 
### Do-It-Yourself Financial Plans

### The VeriPlan User Guide

By Lawrence J. Russell

Manage your own personal finance and investment affairs

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Copyright 2016 Lawrence J. Russell. All rights reserved worldwide.

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### Table of Contents

Click on any line to go to that article.

Chapter 1: VeriPlan's lifetime financial planning tools for better decisions

Chapter 2: Graphics and Data Outputs

Chapter 3: Start Here worksheet

Chapter 4: How to Use worksheet

Chapter 5: Summary of Inputs worksheet

Chapter 6: Income worksheet

Chapter 7: Expenses worksheet

Chapter 8: Financial Assets worksheet

Chapter 9: Property worksheet

Chapter 10: Debts worksheet

Chapter 11: Taxes worksheet

Chapter 12: Retirement worksheet

Chapter 13: Tax-advantaged Retirement Plans worksheet

Chapter 14: Asset Allocation worksheet

Chapter 15: Portfolio Risk and Returns worksheet

Chapter 16: Investment Costs worksheet

Appendix: VeriPlan's design and discounted cash flow modeling

Appendix: Who is behind the curtain? Biography of VeriPlan's designer

Table of Image Credits

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### Chapter 1: VeriPlan's lifetime financial planning tools for better decisions

Section 1.1: A tool to improve your lifetime financial planning

Section 1.2: Executive summary of VeriPlan

Section 1.3: VeriPlan's lifetime financial planning decision tools

Comprehensive and economical do-it-yourself financial planning software

Develop your own lifetime financial plan at home on a PC or a Mac

http://www.theskilledinvestor.com/VeriPlan/financial-planning/

IMPORTANT NOTES:

VeriPlan is a self-learning lifetime financial planning and investment application.

* All needed user operating instructions are embedded within the VeriPlan software.

* This guide is supplementary. You do not need it to use VeriPlan.

* This guide includes all the instructions that are provided within VeriPlan, and it adds substantial additional commentary.

* When you use VeriPlan, it will indicate when you can find supplementary information that is in this user guide but is not in the VeriPlan software.

* Because this guide includes all operating instructions and all supplementary information, those who do not have the VeriPlan software can read this manual to understand how it works and what it can do.

Section 1.1: A tool to improve your lifetime financial planning

VeriPlan gives you significant personal insight into your most important personal finance and investment portfolio decisions. Through comprehensive and customized lifetime projections, VeriPlan's integrated financial calculators and investment calculators model your particular financial situation across your adult lifetime. VeriPlan projects fully integrated scenarios about your income, expense budget, debts, investment portfolio assets, investment returns, and investment costs within the context of the U.S. federal, state, and local income taxes that apply to you. VeriPlan presents all your personal lifetime financial modeling information in clear graphics and data tables.

You can easily customize any of your personal data and settings in VeriPlan. After you make any modification, VeriPlan's financial calculators and investment calculators automatically and instantaneously revise your complete lifetime projection. As you use VeriPlan's rich set of fully integrated "what if" financial modeling tools, you take control of your own financial, investment, and retirement planning.

VeriPlan can help you to analyze important personal finance questions, including:

Career Planning:

* What are the long-term economic benefits of changing positions or employers?

* Would returning to school to improve my career skills make economic sense?

Debt Management:

* What tradeoffs are associated with accelerating mortgage loan payments or other debt repayments?

Education Expenses:

* Will I be have enough college savings to pay for my children's education?

Estate Planning:

* How could my savings rate and investment strategy affect the size of my estate?

* After my living expenses, how much could I give or bequeath to family and charities?

Insurance Budgeting:

* How large might my exposures to insurable financial risks be over time?

* How might different budgets for insurance premiums affect my lifecycle financial plan?

Investment Cost Reduction:

* What investment returns might I earn net of investment costs?

* How much could I waste on unproductive investment costs?

* How might I optimize my investment returns, while keeping costs to a minimum?

Investment Returns:

* How does my current investment strategy compare with a scientific strategy focused on long-term, risk-adjusted returns net of investment costs and capital gains tax?

Investment Risk Management:

* What returns might I expect from the balance of expected investment returns and investment risks that I have chosen?

* Am I saving enough to stay in my investment risk and return comfort zone and still reach my financial planning goals?

* If I were to lose income in the future, how long would my liquid investment portfolio assets cover my projected expense budget?

New Business Ventures:

* What are the likely long-term benefits and risks, if I fore-go current income to start a business?

* Could I self-fund my business venture or would I need external capital?

Real Estate Planning:

* When will I have sufficient capital for a real estate purchase?

* How would more or less mortgage debt affect my investment portfolio and other financial goals?

Retirement Planning:

* Would I have sufficient investment assets to retire early?

* Would my investment assets be adequate to cover my expenses, if I live a very long time?

* What is a relatively safe asset portfolio withdrawal plan?

Saving Goals:

* Am I saving at a sufficient rate to fund all our future financial planning goals?

* How much benefit might I expect from increasing my income and/or reducing my expense budget?

* What is the long-term value of saving most of my bonus?

Tax Reduction:

* Am I managing my investments from an income tax efficiency standpoint?

* How much should I put into either taxable, traditional retirement accounts, or Roth retirement accounts?

* Would my retirement portfolio assets be adequate after my income taxes and other taxes are paid?

Section 1.2: Executive Summary of VeriPlan

Organization, Graphics, and Data:

VeriPlan provides 34 user worksheets organized into groups. VeriPlan is a lifetime projection model for 1 or 2 earners from 18 to 100 years old. Projections can begin at any age from 18 to 99 and continue through age 100. VeriPlan automatically provides 19 graphics and a consolidated worksheet with the data for these graphics. All VeriPlan projections extract inflation and use real or non-inflationary dollars with constant purchasing power across your lifetime.

Earned and Other Income:

* Regular employment and/or self-employment income can be projected for either earner. You can also enter information about other income sources that you expect to have.

Pensions, Annuities, and Social Security Income:

* VeriPlan projects up to 10 separate pensions and annuities. For each pension or annuity, VeriPlan automatically projects: a) the dollar amount of the monthly payment, b) separate real dollar growth rates before and after the first payment, c) whether payments begin at a specific age or at either user's retirement, d) duration of payments, and e) taxability of payments. Concerning your Social Security retirement payments, you can set current dollar levels for your entitlements, adjust the age to begin to receiving payments, and scale back the amount of your projected payments, if you wish.

Debts:

* VeriPlan automatically projects the pay-off of up to 25 current debts. You can plan for the accelerated repayment of any or all debts. Interest on selected debts can be tax-deductible. Also, VeriPlan automatically manages mortgage repayments on your planned future purchases of up to three homes.

Assets:

* VeriPlan projects your asset holdings in five asset classes. Individually and automatically, VeriPlan will manage separately up to 24 cash assets, 24 bond and fixed income assets, 99 stock and equity assets, and 20 property, real estate assets, and other assets. For each of your asset holdings, VeriPlan collects information about share ownership, values per share, investment costs, and account taxability.

* VeriPlan's integrated, automated, and high performance asset projection facilities enable the rapid evaluation of a wide range of customized financial plans. Growth of your projected "centerline" investment asset values are based on 85-year historical risk-adjusted and inflation-adjusted asset class growth rates. Growth rates are fully user-adjustable using either VeriPlan's systematic and/or judgmental growth rate adjustment tools.

* For each of your financial asset holdings, VeriPlan separately and automatically projects annual returns, return variability, taxes, and investment costs. VeriPlan automatically projects your net annual holdings by asset class, including new investments from future positive annual net earnings, reallocations, and withdrawals due to projected negative net earnings. VeriPlan automatically assesses your overall annual net portfolio returns, tax-efficiency, and investment cost-efficiency.

* VeriPlan can project these aggregates, even though the net valuation of your individual financial asset holdings may change at different rates due to return adjustments you make, varying investment costs, uneven taxable distributions, and legal differences in account taxability. VeriPlan can provide significantly more personalized insight, because its projections focus on your particular projected financial life situation, instead of relying upon averages for the general population.

Taxes:

* VeriPlan automatically projects your lifetime tax obligations in eight tax categories. It automatically projects your particular federal, state, and local income tax rates and limitations; your tax exemptions, adjustments, and deductions; and your property and other taxes. VeriPlan supports the 'Single' and "Married, Filing Jointly' federal income filing statuses and automatically applies the tax rates and limits associated with these filing statuses. To prevent obsolescence, you can change VeriPlan's tax rates and limits, if laws change.

* VeriPlan applies current variable U.S. federal ordinary income tax rates and limits. It contains tax rate information for the 50 United States and Washington, D.C. and automatically applies either variable, flat, or no income tax for any state that you choose. VeriPlan can automatically apply any local ordinary income taxes. Furthermore, it can develop projections using different levels of federal, state, and local taxable income.

* VeriPlan automatically projects annual tax exemptions and their phase-outs for up to 10 dependents and up to 6 different adjustments to your taxable income. VeriPlan automatically projects your federal income tax deductions and applies the more favorable of either the standard deduction or your itemized deductions. VeriPlan automatically applies Social Security (FICA) and Medicare taxes, and projects either employee or self-employment tax rates, as appropriate.

* Concerning your assets, VeriPlan automatically applies long-term capital gains tax rates on capital appreciation and qualified dividend distributions including asset withdrawals net of accumulated asset tax basis. Over your lifetime projections, VeriPlan will automatically track your cumulative cash, bond, and stock asset class tax basis. VeriPlan automatically projects your property, real estate, and other assessment taxes.

Tax-advantaged Retirement Plans:

* VeriPlan has automated your lifetime projections regarding employer retirement plans and personal IRA accounts that allow you to defer taxation or to avoid future taxation altogether. VeriPlan automatically projects separate values for your taxable accounts, traditional retirement accounts, and Roth retirement accounts. For traditional and Roth IRA and employer-sponsored retirement accounts, VeriPlan automates the projection of your lifetime contributions, deductions, asset growth, withdrawals, and taxation. It automatically assesses federal and state early withdrawal penalties, as required.

Documentation:

* VeriPlan's worksheets provide extensive, integrated documentation. A separate VeriPlan User Guide Manual is also available. You are reading it now. It contains all of the documentation integrated within VeriPlan, plus additional information that may be useful in your lifetime financial planning.

Systems Platform:

* VeriPlan is a fully self-contained Microsoft Excel spreadsheet application that runs in a standalone configuration with local data storage. To operate, VeriPlan requires a moderately powerful Microsoft Windows PC or Apple Macintosh with any Microsoft Excel version 2002 or later.

License and Purchase Information:

* VeriPlan is licensed and is for personal, non-commercial use by one (1) household. Buyers receive an unconditional thirty-day (30 day) satisfaction guarantee. Shipping and handling is free within the U.S. California residents pay sales tax. Purchase terms are subject to change without notice. VeriPlan also provides a thirty-day (30 day) error correction warranty.

Section 1.3: VeriPlan's lifetime financial planning decision tools

Asset Allocation Tool:

Your asset allocation strategy allows you to align the risk of your investment portfolio with your risk tolerance. VeriPlan provides five user selectable and adjustable asset allocation methods for your lifetime projections. Fixed, variable, and age-based allocation mechanisms are provided. Reallocations are performed automatically at the beginning of all subsequent projection years.

Cost-Effectiveness Tool:

Excessive investment costs are a huge problem for the average investor. VeriPlan's projections automatically analyze the impact of five types of investment expenses across your lifetime: 1) purchase fees and loads, 2) management fees, 3) marketing fees, 4) transactions costs, and 5) account custody fees. VeriPlan fully automates the comparison of lifetime investment costs between the investment costs of your current financial asset portfolio and the costs that you believe are reasonable to pay.

Expense and Savings Tool:

This tool allows you to change your current expense levels and future expense growth rates. It also allows you to enter major planned expenses and their growth rates in any future year. You can enter positive and negative expense adjustments and growth rates for any projection year. This tool can be used as a Children's Education Expenditure Planning Tool, and as a Mid-Career Education Planning Tool to model tradeoffs associated with returning to school for career advancement. VeriPlan also provides a 24-month household expense tracking, budget planning, and expense versus budget variance analysis tool.

Current and Future Debt Tools:

Regarding any current debts that you have, VeriPlan automatically repays interest and principal as you specify. You can use VeriPlan's debt management facilities to analyze and plan for the accelerated repayment of any or all of your current debts. In addition, excess consumption and the cost of associated debt can be very destructive, when you do not live within your means. This tool allows you to set a debt interest rate for future unfunded consumption. When your projected expenses exceed your projected income, VeriPlan automatically accumulates excess consumption debt and unpaid interest, after your cash, bond-fixed income, and stock-equity financial assets would be depleted. If subsequent positive net income becomes available, VeriPlan will automatically retire some or all of this unfunded consumption debt.

Historical Asset Class Returns:

VeriPlan's automated "centerline" projections are based on the very long-term, historical securities market rates of return that have been achieved in the cash, bond-fixed income, and stock-equity asset classes over the past 85 years. You can adjust these projected rates of return, using VeriPlan's various portfolio risk tools. VeriPlan's projections automatically deduct your taxes and investment costs from your financial asset class returns. Furthermore, across your lifetime, VeriPlan will automatically project the value of your real estate, property, and other assets, which are not priced currently on real-time securities markets. VeriPlan uses the current fair market value and future growth rate assumptions that you set for these real estate, property, and other assets.

Home Purchase Tool:

VeriPlan provides this tool for users who plan to purchase from 1 to 3 homes in the future. For future home purchases, this tool automatically takes into account: a) the planned purchase price, b) closing costs, c) settlement cash required, d) mortgage debt to be assumed, and e) expected interim and subsequent price changes.

Portfolio Asset Class Rebalancing Tool:

This tool aids in reallocating currently held financial assets, according to both the asset allocation and the asset tax location models chosen. Thus, it simultaneously takes into account the distribution of cash, bond, and stock assets across taxable accounts, traditional tax-advantaged retirement accounts, and Roth tax-advantaged retirement accounts.

Portfolio Risk Tools:

VeriPlan provides several combinable methods to develop projections automatically using asset class return assumptions that differ positively and/or negatively from VeriPlan's "centerline" historical assumptions:

The Projection Variance Tool allows you to vary asset class returns upward or downward automatically in proportion to their historical volatility or risk.

The Asset Class Return Adjuster allows you to vary financial asset growth rates automatically on a one-by-one judgmental basis.

The Current Portfolio Revaluation Tool to help users understand the potential effects of substantial changes in near-term portfolio asset values.

Portfolio Safety Tool:

Individual investors face a dilemma. Both less risky and more risky investment strategies may not achieve desired results for different reasons. When assessing investment strategies with different risk levels, it can be helpful to understand how the "safer" portion of your portfolio assets might evolve across your lifecycle. VeriPlan's Portfolio Safety Tool automatically projects how long your cash and shorter-term fixed income assets would cover your projected expenses, if all your expected income sources ceased at any point. It automatically measures your projected financial capacity to weather future financial risks.

Retirement Tool:

With this tool, you can set individual retirement ages for either earner. You can select whether or not to retire simultaneously. You can also adjust your expected ordinary living expenses in retirement and the growth rate of those expenses. Concerning Social Security retirement payments, you can set the levels of your entitlements and adjust the age at which you would first begin to receive Social Security payments. Furthermore, you can scale back the amount of your projected Social Security payments, if you wish. Finally, because much older workers can face significant erosion of real dollar wage rates, you can adjust VeriPlan's assumptions about real dollar wage erosion for earnings at ages over 65.

Tax-Advantaged Retirement Planning Tools:

VeriPlan has automated your lifetime projections regarding employer retirement plans and personal IRA accounts that allow you to defer taxation or to avoid future taxation altogether. VeriPlan automatically projects separate values for your taxable accounts, traditional retirement accounts, and Roth retirement accounts. For traditional and Roth IRA and employer-sponsored retirement accounts, VeriPlan automates the projection of your lifetime contributions, deductions, asset growth, withdrawals, and taxation. It automatically assesses federal and state early withdrawal penalties, as required.

Your settings on this tool control your projected tax-advantaged plan contributions funded from your future positive net income and/or from your future taxable financial assets, up to current legal annual contribution limits. This tool allows you to determine the portion of your projected annual contributions that would be deposited automatically into either traditional tax-deferred accounts or Roth accounts.

The Total Contribution Limitation Tool allows you to set your personal limitation on overall tax-advantaged account deposits, as a percent of your future annual positive net cash flows.

The Roth Contribution Limitation Tool allows you to set the percentage that Roth contributions would be of your total annual contributions into both traditional and Roth accounts.

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### Chapter 2: Graphics and Data Outputs

Section 2.1: Overview of VeriPlan's graphics and data outputs

Section 2.2: VeriPlan uses real, constant purchasing power dollars with inflation removed

Section 2.3: Graphics and data tables allow easy comparison of projection scenarios

VeriPlan's automated graphics:

INCOME: Non-Asset Income -- Earned, Pension, Annuity, Social Security & Other

EXPENSES: Ordinary Living Expenses with Other Planned & Adjusted Expenses

DEBTS: Debt Payments

TAXES: Tax Payments

CASH FLOW: Non-Asset Cash Flow

HUMAN CAPITAL: Expected Income and Savings Before Retirement

SAVINGS RATES: Pre-Retirement Savings Rates with Investment-Oriented Debt Repayments

ALLOCATION: Financial Asset Allocation

TOTAL ASSETS: Financial Assets, Property, and Debts with Assets Lost to Excessive Investment Costs

ASSET FLOWS: Non-Asset Cash Flow with Cash, Bond, and Stock Financial Asset Returns

WITHDRAWALS: Withdrawal Rates from Cash, Bond & Stock Financial Assets

ASSET TAXABILITY: Taxable, Traditional & Roth Tax-Advantaged Financial Assets

TRANSACTIONS: Taxable & Tax-Advantaged Deposit & Withdrawal Transactions

COST-EFFICIENCY %: Net Cash, Bond & Stock Financial Asset Returns with Returns Lost on Excessive Investment Costs

COST-EFFICIENCY $: Net Cash, Bond & Stock Financial Asset Returns with Returns Lost on Excessive Investment Costs

SALES LOADS: Lost Returns on Past and Future Financial Asset Sales Load Purchase Fees

SAFETY MARGIN: Emergency cash and bond coverage of necessary expenses without expected income

HISTORICAL RETURNS: U.S. Financial Asset Class Returns for 1928 to 2011

Section 2.1: Overview of VeriPlan's graphics and data outputs

VeriPlan presents your projections in 18 graphics, which are described below. Whenever you make any change, VeriPlan will automatically and instantly revise these graphics. In addition, the data worksheet will be updated automatically, as well.

You can find all the data for all the projection series that VeriPlan uses to draw these graphics on the green-tabbed "GRAPHICS DATA" worksheet which is the right most spreadsheet tab within VeriPlan. The Graphics Data worksheet lists the data for all graphics in the order that the graphics tabs appear within VeriPlan.

VeriPlan projects your individual or family financial affairs over a lifetime, as if you were a business using cash flow planning methods. VeriPlan puts you in the position of general manager, and it provides graphics and data worksheets that a general manager might need to understand long-range financial projections regarding your personal financial planning.

The unit of time on the horizontal axis of every graphic is one year, and all graphics cover ages 18 to 100. Your particular projections will begin with the initial age of Earner #1. All graphics lines originate at a zero value on the horizontal axis beginning the year just prior the initial age of Earner #1. Then, the graphical areas or lines will move up or down to the beginning value of the projection data series beginning with Earner #1's initial age.

VeriPlan's graphics provide an integrated projection of your lifetime finances. Summaries of each are provided below.

Section 2.2: VeriPlan uses real, constant purchasing power dollars with inflation removed

All dollar based numbers in VeriPlan are "real" in the sense that they assume constant purchasing power for currency over time. To understand more about the 80+ year history of US inflation and major financial asset class returns and variability, inspect the Historical Returns graphic and read the Risk & Returns worksheet.

Inflation (and sometimes deflation) are facts of financial life, but they are not systematically predictable. Making dollar projections that include an inflationary component adds little value to projection modeling. To the contrary, nominal dollar projections that include inflation assumptions tend more often to confuse decision-making. Projections with inflation may create an illusion of growth, when the opposite might be true. Your nominal assets could increase by five times, but the price of a loaf of bread could increase by ten times. Projection modeling using real, constant purchasing dollars reduces this problem.

The impact of inflation on various investments needs to be considered when making investment choices. Inflation's unpredictability limits your strategic investing options. Generally, a fully diversified asset strategy will reduce the variability associated with inflationary differences between sectors, while leaving an exposure to the general rate of inflation. Your asset allocation can be used to adjust investment exposure to asset classes that historically have exceeded inflation by a lesser or greater amount.

Section 2.3: Graphics and data tables allow easy comparison of projection scenarios

Try this approach:

* develop a baseline projection scenario with your data and assumptions and save it with a unique name;

* develop an alternate projection from your baseline projection and save it with a unique file name;

* open both your baseline projection file and your alternate projection file on your computer at the same time;

* decide which graphic(s) and data table(s) would be most informative to evaluate;

* navigate to the same graphic tab or data table in both of the open baseline and alternate projections;

* choose one or more future ages as your projection comparison age(s); and

* toggle back and forth between these two open files to make comparisons.

With VeriPlan's graphics, you can use your cursor to compare values at the same future age by holding your cursor over the graphics. This cursor method works for single age comparisons, but it can be awkward for some to use. An alternative method to compare graphic projection numbers involves using VeriPlan's data output worksheet. All graphics are drawn with data series from ages 18 to 100 and these are presented on the data worksheet. In addition to making online comparisons, note that all graphics and data tables are pre-formatted for printing.

The sample graphics presented below are financial projections for a couple who are 34 and 29 years old, respectively. The 34-year-old is modeled as Earner #1 and expects to hold a regular wage and salary position until retirement. The 29-year-old, modeled as Earner #2, is self-employed and has already established a new business with more long-term self-employment income growth potential. To explain the modeling customizations that resulted in this couple's particular projection graphics, additional explanatory text accompanies each sample VeriPlan graphic below.

### Section 2.4: INCOME Graphic

**Non-Asset Income -- Earned, Pension, Annuity, Social Security & Other**

(Real $/year by age; Excludes reinvested asset returns and asset withdrawals)

This INCOME graphic projects the income associated directly or indirectly with earned income sources (excluding income from your asset portfolio), including:

* Earned employment and actively-managed business income with your real dollar growth rates for Earners #1 and #2 that you entered on the income worksheet

* Note that earned income for Earners #1 and #2 will also reflect any year-by-year income adjustments that you have made on the income worksheet.

* Pension, annuity, and Social Security income from the retirement worksheet

* Other income with adjustments from the income worksheet

These income sources summarize your earned income sources and that non-asset related retirement income that is generally associated with your earned income. Annuities are the exception in the sense that they sometimes represent assets that you have transformed into contractual income sources. Other annuities may be acquired without asset financial transformation through a regular, contractual purchase plan. Some other income sources may also be passive sources that do not require your active work to be received. These passive other income sources are included primarily because they listed as other income on your tax returns, are taxed at ordinary income tax rates, and are grouped with your other more actively-managed income sources.

No income from assets nor any capital appreciation is represented on this graphic. Asset income is assumed to be taxed and reinvested. Assets would be withdrawn only in years when you are projected to have a cash expense-to-earned income shortfall.

Sample INCOME graphic

In this sample income graphic below, Earner #1 is projected to have moderately increasing real dollar lifetime income reflecting a .5% annual income increase relative to consumer price inflation. Earner #2 is self-employed and projects a steeper increase in annual income at 2.5% above inflation. In addition, Earner #2 has used VeriPlan's year-by-year positive and negative income adjustments facility to model that the vicissitudes of four primary business cycles. Because both of these earners are relatively young, motivated, and intent upon career advancement, they have developed income projections that exceed inflation, which is atypical of most workers.

This graphic also demonstrates VeriPlan's ability to project other sources of income. First, they own a small property that they expect will produce modest but steady income, and this is reflected in the teal colored bar that extends across their projections.

Second, in retirement, they both expect to have Social Security retirement income, that each will first accept when each reaches the age of 70. These Social Security retirement income payments are projected to maintain their purchasing power due to cost of living increases in retirement. However, given their ages, lengthy time until retirement, and concerns about the funding adequacy of the Social Security retirement trust fund, they have chosen to use VeriPlan's capabilities to "take a haircut" on their projections and reduce the Social Security Administration's dollar projections by 35% overall.

Finally, Earner #1 is among the lucky and relatively few young workers with a funded, albeit modest, traditional retirement pension. This pension is projected using VeriPlan's pensions and annuities features, and this particular pension projection assumes that the retirement pension will keep pace with inflation up until retirement, but once pension payments begin at age 70, they will not be subject to cost of living increases and will decline annually by 3% due to expected inflation. This accounts for the declining slope of the solid pink bar from age 70 to 100.

### Section 2.5: EXPENSES Graphic

**Ordinary Living Expenses with Other Planned & Adjusted Expenses**

(Real $/year by age; Excludes tax payments, debt payments, and asset fees & expenses)

This EXPENSES graphic projects your expenses related to living and not the expenses related to your assets, debts or taxes This graphic includes your ordinary living expenses and major planned expenses with year-by-year adjustments and real dollar growth rate adjustments from the expense worksheet.

Sample EXPENSES graphic

Similar to their assumptions about real dollar earnings growth, this couple has assumed that their ordinary living expenses, will increase by .5% above the prevailing rate of consumer price inflation. Because VeriPlan is set for simultaneous retirement, at age 67, when Earner #1 retires, this projection also assumes that Earner #2 will retire early at age 62. In retirement, they expect that their ordinary expenses will be 90% of their expenses immediately prior to retirement and then will remain constant with respect to inflation. However, just after retirement and every four years thereafter through age 85, they have also used VeriPlan's year-by-year expense adjustments features to add $25,000 in expenses to fund a long cruise or similarly expensive vacation. These expenses are represented by the expense spikes with green diagonal lines during retirement.

They also have two children, who are currently 1 and 5 years of age. The green diagonal bar from ages 44 to 52 projects the cost of sending both children to four-year colleges in consecutive non-overlapping years. They have used VeriPlan's year-by-year expense adjustments features to model annual college costs of $25,000 per year with a 2% additional increase in costs above the rate of inflation. This additional 2% increase in costs explains why these additional costs have a sharper slope compared to the rate of increase in their normal living expenses projected for the pre-retirement period of their lives.

### Section 2.6: DEBTS Graphic

**Debt Payments**

(Real $/year by age; Nominal dollar debt payments are converted to real dollars with a 3% inflation adjustment.)

This DEBTS graphic projects your annual debt repayment obligations according to your settings on the debts worksheet. On the debts worksheet, you can classify your debts as consumption-oriented or investment-oriented. Consumption-oriented debts represent past consumption that you have financed. Investment-oriented debts are those you take on with a rational expectation that they will increase the value of your human capital and/or portfolio assets.

Because VeriPlan uses real or constant purchasing power dollars with inflation extracted throughout your projections, your future debt payments related to your current debts will be discounted. Because your current debt re-payment obligations are stated in nominal dollars, VeriPlan uses a 3% inflation assumption to convert your future payments into real dollars.

If at any point in the future, your expenses would exceed your net income and would fully deplete your accumulated cash, bond, and equity financial assets, then VeriPlan automatically would begin to accumulate an "unfunded consumption debt" loan for you. On the debts worksheet, you can set a projected loan interest rate for any such unfunded consumption debt. Were this undesirable situation to occur in the future, then the required interest-only annual payment on this accumulated unfunded debt would display automatically on this DEBTS graphic.

Sample DEBTS graphic

The sample Debts graphic below reflects three different debts that affect this couple's projections. The first thing to note is that debt payments decline significantly over time. In general, this decline in annual payments is influenced by the fact that VeriPlan's projections are in real, constant purchasing power dollars and that debts are repaid in nominal dollars that inflate with time. In addition, some of this rapid fall-off in payments is due to the payoff within a decade of both $32,000 in low interest student loan debt and $9,200 of higher interest credit card debt.

Nevertheless, the bulk of the debt represented in this graphic is due to a 30 year fixed rate mortgage on a home that this couple plans to buy. They have used VeriPlan's home purchase tool to plan a $500,000 home purchase in three years with 10% down plus 2% closing costs and a $450,000 mortgage. This flexible tool allows them to enter a variety of parameters related to the future purchase of a home, including property appreciation before and after purchase, while VeriPlan automatically sets up both the property asset and the associated debt. Cash requirements, tax impacts, and debt pay-down are automatically integrated with the rest of their projection model.

### Section 2.7: TAXES Graphic

**Tax Payments**

(Real $/year by age; Includes all federal, state, and local earned income taxes, employment taxes, property taxes, and realized asset-related federal, state, and local short-term & long-term capital gains taxes and penalties.)

This TAXES graphic lists all projected tax payments across your lifecycle, and reflects your settings on the tax worksheet and your tax-related entries on the tax-advantaged plans and financial assets worksheets.

This TAXES graphic includes your projected taxes related to:

* Federal, State and Local ordinary income taxes on earned, interest, retirement and other income calculated with the marginal or flat rate taxes that apply to single or married taxpayers filing jointly

* FICA/Social Security and Medicare taxes for both salaried and self-employed workers

* Property and real estate taxes

* Ordinary Federal, State, & Local taxes on mandatory and needed tax-deferred account withdrawals

* Federal long-term capital gains taxes

* State and Local ordinary income taxes on long-term capital gains

Note that this TAXES graphic also reports "realized" asset taxes related to asset withdrawals, ordinary income, and capital gains distributions, including early withdrawal penalties. Long-term capital gains are calculated at the federal tax level and assessed at ordinary rates at the state and local income tax levels. Federal, state, and local ordinary income taxes on reinvested interest are also assessed automatically.

The information that you enter on the financial assets worksheet related to taxation, including that tax basis in your various accounts, will affect your tax projections. Ordinary earned income and ordinary short-term capital gains asset income tax treatments are similar, and therefore VeriPlan combines both earned income and asset income sources here for taxation purposes. Generally, most asset income taxes will be from current interest and dividend payments on cash and bond/fixed income assets.

Sample TAXES graphic

For the sample graphic above, note several particular things about this couple's projected taxes. This projection assumes that this couple lives in Connecticut and works in New York City, subjecting them to New York City local income taxes, which are also supplied by VeriPlan. Additionally, this couple pays substantial Social Security payroll taxes throughout their working years. They pay substantially more than two wage and salary employees would, because Earner #2 is self-employed and pays both the employer and employee portions of these Social Security payroll taxes, which VeriPlan assesses automatically.

Notice several tax spikes during their working years. The first spike in year four represents capital gains taxes on the sale of financial assets held in taxable accounts and net of any asset tax basis, which VeriPlan tracks automatically. These capital gains taxes would be incurred to raise cash for the down payment and closing costs related to their planned purchase of a home in the third year of this projection.

In the middle of their working years you will notice two spikes related to the withdrawal of assets from traditional retirement accounts to fund some of their children's educational expenses. When this couple gets closer to paying their children's education there are several steps that they could take to reduce retirement plan withdrawals and avoid early withdrawal penalties. Here, VeriPlan acts as an early warning system, so that they can understand the short-term risk of depleting assets in taxable accounts that would not be subject to early withdrawal penalties.

Finally, note that in retirement, this couple would pay increasing taxes on withdrawals from tax-advantaged retirement plans to cover retirement living expenses and to satisfy requirements for Required Minimum distributions which also are automatically projected by VeriPlan. In this particular plan, they have projected that 50% of their allowable lifetime contributions to tax-advantaged retirement plans will be made to Roth accounts. They can use VeriPlan's automated Roth contribution limitation tool to test whether lower or higher Roth contribution percentages could be more optimal.

### Section 2.8: CASH FLOW Graphic

**Non-Asset Cash Flow – Income less Expenses, Debt, & Tax Payments**

(Real $/year by age; Excludes asset-related interest, dividends, costs, and capital appreciation)

Sample CASH FLOW graphic

This CASH FLOW graphic projects your net earned and other non-asset income -- reduced by all expenses, taxes, and' debt payments. The graphic is a summary of all projected financial activity, but without any asset-related returns or appreciation net of investment costs. However, it does include the projected impact of required taxes related to assets.

