending Levels Spending will never be more than the desired amount. Spending will never be less than the required amount. Note: both these amounts will be increased each year for inflation. Withdrawal from assets will never be higher than the maximum percentage. 1. 2. 3. Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 13 of 15 Behavior Analysis Graph Explanation Assumptions Randomize inflation rate Randomize rate of return Allow for a different retirement age Later Variable spending budget floor Initial withdrawal rate limit Ending withdrawal rate limit Dynamic Behavior Analysis extends the Monte Carlo simulation to consider effects of intelligent responses to changing financial conditions. These charts show the percentage of projections that are successful for given retirement ages. Each red column shows the probability of having enough funds at retirement to safely make the planned initial withdrawal. Each Green column shows the probability of having sufficient funds through life expectancy. Given your planned retirement spending of $80,000/year, this shows the percentage of projections in which you have enough funds for this spending not to exceed the maximum initial withdrawal rate. In other words, the successful projections are the ones in which you have at least $1,777,778 in today's dollars. No Yes Yes 2 90 % 4.5 % 10.0 % Variable spending budget ceiling 125 % Early 2 Variable spending increase ratio 25 % Probability of meeting Initial Retirement Spending Levels at each Age Behavior Monte Carlo Simulation result at each Retirement Age Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 14 of 15 Retirement Income Sustainability and Variable Spending Retirement investments are often the most important source of funding for retiree’s spending needs. Key to the reliable flow of these critical funds throughout retirement is a strategy to avoid taking too much money from retirement investments in any one year. In order to model effects of retiree spending flexibility, Dynamic Behavior Analysis bases spending on the budget, but makes limited reductions in simulation situations where the full budget figure requires withdrawals above the maximum withdrawal rate. The size of budget reduction adjustments is limited based on retiree discretionary spending flexibility. Variable spending calculations make adjustments in each simulation year when the full budget would require withdrawals that exceed that year’s rate limit. This can occur when investment assets don’t grow as expected or when inflation is higher than anticipated. Calculated spending is based on the inflated budget, but is limited on the upper end by the maximum asset withdraw rate, and on the lower end by the minimum acceptable percentage of the inflated budget. For each example retirement age, this Dynamic Behavior Analysis graph illustrates the simulation result for each age’s success rate at full budgeted spending (blue) and the simulation success rate with variable spending (green). In this simulation, retirement age is based on an initial withdrawal rate limit of 4.5 % and variable spending is kept between 90 % and 125 % of inflated budget based upon the initial withdrawal rate limit and the ending withdrawal rate limit of 10.0 %. Personal Financial Plan mohamed alzaabi November 21, 2015 This report, and its hypothetical illustrations, are intended to form a basis for further discussion with your legal, accounting, and financial advisors. Actual future investment returns, taxes and inflation are unknown. Do not rely upon this report to predict future investment performance. Page 15 of 15