For this couple, they are projected to be net savers during the earlier and later working years. For the eight year period when their two children are in college, they are projected to be close to cash flow breakeven. As for most people, in retirement, their projection shows a cash flow gap between retirement expenses and retirement income sources, such as Social Security and pensions. Therefore, they will need to draw upon investment assets to make up the difference. (Note that investment asset related projection information is added to this Cash Flow information in the "Asset Flows" graphic, which is discussed later in this chapter in the Asset Flows graphic section.)

### Section 2.9: HUMAN CAPITAL Graphic

**Expected Income and Savings before Retirement**

(Real $ beginning balances by age; Depletion of expected future gross and net pre-retirement earned & other non-asset income)

This HUMAN CAPITAL graphic projects the cumulative remaining gross and net human capital for Earners #1 and #2 up until the retirement age of Earner #1.

Human capital is a depletable personal asset. Without substantial inherited assets, gifts, or lottery winnings, human capital is the only asset one has. It must converted into earned income to pay ongoing expenses. Some of it must also be saved and converted into valuable assets, if one is to have assets to live on after human capital is gone.

VeriPlan measures your gross human capital as your cumulative yet-to-be-earned real dollar income prior to retirement. Your gross human capital depends upon your entries and growth rates on the income worksheet. These entries are related to your: A) wage and salary income, B) actively-managed business income, and C) other income sources, which may or may not be associated with active income generating efforts on your part.

Your net human capital or savings should be measured after ordinary income taxes are paid, but before debt repayments. Despite the fact that some of your other income sources on the income worksheet might be passively derived, VeriPlan must combine these other income sources with your earned income sources to project your net human capital. Federal, state, and local ordinary income taxes can only be assessed properly, when both your earned income sources and your other income sources are combined. Since your net human capital projections include your other income sources, then for consistency, your gross human capital projections must also include these other income sources. (Note that VeriPlan's projections of your gross and net human capital exclude any asset income derived from your cash, bond/fixed income, and stock/equity assets. Pension, annuity, and Social Security income is also excluded.)

You can spend and/or save your gross human capital. To the extent that you save it rather than spend it, you will have projected net human capital. Your projected net human capital is your cumulative yet-to-be-saved real dollar net earned income or savings after expenses prior to retirement. Your net human capital can be converted into other assets, which can increase in value and be withdrawn in the future to fund expense shortfalls.

On other asset related graphics, VeriPlan will display your net human capital to illustrate the projected depletion of your human resources. As you move toward retirement and as you convert net income into other assets via savings and new investment deposits, net human capital must fall. The current balance of your net human capital is not a bankable or spendable asset, but you can increase or shrink it through your projected savings rate. Both your gross and net human capital illustrate the aggregate future value of your labor related earned income stream. Human capital is another way to measure future income that could also be at risk due to other factors such as unemployment, underemployment, early disability, and/or premature death.

Finally, you may have other forms of future human capital that are not included in this particular graphic. Pension rights, Social Security benefit entitlements, and even annuity income contracts can be examples of future human capital, which are related to your personal efforts over your working lifetime. These alternate forms of human capital usually shift the receipt of some of your human capital from your normal working years into your retirement years. Pension and Social Security rights are straightforward examples of deferred human capital. Purchasing an annuity contract can reduce current savings to increase future income rights, and thus annuities can also represent deferred human capital.

While there are ways to estimate a current asset value for these future rights and entitlements, VeriPlan avoids such unnecessary complexity. Instead, VeriPlan projects your future income rights as separate annual income streams in the years when you expect to receive this income. These future income streams would pay some of your expenses, usually in retirement, and thus they are comparable to your gross pre-retirement human capital. If your future rights based income sources are greater than your future annual expenses, then VeriPlan would automatically convert any of this excess rights-based income into more financial assets. Thus, rights based income that exceeds expenses in retirement is comparable to net pre-retirement human capital. Note that, while these income sources are generally associated with retirement, you might also receive pension, Social Security, or annuity income, while you are still working.

Sample HUMAN CAPITAL graphic

This couple's lifetime cumulative gross earnings are expected to exceed $5,000,000 and they are projected to spend about $3,500,000 of that for ongoing expenses, debt payments, and taxes during their working years. The good news is that this couple is projected cumulatively to save about $1,500,000 of their gross projected income, which they will put toward their investment program.

On the Human Capital graphic their cumulative expected net savings are represented by the area with the diagonal green lines. On all of VeriPlan's other area graphs that project this couple's lifetime investment assets, you will notice that his Net Human Capital will also be included. This is done to illustrate the conversion over time of their valuable labor into valuable investment assets.

### Section 2.10: SAVINGS RATES Graphic

**Pre-Retirement Savings Rates with Investment-Oriented Debt Repayments**

(%/year by age; % of non-asset income in years when non-asset cash flow is positive.)

This SAVINGS graphic projects your annual savings rates up to the planned retirement age of Earner #1. Up until retirement, saving rates will be zero for any projection year when expenses, taxes, and debt payments exceed non-asset income.

Sample SAVINGS RATES graphic

The graphic does not show savings rates in retirement, even if non-asset income is projected to exceed expenses, taxes, and debt payments in some retirement years. Because non-asset income in retirement is usually much less than pre-retirement income, this would distort pre-retirement versus post-retirement savings rates. Therefore, to understand potential savings situations during retirement, instead, you should refer to the asset flows graphic.

This graphic projects your savings rates with and without your investment-oriented debt payments. Particularly early in many people's lifetimes, it can seem difficult to save. Savings is always important, and it is useful to recognize that investment-oriented debt payments are a form of savings. When such debt has been retired, then your "normal" savings rates usually need to increase substantially to ensure that adequate assets will be accumulated prior to retirement.

For this couple in the sample graphic above, they are projected to have very high personal savings rates. In addition, to living within their means, and saving normally from their earned income, VeriPlan also includes the payoff of the principal on their educational loans and on their mortgage as additional "investment oriented debt savings."

### Section 2.11: ASSET ALLOCATION Graphic

**Financial Asset Allocation**

(%/year by age; Calculated from projected asset balances after annual reallocations)

Sample ALLOCATION graphic

This ALLOCATION graphic shows your projected annual financial asset allocation across your lifetime. This graphic depends upon your settings on the allocation worksheet.

VeriPlan provides five asset allocation methods with flexible user adjustments. In this sample graphic, this couple has chosen to adopt an asset allocation strategy more weighted toward equities while they are younger. Over time, they will steadily increase their allocation to bonds and cash and decrease their allocation to equities. In this particular projection, this couple has chosen the VeriPlan asset allocation method that set a fixed ratio between bond and cash.

### Section 2.12: TOTAL ASSETS Graphic

**Financial Assets, Property, and Debts with Cumulative Assets Lost to Excessive Investment Costs**

(Real $/year by age; Beginning balances with reallocations; Debt causes assets to display below 0)

This TOTAL ASSETS graphic shows your projected cash, bond/fixed income, and stock/equity financial assets and property. Your net human capital is also shown to illustrate the conversion of your net earned income into financial assets through your savings. Cash, bond/fixed income, and stock/equity financial assets and property assets are graphed in layers. On top of your financial assets, this graphic also displays the projected values of your property and other assets that you entered on the property worksheet.

Sample TOTAL ASSETS graphic

Debts display differently. This graphic includes the value of your current debts, as they are paid down, plus any future debts that you accrue. Because of how the graphics drawing facilities of the underlying spreadsheet engine work, your debts will not display directly when you have other positively valued assets. However, your current and future debts will affect how your positively valued assets are displayed.

The presence of your current or future debts can be detected easily on these graphics. Whenever the lower edge of any positively valued asset falls below zero, your outstanding debts are the cause. How much your positively valued assets will be pulled downward depends upon the total principal amount of your debts with any accrued interest. If you refer the corresponding 'DATA' worksheet, you will find the value of current consumption debt, investment-oriented debt, and future unfunded consumption debt in each projection year.

In this sample graphic, this couple's lifetime asset projection indicates that they would have increasing amounts of cash, bond, and stock financial assets and real estate property over their lives. However, due to the various costs of their investment portfolio, they would spend their lives paying unnecessarily high investment expenses. In the process, in effect, they would throw away almost as much in total assets by age 100 than they would have retained. The sad thing is that this couple pays average investment costs, so they like other average investors would spend their lives paying excessive fees to the financial services industry unnecessarily. VeriPlan provides easy to use investment cost analysis facilities that help users understand the lifetime impact of the investment fees they pay.

### Section 2.13: Graphing investment cost inefficiencies on the Total Assets graphic

In addition to projecting your cumulative financial and property assets, this TOTAL ASSETS graphic will also project your cumulative assets lost to excessive investment costs associated with your cash, bond, and stock financial assets and depending upon your settings on the investment costs worksheet.

VeriPlan does not attempt to measure investment cost-inefficiencies related to your property and other assets in these graphics. It does however, reduce the projected annual growth in the value of these property and other assets by the investment cost information that you supply on the property worksheet.

Your property and other assets are graphed with your financial assets and cost-inefficiencies and have been arranged on these charts to demonstrate how long your total assets are projected to last. If you are projected to have expense shortfalls that will reduce your assets in the future, then your more liquid financial cash, bond/fixed income, and stock/equity assets will be depleted first. After they are exhausted, VeriPlan assumes you will deplete your other assets (business interests, private equity, etc.) followed thereafter by your real estate property assets.

Interpretation examples

If your projection indicates that you would still have financial assets at age 100, then this is a projection of the real dollar size of your estate at age 100. (Obviously, you can also use this Total Assets chart and/or the corresponding data table to find your projected estate at an earlier age of demise. By making reference to age 100, we will be optimistic about your longevity.)

On this graphic, your projected property and other assets are displayed in between your financial assets below and your projected assets lost to excessive costs above. If you have property and other assets, then these could be liquidated as your financial assets are running out. In the same manner described just below, you could estimate how long your property and other assets would fund any expense shortfall, until they too are exhausted. If some property and other assets remain at any age of projected demise, then those assets would be part of your estate. In this situation, any projected assets lost to excessive costs could further increase the size of your estate to the extent that you eliminated your investment cost-inefficiencies.

If this Total Assets graphic shows that your financial assets will be exhausted before age 100 and shows that you have some level of assets lost to excessive costs, then the red bar representing these lost assets will begin to dip below the zero assets level measured from the Y axis -- if you have no real estate, business, or other property assets than can be liquidated to meet your living expenses.. This graphical projection can help you to understand how much longer your financial assets could last, if you eliminated cost-inefficiencies in you financial asset portfolio that are in excessive of your reasonable maximum assumptions.

For example, if your financial assets were exhausted by age 90, then reducing your cost-inefficiencies could help your assets to last longer. If the trailing edge of the red area representing your Lost Assets dips below zero at age 97, then eliminating your investment portfolio's inefficiencies could help your financial assets to last an additional seven years. If the red area of Assets Lost to Excessive Costs still remains above zero at age 100, then eliminating your cost-inefficiencies could fund an additional 10 years of retirement and leave some positive estate at age 100.

You should note, however, that these charts may overstate the number of years that assets lost to excessive investment fees might sustain your living expenses, because these are phantom assets have not been subjected to your projected asset tax rates. If you want to project the potential value to you of these lost assets after taxes have been extracted, then just set the selector on the investment costs worksheet to use your "Reasonable Investment Costs" in VeriPlan's centerline projections. Then, these phantom assets will be returned to your tangible portfolio projections and asset taxes will be assessed automatically.

For most users, this would modestly shorten the number of years of expense coverage provided by these recovered phantom assets that are not lost to excessive costs. Again, remember that you would need to maintain and not increase your current living expense assumptions, and you would need to bring down the investment costs of your current investment portfolio to be in line with your reasonable investment cost assumptions.

### Section 2.14: ASSET FLOWS Graphic

**Non-Asset Cash Flow with Cash, Bond, and Stock Financial Asset Returns**

(Includes Required Minimum Distributions, & Unfunded Consumption) (Real $/year by age)

The graphic provides several summary financial projections. First, it graphs both annual financial asset returns net of current year investment expenses. Second it graphs your total annual cash flow from non-asset related activities, including all earned and other income, living expenses, debt payments and taxes -- including investment taxes. (This is from the CASH FLOW graphic.) Then, it graphs the combination of your projected non-asset cash flow and current year net asset appreciation.

This ASSET FLOWS graphic also indicates total projections annual Required Minimum Distributions (RMDs) from traditional tax-advantaged retirement accounts. Finally, it graphs unfunded consumption expenses, if and when projected cash, bond, and stock financial assets are exhausted. These unfunded consumptions expenses would need to be paid through borrowing or the sale of property and other assets or they would be entirely unfunded.

Sample ASSET FLOWS graphic

Some VeriPlan users find the Asset Flows graphic to be very useful, because it combines the effects of lifetime cash flow from earnings, expenses, debts, and taxes with the effects of lifetime appreciation of their cash, bond, and stock financial asset portfolio. In this sample graphic, this couple's projection data from their Cash Flow graphic is drawn as the blue line. The projected annual return on their investment portfolio is graphed as the green line, which steadily increases during their working years. During their retirement years, the projected annual return on their investment portfolio levels off but still grows moderately, as they utilize some of their investment returns to fund their negative cash flow in retirement.

The black line on the Asset Flows graphic combines this couple's cash flow from earnings, expenses, debts, and taxes with the appreciation of their cash, bond, and stock financial asset portfolio. Whenever that black line is above zero, then their total family assets are projected to increase by that annual amount. Correspondingly, when the black line falls below zero, this would mean that their cash flow gap exceeds the projected investment return of their financial asset portfolio.

For user convenience, this graphic also lists this couple's projected Required Minimum Distributions from traditional tax-advantaged retirement accounts. However, users should understand that RMDs are not retirement "income," but are simply legally mandated withdrawals from tax-advantaged accounts to create "income taxable" events and corresponding income tax payments. RMDs occur whether or not the retiree(s) need the after-tax funds to live on in retirement. If they do, then RMDs can fund negative cash flow. If they do not, then the after-tax funds are simply reinvested in taxable accounts. The Withdrawals graphic, immediately following, discusses RMDs in greater detail.

### Section 2.15: ASSET WITHDRAWALS Graphic

**Withdrawal Rates from Cash, Bond & Stock Financial Assets**

(%/year by age; Withdrawals for net cash flow shortfalls, RMDs, & associated taxes)

This WITHDRAWALS graphic presents your net overall annual financial asset withdrawal rates as a percentage of the beginning balances of your then current financial asset holdings. An asset withdrawal rate can only be shown, when your total cash, fixed income, and equity financial assets are positive.

This graphic also indicates how much of withdrawals following age 70 are attributable to annual Required Minimum Distributions (RMDs) from traditional tax-advantaged retirement accounts. In any projection year when negative cash flow requirements exceed RMDs, additional withdrawals will be indicated. In years when RMDs exceed cash flow requirements, then any excess RMD withdrawal beyond cash flow requirements with not be shown here. Instead, that RMD excess will be deposited automatically in taxable financial asset accounts.

Thus, if the amount of your RMD for a particular year exceeds your withdrawal needs, then this graphic will show only a portion of your RMD for that year. The graphic will not include the portion of your excess RMD that is automatically reinvested in a taxable investment account. To find the total RMD for any particular year, instead, refer to the ASSET FLOWS graphic.

Sample WITHDRAWALS graphic

While those planning retirement seek rules of thumb about asset withdrawal rates, the future unfolds unpredictably and withdrawals over a lifetime will depend upon the net effects of a myriad of financial factors. Retirement withdrawal studies that discuss methods of gauging and planning safe withdrawals of 3%, 4%, or even higher percentages from retirement portfolios have utility and are very important to consider.

For this couple, their Withdrawals graphic provides information about a variety of projected events over their lives that would involve withdrawals of assets from their cash, bond, and stock financial asset portfolio – exceeding the projected yield of their financial portfolio at that point in time. The first and largest percentage drawdown occurs early in their projection, when their portfolio is the most modest and when they need to raise cash for the down payment and closing costs on their projected purchase of a home in three years. The second drawdown occurs during some of the eight consecutive years when their two children are in college. The third drawdown occurs in their early retirement years when that have a larger cash flow gap, because they have chosen to increase their Social Security retirement payments by delaying acceptance of their first payment until they are age 70.

Finally, the fourth and longest drawdown event begins around age 70 for Earner #1, which illustrates the projected amount they need to withdraw to fund negative cash flow once they have begun to receive Social Security retirement payments and are also subject to Required Minimum Distributions. (Read the section immediately following this sample graphic to better understand the influence of RMDs on this retirement graphic.)

Note that even in selected years when their take long and expensive vacations during retirement, their projected retirement financial asset withdrawals do not exceed 2%. For retirees who wish to project the adequacy of their retirement portfolios in the light of retirement withdrawal rate percentage studies, this Withdrawals graphic is very useful when used in combination with the asset appreciation tools on the Risk and Returns worksheet. The graphic helps users to project their particular financial affairs in the light of long-term historical asset class returns and variations around those returns. Depending upon the asset appreciation assumptions used and other personal financial projection factors, when this Withdrawals graphic indicates much larger percentage withdrawals in retirement than this sample graphic and particularly accelerating withdrawal rate percentages, then there may be increasing concern about the long-term viability of the financial plan.

### Section 2.16: Graphing Required Minimum Distributions (RMDs)

After age 70.5, tax laws specify that a portion of the assets held in traditional tax-advantaged IRAs and employer sponsored retirement plans must be withdrawn as Required Minimum Distributions (RMDs). Calculated according to actuarial tables, RMDs force assets out of traditional tax-advantaged accounts and into taxable accounts solely to assess income taxes on the taxable proceeds (above any tax basis that these retirement account assets might have).

This occurs annually after age 70.5 whether or not one needs these RMDs for living expenses, tax payments, etc. RMDs are not really retirement income, but are just a forced taxable asset transaction that would also provide cash flow for projected expenses, if needed. If some portion or all of the RMD was not needed to cover negative cash flow due to expenses and taxes, then those RMD funds would be reinvested in a taxable financial asset account.

In VeriPlan, projected annual real dollar asset balances in traditional tax-advantaged accounts are found on the ASSET TAXABILITY graphic and corresponding data table worksheet. Total annual RMD real dollar withdrawals are found on the ASSET FLOWS graphic and corresponding data table worksheet.

In long-term financial planning, sustainability of withdrawal rates is sometimes associated with supposedly "safe" withdrawal percentage rules of thumb, based upon historical studies. Thus, VeriPlan provides this WITHDRAWALS graphic. To provide more information about RMDs related to your projected withdrawals, VeriPlan breaks out the proportion of your net annual financial asset withdrawals that are accounted for by RMDs.

For this WITHDRAWALS worksheet, the denominator of these withdrawal portions is the "Non-Asset Cash Flow (Income, Expenses, Debt & Taxes)" line of the ASSET FLOWS graphic. This is the total amount needed to be withdrawn annually from assets -- whether from current asset returns, asset principal, or even from non-financial assets such as real estate or other property. Then, to calculate the percentage withdrawal rates for this WITHDRAWALS graphic, these net annual withdrawals are divided by total projected cash, bond, and stock financial asset balances to derive the withdrawal rate.

More specifically regarding RMDs and these withdrawal rates, when your total projected annual withdrawals would exceed your projected annual RMD, you would see both yellow and red withdrawal areas on this graphic. This means that your entire RMD would be used for current cash flow requirements, and it also means that additional taxable assets would need to be withdrawn to meet total cash flow needs for that year. If instead, you see only yellow in a particular year on this graphic, this means that your RMD is projected to cover your entire annual shortfall -- and perhaps would exceed your projected cash flow shortfall.

Note that you can also refer to the TRANSACTIONS graphic to understand the flows between taxable and traditional tax-advantaged retirement accounts related to RMDs.

All VeriPlan graphics are instantly developed for every scenario you run

Comprehensive Lifetime and Retirement Financial Planning Software

For more information, see: http://www.theskilledinvestor.com/VeriPlan/financial-planning/

### Section 2.17: ASSET TAXABILITY Graphic

**Taxable, Traditional & Roth Tax-Advantaged Financial Assets**

(Real $/year beginning balances by age; Net of new investments, yields, transfers, and withdrawals)

This ASSET TAXABILITY graphic projects your holdings of financial assets between your taxable and tax-deferred accounts. These assets depend upon the tax characteristics your current holdings, which you entered on the financial assets worksheet. This graphic also depends upon your settings on the tax-advantaged plans worksheet regarding your future contributions into tax-advantaged retirement plans.

Sample ASSET TAXABILITY graphic

The Asset Taxability graphic for this couple indicates that their 50% allocation of tax-advantaged retirement plan contributions to Roth retirement accounts would grow steadily. Concerning their traditional tax-advantaged accounts those assets would grow and then decline in retirement with RMDs after age 70 and ½. Throughout their working years this couple plans to take maximum advantage of tax-advantaged retirement investing. This means that they need to keep an eye on their ongoing contributions to deal with years where assets in taxable accounts would not fund near term expense needs.

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### Section 2.18: ASSET TRANSACTIONS Graphic

**Taxable & Tax-Advantaged Deposit & Withdrawal Transactions**

(Real $/year by age; Required inter-account transfers)

This TRANSACTIONS graphic shows your projected annual net financial asset cash flows into and out of both your taxable and tax-advantaged accounts. It also shows your net overall financial asset transactions, which is a combination of your taxable and tax-advantaged accounts transactions. This combined annual transaction line indicates whether you are adding to or withdrawing from your financial asset accounts to meet your expense, debt, and tax obligations. Annual costs without interest that cannot be funded with financial assets are also included in the taxable and net asset categories.

Sample TRANSACTIONS graphic

This graphic is helpful when you wish to assess whether withdrawals from tax-advantaged accounts are being made to cover necessary expenses and/or to meet mandatory tax recognition and taxation requirements over age 70 and 1/2. If tax-advantaged account withdrawals are indicated simultaneously with deposits into taxable accounts, then some or all of your tax-advantaged account withdrawals are being made to satisfy mandatory withdrawal rules. This graphic focuses on transactional cash flows only. It does not show your overall projected net financial asset yields. All your financial asset deposits, distributions, and other withdrawals are included. However, capital appreciation that is not recognized for tax purposes is not. Instead, capital appreciation that does not involve taxation is simply reinvested and is reflected in your financial asset balances on VeriPlan's various financial assets graphics.

This couple can use the transactions graphic above to understand how assets would move by account taxability type.

### Section 2.19: COST-EFFICIENCY % Graphic

**Net Cash, Bond & Stock Financial Asset Returns with Returns Lost on Excessive Investment Costs (Real $/year by age)**

By comparing your current portfolio's investment costs to the investment costs that you believe are reasonable to pay, this and the next graphics illustrate your potential returns with a more cost-efficient strategy versus your projected asset returns and portfolio values with your current costs. See the investment costs worksheet for more information.

Sample COST-EFFICIENCY % graphic

The COST-EFFICIENCY % graphic presents the same information as the following COST-EFFICIENCY $ graphic, but in percentage terms. For people who must draw down their financial assets at various points in their lives to make up for expense shortfalls, the percentage of returns lost to cost-inefficiencies will increase. Of course, almost everyone will have to draw down their assets at various points, because their earned income will not exceed their expenses during all years of their lives. Because investors only can pay expenses from their tangible retained assets, expense shortfalls will only eat into these assets. In contrast, because the assets that they gave away to cost-inefficiencies are phantom assets or opportunity costs that cannot be used, then those lost assets will grow increasingly faster than your tangible and depletable retained assets.

The couple depicted in these sample VeriPlan graphics pay investment costs that are typical of the average investor. While surprising to most investors, the lifetime costs of excessive investment costs for the average investor are simply huge. Most investors think that the investment costs that they pay are small, but the compounded and accumulated lifetime value of assets lost to the financial services industry are anything but small.

For this couple, they are losing to fees and taxes about one third of their potential investment returns on their retained assets each year. However, the situation deteriorates thereafter. Keep in mind that all VeriPlan graphics are based upon "real or constant purchasing power" dollars and all these graphics have removed inflation. Investment costs are assessed on nominal or inflationary dollars, but the investor has to live with what remains.

Investors absorb 100% of the negative impacts of inflation. Therefore, when percentages are calculated with real dollars, investment costs take a larger piece of the pie. Net returns after expenses and taxes are what count to the individual investor. As a visual analogy, think of each individual investor who pays unnecessarily high fees as an unfortunate fisherman. Moreover, think of the average investor as Santiago, the fisherman in Ernest Hemingway's " _The Old Man and the Sea_."

Santiago takes the risks of going to sea and finally hooks a big marlin (his gross return). However at age 85, he does not have the strength to pull the marlin into his boat. By the time Santiago returns to shore, the sharks have reduced his marlin to only the skeleton, which equals his net return. The sharks of the financial world are nicer in the sense that they usually take less than half of the flesh through excessive fees and unnecessary taxes, before you make it to shore. Unfortunately, these financial sharks circle every investor's boat year in and year out feeding off your catch.

In the short-term, what remains for the couple in this graphic are significantly diminished net percentage returns after excessive investment fees and after unnecessary investment taxes. Then, these investors need to live on those assets through years of negative cash flow related to their income after expenses, taxes, and debt payments. However, phantom investment assets lost or given away through excessive fees and taxes are not similarly drawn down to cover negative cash flow. Thus, these "phantom" assets compound in the future much more rapidly than the assets that this couple would retain and draw upon, as needed. Thus the proportion of lost assets grows across their lives and comes to dominate their financial projection – particularly as the time horizon increases into multiple decades.

### Section 2.20: COST-EFFICIENCY $ Graphic

**Net Cash, Bond & Stock Financial Asset Returns with Returns Lost on Excessive Investment Costs (Real $/year by age)**

Sample COST-EFFICIENCY $ graphic

Rather than being presented in percentage terms, the graphic below is a projection of annual real dollar net returns and of returns lost to various types of investment cost inefficiencies. See the commentary below regarding the data underlying this sample graphic.

The COST-EFFICIENCY $ graphic projects the net real dollar returns your portfolio will earn each year. In addition, it projects each of the five investment cost-efficiencies that your portfolio may have. If your current investment portfolio is as efficient as the maximum reasonable costs that you have set above on this worksheet, then your portfolio projections will show no cost-inefficiencies. If this graphic projects inefficiencies, then you may have opportunities to make improvements by reducing your investment costs.

If you have cost-inefficiencies, you should also note that they will continue to grow, even if all your retained financial assets have all been depleted to cover expense shortfalls. The foregone value of these annual costs will continue to increase even after your actual owned assets are gone. These assets still exist and still grow, but they do not in your accounts, since in effect you gave them away.

VeriPlan projects the rate of increase of these lost assets to be equal to the long-term historical weighted average gross (pre-tax) real returns using your chosen asset allocation model, less your reasonable maximum costs assumptions. These lost assets may compound rapidly compared to your retained assets. You retained assets may be depleted by your negative cash flow for living expenses, debts, and taxes, while these lost assets are not subject to these burdens.

### Section 2.21: SALES LOADS Graphic

**Lost Returns on Past and Future Financial Asset Sales Load Purchase Fees**

(Real $/year by age)

VeriPlan presents information about annual returns lost to both your past and future sales load payments on this SALES LOADS graphic. To quantify the financial impact of loads that you have paid in the past to acquire your current portfolio, VeriPlan uses both the tax basis that you report for each of your assets and the sales load percentages that you report that you paid on the financial assets worksheet. Then, it projects future lost returns related to these past load payments.

Sample SALES LOADS graphic

While you cannot recover sales loads that you have paid in the past, VeriPlan can help you to understand their potentially substantial impact on your lifetime projections. A description of how VeriPlan develops its sales load projections can be found on the investment costs worksheet and in this _VeriPlan User Guide_ in a section entitled: "The returns you lose to excessive sales loads."

In the sample graphic above, this couple cannot avoid the lost returns on investment sales purchase loads that they have paid in the past. However, they can stop paying sales loads in the future and eliminate the much larger beige area of the graph below. If you seek out diversified, low cost investments proactively, you will find vendors willing to supply them without middleman charges.

### Section 2.22: ASSET SAFETY MARGIN Graphic

Emergency cash and bond coverage of necessary expenses without expected income

(Number of years by age that cash and shorter-term fixed income financial assets would cover necessary expenses -- without any other expected earned income, Social Security, pensions, annuities, or other non-asset income)

Sample SAFETY MARGIN graphic

This SAFETY MARGIN graphic provides a measure of how long, measured in years going forward, that your projected emergency cash and more liquid cash and fixed income assets would cover your projected necessary expenses, if you lost all your expected sources of income. In effect this is a stress test of the unusual situation where all personal income sources ceased, while the stock market experienced a significant downturn, and you needed to fund needed living expenses solely from your cash and shorter-term bond investment assets.

Particularly after this couple puts their two children through college (by the time that Earner #1 is 50), their portfolio safety margin keeps increasing. Some of this is due to aggregate long-term portfolio appreciation, and some of this is due to the fact that they have chosen an asset allocation strategy that increasingly shifts toward bonds and cash over time.

Section 2.23: HISTORICAL ASSET RETURNS Graphic

U.S. Financial Asset Class Returns for 1928 to 2011

(Real dollar return percentages -- Annual asset class rates of return have been adjusted for the CPI inflation/deflation rate.)

These historical US asset class total investment returns are provided for reference. These total returns are calendar year returns, including both interest or dividends and capital appreciation. These data sources have been transformed for their use within VeriPlan. In particular, the US 3-Month Treasury Bill, US 10-Year Treasury Bond, and S&P 500 Stock Indexes have been transformed from "nominal dollar" percentage returns to "real dollar" percentage returns. This means that the percentage Annual Inflation Rate (CPI) figures on the chart have already been subtracted from the investment asset class returns that are graphed.

These historical asset class returns series are used to calculate A) the historical real dollar "compounded or geometric average" asset class returns measures and B) the historical statistical standard deviation asset class volatility measures, which are used in VeriPlan's default projections. These compounded asset class returns parameters can be changed downward or upward by the user in the risk and returns worksheet, either arbitrarily or systematically with respect to asset class volatility.

When interpreting these historical asset class returns, note the asymmetric nature of percentage change data relative to absolute dollar returns data. For example, when an asset begins at a particular dollar value and then increases in value by 100%, it only needs to fall by 50% from that increased dollar value to return to the original dollar value. Conversely, when an asset begins at a particular dollar value and then falls in value by 50%, it must increase in value by 100% from that decreased dollar value to return to the original dollar value.

The HISTORICAL RETURNS graphic

This is the only VeriPlan graphic that remains fixed across all projections. This graphic provides a visual history of the annual asset class percentage changes that underlie the compound annualized baseline asset class growth assumptions of VeriPlan's asset projection logic. With the risk and returns worksheet, a VeriPlan user has several mechanisms to change these asset class growth rate assumptions going forward -- either systematically with respect to volatility or judgmentally/arbitrarily. However, of course, those user adjustment would not affect this graphic, since it is historical in nature.

These historical US asset class total investment returns are provided for reference. Note that they are calendar year returns, including both interest or dividends and capital appreciation. The sources of these data are:

Bureau of Labor Statistics -- Consumer Price Index

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

Economic Research -- Federal Reserve Bank of St. Louis

<http://research.stlouisfed.org/fred2/>

Standard and Poors

<http://us.spindices.com/>

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### Chapter 3: Start Here worksheet

Section 3.1: Agreeing to the VeriPlan End User License

Section 3.2: Overview

Section 3.3: Intended users

Section 3.4: High value, low cost, and no planned obsolescence

Section 3.5: Unconditional 30-day user satisfaction guarantee

Section 3.6: VeriPlan User Guide

Section 3.7: VeriPlan's worksheets, graphics, and data

Section 3.8: Making inputs and changing settings

Section 3.9: Microsoft Excel set-up and file operations on Windows and Mac

Section 3.10: Microsoft Windows PC and Macintosh systems requirements

Section 3.11: File security and backups

Comprehensive lifetime financial planning software for home use

http://www.theskilledinvestor.com/VeriPlan/financial-planning/

### Section 3.1: Agreeing to the VeriPlan End User License

The first thing you see on the Start Here worksheet is this license approval section. Until you approve the VeriPlan End User License Agreement, VeriPlan will not work. Once you approve this agreement, the notices in bold red text at the top of VeriPlan's various worksheets will also disappear.

TO USE THIS SOFTWARE, YOU MUST ACCEPT VERIPLAN's END USER LICENSE AGREEMENT.

Click here for the License Agreement and Terms of Use, found below in Section 9 of this worksheet

By using, installing, or copying VeriPlan, you agree to be bound by the Terms of this Agreement. If you do not accept these Terms, you are not permitted to use, install, copy, or otherwise retain VeriPlan. (If you do not agree to the Terms, you must return or destroy the software. See the instructions below.)

Section 3.2: Overview

VeriPlan helps you to answer important financial and investment planning questions within the context of your personal affairs, projected across your lifecycle.

Developed for self-directed individuals and their families, VeriPlan is a fully integrated lifetime financial planning application. Capable of modeling the financial and investment affairs of anyone and any family across a full adult lifecycle, VeriPlan quickly produces highly customized, user-changeable, and easily understood graphical projections.

Each VeriPlan projection automatically integrates a user's comprehensive current financial information and long-term objectives. In the form of an easy-to-learn and easy-to-use multi-page spreadsheet application, VeriPlan provides fully integrated personal modeling technology that reflects best practices from the scientific finance literature.

VeriPlan is a sophisticated personal decision support tool with extensive documentation in this _VeriPlan User Guide_ manual. VeriPlan provides a wealth of tools and variable controls that quickly react to each user input or adjustment. These flexible VeriPlan facilities help users to evaluate rapidly many alternative scenarios within the particular context of their own personal financial and investment affairs as projected across their lives.

Self-directed individuals have many important, unanswered questions that VeriPlan can help them to evaluate and answer. A partial list of these questions might include:

* What is the long run value of increasing my income and/or reducing my expenses?

* When might I be able to make a down payment on a house?

* How would putting the kids through college affect us?

* What tradeoffs would be associated with accelerating mortgage and/or other debt repayments?

* Can I retire early? Can I ever retire?

* Will my retirement assets be adequate after taxes are paid?

* Will my assets be adequate to cover my expenses, if I live a very long time?

* What is a relatively safe asset withdrawal plan, given my particular circumstances?

* What risk-adjusted investment outcomes might I expect with different strategies?

* How would investment costs affect my net investment returns?

* If I am wasting money on unproductive investment costs, what is the long-term impact?

* If I were to lose income at any point in the future, how long would my liquid assets cover my expenses?

* Am I managing my investments tax-efficiently?

* How much should I put into taxable versus tax-deferred accounts?

* How much insurance should I carry?

* After my living expenses, how much could I give to family and charities?

* How might my potential estate evolve, as I age?

Lawrence Russell and Company develops and distributes VeriPlan. It also publishes _The Skilled Investor_ website, the _My Financial Freedom Plan_ website, and the _Pasadena Financial Planner_ website, which provide objective educational articles on financial and investment topics for the general public.

Go to The Skilled Investor website

Go to the My Financial Freedom Plan website

Go to the Pasadena Financial Planner website

VeriPlan provides hyperlinks to articles about sensible lifetime financial planning and investment strategies. None of these articles are required to use VeriPlan. However, you may find them to be informative.

Most hyperlinks in VeriPlan that reference third party websites will first direct you to a web linking page on _The Skilled Investor_ website. Using this indirect procedure allows for the maintenance of valid links to external resources over time, when possible. Often, webmasters will move or delete their web pages, and these actions will break the links that other people depend upon. With this approach, you may also find other interesting third party financial and investment links that are maintained on _The Skilled Investor_ website.

Click here for the WEB LINKS page on my _The Skilled Investor_ website

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Receive my free monthly "What Works Financial Newsletter"

http://www.theskilledinvestor.com/VeriPlan/financial-planning/

= ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ =

Section 3.3: Intended users

Self-directed individuals and families

VeriPlan's intended users are self-directed individuals and families who want to improve the sophistication and quality of their long-range financial and investment planning efforts. VeriPlan helps self-directed persons understand the possible future implications of current financial behaviors.

Intelligent people, who are successful in other endeavors, can be frustrated when it comes to self-management of their personal financial and investment affairs. They do not want to face the future blindly. They need a tool to help them decide whether their current financial behaviors are sustainable or need to change.

VeriPlan's intended individual users want a personally controllable, flexible, and automated software tool that will help them to understand a wide range of possible outcomes. They also want an inexpensive decision support tool that can develop integrated and automated scenario projections based upon their specific financial situation.

Self-directed individuals understand that their lifetime finances are a marathon. They want a financial planning tool that is designed to prevent obsolescence and can be useful over time. They need a financial decision-support tool that can be updated quickly and easily, as their financial situation and expectations evolve.

Value-added financial advisors

VeriPlan's other intended users are financial advisors who truly focus on the fiduciary interests of their clients. Self-directed individuals may engage advisors, including financial planners, lawyers, and other specialists, to assist them in planning and managing their financial affairs. Nevertheless, most self-directed individuals using advisors realize that they always are the ultimate decision maker and must live with the results in the long-term. An advisor should be just that -- an advisor -- and not the final decision-maker about a family's financial future.

In the hands of a truly valuable advisor who uses cost-effective and scientifically grounded strategies, VeriPlan can be a powerful value-added tool. For their interested clients, these advisors can acquire individual, personal use VeriPlan licenses for their clients with quantity discounting, when 5 or more copies are licensed. Advisors can offer VeriPlan as a value-added component of their financial and investment planning services offering. Through this arrangement, both the client and the advisor can use VeriPlan to further the client's long-range financial planning interests.

Section 3.4: High value, low cost, and no planned obsolescence

VeriPlan is a genuine bargain that does not require repeated software expenditures. VeriPlan provides highly sophisticated financial planning capabilities at a small fraction of the cost of professional products and services.

An integrated lifecycle financial planning tool is vital for any serious, self-directed individual. VeriPlan is a highly sophisticated financial decision support tool designed for intelligent individuals and the advisors who genuinely serve their fiduciary interests.

VeriPlan is unique in the marketplace. It costs a fraction of the prices charged by other financial planning software vendors, who sell almost exclusively to advisors rather than directly to individuals. We believe that VeriPlan's lifecycle financial planning functionality is equal to or better than many products sold to professional advisors.

VeriPlan's valuable customized planning functionality and low price enable very rapid payback of its cost. VeriPlan helps younger adults adopt efficient savings and investment practices that can pay-off substantially throughout their lives. For those who already have substantial assets, VeriPlan is a phenomenal bargain.

Among its many other capabilities, VeriPlan helps you to understand the great damage to your lifecycle finances caused by excessive investment costs. If you have a portfolio with inefficiently invested assets and you adopt a more cost-efficient strategy, VeriPlan can pay back its cost in weeks or even days.

Furthermore, VeriPlan avoids the marketing tie-ins of other vendor's planning products, which usually promote the industry's expensive investment products and services. While many competitive financial planning products used by advisors lead their clients toward expensive investments, VeriPlan leads you away from them.

No planned obsolescence

VeriPlan is intended to be a full lifetime financial planner that evolves to meet your needs over the years. We want it to serve your needs as a financial decision support tool and to become more valuable with the passage of time. To keep VeriPlan relevant to you over time, we have built into it an extensive ability for you to make your own updates.

Many application software vendors depend upon planned obsolescence to force customers to buy new software versions. While we may offer enhanced versions of VeriPlan in the future and we may charge an upgrade fee, you do not need an upgrade to keep your copy of VeriPlan current. You can change VeriPlan's settings and stay up-to-date. For example, you could quickly change numerous tax values, if tax laws were to change.

When a company does not force its customers to upgrade, it must instead attract and satisfy new customers to support its ongoing operations. If you like VeriPlan, please spread the word and encourage your friends to purchase VeriPlan. Encourage them to visit our website, http://www.theskilledinvestor.com/VeriPlan/ to learn more about the utility of VeriPlan.

Find VeriPlan information on the http://www.theskilledinvestor.com/VeriPlan/ website

Section 3.5: Unconditional 30-day user satisfaction guarantee

VeriPlan is a genuine bargain that does not require repeated software expenditures. VeriPlan provides highly If VeriPlan is not right for you, you have a full 30 days to get all of your money back.

Lawrence Russell and Company offers a thirty (30) day unconditional money back satisfaction guarantee for VeriPlan users. If for any reason you are not completely satisfied with VeriPlan during the first 30 days after your purchase, uninstall and return VeriPlan for a refund of your purchase price and any sales tax paid. See the End User License below on this worksheet for the specific terms of this user satisfaction guarantee.

Comprehensive Lifetime and Retirement Financial Planning Software

The best home financial planning software available

For more information, go to: http://www.theskilledinvestor.com/VeriPlan/

Section 3.6: VeriPlan User Guide

This VeriPlan User Guide contains extensive information in addition to the guidance and documentation that is included within this VeriPlan software product. (You are reading it now.) This is an Adobe Acrobat .pdf document which is downloadable from the Internet and is free to anyone. To download a copy of the latest version of this VeriPlan User Manual, use this hyperlink: Click here to download the free VeriPlan User Guide

Section 3.7: VeriPlan's worksheets, graphics, and data

VeriPlan's 34 user-accessible worksheets are:

Informational worksheets

START HERE (left-most red tab)

HOW TO USE (next red tab)

GRAPHICS & DATA (left-most blue tab)

Input worksheets (with yellow tabs)

INCOME

EXPENSES

FINANCIAL ASSETS

PROPERTY

DEBTS

TAXES

RETIREMENT

TAX-ADVANTAGED PLANS

ASSET ALLOCATION

RISK & RETURNS

INVESTMENT COSTS

Input summary (with purple tab)

SUMMARY of INPUTS

Graphics worksheets (with blue tabs)

INCOME

EXPENSES

DEBTS

TAXES

CASH FLOW

HUMAN CAPITAL

SAVINGS RATES

ALLOCATION

TOTAL ASSETS

ASSET FLOWS

WITHDRAWALS

ASSET TAXABILITY

TRANSACTIONS

COST-EFFICIENCY %

COST-EFFICIENCY $

SALES LOADS

SAFETY MARGIN

HISTORICAL RETURNS

Data worksheet (right-most worksheet with a green tab)

GRAPHICS DATA

Section 3.8: Making inputs and changing settings

Only certain cells on the yellow-tabbed data entry worksheets can be changed by the user. The graphics and graphics data worksheets are "read only" and are not user changeable.

After each new entry or change that you make to any user-adjustable cell, VeriPlan will generate a new projection automatically and almost instantly. If you have a collection of data to enter or want to change several settings at the same time, simply make all you additions and changes and then refer to the graphics and data worksheets for the final projection results. Each change will generate a new projection, but so rapidly that is should not affect your entries. Even if you do experience any delay, you can still move on to make the next entry, when making multiple entries.

All your data entries and adjustments of VeriPlan's controls will be made in "bold bordered" user data entry boxes or cells. While these user data entry boxes always have bold borders, in some tables with multiple rows, lines of gray boxes will alternate with lines of blue boxes to help you distinguish one line from another. Only these bold bordered user data entry boxes will be selectable with your computer's pointer. **After making any numerical entry, you can press either the 'Enter', 'Tab', or arrow keys to add your entry and develop a revised projection.**

Numbers in other cells with more narrow borders are for your information only and are not user changeable. You will not be able to select these cells with your computer pointer. If their information is output oriented, then these cells will change automatically, when a new projection affects them.

Your entries into any of the bold bordered user data entry boxes will be constrained to certain acceptable data types and ranges of data by VeriPlan's data validation processes. When you click on any data entry box, a "Movable Data Entry Guidance Box" will pop up automatically. This box will provide customized written guidance regarding acceptable inputs for this particular data entry box. You can move this box, if you need to by selecting and dragging it with your computer's pointer. If you have precise figures for any number that you enter, then enter that precise number. Rounding is not necessary.

**ALWAYS CHECK YOUR ENTRIES TO ENSURE THAT YOU HAVE TYPED WHAT YOU HAD INTENDED TO TYPE.** If you enter data into any user data entry box that is not of the correct data type or within the acceptable range, then an error box will pop up. This error box will ask you to either "retry" your entry or "cancel" it. This error box is movable and will provide guidance on how to make a proper entry. You will not be able to proceed, unless you make a proper entry into the data entry box according to the instructions that are provided.

Whenever the data you are entering is a percentage, **You Must Type the Percentage Sign -- Check your entry to ensure that you have entered the number you intended with the percentage sign.** For example, if you entered a 1 without the percent sign for a real growth rate, Microsoft Excel would interpret a 1 as 100%. Growing and compounding annually by 100% over decades could lead to some astronomical numbers. VeriPlan's data validation processes will limit the potential for some major errors such as this, when you enter percentages, but you should always check every entry you make, before moving on.

While user data entry cells have been restricted, these data entry cells will allow a very wide range of inputs that should accommodate the personal financial circumstances and sane expectations of anyone on earth. Most users will undoubtedly try to use the best personal estimates that they have regarding their own circumstances to develop a VeriPlan projection. However, sometimes you may enter erroneous data, which can differ from a reasonable measurement of your personal circumstances. Whatever data you put in, VeriPlan will develop a projection based upon those numbers. If something looks odd on any graphic, check your inputs.

Because VeriPlan is built on top of the Excel spreadsheet engine, VeriPlan's ability to develop any scenario projection is only restricted by VeriPlan's input limitations and by the computational resources of Excel and your PC. By accident or for amusement, you could project that you quickly would become the richest person in the world. Therefore, as you get more experience with VeriPlan's output graphics and data tables, you usually will find that inspecting the output graphics and data tables can help quickly identify your erroneous inputs. If your graphics and data outputs show doubtful, astronomical, or clearly erroneous results, then retrace your steps to your most recent changes on the input worksheets to find the source of your input error. Also, after you have completed all your data entry and settings on the user data entry worksheets, carefully review and verify all your inputs and settings.

**NEVER USE "CUT-AND-PASTE" OPERATIONS**. If you do, you could ruin your planning workbook and be forced to roll back to a prior version that you saved as a backup.

ONLY USE "COPY-AND-PASTE" WITHIN TABLES AND ONLY BETWEEN CONTIGUOUS CELLS IN THE SAME COLUMN. (Otherwise never copy and paste anywhere else in VeriPlan

Notice that "Copy-and-Paste" operations are dramatically different from "Cut-and-Paste" operations.

A "Cut-and-Paste" operation will cut out the cell from the entire spreadsheet. Since everything within VeriPlan is integrated and interconnected, VeriPlan is likely to be mortally wounded or at least very, very, very unhappy with what you have done, so be nice to VeriPlan and do not use "Cut-and-Paste" operations. Since VeriPlan is an Excel spreadsheet, VeriPlan cannot stop you from doing this, but you can stop yourself.

In contrast, a "Copy-and-Paste" operation will make a copy of the current cell into another cell. Since all user data entry cells WITHIN THE CONTIGUOUS CELLS OF THE SAME COLUMN of any user data entry table behave the same, then this is the only situation where you should perform "Copy-and-Paste" operations. VeriPlan's user data entry cells all have defined data types and associated checking logic. Within columns of tables the cells behave in the same manner. If you "Copy-and-Paste within a contiguous column you will simply replace a cell with the same characteristics, and you will not remove a cell from Excel that other cells may depend upon.

Section 3.9: Microsoft Excel set-up and file operations on Windows and Mac

VeriPlan operates as a standard Microsoft Excel spreadsheet application. User changes to the entire model occur very quickly. VeriPlan requires Microsoft Excel 2002 (or a later "year" version of Excel) running on Windows XP (or a later version of MS Windows, such as Vista or Win 7) or Excel running on the Macintosh (though OS X). VeriPlan is tested up on at least Windows XP, Windows 7, and Mac OS X. As fully self-contained Excel application, VeriPlan takes advantage of Excel's cross-version, cross-OS and cross-platform compatibility.

If you receive VeriPlan on a CD, initially, you must copy the files from the VeriPlan CD into a directory on your hard drive using your Windows or Mac file system.

If you get a "Read Only" warning, you opened VeriPlan directly from the CD and are trying to save to the CD. Files cannot be saved to a CD, and thus are "Read Only." Instead, just save VeriPlan to your hard drive with a different name.

Before using VeriPlan, ALWAYS shut down all other Microsoft Excel spreadsheets and close down Excel first.

Because VeriPlan is developed upon Excel, it opens in the same manner that any Excel file would open.

Many people do not understand that Excel files may have both "local" and "global" settings that can affect spreadsheet functionality. In its infinite wisdom, Microsoft has decided that any Excel spreadsheet that is opened after another spreadsheet is already running in an Excel session will inherit the global settings of the prior spreadsheet. Excel does this without warning, even if these global settings are in conflict. c) VeriPlan comes with particular global settings, which could differ from other Excel spreadsheets.

If you shut down Excel first and then open VeriPlan by clicking directly on the VeriPlan file name within your file system, then Excel and VeriPlan will open automatically, and Excel will not inherit inappropriate global settings.

If you are already running VeriPlan and wish to open additional instances, either click on the filename in your file system, or open them from Excel's pull-down menu.

The first time you use VeriPlan, open the original master VeriPlan file, and before doing anything else, resave your working VeriPlan model to your hard drive with a different life name.

When saving your VeriPlan files that contain your various personal lifetime financial models, use some file naming convention, such as MyFinPlan_05-22-2014-A, -B, -C, etc. that makes sense to you.

Back up your work frequently and DO NOT KEEP WRITING OVER THE SAME FILE NAME.

To end a planning session, just save your VeriPlan file and shut down Excel. To restart the next time, reopen VeriPlan by clicking your most recently saved VeriPlan file name within your file system. (After ensuring that Excel is already shut.)

Save VeriPlan to the native Excel Workbook format of the Excel version that you have. VeriPlan comes with the Excel 2002 file format. As a one-time conversion, when you are saving your VeriPlan file name with an new name via the "Save As" function, notice that just below the file name, there is also a pull-down menu to select the file format. Simply pull down that menu and look for the Excel Workbook format for your version of Excel. This usually will mean that you need to look higher in the list of file formats -- usually to the first one listed. Select the native Excel Workbook format, and Excel will do whatever conversion it needs to do.

If you keep saving your VeriPlan projection files without changing the file format, they will always be saved in Excel "97-2002" file format. However, if instead, you save any of your VeriPlan files using "save as" and you also use the "save as type" pull-down menu just below the file name entry box, you can save to the native format of whatever version of Excel you happen to have. The native format is the top-most entry and is named "Microsoft Excel Workbook" in the "save as" pull-down menu. When you do this, Excel will perform a conversion to the native format. Thereafter, all of your VeriPlan projection files will inherit that native format.

In reality, none of this actually matters on a Windows PC, because performance to any change to your projection model is sub-second -- whether or not you use the Excel "97-2002" file format or convert to the "Microsoft Excel Workbook" format for your particular version of Excel -- even on an old, under-powered Windows PC.

However, since model changes can take a few seconds on a Mac, converting to the native Excel workbook format for your Excel version running on a Mac could speed up computations moderately. Note that Microsoft's implementation of Excel itself on the Macintosh OS is a non-native or interpreted implementation. Therefore, some changes may take several seconds to calculate completely.

Nevertheless, while Excel is calculating, a VeriPlan user on the Macintosh does not need to wait and can move to the next data entry box and make another change or can navigate to another worksheet or graphic, while Excel's calculations are being completed. New data entry changes are simply added to this calculation process. Normally calculations will complete themselves by the time the VeriPlan user on a Mac has navigated to the graphics and data to inspect the results of their revised projection scenario.

You can run more than one VeriPlan model simultaneously using different descriptive file names. The maximum number of files is limited by the memory and CPU of your Windows PC or Mac. In practice, with the current generation of personal computers, more than two simultaneous instances of VeriPlan could run, however, it is usually best to run only two at a time. You will find out why, when Excel auto-saves all of your open files in succession, leaving you to twiddle your thumbs for a bit.

Excel Options set-up tips:

To adjust Excel's Options, find its "Options" panel, which Microsoft keeps moving around from version to version. For Windows Excel 2002, look for Options in the Tools menu. In Windows Excel 2007, look in the left-hand part of the ribbon near the bottom. For Windows Excel 2010, find Options on the File menu. For Excel on the Mac, see Properties on the Excel menu. For other Excel versions, look around -- it is there somewhere.

If you get a "Circular Logic" warning when you open VeriPlan, just shut any pop-up warnings and tools that appear. VeriPlan intentionally uses iterative logic in some of its projection calculations. Setting Options "Calculation" to "Automatic; Iteration box checked; 500 iterations: .001 max change" will eliminate these warnings. (However, VeriPlan should already be set up this way. If not, you may have opened VeriPlan after Excel was already running, and it inherited inappropriate global settings from another spreadsheet. Just shut down and restart as described above.)

To adjust cursor movement go to "Edit" -- "Move cursor after Enter Direction". Left or right movement prevents the cursor from jumping up or down the page to the next data entry box. Your taste, but horizontal cursor movement is better.

To adjust auto-save frequency on "Save" -- Check "Save AutoRecovery" box and choose the minutes. With Autosave, Excel consecutively saves each open VeriPlan file. If this is irritating with many VeriPlan files open, increase the minutes.

The Excel file security level for VeriPlan is set to "high," which will disable all macros. **VeriPlan does not contain and does not require any macros to perform its functions.** By requiring security to be high, VeriPlan enhances protection of your system. Under no circumstance, should it be necessary to lower your security setting below "high" to run VeriPlan. Excel should not issue any warnings about macros, because VeriPlan has no macros.

With Excel 2007 and 2010, double click the "Home, Insert, or Page Layout" tabs near the top to close the unneeded "ribbon".

VeriPlan's highly efficient internal design enables very rapid development of a new projection after each user data entry. VeriPlan's fully integrated internal logic requires a large file size. To deliver its sophisticated functionality, VeriPlan contains a substantial amount of logic on hidden spreadsheets that are not user accessible. VeriPlan maintains separate full lifetime projection information for each of your income sources, debts, and assets, and this is the primary reason for the large file size. Your user data will have very little impact on VeriPlan's file size.

VeriPlan is performance optimized for sub-second revisions to your model on a Windows PC. Changes on a Mac take longer.

VeriPlan's very large (~50Mb) file size means that Excel can take time to open and save your VeriPlan files on your Windows PC or Mac. Newer, faster machines open and save VeriPlan faster, and run more simultaneous VeriPlan models.

Internal VeriPlan application code is password protected and is not user accessible or user modifiable. A Visual Basic project is associated with VeriPlan, but it contains no code. This VB project is used solely to lock and encrypt the internals of VeriPlan. Because all internal VeriPlan logic is completely integrated, it is not easily changed without intimate knowledge of the system design.

You should set your screen resolution to 1024 by 768 pixels or higher. VeriPlan can work with lower screen settings, but much more horizontal and vertical scrolling within worksheets would be required, and VeriPlan's graphics may not display as intended. To change screen resolution in Windows click Start -> Control Panel -> Display -> Settings, move the Screen resolution slider, and click OK.

Section 3.10: Microsoft Windows PC and Macintosh systems requirements

VeriPlan is built on top of the Microsoft Excel spreadsheet engine and runs on any Excel version 2002 or later. Therefore, VeriPlan shares the features and functionality of Excel. VeriPlan is a fully self-contained Excel application and contains no macros. If you are familiar with Excel or other spreadsheet applications, many aspects of using VeriPlan already will be familiar to you. VeriPlan is not supported and will not run on OpenOffice's spreadsheet. Despite the impression that some people have, Excel and OpenOffice are not fully compatible -- particularly with large and sophisticated spreadsheet applications. Do not waste your time trying to run VeriPlan on OpenOffice.

To operate and execute acceptably for most users, and as a minimum configuration, VeriPlan requires a modestly powerful Windows PC or Macintosh running the Microsoft Excel spreadsheet product. VeriPlan's minimum test system specification is: 800 MHz Pentium 3 processor, 256 Mb RAM, MS Windows XP (SP-2), and MS Excel 2002 (SP-3) -- which is a relatively old and low powered platform.

VeriPlan will not execute on versions of Excel before 2002. Systems with lower performance and capacity might execute acceptably to you, but no assurances are offered that you will be satisfied personally with VeriPlan running on any configuration. If satisfactory performance cannot be obtained with any configuration, it may be necessary to acquire a more powerful computer and/or a more up-to-date systems and applications software configuration. However, it is highly unlikely that users will have any performance problems. The reference test configuration listed above is for an average windows PC manufactured in 2002, which runs simultaneous instances of VeriPlan with sub-second revision times. VeriPlan's functionality has been stable and robust since 2006 and updates are done largely to update tax information and make minor improvements.

VeriPlan runs in a standalone configuration. VeriPlan does not require any network or Internet connectivity to operate. However, if you wish to use any of the Internet hyperlinks provided within VeriPlan to access information on the web, you will need to have both Internet connectivity and a web browser. Having an Internet connection is recommended, because VeriPlan provides links to related articles on various websites.

Section 3.11: File security and backups

Protect your VeriPlan files from two perspectives: access security and backups.

VeriPlan will contain your sensitive personal financial information. VeriPlan never asks for nor does it require your account numbers or other such highly sensitive financial information. Nevertheless, once you have loaded your data and have fine-tuned your projections, your VeriPlan files will contain a rather comprehensive picture of both your current and projected financial affairs. Obviously, you should take reasonable steps to secure your information from unwanted access.

Regarding access security, you should follow standard, recommended practices to restrict physical access to your computer system, use appropriate file system passwords, and properly set up network security. How to do this is beyond the scope of this introduction, but if you have not already done this for your personal computer systems and home network, you should learn how to do this, and you should do it as soon as possible. Find an extensive article about identity theft protection and prevention here:

 Find my extensive article about Identity Theft Protection and Prevention

Regularly backup your work with multiple files

You should also back up your VeriPlan files. You will spend your valuable time loading data and fine tuning your projections. Over time you can update VeriPlan periodically and use it to analyze additional financial decisions. Make sure that you do not lose your valuable work to some kind of system failure, by failing to back up your work. VeriPlan is licensed to individuals for their personal and private use within a single household. You can keep of backup copies of VeriPlan that include your personal data.

Concerning these backup copies, we strongly recommend regularly following procedures similar to these:

On the same machine, keep multiple copies of your VeriPlan models rather than just a single copy with the same name. Adopt a naming convention such as: <fixed name>_<date>_<letter>. An example would be: \your-directory-name\SueAndSamPlan_03_24_2014-C

'SueAndSamPlan' would remain fixed, the date would be updated for each new day that VeriPlan was used, and the letter would be incremented for multiple backup copies within a day. The point of such a naming scheme is that you do not always use the same file name across time. If you have a problem, then there will be prior copies to roll back to. All your work will not be in a single basket, and you are not continually writing over your work. In addition, you can open separate VeriPlan files to compare projections that use different settings.

Save your work frequently. VeriPlan has been tested for years and is highly stable. Nevertheless, frequent saving is recommended. Your system can crash for a wide variety of reasons, such as system software failures, hard disk crashes, power failures, etc. Since VeriPlan files are large, you should delete older copies periodically to release disk space. At 50Mb per copy, 20 backups would consume 1Gb of disk space.

On a regular schedule, back up your VeriPlan files and other valuable files to another machine on your network and/or to some form of removable storage. Store your files in a safe and secure location. You should consider the various potential threats to you valuable personal files including VeriPlan. Such threats might include: system failure, network intrusion, flood, fire, theft, etc. As long as you remain in compliance with the Terms that you have agreed to in the End User License Agreement on the START HERE worksheet, you can store backup copies of your VeriPlan files on-site or off-site, when they are kept in a safe and secure location and are inactive.

### Section 3.12: VeriPlan License Agreement and Terms of Use

This section within the VeriPlan product contains VeriPlan's End User License Agreement and Terms of Use, which you must agree to and approve at the top of the Start Here worksheet, for VeriPlan to operate.

VeriPlan is licensed software and is not sold. The VeriPlan End User License covers the personal and non-commercial use by one household of VeriPlan running on the personal computers owned by that household.

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### Chapter 4: How To Use worksheet

**Developing a lifetime financial and retirement plan – VeriPlan user guidance**

Section 4.1: How to succeed with VeriPlan

Section 4.2: Family financial planning with VeriPlan

Section 4.3: Think about your lifetime financial goals and what you want to achieve financially

Section 4.4: Read VeriPlan's documentation and learn how to use its functionality

Section 4.5: Navigating within VeriPlan

Section 4.6: Load your financial data and choose your initial VeriPlan tool settings

Section 4.7: Compare different projection scenarios to refine your baseline financial plan

Section 4.8: Update your baseline financial plan and evaluate new decisions in the future

Section 4.9: Scenario planning for an uncertain future

Section 4.10: VeriPlan's financial viewpoints

Section 4.1: How to succeed with VeriPlan

* Read the "START HERE" worksheet completely.

* Read and agree to the End User License Agreement on the "START HERE" worksheet

* Read this "HOW TO USE" worksheet

* Consult this VeriPlan User Guide, as needed.

* Load your financial information into the yellow-tabbed input worksheets

* Select your initial settings on VeriPlan's various tools within the input worksheets and check your entries on the "SUMMARY OF INPUTS" worksheet.

* Evaluate your projection with VeriPlan's blue-tabbed graphics and the green-tabbed "GRAPHICS DATA" worksheet

* Change assumptions, while comparing as many projections as you wish, as you iteratively converge on the financial plan that you intend to implement going forward

* Make real life adjustments to your financial behaviors, portfolio, etc. that will put your planning intentions into effect

* Monitor your progress periodically, update your data in VeriPlan, and analyze new financial decisions in the future, as needed

Section 4.2: Family financial planning with VeriPlan

VeriPlan is personally customizable financial planning software that helps you develop your own comprehensive lifetime financial and investment plan for your family. Functioning as financial decision support software, it automates millions of integrated projection calculations behind the scenes. With VeriPlan you can improve your financial decision-making, because you are better informed about the implications of your decisions. VeriPlan demonstrates the value of improved financial practices within your particular situation and can save you many thousands of dollars.

VeriPlan automatically develops fully integrated projections of your lifetime income, expenses, debts, taxes, and assets. It gives you direct control over all the data and assumptions that underlie your lifetime financial plan. After any change that you make, VeriPlan will instantly project a revised lifetime cash flow and asset growth scenario for you. VeriPlan makes "do-it-yourself" lifetime financial planning feasible by automating millions of fully integrated and personalized projection calculations for you.

For "financial planning," every year millions of people do the following. They find a simplistic, free financial planning calculator on a website. They plug in a few numbers and press the magic button. The free calculator shines a green or red light or spits out a "save this much more" number. Even worse, they get instant buy-me-now recommendations for expensive financial products that just happen to be promoted by the website.

The average person works about 2,000 hours per year for about 35 years (~70,000 hours). Given just how very difficult it is to earn a good living and to develop financial security, it makes sense to spend more effort on your financial planning. You cannot do informed financial planning without sophisticated software. Unless you can afford an expensive financial advisor with access to professional grade financial planning software, you cannot begin to do your own planning without VeriPlan. It is the most sophisticated do-it-yourself financial planning software available to home users.

When you dedicate the necessary time and effort to model your financial situation in VeriPlan, it will handle all the calculation grunt work for you. With VeriPlan, you can make better informed choices about your financial alternatives for the future.

Section 4.3: Think about your lifetime financial goals and what you want to achieve financially

Model your financial life goals and financial resources and within VeriPlan, moving to the baseline plan that you intend to implement. Developing a lifetime financial and retirement plan is much more than just putting numbers into a financial planning software tool. Comprehensive lifetime financial planning is an iterative process wherein you:

* establish financial goals and objectives,

* make assumptions about the future,

* model your lifetime finances in software, and

* evaluate your opportunities and constraints.

As you study your opportunities and limitations in light of your personalized financial projections, you will refine your goals and financial plan. With a better understanding of potential opportunities and constraints provided by your customized VeriPlan financial projection models, you will decide what you intend to change or not to change in your real-life regarding your financial behaviors going forward.

Your initial usage of VeriPlan should be thought provoking and the most labor intensive. You will consider your objectives, load and refine your data, and test alternative assumptions. During this process, you will move iteratively toward the development of the "baseline financial plan" that you intend to implement. VeriPlan aids you in this planning process by allowing you to model your alternatives very quickly and make better informed decisions, as it hides the millions of calculations needed to quickly develop lifetime financial projection scenarios that are customize to your situation.

Once you have established your baseline lifetime financial plan, you challenge will be to implement those decisions in real life. After some period of time (e.g. months or a year), you could then update your information in VeriPlan to see whether you are on track toward achieving your financial plan. All data and parameters in VeriPlan are user-changeable, so you can continue to use it without requiring software updates, upgrades, or maintenance contracts.

Section 4.4: Read VeriPlan's documentation and learn how to use its functionality

VeriPlan's documentation making your inputs is embedded within its worksheets. In addition, this _VeriPlan User Guide_ manual provides significantly more information about both how to use VeriPlan and about personal financial and investment planning generally.

Open VeriPlan within Microsoft Excel and read the START HERE worksheet and this HOW TO USE worksheet carefully. These informational worksheets provide an orientation to VeriPlan's functionality, layout, and design philosophy.

VeriPlan's embedded user documentation will help you to understand how VeriPlan works and what it allows you to do. All of VeriPlan's "usage" documentation is placed within VeriPlan where you need it, explaining what to do.

This _VeriPlan User Guide_ also addresses the "why" of financial planning and add extensive information on "best practices" in personal financial planning and investment management. In addition, it provides hyperlinks to external financial information for further reading.

To download a copy of the latest version of this VeriPlan User Guide use this hyperlink to the My Financial Freedom Plan website, where you will be able to use the Sitemap and find the download page for the user manual.

Section 4.5: Navigating within VeriPlan

VeriPlan has extensive, fully integrated functionality across a variety of spreadsheets. To understand how to find what you want to use among the wealth of functionality in VeriPlan simply click on all the tabs to see what is there. As you become familiar with navigating within VeriPlan, your productivity will accelerate.

VeriPlan groups worksheets with similar functionality. These worksheet tabs are arrayed along the bottom of your computer screen from left to right. Worksheet groups have descriptive names on their tabs and are numbered within groups.

Since VeriPlan has a large number of user-accessible worksheets, not all tabs are visible on the screen at once. To scroll the tabs, notice two small arrowheads pointing to the left and two small arrowheads pointing to the right. Use these arrows to scroll among the worksheet tabs. The leftmost or rightmost of these small arrowheads, you will be taken to the first and last of the spreadsheets. Clicking repeatedly on the two inner arrowheads or holding down an arrow with your pointer will allow you to scroll spreadsheet tabs one at a time. When you find the tab that you want, click on it to open the worksheet.

To navigate within any worksheet, use the vertical scroll bar on the right edge of your screen and the horizontal scroll bar in the lower corner of your screen, adjacent to the worksheet tabs. Only some of VeriPlan's worksheets require use of the horizontal scroll bar, and this is dependent upon you screen size and choice of screen resolution. When you review VeriPlan's output graphics worksheets, scroll bars are unnecessary and will not be displayed.

In addition, on any worksheet that allows user inputs click on the hyperlink headings at the top of the worksheet to go directly to that section. Use the "Return to the Top" links to pop back to the top of that worksheet.

Section 4.6: Load your financial data and choose your initial VeriPlan tool settings

Load your current financial information into VeriPlan and set appropriate parameters on the yellow-tabbed user profile and tools worksheets. All user-changeable financial data inputs and parameter settings are found on these worksheets.

More complete financial profile information and planning assumptions will help you to develop a better lifetime financial plan. While the actual data entry does take some time, most of the time involves finding financial records and researching needed information. Few people already have well-organized financial information, and for many people, VeriPlan will provide the first consolidated picture of their financial affairs that they have ever had.

All input worksheets are divided into sections and at the top of each input worksheet there is a hyperlinked list of these sections. Reading these section headers, you can presume that you should make any needed entries in these input sections, unless a section title has "(optional)" or "(informational)" at the end of it. Note, however, that even when a section is listed as "(optional)" you might want to make some entries or settings in these optional sections, since these sections could be important to fine-tuning your particular planning situation.

To make your financial data entries within workbook sections, select the data entry cell directly by using your cursor or by tabbing between cells. Then, either type your information directly into that cell or into the Excel "Formula Bar" near the top of the screen. All standalone data entry cells or data entry cells in tables are outlined with a bold black line around them. All other cells are locked and are not user selectable. Some standalone cells and cells in tables may be outlined with solid or dashed lines, but are for information. If you cannot select a cell, it is informational and not user-changeable.

Once selected, every data entry cell has a "Moveable Data Entry Guidance Box" that will appear and provide instructions. Select and move these boxes with your cursor, if they are in your way. All data entry cells have error checking to prevent entering inappropriate data. If you enter inappropriate data, an error box will pop up with instructions on how to revise your input.

You should NOT use cut-and-paste operations from one data entry cell to another. See the section of the Start Here worksheet entitled: "Making inputs and changing settings" for more information on this important topic.

Easily develop your own financial plan with VeriPlan

http://www.theskilledinvestor.com/VeriPlan/financial-planning/

Section 4.7: Compare different projection scenarios to refine your baseline financial plan

In general, once you have loaded your financial data and set you initial assumptions, you can begin to evaluate alternative financial decisions. By comparing one VeriPlan scenario projection to another that uses different data and/or assumptions, you can evaluate alternatives. Through an iterative process of evaluating alternatives, you can develop a refined lifetime plan that you intend to implement.

In general, to determine whether personal financial "Strategy A" or "Strategy B" is likely to be better for you in your particular circumstances, you will compare two VeriPlan projection scenarios to see which yields a better long-term financial result. After you have loaded your financial data and made you initial parameter settings, you have automatically created a draft baseline financial plan. However, this draft plan is unlikely to be your optimal lifetime financial plan.

Therefore, to refine and optimize a financial plan in VeriPlan use this approach (which compares investment costs):

* Complete all your data entry and parameter settings for your initial plan and save it with a unique file name, such as "MyFinPlan_04-17-2014-A"

* Resave your plan with a different file name, such as "MyFinPlan_04-17-2014-A_Lower-Investment-Costs"

* Open both "MyFinPlan_04-17-2014-A" and "MyFinPlan_04-17-2014-A_Lower-Investment-Costs" and have these two VeriPlan models running simultaneously on your PC

* Within the "MyFinPlan_04-17-2014-A_Lower-Investment-Costs" version, go to VeriPlan's investment costs worksheet. Change the "0" to a "1" to use your "reasonable investment cost" assumptions.

* (Note: Even "average" investment costs are horrendous and unjustified. Cut them to the bone and save thousands yearly. The financial industry feeds on your assets -- leading to worse, not better returns.)

* Compare lifetime projection scenarios and choose the more advantageous path

Now, you have two alternative lifetime financial plans that differ in one respect, that is, the level of investment costs that you plan to pay over your lifetime. In this comparison, the first version of VeriPlan automatically projects your lifetime investment costs in proportion to those of your current investment portfolio. The second version uses alternative investment cost assumptions. Now, the question is simply to compare one scenario with the other. If one strategy is more appealing that the other, then this strategy becomes part of your baseline family financial plan. Use that version of VeriPlan going forward, as you test additional strategy projections and choose between them.

Compare one VeriPlan projection scenario with another by using VeriPlan's standard output graphics and corresponding data table worksheets. They enable you to make easy visual and numerical comparisons between your projections:

Use the two alternative projection scenarios that you have open in your Windows PC or Mac

Choose which of the output graphics (and corresponding data tables) you wish to use in your comparison (In many cases, you would use a total assets graphic, because these graphics project your cumulative long-term financial assets, which are the net result of all prior income, expense, debt, tax, and investment asset growth factors over the intervening projection years.)

VISUAL COMPARISONS:

Simply open both of your VeriPlan projection models in full screen mode. Open both models to the particular graphic that you wish to compare. Then, simply toggle back and forth between the different models by clicking on the filenames at the bottom of your screen. The graphics could be aligned so that differences are obvious as you toggle back and forth between the two models. The different descriptive names that you give to each of these models will show on the top Excel bar, allowing you to instantly know which model you are looking at any given time. If your comparison affects other graphics, then simply display these other graphics one at a time in each of the models and toggle between them, as well. You will be able to assess the scale of any differences by reading the values on the vertical axis and/or by holding your cursor over the graphic to read the specific projection values.

NUMERICAL COMPARISONS:

If you need to collect specific numerical data from a graphic and want to read the numbers underlying any graphical data series, you may find it easier to look at the green-tabbed Graphics Data worksheet. You could print the data or just write down a few numbers for comparison.

In general, the projection with the highest projected dollar amount at some future age(s) would be the preferred strategy. Choose one or more future ages as your comparison benchmark age(s). However, you need to judge the magnitude of the projected financial advantage to decide whether the advantage warrants the effort in real-life required to achieve that advantage.

Note that the highest projection value is not always the correct answer when choosing been strategies. In particular, when you are evaluating a greater level of consumption, then projected future values may be lower rather than higher. Financial planning is not simply about running up your personal balance sheet. Instead, it is about your finances serving the needs of your family.

For example, you might be comparing your current housing situation with an alternative wherein you acquire a larger home. Various projected expense, tax, and investment factors will determine the cost and/or value of owning a larger home. If your family's projected aggregate future assets increase in relative terms, then you understand better the investment value of owning a larger home. If projected aggregate future assets decline in relative terms, then you have a better understanding of the projected cost of consuming more housing.

Section 4.8: Update your baseline financial plan and evaluate new decisions in the future

To refine your baseline financial plan, you simply keep making comparisons between alternative strategies and projections, until you have a refined lifetime financial plan that reflects your family's financial needs, desires, constraints, and intentions. Then, the real challenge becomes how to alter your real-life financial practices related to income, expenses, debts, taxes, and investing to conform to your financial planning intentions.

After you have used VeriPlan to develop your initial lifetime financial plan, you can update your plan periodically. All data inputs and parameters are user-updatable. VeriPlan can help you to evaluate monitor your progress and help you to evaluate future financial decisions.

Since VeriPlan allows you to change all financial data and all settings and parameters, it has no built-in obsolescence. After the passing of some months or a year, you could update your model with then-current data to check your progress. As new financial decisions arise in the future, you can update your model and evaluate those future financial decisions.

VeriPlan is a comprehensive, automated, and fully integrated lifetime cash flow and asset valuation tool that you can customize in detail to your particular financial situation. Therefore, it can help you to evaluate a very long list of financial strategies. When you compare strategies using different VeriPlan projection scenarios, it is important that you think clearly about the positive and negative financial characteristics of each financial strategy. As you would normally do, list those characteristics on a piece of paper and estimate any associated costs and returns. Then, plug those numbers into an alternative VeriPlan projection scenario and compare the projection results with your current baseline financial plan.

This "how to" guide will not attempt to list all of what VeriPlan could enable you to compare. For more information, on the range of what VeriPlan can do, refer to its embedded user documentation. For a few examples of how to model alternatives within VeriPlan, see these sections of this _VeriPlan User Manual_.

  * "Overview: Planning to buy a home in the future" in the Debts chapter

  * "Children's Education Expenditure Planning and "Mid-Career Education Planning" in the Expenses chapter

  * "Evaluating alternative tax-advantaged investment strategies" in the Tax-Advantaged Plans chapter

Also, refer to the www.myfinancialfreedomplan.com website, and the how-to articles in the blue horizontal menu bar.

www.myfinancialfreedomplan.com

Section 4.9: Scenario planning for an uncertain future

NOBODY CAN PREDICT THE FUTURE. VeriPlan's PROJECTIONS ARE HYPOTHETICAL IN NATURE, DO NOT REFLECT ACTUAL INVESTMENT RESULTS, AND ARE NOT GUARANTEES OF FUTURE RESULTS.

VeriPlan's lifetime projections are hypothetical illustrations. VeriPlan mathematically computes its projections from your personal financial data inputs and from your adjustable settings on it various tools. This _VeriPlan User Manual_ provides you with details about how its projections are developed.

VeriPlan's projections model your financial affairs and your intentions regarding the future. As internally coherent scenarios, VeriPlan's projections incorporate:

*your projected earnings, expenses, savings, debts, and assets

* long-term historical returns and risk premiums for the cash, bond, and equity asset classes

* a model of your current federal, state, and local taxes

* measurements of your investment costs

To develop a wide range of more pessimistic and more optimistic projection scenarios, VeriPlan allows you to adjust realized historical return rates both proportionately and arbitrarily. This scenario planning capability helps you to evaluate how you might manage over the long-term, if future asset returns were to deviate consistently from the long-term historical trend.

The future is fundamentally unpredictable. Nobody can predict what will happen. You should not develop any false comfort that you can predict the future, nor should your expect that any financial tool can predict it for you. VeriPlan neither predicts nor forecasts. Furthermore, VeriPlan does not assess probabilities about the future, which is another form of prediction. While probabilistic features could be added, VeriPlan does not provide probability assessments primarily due to the very significant potential of user misunderstanding.

VeriPlan's lifetime graphics and data tables show coherent projection scenarios for your particular data. We hope that you will find them to be useful in your financial planning. However, we can give you no assurance whatsoever that your future financial affairs will turn out to be anything like the projections that VeriPlan develops for you.

Despite the future's unpredictability, you still have significant control over your financial destiny. You can quickly use VeriPlan to generate a wide range of personally customized projection scenarios. You can judge whether you would be able to manage in each scenario and whether you would be satisfied doing so. You can adjust present-day behaviors in ways that would permit you to prosper under as wide a range of VeriPlan's outcome scenarios as you would like.

If you behave financially now in manner that increases your ability to manage wider range of VeriPlan's illustrative scenarios, then you may have more financial choices as you move through life. Over time, if things turn out better than you had anticipated in your financial planning, then you could gradually ease up on your self-imposed constraints.

On the contrary, if you live in a more profligate manner financially, you still might get lucky and skate by. However, the future might turn out to be significantly less rewarding than you now expect. If you do not constrain yourself as you move through life, then you could be forced to cut back much more severely in the future. In some circumstances, recovery would simply be impossible, and your desired lifestyle could slip out of reach in the future.

This is simply tortoise and hare logic. The tortoise won the fabled race in a slow and steady manner. The hare could have won easily, but wasted too many opportunities along the way. In the end, the hare just got too far behind. Both made important personal choices as the race proceeded. For more information on this subject, prefer to the Risk & Returns worksheet.

Section 4.10: VeriPlan's financial viewpoints

The design of VeriPlan is based on durable findings from the financial planning and investment research literature. In the rough and tumble world of personal financial planning and investing, you are much better off with a stable belief system or point-of-view that keeps you focused and on track.

Explicitly or implicitly, every financial tool has a point-of-view. If you use a personal financial decision support tool like VeriPlan, you should understand and agree with its point-of view.

VeriPlan can generate lifetime projections, which are hypothetical illustrations that model any family's financial affairs. VeriPlan's functionality reflects a belief that, if they could, individuals would follow scientifically-grounded, savings-conscious, risk-adjusted, cost-effective, and tax-efficient financial planning and investment strategies. VeriPlan's simple premise is that you want to get the most out of your money. While this objective is a 'no-brainer,' successful results must flow from appropriate, well-constructed strategies implemented conscientiously over a lifetime.

Because of the importance of a financial point-of-view, this _VeriPlan User Manual_ includes these viewpoints, which are discussed elsewhere in this book. Follow the links provided below.

These viewpoints underlie the design of VeriPlan. The links take you to other sections of this book.

THE PROBLEM:  Straight answers about personal financial and investment planning are hard to find.

THE SOLUTION: Follow only financial and investment strategies that are: a) scientifically grounded, b) completely passive, c) thoroughly diversified, d) savings conscious, e) risk adjusted, f) cost effective, and g) tax efficient.

1)  Your financial and investment strategies should have a scientific basis

2)  Your personal earnings, expenditures, and savings are the most important determinants of your family's long-term financial wealth

3)  There is no such thing as risk-free money from investing for individual investors

4)  You need to allocate your financial assets in a manner that reflects your relative tolerance for investment risk.

5)  You need to stay in the securities markets to earn market risk premiums

6)  Build asset buffers to protect yourself from market volatility

7)  You should always completely diversify your portfolio

8)  Own investment funds and not individual securities

9)  Spending your valuable time on the wrong financial activities is just plain bad for you

10)  Passive, index-oriented investment strategies tend to be superior, because they  narrow the range of outcomes, and therefore, they reduce the total investment risk  associated with your portfolio

11)  Unfortunately, you cannot reliably identify beforehand professional investment  managers who will deliver superior performance in the future, and you cannot hire  them at a price that is lower than their potential value-added

12)  Never invest solely because of superior past performance

13)  Tax-advantaged investing is very good for most people at most times

14)  Excessive visible and hidden investment costs can unnecessarily and dramatically reduce the potential value of your portfolio

15)  Direct and indirect costs advisory costs and the expected value of the strategies that  you are encouraged to use will determine your total return from advisory services

16)  If financial behavior control is difficult for you, then carefully hire a good advisor

17)  Do not ignore other risks that could destroy your best-laid financial plans

18)  Your portfolio assets are simply your evolving estate. You need to prepare  appropriately for the day, when your assets become your estate

19) Nobody and no tool can predict the future

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### Chapter 5: Summary of Inputs worksheet

**Overview**

This summary of inputs worksheet provides a central place for you to scan your current summary data and settings on the input worksheets.

Your Inputs Cannot Be Changed Directly on this Worksheet.

Any of the lines that begin with the words "JUMP TO:" below are active hyperlinks in VeriPlan that with allow you to jump directly that section. Just click on any of these blue links in VeriPlan to jump to the appropriate worksheet section, where you can make your changes directly.

To keep this listing more manageable, it contains only those inputs and parameters that you are more likely to change, during "what if" analysis. Links are not provided to all user-adjustable on the inputs worksheets. Settings that you are not likely to change frequently, such as tax law parameters, may not be linked below. You can, however, click on adjacent links below to locate these less frequently adjusted settings.

### Section 5.1: Income worksheet

JUMP TO: the input table for your ANNUAL earned income adjustments

Other Income

JUMP TO: the input table for your ANNUAL other income adjustments

### Section 5.2: Expenses worksheet

JUMP TO: the input table for major planned expenses and expense adjustments

24 month expense tracking, budgeting, and variance tool

JUMP TO: the monthly budgeting input table

### Section 5.3: Financial Assets worksheet

JUMP TO: the input table for your cash and cash equivalent assets

JUMP TO: the input table for your bond and fixed income assets

JUMP TO: the input table for your stock and equity assets

### Section 5.4: Property worksheet

JUMP TO: the input table for your property and real estate assets

JUMP TO: the input table for your other assets

### Section 5.5: Debts worksheet

JUMP TO: the Debt Input Table

Home Purchase Tool

JUMP TO: the Home Purchase Tool input table

Future Debt Tool

### Section 5.6: Taxes worksheet

Your tax filing status is linked to the number of Earner/Users that you set on the income worksheet.

JUMP TO: Your federal income tax rates

JUMP TO: Your state income tax rates

JUMP TO: Your local income tax rates

JUMP TO: Differences between your federal, state and local taxable income

JUMP TO: Your federal income tax exemptions

Ages of all dependents whom you claim for federal income tax purposes (oldest to youngest)

JUMP TO: Your federal income tax adjustments, which reduce taxable income

JUMP TO: Your federal income tax itemized deductions

JUMP TO: "Taxes You Paid" deductions

JUMP TO: Your property and real estate taxes

JUMP TO: Tax rate adjustments

### Section 5.7: Retirement worksheet

Earner #1 -- Projected Social Security Retirement Payments by age of first receipt

Earner #2 -- Projected Social Security Retirement Payments by age of first receipt

Use an initial Social Security payment age that is different than Earner #1's retirement age?

What alternative Earner #1 age for initial Social Security retirement payments do you want to use?

Use an initial Social Security payment age that is different than Earner #2's retirement age?

What alternative Earner #2 age for initial Social Security retirement payments do you want to use?

Your Pensions & Annuities

JUMP TO: the pension and annuity input table

JUMP to table: "User-Adjustable Annual Real Earnings Decline Assumptions," when working past age 65

### Section 5.8: Tax-Advantaged Plans worksheet

Do you want VeriPlan to develop projections for you that assume you can contribute to a designated Roth 401(k) or 403(b) employer-sponsored plan?

JUMP TO: Section 6) Change income tax deduction limits for traditional IRA contributions

### Section 5.9: Asset Allocation worksheet

Method #1: The asset allocation percentages of your current portfolio

Method #2: A constant lifetime asset allocation for the investor with average risk tolerance

Method #3: A constant lifetime asset allocation with percentage adjustments to Method #2

Method #3's Positive and Negative % Adjustments to Method #2

The constant allocation percentages that will be used for Method #3, after your adjustments

Method #4: A declining lifecycle percentage allocation to equity assets with a constant percentage of cash

Method #5: A declining lifecycle percentage allocation to equity assets, with a constant ratio between cash and fixed income asset percentages

JUMP TO: the current portfolio rebalancing tool

### Section 5.10: Portfolio Risk & Returns worksheet

JUMP TO: The Projection Variance Tool

JUMP TO: The Asset Class Total Return Adjuster

JUMP TO: The Current Portfolio Revaluation Tool

JUMP TO: The Portfolio Safety Margin Tool

Historical Asset Returns

JUMP TO: Property and Other Asset Classes -- Projected Total Annual Real Returns

### Section 5.11: Investment Costs worksheet

The maximum investment cost assumptions that you believe are reasonable

Choosing between your current portfolio's investment costs and your reasonable cost settings:

JUMP TO: How many times have you paid sales loads on your assets?

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### Chapter 6: Income worksheet

Section 6.1: Number of Earner/Users and their Ages (required)

Section 6.2: Current annual earned income (required)

Section 6.3: Changing projected real earned income growth rates (optional)

Section 6.4: Year-by-year adjustments to your projected earned income (optional)

Section 6.5: Other income that is taxed at ordinary income tax rates (optional)

Section 6.6: Tax considerations related to "other" income

### Section 6.1: Number of Earner/Users and their Ages

VeriPlan is a lifecycle projection model for 1 or 2 "earner/users" from 18 to 100 years old. VeriPlan develops projections for 1 single or 2 married "earner/users." This selection also determines whether VeriPlan will use the "Single" or "Married, Filing Jointly" income tax rates and rules.

Do you want VeriPlan to develop lifecycle projections for 1 or 2 'earner/users'?

The number of Earner/Users sets the tax filing status

If you enter 1 user, then VeriPlan will automatically set your income tax filing status to "Single." If you enter 2 users, then VeriPlan will automatically set your income tax filing status to "Married, Filing Jointly."

If you indicate only 1 earner/user, then VeriPlan will ignore any income information that you may enter regarding a second earner/user on this income worksheet. VeriPlan must do this to develop projections that properly apply the appropriate tax filing status. If you still do enter income information for a second user, then VeriPlan will display red letter warnings.

The taxes section of this _VeriPlan User Manual_ explains why VeriPlan automatically uses the "Single" and "Married, Filing Jointly" tax filing statuses versus the alternatives.

Developing separate projections for unmarried earners living in the same household:

If you wish to model two unmarried earner/users living in the same household, please refer to the discussion entitled "Taxes and unmarried earner/users in the same household" in the taxes section of this _VeriPlan User Manual_. Because of the tax laws, it would not be appropriate to combine the earnings of unmarried couples into a single VeriPlan projection, unless both intend to marry each other soon.

Enter Your Age(s)

The unit of time in VeriPlan for all projections is one year. All graphics and data tables use the age 18 through age 100 range. VeriPlan accepts initial ages between 18 and 100. Your particular projection graphics and data tables will begin to present data at the Initial Age for Earner/User #1. Initial ages must be less than or equal to the retirement ages.

Enter below the ages that each earner will be on January 1 of the NEXT calendar year. Doing this aligns VeriPlan's projection years with the tax filing year that is normal for most people. Alternatively, if you are using this tool when it is well into the second half of a calendar year, you could consider using your present age.

Earner #1

* This Initial Age must be less than or equal to your Planned Retirement Age on the retirement worksheet. To increase this Initial Age, you may first need to increase the retirement age, and then increase this Initial Age.

* Earner/User #1 does not have to have wage or salary income and could be living on other financial resources.

Jump to the retirement worksheet

Name of Earner/User #1 (optional)

Earner #2

* This Initial Age must be less than or equal to your Planned Retirement Age on the retirement worksheet. To increase this Initial Age, you may first need to increase the retirement age, and then increase this Initial Age.

* Earner/User #2 does not have to have wage or salary income and could be living on other financial resources.

Name of Earner/User #2 (optional)

For a married couple, either person could be designated as Earner/User #1. If it is anticipated that a particular person would retire at a later date than the other, then that person retiring later would usually be designated as Earner #1. Otherwise, it is recommended that the major earner be designated as Earner/User #1.

The retirement modeling age of Earner #1 tends to drives some of the projection functions provided by VeriPlan. However, since VeriPlan also provides a variety of year by year adjustment facilities, either employed spouse can be designated as Earner #1.

Each person will be referred to an "Earner," but an "Earner" does not have to be traditionally employed and receive a paycheck. If only one person has earned income, then that person should certainly be designated as Earner/User #1. VeriPlan does not require either person to have any earned income. One or both could live on other income or asset-based income sources.

Section 6.2: Current annual earned income (required)

Your gross pre-tax earned income is the baseline for your lifetime earned income

This section collects information about current income that you earn as an employee or as a working business owner. (There are optional sections below on this worksheet to adjust your projected income year-by-year and to add other kinds of income that would be taxed as ordinary income.)

Earner #1: Determine Earner #1's gross annual pre-tax employment and working business owner's income

Earner #1's current annual employment income (wage, salary, bonus, commissions, tips, etc.)

* Your ANNUAL W-2 Gross earnings AFTER your reported income has been REDUCED by any PERSONAL current annual contributions you made to EMPLOYER-SPONSORED tax-deferred retirement programs.

Earner #1's current annual net self-employment business income

* Your ANNUAL Schedule C and/or K-1 Gross earnings AFTER your reported income has been REDUCED by any PERSONAL current annual contributions you made to EMPLOYER-SPONSORED tax-deferred retirement programs.

Earner #1's -- total PERSONAL contributions in the past year to CURRENTLY TAX-DEDUCTIBLE employer retirement plans (both employee and self-employed plans) that reduced Earner #1's reportable income subject to federal income taxation.

* Do Not include pension payments or the effects of personal IRA contributions.

* If you made Roth contributions into employer sponsored plans, those contributions did not reduce your reported income.

(Not a user entry.)

Earner #2: Determine Earner #2's gross annual pre-tax employment and working business owner's income

If there is no Earner/User #2, then VeriPlan will ignore any entries for Earner #2 below. VeriPlan determines whether there is an Earner/User #2, by checking your answer to the question: "Should VeriPlan develop lifecycle projections for 1 or 2 "earner/users"?" above on this worksheet.

This is your current answer to this question:

Your answer cannot be changed here. Instead, you can change it above on this worksheet.

Earner #2's current annual employment income (wage, salary, bonus, commissions, tips, etc.)

* Your ANNUAL W-2 Gross earnings AFTER your reported income has been REDUCED by any PERSONAL current annual contributions you made to EMPLOYER-SPONSORED tax-deferred retirement programs.

Earner #2's current annual net self-employment business income

* Your ANNUAL Schedule C and/or K-1 Gross earnings AFTER your reported income has been REDUCED by any PERSONAL current annual contributions you made to EMPLOYER-SPONSORED tax-deferred retirement programs.

Earner #2's -- total PERSONAL contributions in the past year to CURRENTLY TAX-DEDUCTIBLE employer retirement plans (both employee and self-employed plans) that reduced Earner #2's reportable income subject to federal income taxation.

* Do Not include pension payments or the effects of personal IRA contributions.

* If you made Roth contributions into employer sponsored plans, those contributions did not reduce your reported income.

(Not a user entry.)

Total Family Annual Gross Pre-tax Earned Income

Notes about your self-employment income:

Self-employment, FICA, and Medicare taxes:

When you enter any annual pre-tax actively-managed / self-employment income in the bold border box above, VeriPlan will automatically project and apply self-employment taxes and tax deductions related to this income. Your self-employment income will taxed at two-times the personal tax rates for FICA (Social Security) and Medicare subject to any applicable income limitations. Also, a 50% income tax deduction is allowed for these self-employment tax payments, which VeriPlan manages automatically. Both these self-employment taxes and deductions would be reported on your Form 1040, Schedule SE. For your regular employment income reported above, VeriPlan will automatically project and apply personal FICA and Medicare taxes at one-times these tax rates, subject to income limitations, and there is no allowable deduction for these personal tax payments. You can find user-adjustable FICA and Medicare tax rates and income limits on the Taxes worksheet.

New actively-managed businesses:

Regarding working business owner income, use your best judgment, but do not assume that any new enterprise will generate substantial net income, until there is some proof. If your business provided negative income in the past year or has averaged a loss over several years, enter zero rather than a negative number. If you expect that you self-employment income will grow in the future, use the yearly table in Section 5 below to project your expected future self-employment income.

Passive income:

If you receive income from a private entity in which you are a passive owner and not an active manager or employee, then that passive income should NOT be entered below. Instead, if that income is taxed at ordinary income tax rates, then you should enter that income on the Income worksheet as part of the "royalties, partnerships, S Corporations, and trusts" other income category. Other income that might be derived from your active labor, such as income from rental real estate, should instead also be entered on the Income worksheet.

Notes about your tax-deductible contributions to employer-sponsored tax-advantaged retirement plans during the past year

Enter only the amount of your personal contributions that reduced your reportable income that was subject to current income taxes. If you made any contributions that did not reduce your taxable income, then DO NOT include those contributions in this section. If your employer made any contributions to your account (matching or otherwise), DO NOT include those contributions in this section.

Use the average for the last two or three years, if you also used this averaging method to determine your annual wage, salary, bonus, and business income above on this worksheet.

This information will be added to the taxable income you reported in this section. When combined, your taxable employee earnings, taxable self-employment earnings, and this tax-deductible contributions information will establish your total baseline gross earned income prior to these employment-related tax deferrals, which reduced your current taxable earned income.

Such employer tax-advantaged deferral plans would include: 401(k) plans, 403(b) plans, the Thrift Savings Plan for federal employees, SARSEP employee plans, SIMPLE employee plans, 501(c)(18)(D) plans, Section 457 plans, other qualified and non-qualified deferred compensation plans, tax deferred executive compensation programs, etc.

* DO NOT include any withdrawals, loans, or rollovers related to any of these various plans.

* DO NOT include any contributions made to the new "Designated Roth 401(k), Roth 403(b), or Roth 457 employer plans, since Roth contributions are taxed in the current year, and therefore they are measured the taxable income amounts your reported above in Section 2.

* DO NOT include any personal contributions into traditional IRAs and/or Roth IRAs, which would have been made from your own IRA accounts in the past year. Note that future personal deposits into A) traditional tax-advantaged employer retirement plans, B) Roth employer retirement plans, C) traditional personal IRAs, and Roth personal IRAs will be projected for your automatically by VeriPlan, according to the methods described on the Tax-Advantaged Plans worksheet.

How to find your annual income information

For most people the easiest way to find your most recent annual taxable income is to refer to your IRS 1040 return and to employer and self-employment income reports such as W-2, Schedule C, and K-1 forms. Therefore, you can look on your federal income tax returns to find this information and make entries into VeriPlan.

Because IRS Form 1040 lines combine income from multiple earners and/or multiple employers, the most reliable way to understand each earner's gross taxable annual income and any reductions in reportable income due to contributions to employer retirement plans is to look at annual W-2 statements from employers. Annual W2's from employers include both taxable income and employee contributions to retirement plans that reduce taxable income.

For married couples, each of the two Earner/Users earners could have employment income (wages, salary, bonuses, etc.) and/or working business owner income. Working business owner income would be considered self-employment income by the U.S. Internal Revenue Service and could be earned through a variety of ordinary income tax pass-through entities, such as sole-proprietorships, partnerships, some LLCs/LLPs, S Corporations, etc.

Use either your federal income tax return data from the most recent year or for an average of the last two or three years, whichever you believe is most representative of your current "steady state" annual income. If your sources of wage and salary income and/or your working business owner income has fluctuated significantly, use an average for several years rather than just the most recent year.

VeriPlan will project that each earner's wage and salary income and actively-managed / self-employed business income listed on this worksheet will continue, until retirement and then will cease. Either earner can set his or her planned retirement age, using the retirement worksheet. VeriPlan manages retirement age differences automatically. If there are two earners, the retirement worksheet also allows a selection of simultaneous retirement or for each earner to retire in different years, when he or she reaches planned retirement age.

The table below on this worksheet allows you to make annual positive and negative adjustments to the projected pre-retirement income of either earner. You may want to make such adjustments to reflect planned events, such as, unpaid sabbaticals, large non-recurring bonuses, working part-time, returning to school, and other situations.

Furthermore, you can use this annual earned income adjustment facility to test the impact of unplanned events on your lifecycle financial plan. Such an unplanned event could be involuntary unemployment at any point for either earner. For example, you could test the lifecycle impact of one earner losing employment involuntarily several years prior to planned retirement age.

If you have other income sources that also would be taxed at ordinary income tax rates, but which are 1) not wage and salary income, 2) do not result from your active management of a business, and/or 3) will not cease upon you retirement, then DO NOT enter those income sources on this worksheet. Instead, VeriPlan offers several other worksheets for you to enter your other income sources:

A) Enter pensions and annuities on the retirement worksheet

B) Enter retirement income from the U.S. Social Security Administration on the retirement worksheet

You also do not need to be concerned about income from or yields on the various financial investment assets that you will list on the financial assets worksheet. VeriPlan will automatically project net returns, reinvest/withdraw, and tax your asset returns, as appropriate, throughout your full lifecycle projections. Various other VeriPlan worksheets and tools explain how VeriPlan does this. No asset related income should be entered on this worksheet.

How this information is used to develop your projections

VeriPlan removes the current tax effects of your current participation in tax-advantaged employer-sponsored plans, because your participation level and resulting income tax reduction during the past year may not be indicative of what you plan to do up until you retire. Once VeriPlan establishes your projected gross family earned income baseline without any current tax reduction benefits from tax-advantaged plans, this baseline earned income can be used to model and project automatically various levels of future participation in tax-deductible employer-sponsored retirement plans that you might chose.

VeriPlan's tax-advantaged accounts worksheet allows you to control your projected tax-deductible participation in tax-advantaged employer-sponsored plans, across your projected working lifetimes, including:

A) modeling the effects of higher and lower participation in such programs relative to your projected net cash flow in future years,

B) controlling and projection your level of contributions into traditional 'tax-deferred' versus Roth 'tax-now-but-not-later' plans, and

C) testing the impacts of a variety of tax-deferral strategies on your lifecycle wealth.

You may notice on your income, savings, and tax projection graphics and data tables that the numbers for the initial projection year will be lower, similar to, or higher compared to subsequent years. These initial differences may display as either slopes or spikes at the beginnings of your income, savings, and tax projection graphics. When your projection settings for your future participation in employer tax-advantaged programs differs from the information that you enter into this section of this worksheet, these differences may cause variations in the first year of your graphics.

VeriPlan automatically takes into account a myriad of factors affecting your contributions, including legal limits, earnings sufficiency, tax deductibility, and whether you have positive cash flow and/or available taxable asset account funds to transfer into your tax-advantaged accounts to pay for your contributions. These factors can also cause future dips or spikes in your projection graphics.

VeriPlan provides very flexible lifetime income planning features

Section 6.3: Changing projected real earned income growth rates (optional)

In this section, enter your expected future real dollar earned income growth rates for Earners 1 and 2. Your earned income may or may not increase in future years relative to inflation. This section allows each user to project separately a real growth rate for their future income through age 65. For each user, VeriPlan will apply your estimated growth rate to your projected combined wage and salary income and actively managed business income.

Remember that you should enter negative or positive percentage adjustments that will change your income growth rates **RELATIVE TO FUTURE CONSUMER PRICE INFLATION**. Take care to limit any negative or positive annual adjustments, because even very small negative or positive growth rate adjustments can have a very substantial effect on your projected income when compounded over many years or decades.

Type a number with the % sign, and verify that your percentage entry is what you intend.

(This will probably be a number between -2% and 2%.) *

Type a number with the % sign, and verify that your percentage entry is what you intend.

(This will probably be a number between -2% and 2%.) *

Do not over-estimate the real wage or salary growth of either earner.

If you are already successful, that success should already be reflected in current compensation. For most people real wages tend to grow little more than inflation, unless the earner obtains significant greater education, is promoted, and/or otherwise takes on greater authority in an organization.

Here are some guidelines to follow, if you agree with them:

* If either earner is fully established in his or her career and does not expect significant further advancement prior to retirement, then enter 0% to .5% (1/2 of one percent) real income growth.

* If an earner is early in their working career and expects some rise in real compensation due to increased expertise and seniority, but not any promotion or greater scope of authority or supervision, then enter .5% (1/2 of one percent) to 1%.

* If the earner expects at least one significant promotion during his or her career within the next ten years, enter 1% (one percent).

* If a younger earner expects to be promoted by two significant levels of authority within 15 years, enter 1.5% (one point five percent).

* If a younger earner expects to become a very successful professional or executive, then enter 2% (two percent).

* If you expect a decline in real wages, then a negative percentage, e.g. -.5% (negative 1/2 of one percent) can be entered. Particularly in the past decade, a large percentage of the working population has experienced an erosion in real wages. If your rate of income growth has not kept pace with the rate of inflation, then you should decide whether or not this is likely to continue. If you expect that it will, then enter an appropriate negative percentage relative to inflation.

Section 6.4: Year-by-year adjustments to your projected earned income (optional)

VeriPlan users may anticipate that they will begin to receive additional salary or working business owner income at some point in the future or that their income received might increase or decrease substantially. This section allows you to make positive and negative adjustments to your projected salary and working business owner income. This section also allows you to change projected rates of real income growth relative to inflation on a yearly basis.

The input table in this section allows you to enter year-by-year positive and negative earned income adjustments, including different annual real dollar growth rates.

The table below allows you to make annual positive and negative adjustments to the projected pre-retirement income of either earner. You may want to make such adjustments to reflect planned events, such as, unpaid sabbaticals, large non-recurring bonuses, working part-time, returning to school, and other situations.

Furthermore, you can use this annual earned income adjustment facility to test the impact of unplanned events on your lifecycle financial plan. Such an unplanned event could be involuntary unemployment at any point for either earner. For example, you could test the lifecycle impact of one or both earners losing employment involuntarily several years prior to the planned retirement age.

See the section below the table for two examples about how to use positive and negative entries in the table below to model part-time work before and after retirement.

How to enter your income adjustments into the table

In the table below, two bold border user data entry columns are provided for Earner #1:

>>> A <<< Your Positive and Negative Adjustments to Other Income IN CURRENT DOLLARS

>>> B <<< Relative growth for Column A (annual % change above or below inflation)

Two similar columns, which operate the same, are provided for Earner #2:

>>> D <<< Your Positive and Negative Adjustments to Other Income IN CURRENT DOLLARS

>>> E <<< Relative growth for Column A (annual % change above or below inflation)

In Column A (or D), you could enter positive or negative dollar amounts for each year. VeriPlan projects each of your annual dollar entries independently of your entries in other years. If you do not wish to make an entry for a particular year, then the dollar amount should be zero. See Section 3 below for examples about how and why to use these annual income entries.

In Column B (or E), you can enter your expected real dollar rate of growth or decline (above or below inflation) for this source of other income. In Column A (or D), simply enter your current dollar estimates for any year into future that you want to model. VeriPlan will automatically use any differential inflationary growth rate that you have entered into Column B (or E) to adjust and project this real dollar income, however far into the future it may be. If there is no dollar entry in Column A (or D), then any relative real dollar growth rate in column B (or E) will be ignored.

This data entry chart is set up to support users of any age between 18 and 100. While you could make entries into Columns A, B, C, or D for ages when Earner #1 would be over 100 years of age, VeriPlan will ignore these entries. Your entries will be ignored, when the light beige rows indicate "Over Age 100"

Negative annual income adjustments cannot exceed total annual earned income.

In the table below, you are allowed wide latitude in the positive and negative annual adjustments that you may enter. However, if you enter any negative annual adjustment that exceeds the total projected earned income for an earner for that year, then VeriPlan will automatically limit your adjustment. The result will be zero total earned income for that earner in that year. In that situation, the user data entry box will turn red.

Input table for your earned income adjustments

Only the bold border columns below are user-adjustable. The others are automatically generated.

All projected dollar figures in this table are real dollars, which include your inflationary growth adjustments.

You may "copy-and-paste" to copy a single entry vertically, BUT ONLY between VERTICALLY CONTIGUOUS CELLS of the SAME TYPE WITHIN THE SAME COLUMN.

Be careful! Other copy-and-paste operations that are NOT between VERTICALLY CONTIGUOUS CELLS of the SAME DATA TYPE in the SAME COLUMN COULD HARM YOUR CURRENT WORKING PLAN FILE. Always back up your plan periodically with different file names on your hard disk drive. A corrupted file will be obvious by looking at the output graphics and data tables. If your file becomes corrupted, then roll back to your most recently saved file without the operations that corrupted the file. Hard disk storage is essentially free, so ALWAYS use a changing file naming convention, so that you do not keep overwriting the same file on disk.

[NOTE: FOR SPACE CONSIDERATIONS IN THIS USER MANUAL, THE ACTUAL VERIPLAN TABLE HAS BEEN DIVIDED IN TWO VERTICALLY AND ONLY THE COLUMNS RELATED TO EARNER #1 ARE DISPLAYED. ALSO, MOST OF THE ROWS HAVE BEEN REMOVED.]

When an earner plans to work beyond age 65, he may potentially be subject to significant erosion in his ability to maintain real wage levels. VeriPlan automatically implements real wage decline assumptions for any income earned over age 65. VeriPlan provides user-adjustable wage decline assumptions in five-year age groupings starting with ages 66 to 70. If you want to change these wage erosion assumptions, you can change them on the retirement worksheet.

You should use the bold border data entry columns above to make any adjustment to income that would be taxed at ordinary income tax rates. It would not be appropriate or necessary to enter any capital gains on this table. Any returns on assets which are potentially subject to capital gains taxes should instead be entered on one of the various worksheets related to financial assets and investing.

If you make income adjustments in the table above that add or subtract income in the year just prior to the age when Earner #1 retires, then that income adjustment could affect the retirement expense adjustment on the retirement worksheet. You can make allowances for this situation by changing year-by-year retirement expenses on the retirement worksheet.

Positive and negative income adjustments in the table above are treated as if they are proportional adjustments to both your regular employment income and your actively-managed self-employment income. Therefore, any adjustments that you make will be proportionately taxed regarding FICA, Medicare, and self-employment tax rates that would apply to your combined employment and working business owner income.

Modeling future changes to your salary or actively-managed income sources

The two examples below illustrate how to use adjustments in the table above to model part-time employment either before or after retirement. These examples could apply either to Earner #1 or #2 or to either salary or actively-managed business income. For simplicity, the two examples below will be for the salary income of Earner #1.

Example A: Part-time earned income AFTER retirement

Additional sources of anticipated earned income may not begin until some years into the future. For example, Earner #1 might be 57 years old now, he might plan to work 5 more years, and then he intends to semi-retire at age 62. He might want to set 62 as his projected retirement age in VeriPlan to trigger various events, such as fixing the relative expense level for retirement, beginning to receive Social Security payments, etc. However, he might also want VeriPlan to project that he would still work part-time for one-half of his salary for another 4 years from ages 62 to 65, after having retired at age 62.

This situation can be modeled by making these entries into VeriPlan:

* DO NOT change any of the regular income entries on this worksheet and DO NOT change Earner #1's planned age 62 retirement age on the retirement worksheet. With these settings, VeriPlan will automatically stop projecting income earned income at the end of age 61.

* Enter one-half of Earner #1's CURRENT annual salary income, as a POSITIVE dollar amount in the age 62, 63, 64, and 65 lines of Column B in the yearly table above.

* Look up the relative real income growth rate that was entered for Earner #1's career income growth in Section 3 above. Enter that same growth rate in the age 62, 63, 64, and 65 lines of Column C.

With these entries, VeriPlan will project four more years of half-salary income growing at the same rate of real income growth.

Example B: Part-time earned income PRIOR TO retirement

This second example will use the same assumptions as the example above, except that Earner #1 has decided to change his retirement age from 62 to age 66. He wants to retire at age 66 to set retirement expense levels at a later age and to delay accepting Social Security payments. Doing so would qualify him for higher Social Security payments, and he would avoid paying higher taxes on both his part-time earned income and his Social security income between ages 62 and 65. As in the example above, he would still plan to work full-time for 5 years through the end of age 61 and then plan to be semi-retired and to work part-time for 4 years from ages 62 to 65 at one-half salary.

For VeriPlan to model and project this situation, do the following:

* Change Earner #1's projected retirement age to 66 on the on the retirement worksheet, but do NOT change the current income on this worksheet.

* (These settings would mean Earner #1 would receive full compensation until retirement at age 66. However, the next two steps will halve this income for the last 4 years.)

* Enter one-half of Earner #1's CURRENT annual salary income, as a NEGATIVE dollar amount in the age 62, 63, 64, and 65 lines of Column B in the yearly table above.

* Look up the relative real income growth rate that was entered for Earner #1's career income growth in Section 3 above. Enter the same growth rate in the age 62, 63, 64, and 65 lines of Column C.

By using a negative income entry for 4 years in Step 2 and the same income growth rate in Step 3, these entries will fully offset one-half of the regular full-time income that VeriPlan will project for ages 62, 63, 64, and 65 in Step 1.

Section 6.5: Other income that is taxed at ordinary income tax rates (optional)

In this section, you can enter your 'other income' sources, which are taxed at ordinary income tax rates. These other income sources would include the categories of income below. Your inputs for these other income sources should be found on your IRS 1040 form and listed as:

Alimony

Other Gains

Rental Real Estate

Royalties, Partnerships, S Corporations, and Trusts

Farm Income

'Other' Income Sources

The other income entries that you make on this worksheet are in addition to any recurring sources of income that are taxed at ordinary income tax rates. Please read the information carefully on this worksheet and in this _VeriPlan User Manual_ to avoid making entries that would duplicate income that you have reported elsewhere in VeriPlan.

Use the first part of this section to enter information about the current other income sources that you expect you will continue to receive for some number of years into the future.

The second part of this section provides a table that allows you to enter year-by-year positive and negative other income adjustments, including different annual real dollar growth rates.

For each of your other income sources, you may enter on this worksheet:

* the dollar amount

* the years from the current year that you expect to receive this type of other income, and

* the expected real percentage growth rate above or below inflation.

For your inspection after you make your inputs, VeriPlan presents summary projections of your other income sources in the adjustments chart that follows below.

In addition to such recurring sources of other income that you might currently receive, VeriPlan also allows you to make both positive and negative other income entries for any projection year. Each of these annual entries can be projected to grow at different positive and negative real dollar growth rates relative to the rate of inflation. This powerful ability to make positive and negative dollar and growth rate entries for each year allows you model and adjust any future other income source that you expect to receive.

Some of your other income sources are derived from assets, which have a measurable fair market value that you can estimate. Assets with a discernible fair market value might include rental real estate properties, assets that pay royalties, partnerships, S Corporations, trusts, and farms. This worksheet can be the appropriate place to enter the income from those assets, if the income is taxed at ordinary income tax rates.

However, the underlying value of the assets from which you may derive this other income should be entered elsewhere in VeriPlan. Usually, you would enter the fair market value of these underlying assets on either the property and debts worksheets. When you enter fair market values for these assets on the property and debts worksheet, you will be asked to project a real rate of appreciation in the value of those assets. When you do so, include only the expected rate of increase to the asset's value or projected sales price. Do not include any of the annual income or yield that you enter on this worksheet. Doing this is similar to separating the total return on common stock into a retained capital gains portion and a paid-out dividend portion.

How to enter other recurring income you are already receiving and expect to receive for some years

If you already receive annually recurring income from other income sources, user the bold border user data entry boxes below to indicate:

A) the dollar amount

B) the years from the current year that you expect to receive this type of other income, and

C) the expected real percentage growth rate above or below inflation.

* If you do not have income in a particular category, leave the dollar amount as a zero.

* Enter 0% (zero%) for any income source that is expected to grow with rate of inflation.

* Note that all dollar figures are real (non-inflationary) or constant purchasing power dollars. Even very small negative or positive growth percentages can compound significantly over the years.

Exclude any payments that are not expected to continue regularly, such as tax refunds or unemployment payments.

* Do NOT include any projected income from asset sources such as "Taxable Interest", "Dividends", or Capital Gains/Losses. VeriPlan automatically calculates growth rates, taxation, tax basis carry-forward, new investments, reallocations, and withdrawals for cash, fixed income, and equity assets.

* Do NOT enter below any expected retirement income. There are separate retirement income entries on the retirement worksheet for income sources such as pensions, annuities, and Social Security.

Other compensation that may have been paid to you in the form salable assets should NOT be included here. Such assets should instead be listed separately on the property and debts worksheet.

Alimony (Form 1040) [Include any other child support or separate maintenance payments]

Other Gains {and (losses)} (Form 1040) {Enter ONLY GAINS that are expected to recur regularly}

Rental real estate, royalties, partnerships, S Corporations, trusts, etc.** (Form 1040)

** Rental real estate, royalties, partnerships, S Corporations, trusts, etc. (Form 1040)

Farm income (Form 1040)

Other income (Form 1040)

How to enter your year-by-year adjustments to your other income sources

In the table below, two bold border user data entry columns are provided:

>>> A <<< Your Positive and Negative Adjustments to Other Income IN CURRENT DOLLARS

>>> B <<< Relative growth for Column A (annual % change above or below inflation)

In Column A, you could enter positive or negative dollar amounts for each year. VeriPlan projects each of your annual dollar entries independently of your entries in other years. If you do not wish to make an entry for a particular year, then the dollar amount should be zero.

In Column B, you can enter your expected real dollar rate of growth or decline (above or below inflation) for this source of other income. In Column A, simply enter your current dollar estimates for any year into future that you want to model. VeriPlan will automatically use any differential inflationary growth rate that you have entered into Column B to adjust and project this real dollar income, however far into the future it may be. If there is no dollar entry in Column A, then any relative real dollar growth rate in column B will be ignored.

This data entry chart is set up to support users of any age between 18 and 100. While you could make entries into Columns A or B for ages when Earner #1 would be over 100 years of age, VeriPlan will ignore these entries. Your entries will be ignored, when the light beige rows indicate "Over Age 100"

Input Table for your Other Income adjustments

Only the two bold border columns A and B below are user-adjustable. The others are automatically generated.

All projected dollar figures in this table are real dollars, which include your inflationary growth adjustments.

You may "copy-and-paste" to copy a single entry vertically, BUT ONLY between VERTICALLY CONTIGUOUS CELLS of the SAME TYPE WITHIN THE SAME COLUMN.

Be careful! Other copy-and-paste operations that are NOT between VERTICALLY CONTIGUOUS CELLS of the SAME DATA TYPE in the SAME COLUMN COULD HARM YOUR CURRENT WORKING PLAN FILE. Always back up your plan periodically with different file names on your hard disk drive. A corrupted file will be obvious by looking at the output graphics and data tables. If your file becomes corrupted, then roll back to your most recently saved file without the operations that corrupted the file. Hard disk storage is essentially free, so ALWAYS use a changing file naming convention, so that you do not keep overwriting the same file on disk.

[NOTE: FOR SPACE CONSIDERATIONS IN THIS USER MANUAL, COLUMNS FOR THE FIVE TYPES OF OTHER INCOME THAT ARE IN THE ACTUAL VERIPLAN TABLE HAVE BEEN REMOVED. ALSO, MOST OF THE ROWS HAVE BEEN REMOVED, AS WELL.]

NOTE: Rows 11 to the end of the table have not been included in this User Manual.

An example of making year-by-year changes to your projected "other" income sources

This section provides a detailed example of how to use the other income adjustments table in the section above.

VeriPlan users may already receive income from other income sources and may expect that this income would continue steadily for a period of years. These users can simply make positive dollar entries above, and VeriPlan will project that this other income will continue for a certain number of years and will grow at a fixed rate relative to inflation.

However, other users may anticipate that they will begin to receive certain other income sources at some point in the future or that the amount of income received may increase or decrease substantially. This year-by-year other income worksheet also allows you to model other income that you have not yet begun to receive, and you can use the techniques described here to reduce or increase future payments from your other income sources. You can also use combinations of the recurring and ad hoc entries to achieve your modeling objectives.

Example: Future expected changes to passive limited partnership income.

In this example, you receive $20,000 per year currently in passive limited partnership income that you normally enter on IRS Form 1040. Therefore, it is appropriate to enter this income above on this "other" income worksheet. However, you expect that you will continue to receive this $20,000 in passive partnership income for 15 more years, after which it will increase to $50,000 per year for year 16 and then drop by $10,000 per year until this income source terminates at the end of 20 years.

You can model this example in VeriPlan using the following entries:

Enter $20,000 per year as a POSITIVE dollar amount on the Rental real estate, royalties, partnerships, S Corporations, trusts, etc. line above. Enter 20 years as the period to receive this income. Enter any appropriate real dollar growth adjustment that may be necessary. For your future reference, write a note about your entries in the bold border notes box provided.

Using Column B, make the following current dollar adjustment entries:

* add $30,000 in year 16

* add $20,000 in year 17

* add $10,000 in year 18

* make no adjustment in year 19

* subtract $10,000 in year 20

For each of these years, enter into Column B the same real dollar inflation adjustment that you used above in step 1. For your future reference, write a note about your entries in the bold border notes box provided below the table.

Alternatively, you could have made entries for twenty years into Columns A and B. The recurring user data entries by the five types of other income simply help to automate data entry for current income sources that you expect to recur for years.

Section 6.6: Tax considerations related to "other" income

The tax discussion below is general and high level, and it is intended to inform you about how VeriPlan projects taxes, when you use the techniques described on this worksheet. You should evaluate your personal income projection needs and decide the most appropriate way to model any of your delayed, reduced, or increased future "other" income, given any special tax situations that you may have.

VeriPlan treats the five "other income" categories in the table above in a similar manner. Any income entered across these five categories will be combined as cash flows, will contribute to your ordinary income, and will be taxed at your then-current federal, state, and local ordinary income tax rates.

Therefore, it would not be appropriate to use these techniques to model situations that involve long-term capital gains taxation. In such situations, you instead should focus on developing appropriate estimates of the current fair market value of your property and other assets on the asset related worksheets.

VeriPlan will project the net capital asset value of your property and other assets according to your assumptions on the property and debts worksheet. Projected values for your assets on the property and debts worksheet will be gross with respect to taxation.

However, some of your property on the property and debts worksheet may produce ongoing rental, royalty, partnership, or other income that is taxable to you at ordinary income tax rates. This worksheet would be the appropriate place in VeriPlan to enter such other income, if it is taxed at ordinary income tax rates and it is not actively-managed earned income. If you would report this income on the lines of the IRS 1040 form that VeriPlan lists above, then this worksheet is the appropriate place to model them in VeriPlan. Such income is usually considered "passive" from a tax standpoint. If you want to project that some of this passive income would be delayed or reduced, then the techniques described here can be applied. (Again, check the tax laws. If you have these types of other income, you probably already know that the tax rules can be nightmarishly complex.)

In other circumstances, you may receive income from your property and your other capital assets that is considered actively-managed income. The tax treatment can be different for such income sources. For example, if you receive actively-managed income, as an owner of a partnership or sole proprietorship business, then such income may flow through from that entity into your Form 1040 and be taxed to you as ordinary income. However, when you receive active business income, that income should not be entered on the table immediately above, but instead should be entered into VeriPlan on the near the top of this worksheet, as actively-managed business income and would directly affect some other aspects of VeriPlan, such as the level of your living expenses in retirement.

Lifetime planning projections that reflect your tax situation

http://www.myfinancialfreedomplan.com

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### Chapter 7: Expenses worksheet

Section 7.1: Your total current annual ordinary living expenses (required)

Section 7.2: Expected growth of ordinary living expenses before retirement (required)

Section 7.3: Your major planned expenses and year-by-year expense adjustments (optional)

Section 7.4: Children's Education Expenditure Planning

Section 7.5: Mid-Career Education Planning

Section 7.6: 24-month expense tracking, budgeting, and variance worksheets (optional)

Section 7.7: 2 Year Monthly Expense Tracking Worksheet

Section 7.8: 2 Year Monthly Expense Budgeting Worksheet

Section 7.9: 2 Year Monthly Budget Variances Worksheet
Introduction

Enter information about your expected expenses on this worksheet. VeriPlan enables you to provide inputs about your expected ordinary and major planned future expenses and to indicate expected growth rates relative to normal consumer price inflation. This tool also allows you to make ad hoc expense adjustments for any projection year.

Most people who decide to do lifetime financial planning usually have already adopted one of the many available manual and automated budgeting methods to track their near-term living expenses. Therefore, VeriPlan does not require you to adopt yet another expense tracking and budgeting mechanism. Instead, you can use the output of whatever expense and budget tracking method that you already use -- with a few easy adjustments that are explained below and in more detail in the VeriPlan User Manual -- to supply your current total annual ordinary living expenses. VeriPlan needs this expense information to develop a living expense baseline for your lifecycle projections.

However, if you do not currently use another expense and budget tracking method, a section at the bottom of this expense worksheet provides 24 month expense, budget, and budget variance spreadsheets for your convenience. You will find six expense, budget, and variance worksheets. Vertically, there are three worksheets: Actual Expenses, Expense Budget, and Budget Variance. Horizontally, each of these three worksheets is duplicated so that you can track expenses for two years. This also means that you can start tracking expenses in a particular month of one year and continue into the next year.

These 24-month expense, budget, and budget variance worksheets are NOT connected automatically to the rest of VeriPlan's functionality. They are provided for your convenience in doing near-term family expense tracking, budgeting and expense variance analysis. You can also use these sheets to develop an accurate estimate of your annual ordinary living expenses for your VeriPlan projections, which you will need to enter on this worksheet.

Anyone interested in improving their financial planning must understand that tracking expenses accurately and comprehensively is very important. Exactly how your expenses are tracked is not so important, as long as the results are relatively accurate. Greater savings through better expenditure control and/or increased income are not abstractions. VeriPlan can help you understand the sustainable projected expenditure levels that still would allow you to achieve your lifecycle financial goals. Whether you will achieve your expenditure and savings goals depends upon your commitment to stay within your budget and upon your accurate measurement of your income, expenditures, and savings.

After you have input your personal financial data and experimented with VeriPlan, it should become clear that relatively very small percentage changes in financial behaviors that are sustained over many years can have a very significant cumulative impact on lifecycle finances. Increased savings through conscious expenditure reductions is the single largest and most controllable factor in the long-term financial success of most households.

Along with efforts to increase earned income, the savings factor largely determines lifelong financial success or failure by steadily and more substantially feeding a rational investment program. Cleverness in the selection of particular investments is a far, far less reliable, less important, and most often negative factor in long-run personal financial success. In addition and similar to personal expense control, limiting investment expenses and taxes are the other more important and more controllable success factors available to individual investors.

Section 7.1: Your total current annual ordinary living expenses

In this section, enter as accurate an estimate as you have of your total current annual ordinary living expenses. If your expenses have fluctuated significantly in the past few years, enter the dollar average that you believe represents your sustained current expenditures. At any time, you can always alter this figure upward or downward, VeriPlan will instantly develop a new projection for you. This 'what if' expenditure testing can help you to understand better the impact that sustaining your expenditure level would have on your lifecycle financial welfare.

For guidance on how to estimate your annual ordinary living expenses, see the section of this _VeriPlan User Guide_ entitled: What are my family's "annual ordinary living expenses?"

What are my family's "annual ordinary living expenses?"

Tracking expenses and budgeting can be time-consuming. Since expense tracking and budgeting takes time and is continuous, many people do not budget for or track their expenditures. Fortunately, current and on-going expense control is one of the most powerful levers that people have, when they want to ensure the long-term financial welfare of their family. Unfortunately, failing to measure and to understand how much you actually do spend versus your income and your savings goals may be one of the most substantial risk factors in a long-term family financial plan.

There are different ways to get a reasonably accurate understanding of your living expenses. For your convenience, VeriPlan provides flexible monthly expense tracking, budgeting, and budget variance worksheets that you might find useful. You can find these monthly expense spreadsheets on the Expenses worksheet.

To illustrate the types of expenses that should be included in your "total current ordinary living expenses," these are the standard ordinary living expense categories provided by the 24 month expense tracking and budgeting worksheet below.

Automobile (including Gas, Insurance, Maintenance, Purchase, & Payments)

Clothing

Communications (including Cable/Satellite, Internet, & Phone)

Donations & Charity

Education

Entertainment

Exercise & Fitness

Food (including Eating Out & Groceries)

Gifts

Hobbies

Home (Rent but NOT Mortgage and NOT real estate taxes -- see why below)

Household Expenses (Cleaning, Furnishings, Gardening, & Insurance)

Life Insurance

Medical (including Copays, Doctors, Drugs, & Health Insurance)

Miscellaneous

Personal Care

Pets

Subscriptions & Books

Utilities (including Electric, Gas, Sewer, Trash, & Water)

Vacations & Travel

You can use the expense tracking worksheet below to develop an estimate of your annual ordinary living expenses, which you would then type that dollar amount into the bold border data entry box below in this section of this worksheet. Please refer to the Monthly Budgeting Tool on the Expenses worksheet for a list of the many types of expenses that would constitute a full accounting of your annual ordinary living expenses. Also, please read the caveats below about what expenses not to include in your total annual ordinary living expenses. Since taxes, debts, investment expenses, and projected net annual savings are automatically projected by VeriPlan, you should not duplicate those costs in your annual expense estimate.

In addition to the expense tracking mechanisms provided by VeriPlan, there are other approaches that may work for certain people. Please refer to this article on the _Pasadena Financial Planner_ website for ideas about different ways to measure living expenses:

 Find Living Expense Tracking Methods article on The Pasadena Financial Planner website

Enter below your current TOTAL CURRENT ANNUAL ORDINARY LIVING EXPENSES:

However, because VeriPlan automatically projects these expenses separately:

1) DO NOT include any taxes (except DO include sales taxes, which are part of your expenditure receipts anyway)

Throughout your lifecycle projections, VeriPlan projects your federal, state, and local income taxes including your tax exemptions, deductions, and adjustments. It automatically projects your taxes for FICA/Social Security, Medicare, self-employment, real estate, and other taxes. Also, it automatically manages taxes related to assets and asset basis, including differentiating between contributions, distributions, and withdrawals related to taxable, tax-deferred, and Roth 'never- taxed' asset accounts.

2) DO NOT include any debt payments, including mortgage payments

VeriPlan automatically manages the payoff of all your current investment-oriented and consumption- oriented debts, and therefore you do not have to include debt payments in your expenses. Effectively, VeriPlan also automatically manages any future situations, when you might need to acquire additional debt, by projecting cumulative negative asset positions in your financial assets, when needed.

3) DO NOT include any investment-related costs, fees, or taxes

VeriPlan automatically projects investment costs, fees, and taxes according to the cost entries for your portfolio, which you provide on the financial assets worksheet. It also gives you full control over projecting costs that you consider to be reasonable. Concerning asset taxes, as mentioned above, all asset taxes are managed automatically by VeriPlan, as well.

4) DO NOT include any savings for future planned expenditures

VeriPlan automatically manages new investments, reinvestments, and withdrawals related to your assets, when cash flow or net annual income after expenses, debt, and tax payments is either positive or negative.

5) DO NOT include any current expenditures that you intend to enter below as a "major planned expense"

In addition to this automated ordinary living expense projection method, below you can project non-recurring major planned expenses and to make positive and negative adjustments to your projected ordinary expenses. Focus here on an accurate estimate of your current annual ordinary living expenses.

6) DO INCLUDE RENT, if you pay rent now AND you intend to continue to rent throughout your projection

If you rent and intend to buy a home soon, DO NOT INCLUDE YOUR CURRENT RENT HERE. Instead, use the property and debt worksheet to project this home purchase. Then, enter rent from now until the purchase as an adjustment in the year-by-year expense adjustments table below. (An example of this situation is provided in the property and debts chapter.)

INCLUDE ALL OF YOUR OTHER CURRENT ANNUAL ORDINARY LIVING EXPENSES

Section 7.2: Expected growth of ordinary living expenses before retirement

In this section, enter your expected annual growth rate for consumption expenses, during your working years.

Throughout every aspect of its financial lifecycle projections, VeriPlan measures all current and future dollar amounts in real or constant purchasing power dollars with inflation removed. However, you might expect that your current total annual ordinary living expenses will decline or increase at a rate, which is lower or greater in real dollar terms, than the general rate of consumer price inflation.

If you have such an expectation, VeriPlan can project that your ordinary expenses will grow during your working years, at some different real dollar growth rate. You can set your relative real dollar growth rate in the bold border user data entry box below in this section. If you do not make a relative growth rate adjustment, then VeriPlan will project that your real dollar ordinary living expenditures would grow with the rate of inflation until Earner #1 reaches retirement age.

VeriPlan will apply the real dollar ordinary expense growth adjustment that your make in this section up until the year that Earner #1 retires. After retirement, you may select a different total ordinary living expenses level and choose a different real dollar growth for ordinary living expenses in retirement. You can adjust your total initial retirement living expenses and your real dollar retirement living expense growth rate on the retirement worksheet.

On the retirement worksheet, you can set whatever planned retirement age that you would like to have for Earners #1 and #2. On that worksheet, you can also fix an adjusted level for your ordinary living expenses during retirement that is relative to your ordinary living expenses in your last working year prior to retirement. Using a similar method as this tool, the retirement worksheet also allows you to change the real dollar growth rate of your projected annual expense budget during retirement.

In table in the following section, and more specifically in its fourth column entitled "Your PRE-ADJUSTMENT projected ordinary living expenses with retirement limits," you can review the year-by-year projections that result from these various settings. If for some reason, you wish to change your expense projections for any year, you can do so with the bold border user adjustments columns of this table.

If you expect your expenses to grow at the rate of inflation, then enter 0%.

NOTE THAT YOU SHOULD NOT UNDER- OR OVER-ESTIMATE EXPENSE GROWTH IN REAL TERMS.

If you use any adjustment, it probably would be within the -1% to +2% per year range for the typical person.

Real expense growth during normal working years tends to depend upon where persons or families are in their income lifecycles and upon the real growth rates of their earned income. Before setting your real expense growth adjustment above for your normal working years, consider the assumptions that you have set for you real earned income growth rates on the income worksheet. In particular, if you project that your relative expense growth rate up until retirement age for Earner #1 would exceed your relative earned income growth rate, then over time your personal savings rate will narrow and possibly turn negative. The result for most people would be an increasing inability to build up financial assets and possibly a steady fall into debt.

Most people intent upon building assets for eventual retirement would assume that their real expense growth rate will be equal to or less than the real growth in their employment and actively-managed business income. This is a reasonable long-range planning assumption, but it must also be realized over time through expenditure monitoring and control.

While they could control real dollar expense growth to a great extent, most people seem inevitably to experience real dollar expense growth, when they can "afford it". This is where deciding between your true current financial needs and the myriad of your many possible "wants" can be a key determinant of how much your expenses might grow over time in dollar terms. VeriPlan might help you to understand the broader lifecycle meaning of being able to "afford it." When certain optional purchases are evaluated solely in terms of current satisfaction of desires, these expenditures may seem highly affordable. However, when evaluated in the context of your financial lifecycle planning and your longer-term family goals, such expenditures may be far less affordable.

Younger persons will often assume higher expense growth rates than more mature persons, because they may face proportionately higher needed expenses in the future that are truly "needed." Such necessary expenses might relate to establishing a household, raising and educating children, etc. For younger persons, these expenditures are more ahead than behind them in a typical financial lifecycle, compared to more mature and established persons. At the same time, younger persons might also have more greater justification than older persons have in assuming that their real income could increase in excess of the rate of inflation.

Finally, it is possible, but relatively more difficult, for most people to grow their living expenses slower than the rate of inflation. To do so requires a very firm determination not just to constrain expense growth, but actually to cut back and not to rely upon growth in real earned income to supply an increasing margin of savings. With no real growth in real dollar income, growing expenses slower than the rate of inflation inevitably requires consuming fewer "units" of goods and services, because average changes in the unit prices of what you currently consume will tend to match the rate of inflation for consumer goods and services.

Section 7.3: Your major planned expenses and year-by-year expense adjustments

The table in this section allows you to enter major planned expenses and to make positive and negative annual expense adjustments. Each annual entry can have a different real dollar growth rate.

Certain major future expenses can be anticipated and projected, such as the purchase of an automobile every so many years, private school/college tuition for children, adding a pool, a cruise around the world, etc. For other expenses, you might not be able to plan as precisely, but you might want to run a 'what if' analysis. Examples might be: paying for a large condominium upgrade assessment, settling a pending and uninsured lawsuit, the cost of several years of nursing home care beginning at age 90, etc. The VeriPlan table below will allow you to add and evaluate numerous such major planned and unplanned expenses to your lifecycle projections.

<<< Using this input table for your major planned expenses and expense adjustments >>>

Only the bold border columns below are user-adjustable. The other columns are automatically generated and permit you to inspect the impact of any dollar amounts and relative inflationary growth differentials that you enter.

* Enter your dollar expenses as POSITIVE numbers into the table below. Any expense adjustment intended to INCREASE expenses should be entered as a POSITIVE number. Only if you want to enter a dollar adjustment, which is intended to REDUCE your other expenses, would you enter a NEGATIVE dollar figure.

* To enter these anticipated major expenses and expense adjustments, you first need to determine the number of years from now until these expenses are expected to occur. For your convenience in selecting which year to use, the table also provides the corresponding ages for Earner #1 starting with his or her current age adjacent to the first projection year.

* Enter all dollar figures in CURRENT value terms. VeriPlan will automatically adjust your current dollar entries when you enter a relative inflationary growth rate for any point in the future.

For those major planned expenses that are expected to grow at a rate below or above the consumer price index, estimate only the EXPECTED AVERAGE ANNUAL DIFFERENCE IN PRICE GROWTH BELOW OR ABOVE a 3% expected Consumer Price Index inflation rate. Because VeriPlan uses real or constant purchasing power dollars in its all of projections, only the difference compared to inflation rather than the total inflation rate itself should be entered.

Enter relative annual percentage growth rate adjustments to inflation, as follows:

* Enter relative percentage increases as POSITIVE PERCENTAGES.

* Enter relative percentage decreases as NEGATIVE PERCENTAGES.

All projected dollar figures in this table are real dollars, after your relative inflationary growth adjustments.

Overall expenses cannot be less than zero in any year. Therefore, overall negative expense reductions on this input table are automatically limited to lowering the sum of your ordinary living expenses, major planned expenses, and expense adjustments to zero. When you attempt to use negative adjustments that are overly large, you will see that the negative total in the last column will not equal the total of your negative adjustments, but will instead equal "Your PRE-ADJUSTMENT projected ordinary living expenses with retirement limits" in the fourth column.

You may "copy-and-paste" to copy a single entry vertically, BUT ONLY between VERTICALLY CONTIGUOUS CELLS of the SAME TYPE WITHIN THE SAME COLUMN.

Be careful! Other copy-and-paste operations that are NOT between VERTICALLY CONTIGUOUS CELLS of the SAME DATA TYPE in the SAME COLUMN COULD HARM YOUR CURRENT WORKING PLAN FILE. Always back up your plan periodically with different file names on your hard disk drive. A corrupted file will be obvious by looking at the output graphics and data tables. If your file becomes corrupted, then roll back to your most recently saved file without the operations that corrupted the file. Hard disk storage is essentially free, so ALWAYS use a changing file naming convention, so that you do not keep overwriting the same file on disk.

NOTE: Rows 11 to the end of the table have not been included in this User Manual.

(The table below shows the other columns that are to the right of the columns shown in the table above.)

Flexible expense planning and budgeting features

### Section 7.4: Children's Education Expenditure Planning

The input table in the section above can be used as a children's education expenditure planning tool. This section provides a detailed example of how to make projected college expense entries for two children, who currently are young.

This section provides an example of how to use the expenditure input table above as a college expense planning tool. In addition, this example also illustrates how to use adjustments in the table above to reflect expected scholarships and other financial aid. In this situation, we will assume that other financial aid will consist of student loans that your children will have the obligation to repay as adults. Therefore, these student loans will reduce your net lifecycle expenses. (Note: This tool can be used in a similar fashion for elementary and secondary private school costs.)

For this example, we will assume that:

* The current cost of sending a child to a college is $30,000 per year for four years.

* You have two children whose current ages are 4 and 6.

* Your children will enter college beginning at age 18.

* Therefore, your first child will enter college in year 12 of the input table above. Age 18 - age 6 = year 12. The second child will enter in year 14. Age 18 - age 4 = year 14.

You would make the following current dollar entries into the bold border user data entry column for major expenses in the table above:

30,000 at year 12 (1 child in college)

$30,000 at year 13 (1 child in college)

$60,000 at year 14 (2 children in college)

$60,000 at year 15 (2 children in college)

$30,000 at year 16 (1 child in college)

$30,000 at year 17 (1 child in college)

Next, you might set a relative growth adjustment for these expenses in the adjacent bold border user data entry column. This inflation differential adjustment factor is particularly useful for college education costs, which have tended to exceed normal inflation. However, you should probably not be overly aggressive in your inflation adjustment. Excess growth trends tend not to be sustained over very long periods. An excess inflation adjustment of 1.0% to 4.0% is probably most appropriate for college costs, using the higher end of the range for nearer term expenses and moving toward the lower end of the range for costs in the more distant future. If you experiment with these percentages, you will see that seemingly small changes in real growth percentages can have a large real dollar impact.

For purposes of this example, assume that you will use +2% as your relative inflation adjustment factor. You should enter this percentage adjacent to each of the dollar figures that you enter in the table above. You could, of course experiment with this percentage and it does not have to be the same for each year.

In addition, it has become clear that your six-year-old is quite precocious, and you are optimistic about her chances of obtaining some financial aid. You decide to plan that she will win scholarships for 1/3 of her college expenses or $10,000 per year. You also expect her to take out loans for another 1/3 of her expenses, and you will pay the $10,000 annual balance yourself. Since he is younger, you are less certain about the prospects for your son, so you are going to assume only that he will take on $10,000 per year in loans, and you will pay the $20,000 annual balance. You decide that you will monitor the situation over the years and in the future you might revise your assumptions in VeriPlan, if his prospects for scholarship seem to improve.

In the bold border dollar adjustments column in the table above, you would make the following negative dollar entries to reflect the scholarships and loans that you expect your daughter and son to win and assume:

* ($20,000) at year 12 (1 child in college) (Daughter: $10,000 scholarship; $10,000 loan)

* ($20,000) at year 13 (1 child in college) (Daughter: $10,000 scholarship; $10,000 loan)

* ($30,000) at year 14 (2 children in college) (Daughter: $10,000 scholarship; $10,000 loan) (Son: $10,000 loan)

* ($30,000) at year 15 (2 children in college) (Daughter: $10,000 scholarship; $10,000 loan) (Son: $10,000 loan)

* ($10,000) at year 16 (1 child in college) (Son: $10,000 loan)

* ($10,000) at year 17 (1 child in college) (Son: $10,000 loan)

However, you are worried that scholarships and loans will be an increasingly competitive challenge to obtain, because of continually rising college costs. Therefore, instead of projecting that the availability of scholarships and loans will keep pace with the 2% real growth rate that you assumed for college costs, you instead assume that they will in fact decline by -1% annually in real dollar growth terms. Therefore, next to each of these negative dollar adjustments above, you will also put in an negative 1% growth rate for these adjustments. In effect, you will plan to make up the difference financially.

Once you have made these entries, you can evaluate VeriPlan's graphics and data tables to assess the impact of this plan to fund your children's college expenses across you entire lifecycle financial plan. Obviously, you can make any adjustments that you would like to any variable in VeriPlan, as you conduct instant 'what-if' planning to develop a workable lifecycle plan that includes paying your portion of your children's college expenses.

Section 7.5: Mid-Career Education Planning

Adults sometimes need to evaluate the advantages and disadvantages of returning to school in mid-career. The input table above can also be used as a Mid-Career Education Planning Tool. This section provides a detailed example of how to use VeriPlan as a Mid-Career Education Planning Tool to model the financial tradeoffs associated with returning to school for career advancement.

The major expense and expense adjustment table above can also be used to analyze whether it is worth returning to school to improve one's earnings capacity. The following example explains the steps to take to analyze the value of obtaining additional education to further one's career.

Assume that you currently earn $50,000 per year and expect your real income to increase annually throughout your normal working years at .5% greater than the rate of consumer price inflation. You have already made various required and optional entries on VeriPlan's worksheets, and you have developed a lifetime financial plan. Your current plan uses $50,000 as your employment income and .5% as your relative earned income growth rate on the income worksheet. After reviewing your current financial plan, you would like to explore ways to improve you long-term outlook for earned income and asset growth.

Currently, you have a bachelor's degree and a strong work ethic, but those who are managers in your profession all seem to have graduate degrees in a specialty valued by your industry. You are considering whether it is worth going to graduate school to obtain a master's degree requiring a two-year course of study. If it makes sense to do so financially, you intend to enter graduate school in one year after working at your current salary for one more year.

Graduate school tuition currently costs $40,000 per year. You expect that these educational expenses will continue rise at 2.5% above the rate of inflation from now until you complete your studies. While in graduate school, you do not intend to work, so you will not earn any salary. Furthermore, you intend to maintain the same level of ordinary living expenses and the same real ordinary expense growth rate that you already have in your current plan.

When you complete your master's degree, you expect that you will be able to earn $75,000 annually. Furthermore, you also believe that your real income would increase annually throughout your normal working years up to age 65 at a slightly higher 1.0% real growth rate relative to inflation.

Clearly, the potential for both higher annual earnings and a higher real earnings growth rate are appealing, but is it worth the two year income loss and the significant cost of paying tuition while in school?

How to model these factors in VeriPlan so that you could evaluate the alternatives:

Step 1) You need to record baseline information about your current lifecycle plan with $50,000 in income and a .5% real ordinary expense growth rate. Since you have already entered all your information on VeriPlan's various worksheets and have a current plan, all you need to do is consult some asset related projection graphics and their corresponding data worksheets. A simple way to benchmark this comparison would be to refer to the financial assets graphic and corresponding data. Print a copy of the full data worksheet or write down the asset numbers for one or two ages in the future.

Step 2) Enter your new lifecycle earnings projection:

* Change your current annual employment earnings from $50,000 to $75,000 on the income worksheet.

* Change your current real dollar earned income growth rate from .5% to 1.0% on the income worksheet.

Step 3) Offset your projected earnings during the first year, while you continue to work at $50,000 for one more year.

* Enter negative $25,000 into expense adjustments Column D for Year #1.

* Enter a real relative growth rate of 1.0% as a positive number in Column E for Year #1.

* This would reduce your salary by $25,000 growing at 1% in real terms, during the coming year.

(Note: If you want to be a more precise, use an adjustment in Step 3a of negative $25,250 versus negative $25,000. This is one-half the difference between $75,000 growing at 1% in real terms to $75,750 by the end of the year versus $50,000 growing at .5% in real terms to $50,250 at the end of the year. Take the $500 difference and divide by 2 to approximate the average difference throughout the year. This observation is made solely to point out that growth rate differences may require consideration, when you make adjustments -- particularly if the percentage rate of growth differences are significant and many intervening years are involved.)

Step 4) Fully offset your projected earnings, while you are in school during years #2 and #3, and you are not employed:

* Enter negative $75,000 into the expense adjustments Column D for Year #2 and #3.

* Enter a real relative growth rate of 1.0% as a positive percentage number in Column E for Year #2 and #3

* This would reduce your salary by $75,000, down to $0 during Year #2 and #3.

(Note: Because the real growth rates are the same, your adjustment would precisely offset your projected salary for Year #2 and #3.)

Step 5) Enter the cost of graduate school tuition:

* Enter positive $40,000 in the major planned expense Column A for Year #2 and #3.

* Enter a real relative growth rate of 2.5% as a positive percentage number in Column B for Year #2 and #3

Step 6) Evaluate your new lifecycle projection to see whether it might be worth returning to school under these assumptions.

* Evaluate the financial assets output data and compare the projected value of your financial asset portfolio at the same benchmark ages that you had chosen above in Step 1.

Test the uncertainty of your projection, by varying your estimated annual earned income and your estimated real income growth rate. Vary any other projection settings in VeriPlan that you find useful to consider.

If it makes sense to you, send in your graduate school admissions applications and buy a bean-bag chair.

Section 7.6: 24-month expense tracking, budgeting, and variance worksheets (optional)

These worksheets allow you to do 24 month family expense tracking, budgeting, and budget variance monitoring. They are supplemental and are not required to by VeriPlan to develop your lifetime financial planning projections.

How to use the monthly family expense tracking, expense budgeting, and budget variance worksheets below

This worksheet provides these expense tracking and budgeting worksheets for your convenience. Below, you will find six worksheets. Vertically, there are three worksheets: Actual Expenses, Expense Budget, and Budget Variance. Horizontally, each of these three worksheets is duplicated so that you can track expenses for two years. This also means that you can start tracking expenses in a particular month of one year and continue into the next year.

These worksheets are NOT connected automatically to the rest of VeriPlan's functionality. They are provided for your convenience in doing near-term family expense tracking, budgeting and expense variance analysis. You can also use these sheets to develop an accurate estimate of your annual ordinary living expenses for your VeriPlan projections. With either 12 months of complete data or annual extrapolation from fewer months with complete expense data, you can verify the annual ordinary expense total that you have entered into the first section of this expense worksheet. As the note below the "Actual Expenses" chart indicates, mortgage expenses and real estate taxes, should be removed when calculating annual living expenses for this expense worksheet. (VeriPlan tracks mortgage payments and real estate taxes separately and automatically.) If you have a complete year of expense data, the mortgage expense and real estate tax removal is done for you below. If you use fewer months to extrapolate, remember to subtract mortgage payments and real estate taxes from the monthly totals.

You could use only the top Actual Expenses spreadsheet to track your expenses monthly, and you could ignore the Budget and Budget Variance worksheets below.

You can also set an annual budget in the second spreadsheet and then track your actual expenses in the top spreadsheet. If you do this, then the variances to your budget will be shown automatically in the third spreadsheet. You can change both the Actuals spreadsheet and the Budget spreadsheet, but not the Budget Variances spreadsheet. Variances are calculated automatically by evaluating the differences between the Actuals and the Budget spreadsheets above the Budget Variance spreadsheet. Positive variances indicate expenses that are below budgeted amounts and negative variances indicate expenses in excess of budget.

User entries are allowed only in the BOLD BORDER spreadsheet cells. You are limited to making positive decimal or whole number numerical data entries. Other cells are locked to prevent accidentally overwriting formulas.

In the "Actual Expenses" worksheet for the "Current Calendar Year" below, there are 38 pre-named expense categories and another 10 that you could add. If you use a different set of expense categories already in your family expense tracking and budgeting and you want to use your own expense categories instead of those provided, you can. Just type in or rename with your list of categories, and your expense category names will automatically propagate to the other five expense, budget, and variance worksheets. Of course, you should first determine you expense categories, before you add any expense data to these worksheets. For the reasons explained above, the mortgage expense and real estate tax categories are locked and highlighted in green. You should enter your mortgage payments and real estate taxes on these lines only and not on any other lines. This preserves the proper derivation of total annual expenses below the expense worksheets, when you have entered complete annual expense information.

You could also use the top "Actual Expenses" spreadsheet to estimate your annual expenses using a sampling method. For example, you could categorize and add up your expenses over three months, divide by 3, and then copy that per month expense figure in any category across the full 12 months. Also, remember to look at the list of categories for other expenses, such as real estate taxes, insurance payments, vacations, etc. that you normally would incur, but that did not occur in months that you sampled. Either enter those amounts in the months that they normally occur; or take those infrequent expenses, divide by 12, and copy the resulting monthly figure across the 12 months.

Remember to exclude any payments that would double count your expenses. For example, include your living expenses, whether you paid by cash, check debt card, credit card, etc. To track your expenses, you might collect all your receipts and/or you could refer to your bank registers and credit card statements for listings of your particular expenses. DO NOT, however, include your payment of your credit card bill, because that would double count your expenses.

Use the Zoom function to change the size of the viewable spreadsheet in your computer window. ( VIEW >> ZOOM )

Section 7.7: 2 Year Monthly Expense Tracking Worksheet

You may "copy-and-paste" to copy a single entry vertically, BUT ONLY between VERTICALLY CONTIGUOUS CELLS of the SAME TYPE WITHIN THE SAME COLUMN.

Be careful! Other copy-and-paste operations that are NOT between VERTICALLY CONTIGUOUS CELLS of the SAME DATA TYPE in the SAME COLUMN COULD HARM YOUR CURRENT WORKING PLAN FILE. Always back up your plan periodically with different file names on your hard disk drive. A corrupted file will be obvious by looking at the output graphics and data tables. If your file becomes corrupted, then roll back to your most recently saved file without the operations that corrupted the file. Hard disk storage is essentially free, so ALWAYS use a changing file naming convention, so that you do not keep overwriting the same file on disk.

(Note that only 3 monthly columns are show. In VeriPlan this table has all twelve months and an annual total. Then, an additional 12 month table for the next year is also provided.)

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Section 7.8: 2 Year Monthly Expense Budgeting Worksheet

This budget worksheet uses the same rows as the Expense tracking worksheet above.

(Note that only 3 monthly columns are shown. In VeriPlan this table has all twelve months and an annual total. Then, an additional 12 month table for the next year is also provided.)

* Provides the same row categories as the Expense tracking worksheet.

NOTE: The remaining rows have been truncated for this User Manual.

Section 7.9: 2 Year Monthly Budget Variances Worksheet

This budget variances worksheet shows the difference between expense actuals and budget by month and category. This budget variances worksheet uses the same rows as the Expense tracking worksheet above.

[Note that only 3 monthly columns are shown. In VeriPlan this table has all twelve months and an annual total. Then, an additional 12 month table for the next year is also provided.]

* Provides the same row categories as the Expense tracking worksheet.

NOTE: The remaining rows have been truncated for this User Manual.

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### Chapter 8: Financial Assets worksheet

Section 8.1: Enter your cash and cash equivalent assets -- up to 24 securities/accounts

Section 8.2: Enter your bond and fixed income assets -- up to 24 securities/accounts

Section 8.3: Enter your stock and equity assets -- up to 99 securities/accounts

Section 8.4: Notes about the cash, bond, and stock financial assets input tables

Section 8.5: Investment costs inputs
Introduction

Use this financial assets worksheet to enter information about your currently owned cash/cash equivalent, bond/fixed income, and stock/equity assets. You can change and update any of this financial asset information at any time.

This current financial asset holdings worksheet allows you to enter information about up to:

24 cash and cash equivalent security/account holdings

24 bond and fixed income security/account holdings

99 stock and equity asset security/account holdings

Cash and cash equivalent assets would include all cash equivalents, such as checking, savings, and money market accounts plus short-term certificates of deposit, etc. A cash equivalent asset would be any asset that is similar to cash, such as a money market fund where a constant Net Asset Value (NAV) is maintained at $1.00 per share. Interest earnings and costs are paid by issuing/redeeming shares with a $1.00 NAV, rather than by changing the value of the shares themselves.

Bond and fixed income assets would include corporate and government bonds, bond funds, and equivalents, including hybrid funds with a fixed income emphasis.

Stock and equity assets would include publicly-traded common stocks, preferred stocks, equity mutual funds, exchange-traded equity funds, etc., including hybrid funds with an equity emphasis.

General Instructions

Suppose that you have an account with a total valuation of $50,000, which is a mixture of $10,000 in cash assets, $25,000 in bonds or fixed income assets, and $15,000 in stocks or equity assets. You should make these entries below:

* Enter the $10,000 in cash in one or more rows of "Section 1: Cash and cash equivalent assets input table"

* Enter the $25,000 in bonds in one or more rows of "Section 2: Bond and fixed income assets input table"

* Enter the $15,000 in stocks in one or more rows of "Section 3: Stock and equity assets input table"

Separating your cash, bond, and stock assets should be relatively straight-forward, when the individual assets that you hold individually are of one asset class or another. If the asset is cash or a very short-term CD (less than a year remaining on the CD), enter the total dollar amount into a row of Section 1 of this worksheet. If the asset is a bond or fixed income asset (including CDs that have a year or more remaining), then enter the number of bonds or the number of mutual fund or ETF shares into a row of Section 2 of this worksheet. Then, use the Internet to look up the current per share market price of that bond, mutual fund or ETF share on the same line. VeriPlan automatically displays the total current market value of that bond. Concerning your stocks and equity assets, use the same method just described for bonds, but instead enter your equity asset share numbers and per share prices into rows of Section 3 of this worksheet.

For each of your financial asset holdings, you should enter information about account taxability and investment costs with your asset entries, so that VeriPlan can automatically project your lifetime asset tax liabilities and investment costs.

VeriPlan collects specific information on each of your asset positions about size, value, taxability, investment costs, and expected distributions. Because it will project each of your holdings separately and will calculate returns, volatility, taxes and costs accordingly, the more accurate your inputs, the more informative the results can be to you.

Internally, VeriPlan will maintain this information separately for each individual holding throughout the lifetime projections. This detailed accounting approach allows your overall portfolio tax-efficiency and investment-efficiency to be calculated for each year of any projection -- even though the net valuation of your individual holdings may change at different rates because of differences in investment returns, costs, and taxes. By avoiding the use of averages, VeriPlan provides much more insight into your particular circumstances rather than those of a hypothetical average investor.

Notes on target date funds and other funds that mix the cash, bond, and stock assets:

There also are blended investment assets, such as target date mutual funds, hybrid mutual funds, and variable annuities that have not yet been converted to a fixed annuity contract. For these investments, you need to use your judgment as to how to enter them across these cash, bond, and stock worksheets. The general approach is to determine the percentage of overall market value and then use those percentages to apportion the total value between asset classes. For cash, of course, use the cash value. However, for an asset that blends bonds and stocks, use their relative value proportions to allocate the appropriate number of shares, and then use the same current market price per share on each worksheet.

As long as the total value of a particular target date fund or other mixed asset holding is represented accurately across these three sections below on this worksheet, then a great deal of refined precision regarding the allocation of a particular holding to the cash, bond, and stock sections below is not necessary. The reason for this lack of need for great precision in the division of a mixed asset relates to VeriPlan's automated asset allocation mechanisms.

After the first year and in every projection year thereafter, the future allocation of your assets and the cumulative projected appreciation of your assets and future savings will be determined by the asset allocation method and parameters that you choose on the asset allocation worksheet. Thus, VeriPlan's sophisticated and automated asset allocation projection methods make great precision in the initial allocation of mixed assets unnecessary.

For example, if you held a mutual fund that was invested 90% in stocks and 10% in cash and bonds, then you could enter the entire value of that holding solely into the stocks section (#3) of this worksheet. If that particular position represented perhaps less than 5% of your portfolio's total current value, then differential asset class appreciation would not make a significant difference for just a single year. At the beginning of the second year through age 100 of your projections, VeriPlan's automated asset allocation mechanisms would project asset appreciation according your chosen asset allocation plan and your initial settings would not be as relevant.

Therefore, in most cases, the precision of your initial splitting of an individual asset position is up to your judgment. However, you should note that you do need to pay attention to the actual holdings of your investment funds over time. While index mutual funds and ETFs tend to stay fully invested in their target asset class, some funds can maintain substantial, but fluctuating cash positions over time. Known as "cash drag" these funds may not achieve the same results as their fully invested and passively managed index fund peers. In fact, this is another area where the research literature indicates that active investment fund managers tend to lack skill in market timing. When asset prices are relatively high, active fund cash balances tend to be relatively low, and when asset prices are relatively low, active fund cash balances tend to be relatively high. If manager skill were in evidence, then one would expect the statistics to demonstrate the opposite. Active managers should be using cash to buy at lower prices and should be selling at higher prices, but unfortunately the numbers do not reflect this market timing skill indicator.

For these three separate CASH, BOND, and STOCK data entry tables below:

* Enter all dollar and percentage information as POSITIVE NUMBERS in the bold bordered data entry boxes.

* For more detailed directions and comments about the columns of these input tables, see the notes below the last table.

* You may "copy-and-paste" to copy a single entry vertically, BUT ONLY between VERTICALLY CONTIGUOUS CELLS of the SAME TYPE IN THE SAME COLUMN. NEVER use any "cut-and-paste" operations.

* Be careful! Other copy-and-paste operations that are NOT between VERTICALLY CONTIGUOUS CELLS of the SAME DATA TYPE in the SAME COLUMN COULD HARM YOUR CURRENT WORKING PLAN FILE. Always back up your plan periodically with different file names on your hard disk drive. A corrupted file will be obvious by looking at the output graphics and data tables. If your file becomes corrupted, then roll back to your most recently saved file without the operations that corrupted the file. Hard disk storage is essentially free, so ALWAYS use a changing file naming convention, so that you do not keep overwriting the same file on disk.

* See the section above in this chapter of the _VeriPlan User Manual_ with notes on target date funds and other funds that mix cash, bonds, and stocks.

* Enter illiquid non-market-traded securities and privately held securities on the property and debts worksheet

* Do not enter your non-market-traded and relatively illiquid equity positions on this worksheet. These non-market-traded equities should instead be entered on the property and debts worksheet. These other equity assets might include: shares or options to purchase shares of private companies, shares in limited partnerships or hedge funds, and other equity assets that have uncertain current value or are subject to restrictions on sale. VeriPlan will project values for these other assets separately and will not include them in the deposit-withdrawal-tax-rebalancing logic that it applies to market traded cash/cash equivalent, bond/fixed income, and stock/equity financial assets. Your other property assets are treated separately, because they may be subject to substantial tax and liquidation constraints and may have a less certain current valuation.

Section 8.1: Enter your cash and cash equivalent assets -- up to 24 securities/accounts

NOTE: VeriPlan's lines for Cash Assets #5 to #24 have not been included in this User Manual.

(The table below shows the other columns that are to the right of the columns shown in the table above.)

VeriPlan provides fully integrated lifetime and retirement investment projections

It is the best retirement financial planning software available for home use.

For more information, go to **:http://www.theskilledinvestor.com/VeriPlan/financial-planning/**

Section 8.2: Enter your bond and fixed income assets -- up to 24 securities/accounts

NOTE: VeriPlan's lines for Bond Assets #5 to #24 have not been included in this User Manual.

(The table below shows the other columns that are to the right of the columns shown in the table above.)

NOTE: VeriPlan's lines for Bond Assets #5 to #24 have not been included in this User Manual.

Section 8.3: Enter your stock and equity assets -- up to 99 securities/accounts

NOTE: VeriPlan's lines for Stock Assets #5 to #99 have not been included in this User Manual.

(The table below shows additional columns that are to the right of the columns shown in the table above.)

NOTE: VeriPlan's lines for Stock Assets #5 to #99 have not been included in this User Manual.

(The table below shows additional columns that are to the right of the columns shown in the table above.)

Section 8.4: Notes about the cash, bond, and stock financial assets input tables

* Reference Number -- Rows are numbered to the left to make it easier for you to locate a particular holding.

* Name of Company Holding Asset for You -- This is the company that acts as a fiduciary and holds the security for you.

* Security Name -- Enter a distinct identifier, such as "XYZ Credit Union Savings", "Big Index Mutual Fund" or "ZeeCorp common stock"

* Ticker Symbol -- This is the symbol under which an asset trades in the market. Some assets will not have trading symbols.

* Number of Shares Owned Now -- Enter the number of shares currently owned. Enter fractional shares as a decimal number.

* Current Market Value per Share -- This is the most recent value at which a share of this asset traded in the market.

* When Taxable? (Tax-Deferred=0; Always=1; Roth 'tax-now-not-later'=2) -- VeriPlan distinguishes between assets that are:

* Tax-Deferred, which are not taxable now, but are taxable in the future. (Enter a 0.) Examples are traditional tax-deferred accounts, such as IRAs and 401(k) accounts, which grow tax-free, but whose withdrawals are taxed.

* 'Always Taxed', which are normal taxable account that could be taxed now and in the future. (Enter a 1.) Yields/gains on almost any asset are taxable, unless some tax code provision exempts or delays its taxation.

* Roth 'tax-now-not-later' which are never taxed. (Enter a 2.) Examples include equity assets held in Roth IRAs and designated Roth 401(k)s.

NOTE THAT THESE ENTRIES RELATE ONLY TO THE TAXABILITY OF THE ACCOUNT ITSELF AND NOT TO THE TAXABILITY OF THE INVESTMENTS HELD WITHIN THE ACCOUNT. FOR EXAMPLE, WHILE CERTAIN GOVERNMENT BONDS MAY OR MAY NOT BE TAXABLE AT VARIOUS LEVELS OF GOVERNMENT, THE INCOME TAXABILITY OF THE BOND ITSELF IS NOT RELEVANT TO THE TAXABILITY OF THE ACCOUNT FOR CATEGORIZATION PURPOSES IN VERIPLAN.

* Current Tax Basis (your already taxed capital contributions)

While future yields or gains on this asset may be subject to additional taxes, the basis is not taxed. VeriPlan tracks the tax basis of your individual assets, and it adds to the tax basis as loads are incurred and as yields and gains are taxed in the future. When portfolio assets are withdrawn, VeriPlan adjusts the tax basis. Regarding the tax basis of the three taxability categories that VeriPlan tracks, consider that:

* An investment in a 'Tax-Deferred' account (coded 0 in the previous column) initially would have a tax basis of zero, if funded with a tax-deductible contribution. If funded with a contribution that was not tax-deductible, then the tax basis would equal the initial asset value. Investment costs, such as a sales load charge, also could increase the account basis in either situation. Over time, appreciation in these accounts funded by either tax-deductible or non-deductible contributions would be shielded from further taxes on any distributions or asset appreciation, until your assets were withdrawn. The tax basis for each account, respectively, would remain at or near either zero or at or near the initial investment amount, depending upon investment costs. Of course, over time, tax-deductible and non-deductible contributions may be made into a single account, and the account tax basis would increase due to further non-deductible contributions and to certain investment costs. Your 'Tax- Deferred' account tax basis helps to reduce your future short- and long-term ordinary income taxes on taxable withdrawals in reality and in VeriPlan's projections for you.

* An investment in an 'Always Taxed' account (coded 1 in the previous column) initially would have a tax basis equal to the amount contributed plus any initial investment costs paid, such as a sales load charge. Ongoing taxable distributions, new investments, and sales loads paid on new investments and reinvestments of taxable distributions would add to your tax basis. This 'Always Taxed' account tax basis will help to reduce your future short- and long-term capital gains taxes on taxable withdrawals.

* An investment in a Roth 'tax-now-not-later' account (coded 2 in the previous column) initially would have a tax basis equal to the investment amount, because your contribution would not be tax-deductible. Investment costs, such as a sales load charge, could add to that tax basis. Because appreciation and withdrawals would not be taxed, these events would not add to your tax basis. However, ongoing investment sales loads that you pay can add to your tax basis. Because Roth assets will not be taxed in the future, tracking their tax basis would seem pointless. However, certain tax situations can occur were this Roth tax basis information would be useful. In addition, knowing your Roth tax-now-not-later' account tax basis is useful to VeriPlan, which uses it to estimate possible cost inefficiencies associated with past load-related investments.

Section 8.5: Investment costs inputs

Investment costs are a huge and highly detrimental factor for individual investors, although few realize the magnitude of the cumulative damage that even average investment costs can do to their portfolio over a lifetime.

VeriPlan provides tools that allow you to understand the projected impact of your current and usually excessive investment costs on your portfolio during the course of your lifetime. You can find the detailed cost inputs on this financial assets worksheet investment cost worksheet. These cash, bond, and stock input sections above on this worksheet provide a variety of input columns for the numerous costs that individual investors pay. The instructions below will help you to understand how to make these inputs on this asset worksheet. The investment cost worksheet explains investment costs and provides an automated mechanism to compare projected investment returns using the investment costs of your current portfolio versus alternate, lower investment costs that you might consider more reasonable to pay.

There is no reason to be subtle about this. Most investors are simply naïve about the insidious and corrosive nature of investment costs.

While most investors do not focus on investment costs, investment costs are the only substantial investment strategy factor over which they have some control that will affect their net long-term investment returns. Investment costs seem like a relatively minor factor to many people, largely because investment costs are stated as a percentage of overall assets and not gross returns. Yet, when investment costs are compared to average gross annual investment returns rather than total assets (which is the proper comparison), then the average investor pays between 1/4 to 1/3 of their gross annual returns in investment costs.

When inflation is considered, then the average investor pays investment costs amounting to about 50% of annual real dollar (after inflation) investment returns.

The financial industry is a massive parasite on investors assets, and overall it delivers a "negative value-added" with respect to its investment costs. On average, the more an investor pays, the less they keep in the long-term. The academic research literature clearly demonstrates that cost reduction is highly beneficial to investors. The investment research literature also demonstrates that individual investors have no reliable mechanisms to pick investments beforehand that will yield superior investment returns -- except lower costs. Historical investment returns normalized for investment costs tell investors absolutely nothing of value in choosing one investments over another. On the other hand, choosing low-cost investments has been demonstrated to be a reliable means to achieve superior returns averaged across the investor population. Nevertheless, if you look at search engine statistics about the phrases that people are searching for related to investments, there is roughly a 100 to 1 ratio between search terms that are associated with superior historical returns compared to investment costs. Like sheep to slaughter, this will continue indefinitely unless individuals wake up and start taking steps to cut their investment costs to the bone.

Depending upon your settings on the investment costs worksheet, VeriPlan will develop your overall automated projections using either your current investment costs or your reasonable investment costs. While it does take some effort to research the investment cost characteristics of the current investment portfolio that you hold:

A) doing this research,

B) entering your investment costs in the columns above using the instructions below,

C) comparing your lifetime projections using your current investment costs versus costs that you consider to be reasonable,

D) committing to a low-cost lifetime investment strategy, and

E) actually implementing that strategy over your lifetime (which is easy to do)

could provide most people with the highest hourly wage for the effort involved, than they would earn doing anything else in their lives -- unless, of course, they have already cut their investment expenses to the bone.

You should note that, if you do not enter investment costs into the columns above, which would allow VeriPlan automatically to develop investment cost percentages weighted by your asset holdings, then VeriPlan can automatically use the low minimum costs for the various expense categories on any asset line that has any positive asset value. This negligence on your part will cause VeriPlan to develop very low-cost investment projections, when in reality you are likely to hold much higher investment cost assets and you are doing nothing to reduce their investment costs. In this situation, it is more likely that your investment return projections in VeriPlan would be significantly more optimistic than the net returns you might obtain with your real-life portfolio in the future. Year after year investment costs would bleed your portfolio, without you taking action. Instead, you should take the issue of investment costs very seriously, do the research on your current portfolio, enter appropriate investment cost figures above, do the analysis, wake up, and take action.

Investment Cost Information Sources

Within the notes about particular investment costs below, potential information sources are suggested. Also, the investment cost worksheet provides more information on how to research investment costs. For bonds and stocks, morningstar.com is often the quickest free source of expense-related information and recent securities prices.

Front-end Sales Load (% of purchase amount) [If you pay a Back-end load, see Note A below.]

* If you paid a sales load when you acquired this asset, then indicate the load as a percent of the original investment. VeriPlan assumes that you will continue to acquire new investments with the same cost efficiency or lack of cost efficiency that you have in the past, unless you decide to change your behavior. VeriPlan will assess the weighted average percentage loads you have paid in the past against new bond and stock investments from positive net earned income (but not on reinvested asset appreciation). If you have paid a sales load %, you should enter it here. Otherwise, VeriPlan will presume that your investment acquisition costs are lower than what they actually have been.

* There are different forms of load charges, including front-end loads and back-end loads. VeriPlan measures the cost of front-end loads. If you agreed to pay a deferred or back-end sales load when you acquired this asset, you should nevertheless enter the front-end load that would have applied, if you had chosen that alternative. The true costs of back-end loads are much more speculative due to future asset value fluctuations, potential conversions, etc. However, from the broker's perspective, these front- and back-end loads are priced to be roughly equivalent. By entering the front-end load here, you can get a reasonable understanding of the long-term impact of paying loads on your investment portfolio. (Note that VeriPlan will charge the percentage loads that you have paid, weighted by the value of the assets acquired, whenever you have positive net earned income and on your reinvested asset yields net of other investment costs.

* For more information on sales loads, see the sales load footnote under "Maximum investment costs that are reasonable to you" on the investment cost worksheet.

* Note that sales loads and sales commissions are different and you may pay both to acquire an asset. If you paid commissions to acquire this asset, do not include those commissions here. Instead, calculate the percent of asset value you paid in commissions and include it in the column titled: "Total Asset Custody Fees, Commissions, and Advisory Fees (% of assets per year)." Read the addition note below and remember that you pay commissions both buying and selling.

Asset Management Fee (% of assets per year)

* Enter the % of assets fee that is charged annually by the manager of this asset. This fee should be found in the most recent prospectus or through on-line sources such as NASD, Lipper, or Morningstar. (Also, see more information on the investment cost worksheet.)

Marketing Fees (% of assets)

* These are annual percent of asset fees charged by certain funds in addition to asset management fees. This information can be found in the prospectus. Note that certain information sources will include these marketing fees in the annual asset management fee. This is true of NASD and Morningstar. If you use one of these sources to obtain the Asset Management Fee, then leave a zero on this line. Despite being combined with the management fee, note that these marketing fees, sometimes called 12b-1 fees for funds, are not spent on asset management. They pay the person and firms that sold you the investment product.

Asset Turnover (% of assets per year)

* Portfolio turnover is an important indicator of the trading costs that are incurred by a fund. These costs are not included in the management or other fees, but do reduce net returns. VeriPlan uses information from industry studies to estimate trading costs associated with turnover.

Total Asset Custody Fees, Commissions, and Advisory Fees (% of assets per year

* In addition to the fees above, securities and advisory firms may also charge a fee against the assets they hold for you. You should enter these "wrap account," "separately managed account," or other asset service fees as a percent of assets in the table below. Note that such fees are charged above and beyond any asset management fee being paid to make investment decisions about the assets held within the account. If you pay a combined annual percent of assets fee for account servicing and investment management, then it can be entered either under this column or under the Asset Management Fee column. If the cost components are reported separately, then enter percentages in their appropriate columns.

* Some people may not pay a percent of their assets, but instead they pay commissions on each transaction, when they buy and sell assets. If you pay by the transaction, review your records and estimate the annual percent of that asset that you pay in transaction fees. For example, if an asset is worth $10,000, and once a year you pay $50 in commissions to sell it and pay another $50 to buy another asset of the same type, then your current cost is 1%/year [ ($50+$50) / $10,000 = 1% ]. Obviously, asset values will affect these percentages, but if you enter reasonable estimates for each asset you hold, VeriPlan will automatically calculate an informative, value weighted average of your transactions costs across all your large and small value assets. If you trade very infrequently and at very low costs, commissions will not have a significant impact on your portfolio. However, if you pay high commissions and/or trade very frequently you should take the time to make reasonable estimates, because commissions can have a substantial negative impact on investors with high transactions costs.

TAXABLE DISTRIBUTIONS: General (Only applies to stock assets held in taxable accounts -- not tax-advantaged accounts.)

VeriPlan automatically calculates annual asset class returns for your portfolio and will reinvest your portfolio's investment yields net of costs and taxes. It assumes that you will hold investment assets for the long-term, until you need to make withdrawals when your expenses exceed current income. Investments instruments vary by the degree to which they will permit you to do this. Many organizations make decisions to issue taxable distributions, which are beyond your control and which will be taxed at the ordinary income or long-term capital gains tax rates applicable to you at the time. Taxes on such distributions affect your financial situation and must be paid when distributed and not when you might have preferred to recognize such taxes. Therefore, if you indicate estimates about expected distributions, given the history of such distributions, then VeriPlan will calculate taxes on these distributions separately and deduct them.

_Note that VeriPlan automatically tracks annual distributions of asset interest, dividends, short-term capital gains, qualified dividends, and long-term capital gains, assesses taxes in accordance with applicable current tax rates, and tracks the tax basis of each asset._ IF YOU ESTIMATE ANY TAXABLE DISTRIBUTIONS THEY WILL HAVE NO IMPACT ON HOW VERIPLAN PROJECTS RETURNS. YOUR ESTIMATES OF DISTRIBUTION WILL ONLY AFFECT THE TIMING OF THE RECOGNITION OF TAXES. If you substantially overestimate taxable distributions, then this will accelerate the recognition of taxes, increase your tax basis in that asset, and reduce your portfolio by the amount of the taxes paid.

TAXABLE DISTRIBUTIONS: Expected Annual Qualified Stock Dividend Distributions (% of assets per year -- Enter 0%, if this asset is held in a traditional 'tax-deferred' or Roth 'tax-now-not-later' account.) -- Check the recent qualified dividend payment history for each asset and enter the annual dividend yield as a percent of asset value. Note that most corporate distributions are taxed at ordinary income tax rates. Do not assume that dividend distributions would be qualified dividends, unless the distributions have been previously classified as qualified. There is no need to make any adjustment for inflation. For any particular equity asset holding, simply enter the percent of your equity assets that typically is distributed to you as qualified dividends is subject to long-term capital gains tax rates.

TAXABLE DISTRIBUTIONS: Expected Annual Interest, Non-qualified stock dividends, and Short-term Capital Gains Distributions (% of assets per year -- Enter 0%, if this asset is held in a traditional 'tax-deferred' or Roth 'tax-now-not-later' account.)

Equity funds may periodically distribute short-term capital gains. Estimate the average distribution as a percent of assets that the fund has made in the past several years. If you have held this fund for some time, tax distribution information may be found on your annual statements. There is no need to make any adjustment for inflation. For any particular equity asset holding, simply enter the percent of your equity assets that typically is distributed to you as interest, non-qualified capital gains, and short-term capital gains and is subject to ordinary income tax rates.

TAXABLE DISTRIBUTIONS: Expected Annual Long-term Capital Gains Stock Distributions (% of assets per year -- Enter 0%, if this asset is held in a traditional 'tax-deferred' or Roth 'tax-now-not-later' account.)

Equity funds may periodically distribute long-term capital gains. Estimate the average distribution as a percent of assets that the fund has made in the past several years. If you have held this fund for some time, tax distribution information may be found on the annual tax statements. There is no need to make any adjustment for inflation. For any particular equity asset holding, simply enter the percent of your equity assets that typically is distributed to you as long-term capital gains and is subject to long-term capital gains tax rates.

Investment Cost Information Related to Cash and Cash Equivalent Assets

For cash held in banks, in very short term CDs, and in money market funds, the costs are not always obvious. While you can look up some costs like management fees, other costs tend to be hidden or obscured. Nevertheless these hidden and obscure costs should not be ignored. For example, if you hold more that very minimal amounts of your assets in checking accounts that do not pay interest, then your management or asset custody fee is effectively the difference between the interest you could have earned in another interest bearing cash account and the 0% interest that you are getting with this checking account. Of course, there is a value to the services of a checking account, but holding a balance larger than your transactional needs is inefficient, and you are potentially missing an opportunity to earn higher interest.

One method to estimate these charges is to determine the market interest rate on relatively low risk interest bearing cash assets, and then record the difference as the implied Asset Management fee or Asset Custody fee in the chart above. You might be surprised at how high these fees are. NOTE THAT THIS ESTIMATION METHOD ASSUMES THAT YOUR "TOTAL ASSET CUSTODY FEES" FOR THAT ACCOUNT (the last column) ARE ESSENTIALLY THE DIFFERENCE BETWEEN A REASONABLY GOOD MARKET RATE FOR CASH INVESTMENTS VERSUS THE INTEREST RATE THAT IS BEING PAID IN THE PARTICULAR ACCOUNT. IN ADDITION, YOU NEED TO FIND THE "ASSET MANAGEMENT FEE" THAT IS BEING CHARGED AND ENTER THAT INTO THE "ASSET MANAGEMENT FEE COLUMN.

One quick method to do this is to look up current rates using free information available on iMoneyNet.com. Go to iMoneyNet.com and select the retail money funds section. Then, look for the link to their "Largest Retail Money Market Funds." Choose the interest rate that you could earn from one of these top money market funds and compare that to what you are earning now. (Incidentally, many, but not all, of the largest retail money market funds tend to be lower cost funds, because people seek them out for their lower costs.) Enter the difference in the "Total Asset Custody Fee" column.

Then, the second step is to look up the Asset Management Fee for that money market fund, for some of the top money market funds, iMoneyNet will provide a green circled "i" that will tell you the money market management fee. Use that fee for checking and savings accounts. However, if you are comparing using this method to estimate the costs of your money market funds, also look up the asset management fee of the fund that you actually hold, and use that figure if it is higher. Also, look more closely at the asset management fee information of money market funds that you actually own.

You might be surprised at just how ridiculously non-competitive money market management fees can be. In the very low interest rate environment following the credit crisis crash, many money market funds with high fees, temporarily cut their management fees so that they would not have to report negative returns. Instead, many of these funds paid a whopping .01% or so annually. They were able to do this only by lowering their fees temporarily. Had they kept their fees the same as before the crisis, then their returns would have been negative. Most investors can figure out that they do not need to pay a money market fund to keep their cash, since they can do the same with a regular checking accounts. With increased short-term market interest rates, most previously overpriced (high-cost) money market funds are likely to push their management fees back up to absurd levels.

Automated lifetime asset value projections with user controls

http://www.myfinancialfreedomplan.com

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### Chapter 9: Property worksheet

Section 9.1: Enter your property, real estate, and other assets -- up to 20 assets/asset accounts

Section 9.2: How transactions costs and taxes may affect projected home values

Introduction

This worksheet allows you to enter information about up to 20 property, real estate, and other asset holdings.

Your ownership interests in Real Estate Investment Trusts (REITs) and similar real estate based securities should be entered on this worksheet. Use recent public market prices, if they are available. Also, use this worksheet to enter any private equity positions, non-publicly traded financial assets, private businesses, limited partnerships, etc.

If you are using this property and debts worksheet to project the future purchase of a first or second home, VeriPlan will automatically add the projected purchase value of the home in the year of your planned purchase. The value of the future home purchase will be reflected automatically in the property and real estate assets band on the total assets graphics. You do not need to make any entry in the table below. You should only enter real estate that you already own in the table below.

Enter your expectation for the future real dollar growth rate of return on each of these properties, and include information about your investment costs with your asset entries, so that VeriPlan can automatically project asset values net of investment costs.

Focus on the assets that you own, which have the more substantial value. If you have a collection of similar tangible assets, you could group them together on a single line. If you make any such groupings, add a note about the composition of the group for future reference in the description column.

Include only salable property with a value that is not expected to be consumed. For example, exclude cars that are used for transportation, but include valuable cars kept as collectables. Cars for transportation will depreciate, and any current asset value is really just a prepaid expense. On the contrary, collectable automobiles may have an asset value that changes above or below the rate of consumer price inflation. In the same vein exclude normal furniture, but include truly valuable antiques; and so on.

Currently owned property and real estate assets, which are not traded in broad national securities markets should be entered on this worksheet. The current fair market values of such assets are generally much more of a challenge to establish. Furthermore, without a long market history, estimating potential value changes in the future can be even more speculative.

Similar to market-traded financial securities, the future values of property assets are not predictable, but at least one can use local market history to calibrate whether one's future expectations are at least reasonable in the light of that market history. If you lack market values, simply enter current fair market value estimates that seem reasonable. Keep in mind that this is a value projection exercise and not a negotiation to sell. Resist the temptation to inflate the current value of any property. Estimate the price that an independent party would pay willingly in the current market environment.

Include only the current resale value of your real estate properties on this worksheet. Concerning the total rental or other income that you receive from these properties, that income should be entered on the other income section #5 of the income worksheet, as perpetual rental income with any real growth adjustment that you believe is appropriate.

VeriPlan will project the value of each property and real estate asset, as if you were to hold them over your full lifecycle, and they were to continue to appreciate. Clearly, many of your property and real estate assets or your other non-market assets could be sold and converted to cash. Nevertheless, VeriPlan will not make arbitrary assumptions about the timing of such sales, which could involve substantial transactional costs and/or deviate from the values that you estimate. If in the future, you were to liquidate any of these non-market traded assets, then simply delete them from the table below, and make new entries on the appropriate asset worksheets to reflect where the sales proceeds have been reinvested.

Only if your cash, fixed income, equity, and other assets were to be exhausted in the future would you need to liquidate your property and real estate or other assets. Such situations could easily be understood by inspecting the assets graphics, which display your total projected assets.

On these assets graphics, your property and real estate assets would also begin to fall below zero, if your cash, bond, and stock financial assets were to become exhausted. After your cash, bonds, and stock financial assets are gone, VeriPlan would graphically project that the liquidation of your real estate and property assets.

First, one edge of the real estate and property band would begin to dip below zero. The total value of your real estate and property assets would continue to fall, as you consumed them to fund your income to expense shortfall. The liquidation of these assets would continue until the other edge of the property and real estate assets band on these graphics also fell below zero at a subsequent age. In effect, VeriPlan's total assets graphics project an indication of the number of years that your property and real estate assets would continue to fund your projected expense shortfall.

Section 9.1: Enter your property, real estate, and other assets

Directions:

* Enter into the table below all dollar and percentage information as POSITIVE NUMBERS in the bold border data entry boxes.

* If you wish to segregate your real estate assets from your other property assets, then enter your real estate assets on lines 1 to 10 and other types of property on lines 11 to 20. If you do this, your real estate assets will be projected and graphed separately from your other assets.

* For each property and real estate asset below, enter your estimate of its current fair market value. Furthermore, enter your estimate of the expected future real or non-inflationary annual growth rate.

For more detailed directions and comments about the columns of this input table, see the notes below this input table.

NOTE: VeriPlan's lines for Property Assets #5 to #20 have not been included in this User Manual.

(The table below shows additional columns that are to the right of the columns shown in the table above.)

NOTE: VeriPlan's lines for Property Assets #5 to #20 have not been included in this User Manual.

Notes about the columns above in the property assets input table

* Reference Number -- Numbered from 1 to 20, this number may make it easier for you to locate a particular holding.

* Title Registration or Name of Company Holding Asset -- This is the company that acts as a fiduciary and holds the asset for you, if there is such a company.

* Brief Property or Real Estate description \-- Enter a distinct identifier, such as "418 Elm Street" or "art collection"

* Trading Symbol (if any) -- This is the symbol under which this asset trades, if there is any.

* Number of Shares Owned Now (Enter 1, if this is an undivided property) -- Enter the number of shares currently owned. Enter fractional shares as a decimal number.

* Estimated Fair Market Value per Share (Enter the total value, if this is an undivided asset.)

* If there is an active market for this asset, then enter the most recent value at which a share of this asset traded in the market. Concerning the current fair market value of many of your property assets, there will be no national securities market to establish a value. A market premium for investment risk will also be more difficult to estimate. For each property and real estate asset, you should enter your best estimate of its current fair market value. You may have a reasonable sense of their value, if you have been tracking comparable local sales.

* Because of the very wide variety of valuable non-real estate property that you may own, you should use your best judgment about current fair market values and real growth rates. Keep in mind that this is a value projection exercise and not a negotiation to sell. Resist the temptation to inflate the current value of any property. Knowingly over-estimating current values and real future growth rates is not helpful to you. You are simply using VeriPlan to develop a reasonable sense of possible future values.

Particularly with real estate assets, sales expenses can be quite costly. Please review the discussion in below entitled: "How transactions costs and taxes may affect projected home values."

When Taxable? (Tax-Deferred=0; Always=1; Roth 'tax-now-not-later'=2)

VeriPlan distinguishes between assets that are:

* Tax-Deferred, which are not taxable now, but are taxable in the future. (Enter a 0.) Examples are traditional tax-deferred accounts, such as IRAs and 401(k) accounts, which grow tax-free, but whose withdrawals are taxed.

* 'Always Taxed', which are always taxed now and in the future. (Enter a 1.) Yields/gains on almost any asset are taxable, unless some tax code provision exempts or delays its taxation.

* Roth 'tax-now-not-later' which are never taxed. (Enter a 2.) Examples include equity assets held in Roth IRAs and Roth 401(k)s.

NOTE THAT THESE ENTRIES RELATE ONLY TO THE TAXABILITY OF THE ACCOUNT ITSELF AND NOT TO THE TAXABILITY OF THE INVESTMENTS HELD WITHIN THE ACCOUNT. FOR EXAMPLE, WHILE CERTAIN GOVERNMENT BONDS MAY OR MAY NOT BE TAXABLE AT VARIOUS LEVELS OF GOVERNMENT, THE INCOME TAXABILITY OF THE BOND ITSELF IS NOT RELEVANT TO THE TAXABILITY OF THE ACCOUNT FOR CATEGORIZATION PURPOSES IN VERIPLAN.

Current Tax Basis (your already taxed capital contributions)

While future yields or gains on this asset may be subject to additional taxes, the basis is not taxed. VeriPlan tracks the tax basis of your individual assets, and it adds to the tax basis as loads are incurred and as yields and gains are taxed in the future. When portfolio assets are withdrawn, VeriPlan adjusts the tax basis. Regarding the tax basis of the three taxability categories that VeriPlan tracks, consider that:

An investment in a 'Tax-Deferred' account (coded 0 in the previous column) initially would have a tax basis of zero, if funded with a tax-deductible contribution. If funded with a contribution that was not tax-deductible, then the tax basis would equal the initial asset value. Investment costs, such as a sales load charge, also could increase the account basis in either situation. Over time, appreciation in these accounts funded by either tax-deductible or non-deductible contributions would be shielded from further taxes on any distributions or asset appreciation, until your assets were withdrawn. The tax basis for each account, respectively, would remain at or near either zero or at or near the initial investment amount, depending upon investment costs. Of course, over time, tax-deductible and non-deductible contributions may be made into a single account, and the account tax basis would increase due to further non-deductible contributions and to certain investment costs. Your 'Tax- Deferred' account tax basis helps to reduce your future short- and long-term ordinary income taxes on taxable withdrawals in reality and in VeriPlan's projections for you.

An investment in an 'Always Taxed' account (coded 1 in the previous column) initially would have a tax basis equal to the amount contributed plus any initial investment costs paid, such as a sales load charge. Ongoing taxable distributions, new investments, and sales loads paid on new investments and reinvestments of taxable distributions would add to your tax basis. This 'Always Taxed' account tax basis will help to reduce your future short- and long-term capital gains taxes on taxable withdrawals.

An investment in a Roth 'tax-now-not-later' account (coded 2 in the previous column) initially would have a tax basis equal to the investment amount, because your contribution would not be tax-deductible. Investment costs, such as a sales load charge, could add to that tax basis. Because appreciation and withdrawals would not be taxed, these events would not add to your tax basis. However, ongoing investment sales loads that you pay can add to your tax basis. Because Roth assets will not be taxed in the future, tracking their tax basis would seem pointless. However, certain tax situations can occur were this Roth tax basis information would be useful. In addition, knowing your Roth 'tax-now-not-later' account tax basis is useful to VeriPlan, which uses it to estimate possible cost inefficiencies associated with past load-related investments.

Front-end Sales Load (% of purchase amount) [If you pay a Back-end load, see Note A below.]

If you paid a sales load when you acquired this asset, then indicate the load as a percent of the original investment. VeriPlan assumes that you will continue to acquire new investments with the same cost efficiency or lack of cost efficiency that you have in the past, unless you decide to change your behavior. VeriPlan will assess the weighted average costs of the loads you have paid in the past against new investments from positive net earned income. If you have paid a sales load %, you should enter it here. Otherwise, VeriPlan will presume that your investment acquisition costs are lower than what they actually have been.

There are different forms of load charges, including front-end loads and back-end loads. VeriPlan measures the cost of front-end loads. If you agreed to pay a deferred or back-end sales load when you acquired this asset, you should nevertheless enter the front-end load that would have applied, if you had chosen that alternative. The true costs of back-end loads are much more speculative due to future asset value fluctuations, potential conversions, etc. For your Property and Other Assets, VeriPlan will charge the percentage loads that you have paid, weighted by the value of the assets acquired, whenever you have income and on your reinvested asset yields net of other investment costs.

Note that direct purchase of residential real estate typically has a front-end load of 1% to 2% when all transactions and financing fees are considered. In effect, they have a huge back-end load of 7% to 8% typically, because the seller pays a brokerage fee of about 6%. Therefore, you should enter only the front-end load amount and not the back-end load. Because VeriPlan assumes that your Property and Other Assets are held throughout the projections then values projected values are gross, rather than net of potential back-end loads.

For more information on sales loads, see "Maximum investment costs that are reasonable to you" on the investment cost worksheet.

Note that sales loads and sales commissions are different and you may pay both to acquire an asset. If you paid commissions to acquire this asset, do not include those commissions here. Instead, calculate the percent of asset value you paid in commissions and include it in the column titled: "Total Asset Custody Fees, Commissions, and Advisory Fees (% of assets per year)." Read the addition note below and remember that you pay commissions both buying and selling.

Expected Future Gross REAL DOLLAR Return for this Asset (%)

Input the expected rate of real price changes below or above inflation (as a -% or +%) If the value is expected to increase with the rate of consumer price inflation, then enter zero percent (0%).

Concerning future annual real growth rates for directly owned real estate, this is influenced by local market conditions, by the national economy, by the credit markets, and other factors. We had not found any real value growth consensus in scientific investment literature regarding real estate. In contrast, there is much evidence of regionalized or localized real estate boom and bust cycles. Furthermore, recent residential real estate price appreciation has been influenced dramatically by generational lows in long-term interest rates.

Given these uncertainties, an estimate of 2% to 3% for real annual future price appreciation on directly owned real estate over the decades may be reasonable. (Note that this is a real price change estimate, which is in addition to the expected future change in the consumer price index. If you think that real estate prices will appreciate in line with the rate of consumer price inflation, then you would enter a 0% as your real price change assumption for a particular property.)

Asset Management Fee (% of assets per year)

* Enter the total % of asset fee that is charged annually by the manager of this property.

Marketing Fees (% of assets)

* If an annual percent of asset fees is charged for marketing in addition to asset management fees, enter it here.

Total Asset Custody Fees, Commissions, and Advisory Fees (% of assets per year)

* In addition to the fees above, securities and advisory firms may also charge a fee against the assets they hold for you. You should enter these "wrap account," "separately managed account," or other asset service fees as a percent of assets in the table below. Note that such fees are charged above and beyond any asset management fee being paid to make investment decisions about the assets held within the account.

* If you pay a combined annual percent of assets fee for account servicing and investment management, then it can be entered either under this column or under the Asset Management Fee column. If the cost components are reported separately, then enter percentages in their appropriate columns. Some people may not pay a percent of their assets, but instead they pay commissions on each transaction, when they buy and sell assets.

* If you pay by the transaction, review your records and estimate the annual percent of that asset that you pay in transaction fees. For example, if an asset is worth $10,000, and once a year you pay $50 in commissions to sell it and pay another $50 to buy another asset of the same type, then your current cost is 1%/year [ ($50+$50) / $10,000 = 1% ]. Obviously, asset values will affect these percentages, but if you enter reasonable estimates for each asset you hold, VeriPlan will automatically calculate an informative, value weighted average of your transactions costs across all your large and small value assets.

* If you trade very infrequently and at very low costs, commissions will not have a significant impact on your portfolio. However, if you pay high commissions and/or trade very frequently you should take the time to make reasonable estimates, because commissions can have a substantial negative impact on investors with high transactions costs.

TAXABLE DISTRIBUTIONS:

If any of your property and real estate assets distribute ordinary taxable income in the current year, you should enter that ordinary income on the income worksheet. For property and real estate assets, this will usually be rental income. If any of these distributions are capital gains or qualified dividend distributions, then do NOT enter them on the income worksheet. Instead, assume that they would be reinvested in a similar property or real estate investment. Then, include these expected distributions, when you estimate the "Expected Future Real Return for this Property" in this table, which is described above.

Annual Property, Real Estate, and other Assessment Taxes that you pay for this property ($/year)

List the annual property taxes that you pay on each of your properties. This column provides a place for you to record your property taxes separately for each property. VeriPlan automatically totals these annual taxes and provides a reference with this total in the "Your property and real estate taxes" section of the taxes worksheet.

Easily integrate your real estate and property into your financial plan

Section 9.2: How transactions costs and taxes may affect projected home values

Concerning transactions costs, residential homes are very expensive to buy and sell.

Typically, the selling owner of a home will bear the brunt of real estate transactions costs. During the sale, the selling homeowner typically pays the total sales commissions for both the selling agent/firm and the buying agent/firm. These commissions usually equal about 6% of the sales price of the home. In addition, when selling a home, the seller might also pay 1% to 2% or more in additional sales transaction costs. In effect, your primary residence usually carries roughly an 8% 'back-end' sales load each time that your home is sold.

If subsequently you purchase a replacement home, the purchase cost typically is about 2% of the purchase price -- particularly when partial mortgage financing in involved. Therefore, each "round-trip" sale and new purchase of a replacement home sale can cost about 10% of then-current market value. At about 10%, one pair of round-trip sale and repurchase transactions is costly enough. However, if you sell and repurchase your home multiple times during your lifecycle, these transactions costs can be very large.

Concerning capital gains taxes on the sale of a home, you may or may not pay any taxes. Done properly, most homeowners can avoid recognizing significant taxes on sale and replacement transactions. If you plan to sell your primary home and repurchase another using a tax-free rollover provision of the tax code, you usually will not need to be concerned about future real estate capital gains taxes. Taxes on real estate capital gains may never be realized and eventually might be avoided entirely upon death and transfer to a spouse. Estate taxes could apply, but this is a separate matter.

Given the fact that house sales transactions cost are very high, yet capital gains taxes likely can be avoided, how should you carry the value of your primary residence in VeriPlan? You have several choices, but these two alternatives may be the most useful to the majority of people.

First, you could carry the value of your primary residence at "gross market value" with respect to potential taxes and transactions expenses. In that situation, you simply understand that VeriPlan's projected real estate values will not reflect any projected sales and repurchase costs nor any capital gains taxes. To use this gross current valuation method, just enter the current fair market value of your home in the table above.

Alternatively, you could carry the value of your home at gross market value with respect to taxes, but at net value with respect to expected sales and repurchase transactions costs. Since capital gains tax avoidance is relatively likely, potential capital gains taxes would be ignored in this method. However, if you believe that you will sell and replace your home several times during your lifecycle, then entering the current fair market value would tend to overstate substantially the projected net equity value of your home.

You can make relatively simple adjustments to the current fair market value of your home that would reflect expected transactions expenses. Because sale and repurchase transactions cost about 10% of home value, you can simply reduce the current value of your home by about 10% for each sale and replacement transaction that you expect in the future.

You might assume, for example, two future sale/repurchase transaction pairs that would reduce current fair market value by approximately 20%. If your home's current gross fair market value is $800,000, then enter $640,000 instead. ($800,000 times (100% minus 20%) equals $640,000.) With such an initial adjustment, VeriPlan's projected values would tend to approximate better the consumption purchasing power of your net home equity. (You should also make a note in the table above to indicate that you already assumed a prior 20% discount for anticipated transactions costs in the home value entered.)

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### Chapter 10: Debts worksheet

Section 10.1: Enter your current debts

Section 10.2: Differences between consumption-oriented and investment-oriented debts

Section 10.3: Use the home purchase tool (optional)

Section 10.4: Overview: Planning to buy a home in the future

Section 10.5: An example of how to use this home purchase tool

Section 10.6: Use the future debt tool (optional)

Section 10.7: Using VeriPlan to model a future personal financial crisis

Section 10.8: How VeriPlan projects your current and future debts
Introduction

This worksheet allows you to enter information about up to 25 current debts. VeriPlan will automatically pay off these debts. If you wish, you can make accelerated payments on any or all of them. VeriPlan can also manage mortgage payments on future home purchases automatically, when you use this worksheet in conjunction with the home purchase tool, which you will find below on this worksheet.

VeriPlan automatically calculates annual interest and principal payments on your currently outstanding debts. It will continue to deduct interest and principal payments from your projected annual cash flow for as long as the unpaid principal on these debts would remain. These debts could include mortgages, lines of credit, bank loans, student loans, revolving credit arrangements, credit card, or other types of loans.

VeriPlan also provides an opportunity for you to project the impact of accelerating the repayment of any particular debt or debts by choosing a higher monthly payment. VeriPlan will automatically shift your positive earned income cash flow toward accelerated debt repayment and away from additional cash, fixed income, or equity investments. This allows you to test the overall impact of accelerated debt repayments within the full lifecycle context of VeriPlan's projections about your future income, expenses, assets, and taxes.

People usually consider the question of accelerating debt repayments, when they expect to have sufficient current net income or cash flow to cover such accelerated debt repayments. VeriPlan does not require this. It can also automatically project the financial impacts of your regular required or accelerated debt repayments over years of both positive and/or negative cash flow before debt payments.

If your projected cash flow in any projection year would not be sufficient to meet either your required or accelerated debt repayment strategy, then VeriPlan's would liquidate projected assets. To cover these debt repayments, it would automatically liquidate some of your future financial assets in proportion to your chosen asset allocation.

You do not need to be concerned about possible future debt requirements, because VeriPlan will automatically project any negative financial asset situations whenever your cash, fixed income, and equity assets are projected to be exhausted. Such situations would arise when your cumulative expenditures and taxes exceed your cumulative earned, asset, and other income. For more on this subject, see the future debt tool on the property and debt worksheet, which explains how VeriPlan develops your projections, when your financial assets become inadequate.

VeriPlan will also automatically project your planned FUTURE purchase of a first or second home and your planned FUTURE assumption of a tax-deductible mortgage debt related that home. Using the home purchase tool, which you will find below on this worksheet, VeriPlan automates the lifetime planning process associated with future residential home purchases.

When you use the home purchase tool, you will make entries about your planned home purchase in the home purchase tool section below of this worksheet. In addition, you will make entries about any associated planned future mortgage in the debt table below. Please refer to the home purchase tool section for an explanation of how VeriPlan does this for you.

Section 10.1: Enter your current debts

In the table below you can enter information about up to 25 of your currently outstanding debts. Enter all dollar figures and percentages as POSITIVE NUMBERS on the bold bordered user data entry lines.

Tax deductibility of interest payments

VeriPlan treats the interest on debts that are listed on the first three lines of the table below as tax deductible. While the first line of the table below should be used for your primary mortgage, debts on lines 2 and 3 are treated the same as your primary mortgage debt on line 1. Therefore, you should only enter tax-deductible debts on debt lines 1, 2, and 3 below.

If interest payments on a debt are not tax deductible, then enter those debts on lines 4 through 25.

Lines 1, 2, and/or 3 may also be used by the home purchase tool, which you can find below on this worksheet, to model the mortgage related to the future purchase of a home using tax deductible mortgage financing. When lines 1, 2, and/or 3 are being used in this manner, notifications will appear and line numbers with be highlighted in orange to alert you. Please refer to the home purchase tool section below on this worksheet for an explanation of how this debts input section interacts with the home purchase tool.

Directions for entering information on a line about a particular debt

* The debt number in Column A is for your reference.

* In Column B, enter the lender's name.

* In the Column C, enter a 1 to classify the debt as consumption-oriented debt or enter a 2 to classify the debt as investment-oriented. Concerning the difference between consumption-oriented and investment-oriented debt, please see the discussion below in this chapter. In general, you should classify any debt as consumption-oriented, unless it will enhance your financial welfare. Investment-oriented debts are only those debts that are taken on in pursuit of business or other personal profit seeking endeavors that are rationally intended to improve your overall financial standing.

* In the Column D, enter the total principal balance that is currently outstanding as a positive dollar figure.

* In the Column E, enter the ANNUALIZED interest rate on this debt as a positive percentage. Remember to type a number with the % sign, and verify that your percentage entry is what you intend.

* In the Column F, enter the currently "REQUIRED MONTHLY" payment of both principal and interest.

* In the Column G, enter a "PLANNED MONTHLY" payment that is greater than the "REQUIRED MONTHLY" payment, IF YOU WISH TO MAKE ACCELERATED PAYMENTS ON THIS DEBT. You would only use this column, if you intend to pay off a debt more quickly than is required under the terms of the loan. Otherwise, you could leave zero dollars as an entry. Note that VeriPlan will automatically choose the larger or the "REQUIRED MONTHLY" or "PLANNED MONTHLY" payment columns. If you experiment with projections involving accelerated debt payments and then decide not to make accelerated payments, remember to change the values in the "PLANNED MONTHLY" payment column to be equal to or lower than the REQUIRED MONTHLY column.

* In Column H, you can enter an optional description of the debt.

* In Column I for Debts 1, 2, and 3, VeriPlan automatically indicates whether or not a tax deductible debt is associated with a planned future purchase of a residence and, therefore, involves the home purchase tool in a section below on this worksheet.

Debt Input Table

Type in all your entries -- DO NOT copy-and-paste any entries in this chart.

NOTE: VeriPlan's lines for Debt #7 to Debt #25 have not been included in this User Manual.

** VeriPlan projects the pay-off of debts at fixed interest rates until the principal balance has been retired. If you want to model the effects of variable interest rates, simply run different projection scenarios with different interest rates and compare differences between these scenarios.

Section 10.2: Differences between consumption-oriented and investment-oriented debts

VeriPlan distinguishes between your consumption-oriented debts and your investment-oriented debts.

Investment-oriented debt payments are a form of savings. In contrast, consumption-oriented debts shift repayment of excess past consumption into the future, and they add the heavy burden of interest payments.

You will note that on this worksheet, VeriPlan classifies debts into two categories: A) consumption-oriented debt and B) investment-oriented debt. Despite this classification, VeriPlan calculates all debts using the same methods. The distinction between consumption-oriented and investment-oriented debts has been added so that you can better understand when debt may be contributing to or detracting from your financial welfare. Not all debt is necessarily bad for your financial outlook. In fact, some judiciously acquired investment-oriented debts could be good for you.

Debt repayments directly reduce your ability to make new asset investments in years when you have positive net earnings. In years with negative net earnings, debt repayments increase the rate that you must liquidate assets. Otherwise, they force you into even greater borrowing -- often at higher interest rates, if such debt is available to you at all.

Consumption-oriented debt is debt that you take on to acquire goods and services that are consumed in the short- term. Examples of consumption-oriented debts could be credit card balances related to purchases that are not paid fully each month, auto loans, debt related to vacations, products purchased on credit plans, etc. In general, consumption- oriented debt indicates that your expenditures exceed your current earned income.

If your excess current consumption is chronic, these debts will persist, and you will not be able to build up your financial assets. Unless you already have very substantial invested assets that will be more than adequate to meet your current and future expenses including debt repayments, then your consumption-oriented debt either already is or could become a very substantial problem. If you are not reducing your consumption-oriented debt load, then reducing current consumption should be given the very highest priority.

In contrast, true investment-oriented debt can enhance your long-term financial welfare, and the repayment of investment-oriented debt can be a form of savings. Therefore, VeriPlan tracks and provides additional information on investment-oriented debt repayment. In particular, the savings graphic shows your pre-retirement savings rates -- with and without investment-oriented debt payments, as a percent of earned income per year.

Earlier in their financial lifecycles, many families labor to pay off educational loans, mortgages, and business loans. Such substantial debts can make it seem that they will never be able to acquire adequate cash, fixed income, and equity financial assets. In fact, these educational, mortgage, and business debt obligations can help to create very valuable assets and enable much higher income later in the working lifecycle.

Investment-oriented debts are only those debts that are taken on in pursuit of business or other endeavors that are rationally intended to improve your overall financial standing. Among other things, such debts could include a home mortgage, educational debt, or a loan to start a business. A home purchase could lead to ownership of a valuable asset, if acquired judiciously. Educational debt that improves one's earning capacity could also be investment-oriented debt. A loan to finance a well-planned business venture could be another.

You should be understand that the distinction between consumption-oriented debt and investment-oriented debt is sometimes cloudy. The distinction rests on both the quality of the financial enhancement plan and on the quality of its execution. Any investment-oriented loans could be disguised consumption, and you should be honest with yourself, when you classify your debts.

Finally, the term "investment-oriented" debt might seem to imply that one should also take on debt to acquire a larger portfolio of market traded securities investments, and then classify this debt as investment-oriented debt in VeriPlan. This is NOT at all the case. While some investors use margin loans and borrow against other assets to increase their portfolio, doing this will very significantly increase the risk profile of your asset portfolio.

Furthermore, the securities industry charges very high margin interest rates, when compared to the long-term historical asset class returns that one could reasonably expect. These high interest charges make it is very likely that only a very small minority of such "margined" investors will be lucky enough in their securities selections to overcome the heavy weight of these margin interest charges. The average margin investor can expect to have a net loss, even before other investment costs are considered.

When alternative borrowing against other assets is used as a means to acquire more market traded financial assets, then interest costs may be similarly high. In addition, when your other assets are used as collateral, they also become subject to securities market risks. These debt obligations will remain, even if your leveraged investment portfolio crashes and burns.

Therefore, a debt taken on to acquire more publicly-traded securities is unlikely to be an investment-oriented debt. Instead, it should be classified as consumption-oriented debt for VeriPlan's purposes. Since this form of consumption is something that you cannot eat or sleep in, then it must be some kind of intangible consumption. Perhaps it is similar to purchase of entertainment or to the hopes associated with buying lottery tickets.

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Section 10.3: Use the home purchase tool (optional)

Make mortgage entries in the Debt Inputs Table immediately above

(The table below shows additional columns that are to the right of the columns shown in the table above.)

Inputting information about your planned home purchase

VeriPlan provides this tool for users who plan to purchase up to three homes in the future. This home purchase tool automatically takes into account:

* planned purchase price,

* closing costs,

* settlement cash,

* mortgage debt,

* interim price changes, and

* subsequent price appreciation.

This home purchase tool allows you to develop projections that include your planned FUTURE purchase of a first or second home. This tool automates the lifecycle planning process associated with future residential home purchases.

Automatically project home purchases and upgrades

Section 10.4: Overview: Planning to buy a home in the future

VeriPlan takes your current dollar value entries and automatically adjusts them to reflect your expectations about any positive or negative value changes prior to the projected year of your intended home purchase.

After the number years that you set below has elapsed, VeriPlan will automatically project the purchase of your new home. At the beginning of the projection year that follows the number of years you set, VeriPlan will also automatically:

* set up and project the value of a real estate property asset that reflects adjusted valuation, purchase costs, future real dollar growth rates, tax basis, etc.;

* liquidate sufficient cash, fixed income, and equity assets to fund the projected home price plus purchase closing costs minus mortgage principal assumed.

Financial assets would be withdrawn from taxable accounts first. If the taxable asset balances were insufficient, then financial assets would be withdrawn from tax-deferred accounts and then from Roth accounts, in that order.;

VeriPlan's normal automated savings, investment, taxation, and withdrawal processes related to your projections will continue to:

* set up and amortize the associated tax-deductible mortgage loan from any associated mortgage that you entered in the debt section above

* project and adjust any taxes and any costs affected by this new home ownership; and

* reflect this home purchase in the graphics and data worksheets.

If you currently rent your residence and you want to buy a first home, you could use this tool to evaluate the projected financial tradeoffs of renting versus owning your primary residence over your lifecycle. You could develop projections that reflect an apples-to-apples comparison of your current home rental versus the future purchase of an equivalent home. Alternatively, you could compare your current home rental to a situation in which the home you plan to purchase upgrades the quality of your housing.

You could use this tool, if you already own your primary residence -- with or without a mortgage -- and you want to purchase a second home at some point in the future. In this case, you should already have entered the information about you existing primary owned residence into VeriPlan. Therefore, the additional entries you make with this tool would focus on the future purchase of this second home. VeriPlan will automatically combine the financial effects associated with the home that you already own and the home that you plan to purchase in the future.

Alternatively, instead of buying a second home, you might want to use this tool to model the future sale of your current home and its tax-free replacement with a more expensive home. In that case, you should leave your current entries about your existing home intact in VeriPlan and simply use this tool to model the incremental changes. Similarly, you could also use this tool to model a major future renovation or expansion of a home that you currently own.

Whenever you use this home purchase tool, VeriPlan will assume that you:

* intend to own and occupy one or two residences;

* expect to take advantage of income tax deductions associated with mortgage interest payments and real estate taxes; and

* want to understand financial tradeoffs and whether such a real estate purchase might be financially manageable.

Note that no home modeled with this tool should be intended for rental, because different tax rules apply to rental real estate. Furthermore, rental income would need to be recognized.

If you own a home and do not plan to purchase a second home

If you already rent or own a home and do not wish to evaluate the future purchase of a home, you do not need to use this tool. Instead, simply enter information about your housing assets, debts, taxes, and expenses on the yellow-tabbed and orange-tabbed worksheets to reflect your current housing situation.

Do the following in VeriPlan:

* enter the current gross market value of any home that you own plus related asset information on the property worksheet,

* enter your primary residence mortgage on line 1 in the debt input table above, and

* enter current dollar information about your annual real estate tax payments in the second-to-last column of the input table on the property worksheet.

When you use the home purchase tool input table, you will make entries about the number of years until you plan to purchase a home, the planned purchase price, and other information related to your expected home purchase.

Buying a home affects a myriad of present and future financial issues including your costs, taxes, debts, and assets. To help you understand how to use this tool properly and make all necessary and appropriate entries into VeriPlan, this _VeriPlan User Manual_ provides a detailed example of how to use this tool.

The vast majority of people require mortgage financing to purchase their first or second home. When you use this tool to plan the purchase of a home, you will simultaneously use the separate debt inputs table above to enter information about the mortgage debt financing that you plan to use.

Follow these steps, as you make entries into the home purchase tool input table above:

Step 1: Enter the expected purchase price of the home in current dollars in Column A.

* Use one of the three lines in the input table below for each planned home purchase. You should use one of the three lines, which does NOT already have an existing tax deductible debt obligation listed in Column E.

* On the same numbered line number in the debt input table, you will enter the anticipated terms of the corresponding mortgage that you plan to take on related to this planned home purchase.

* The line number that you use in the table below MUST BE the same line number that you use on the mortgage debt inputs table. Once you make your mortgage entries there, then the total mortgage principal that you plan to take on will also be displayed in Column E.

* Note that when you make a dollar entry, certain cells will turn orange automatically and a self-explanatory notice will appear above the input table. However, after you make a "number of years until purchase" entry in the next step below, which is equal to or greater than one year, then these alerts will automatically disappear.

Step 2: Enter purchase closing costs in Column B, as a percent of the purchase price in Column A

* Such purchase closing costs typically range from 1% to 3% of the purchase price of a home. These purchase closing costs would also include the costs associated with acquiring a mortgage loan. (Note that the seller's closing costs typically are much higher. The seller normally pays the sales commission for both the buying and selling agents/firms, which typically is about 6% of the purchase price -- in addition closing costs of 1% to 3%.)

Step 3: Decide how many years until you plan to purchase your home and make an entry in Column C.

* When you set the number of years in Column A to be 1 (one) or greater, then VeriPlan will automatically implement the other functionality described on this tool worksheet.

* If you were to enter 3 years in Column C, for example, then VeriPlan would wait a full three years and execute the home purchase transaction at the beginning of the fourth year.

At that point, VeriPlan automatically:

* establishes a property asset equal to the purchase price, which will be included in your property asset class,

* sets up an self-amortizing mortgage loan with the terms that you specify, and

* withdraws the financial assets needed to fund the difference between the projected purchase price plus purchase closing costs minus the mortgage loan principal.

VeriPlan will automatically make any real dollar cost or valuation adjustments that you enter and wish to have occur up until the year of this home purchase transaction.

* If you do not intend to use one or more of the three lines in the table below to model a future home purchase, THEN FOR THAT LINE YOU MUST ENTER 0 (zero) DOLLARS IN COLUMN A AND 0 (zero) YEARS IN COLUMN C.

* Entering zeros in Columns A and C shuts off all of this tool's future home purchase functionality for that line. When Columns A and C are set to a zero, VeriPlan will treat any corresponding debt for that line on the debt inputs worksheet, as a debt that you currently owe.

As you make entries, conditional and self-explanatory notices may appear and data entry boxes may change to orange. These notices and color changes could display on both the input table and on the debt input table. VeriPlan does this, because the logic for this future home purchase tool and for your current debts is fully integrated and shared.

When you are not using a tax-deductible debt entry line on the debt inputs worksheet for an existing mortgage debt or line of credit, you can instead use it to project a future home purchase, and vice versa. Both current and future debts will display on the debts graphic.

When the number of years in Column C is set to zero, VeriPlan will NOT automatically generate a property asset to correspond with any mortgage debt that might display this line. That is because a zero years entry shuts off all of this tool's functionality. Instead, you must directly enter the current fair market value for residential homes that you already own on the property asset worksheet. When using a future purchase price, VeriPlan can automatically assign a fair market value. However, with your existing residential real estate assets, the fair market value is no longer connected to the purchase price, and your home's value may have changed significantly, since you acquired it. That is why you need to supply directly the current value and your estimate of future value growth on the property asset worksheet.

Step 4: Enter the terms of the mortgage that you would plan to take on in the future to purchase this home.

* Go to debt inputs table above and enter the terms of the mortgage on the same line number corresponding to the line you are using in the table below.

* Enter the anticipated mortgage principal amount, the expected ANNUAL interest rate, and the expected MONTHLY mortgage payment amount. Once you complete other entries to model this home purchase, you could change the terms of the mortgage to test sensitivity to interest rate changes, etc.

* Then, look at Column E of the home purchase inputs table to verify that the mortgage principal that you entered on the debt inputs worksheet for this planned purchase has been displayed on the correct line.

* If any loan principal amounts are displayed on one or more of the three lines in Column E, and you are not using that line to plan a future home purchase, then the loan principal already displayed must be associated with a different tax-deductible debt that you already currently owe.

Step 5: In Column F, enter your expectation about relative real dollar percentage housing price growth BEFORE this home purchase is expected to occur

* The BEFORE PURCHASE real dollar price appreciation percentage that you enter in Column F should be relative to general level consumer price inflation in the short-term. For example, if you expect housing values to grow at values that equal the rate of consumer price inflation in the near-term, then enter 0%.

* The BEFORE PURCHASE relative price appreciation rate in Column F allows you to experiment with the effect of short-term real dollar changes in housing values before you plan to buy.

* Depending on your setting in Column F, VeriPlan will decrease or increase your total required cash to purchase this home in Column G to reflect expected real dollar price changes. Column G is entitled: "Cash required in current dollars to purchase this home (No entry; automatically generated)."

* If you expect short-term housing prices to increase/decrease relative to general inflation, then the projected real dollar cash down payment and closing costs required to complete this home purchase will also increase or decrease, respectively.

Step 6: In Column H, enter your expectation about relative real dollar percentage price growth AFTER this home purchase

* The AFTER PURCHASE total real dollar price appreciation percentage rate in Column H should be set relative to your expectations about the general level of consumer price inflation in the long-term. If you expect longer-term housing values to grow at the rate of inflation, then enter 0%.

* VeriPlan uses your entry in Column H to project the long-term asset value for this home after it is purchased. This projected home value will be added automatically added to the Property asset class. The home's projected real dollar value will be displayed as part of the Property asset class on VeriPlan's "total assets" graphics and corresponding data worksheets.

Step 7: In Column I, enter your average expectation about the percent of house's value that will be needed annually to maintain the structure in a condition similar to when it was purchased.

* Annualized expenses that you should consider here relate to structural maintenance, such as roofing, painting, termite repairs, and repair and replacement of heating, air conditioning, water heaters, etc.

* Do not include any costs related to major anticipated renovations or upgrades. Such infrequent and planned one-time expenses should instead be entered as major planned expenses on the expenses worksheet.

* Do not include any cost assumptions related to home furnishings or periodic maintenance such as gardening or pool services. Instead, these frequently recurring expenses should be included in the annual living expense budget that you enter on the expenses worksheet.

Step 8: In Column J, enter your expectation about annual real estate taxes, as a percent of purchase price

* VeriPlan will automatically project your future real estate taxes using this percentage. (See the taxes worksheet for more information.)

Other entries to complete the projection modeling of you future home purchase:

Purchasing versus renting a home or acquiring a second home both may involve significant differences in your living expenses and taxes. Such differences should be accounted for in a well-developed lifetime plan. To aid you in understanding how to make these adjustments, VeriPlan provides a detailed example in this _VeriPlan User Manual_. This example will help you to understand the additional entries that you would need to make. It also explains certain things that VeriPlan does automatically for you.

The following is a category list of other entries that you may need to make in VeriPlan.

* Adjust your projected annual ordinary living expenses for the long-term

* Adjust your projected annual ordinary living expenses for the interim period until the home is purchased

* Add any additional projected major planned expenses

Section 10.5: An example of how to use this home purchase tool

This detailed example specifically addresses the planned future purchase of a first home. Nevertheless, it is generally instructive. Adapting this example to the future purchase of a second home, to the future sale and repurchase of an upgraded home, or to a major future renovation or expansion project involving mortgage debt should be relatively straightforward.

The current situation and planning assumptions for this example

You currently rent and do not own your primary residence. You have already developed and refined a lifetime financial projection in VeriPlan by entering your information on the various worksheets. Your current projection assumes that you would continue to rent your primary residence throughout your life. However, you also want to understand how buying a home in the future could change your long-term financial outlook.

In your current VeriPlan rental projection, you have included annual rent and other rental expenses, as part of your total annual living expenses. Currently, you pay $18,000 annually in rent. With concern, you expect that your rent will continue to increase over the long-term at a real dollar rate that is 1.25% higher than the general rate of consumer price inflation. You also have additional annual rental housing related expenses of $4,500. These additional expenses consist of utilities (electric, gas, trash, and sewer), renter's insurance, new furnishings, and gardening.

The annual living expense total that you already entered in the ordinary living expenses section of the expense worksheet includes this $18,000 in rent and $4,500 in related rental expenses. For your overall living expenses, you have assumed an annual .50% real dollar appreciation that you have also entered on the expenses worksheet. This .50% real dollar growth rate for your total annual living expenses is lower than your expectation from above that your rent will increase by 1.25% annually in real dollars. In effect, you expect that rent will take an increasingly large portion of your total living expense budget over time. This factor is a primary reason why you want to evaluate the purchase of a home.

In three years, you would plan to purchase a home that currently would cost either $400,000 or $600,000. During the next three years, you are unsure about whether real dollar residential real estate prices will rise or fall. For the next three years, your average guess is that real estate prices will decline by a negative .05% per year (-.5%/year) in real dollar terms compared to the expected rate of change in consumer prices.

You are interested in testing higher and lower interim real dollar housing price inflation rates. While you expect relatively low real dollar housing inflation in the nearer term, you want to understand how much higher relative price changes would affect your ability to afford a home in three years. And, on the contrary, you also think it is possible that real estate prices could fall in real dollar terms even more than -.5%. However, you would not delay your purchase solely due to personal speculation about lower future prices.

After you purchase your home, you expect that real estate prices will increase by 1.75% annually over the rate of inflation for the very long-term. This higher long-term price appreciation expectation is another significant reason for considering purchase versus rental. Because you expect that housing values and rents both may continue to rise, you would rather pay yourself through home ownership, than help a landlord to pay himself.

The primary reason you want to wait three years is to accumulate a purchase down payment and still have an additional financial asset buffer for other risk contingencies. Neither your parents nor your spouse's parents are in a position to help you to fund the down payment for this home. You both realize that you are on your own.

You and your spouse are talented and both have a strong work ethic. You rationally expect that your real wages will increase 1.5% annually on average between the two of you. You have agreed to control your living expenses and to save and invest to build up assets for the down payment. Furthermore, you firmly intend to control your living expenses long after you have bought your home. This home is just the nearest of many other important financial goals for your new family.

You have decided to evaluate the purchase of a $400,000 home, because this price is comparable to the value of the home that you currently rent. You want to do this analysis first, so that you have an "apples-to-apples" financial projection comparison. You want to understand the tradeoffs between renting and owning at a comparable housing value level.

Once you understand this equivalent value rent versus buy comparison, then you also would like to use VeriPlan and this home purchase tool to develop another projection to buy a $600,000 home in three years. You understand that you and your spouse have sufficient income now to qualify for a large enough mortgage at current 30-year fixed mortgage rates. However, you are concerned about the long-term impact of the much higher initial and ongoing financial outlays required to purchase a more expensive home. Furthermore, you know that either a higher down payment and/or less favorable mortgage terms may be required to purchase a more expensive home. These factors would add to the risk of you being insufficiently prepared in three years to buy this more expensive home.

You have studied the local housing market and have investigated your ability to obtain a real estate loan. You have learned to make mortgage calculations with your calculator. Currently, you understand that your combined income and your very low outstanding credit debts probably would allow you to obtain a $480,000 thirty-year fixed rate mortgage loan with an 80% loan-to-value ratio and an interest rate of up to 6.00%. While you cannot know what mortgage terms will be in three years, you hope for the best. In this hypothetical situation, current rates for this type of mortgage are in the 5% range, so you believe that your hope is reasonable.

You are going to begin your projection modeling with the following upper limit mortgage assumptions:

* $400,000 home -- An 80% thirty-year fixed rate mortgage of $320,000 at 6.00% would require a $1918.56 monthly payment in current dollars.

* $600,000 home -- An 80% thirty-year fixed rate mortgage of $480,000 at 6.00% would require a $2,877.84 monthly payment in current dollars.

While you might take on a higher percent loan-to-value ratio when the time comes, you plan to save sufficient personal funds to pay a 20% down payment for either home and to pay an additional 2% of the home price in purchase closing costs. Of course, higher loan-to-value ratios may possible given your financial circumstances.

A larger mortgage might allow you to purchase a home sooner. However, you intend to build your initial projection with these starting assumptions, because you realize that VeriPlan is fully integrated and will allow you to adjust any assumption later. You know that it can instantly develop a wide range of revised future home purchase projections for you.

Given the other assumptions that you enter, VeriPlan will automatically calculate the funds that you need to pay the down payment and the purchase closing costs. VeriPlan displays the total amount required in Column G, entitled: "Cash required in current dollars to purchase this home," of the input table in above. Column G will reflect the current value impact of the various relative growth factors that you will use for the next three years.

Finally, you hope to buy a home when you can -- sooner or later than three years. While you realize that financial assets markets may fluctuate in the short-term, you have chosen to invest according to your long-term asset allocation plan, as you accumulate a down payment. You have decided that it would probably be harder to accumulate the down payment, if you avoided long-term equities and fixed income investing during the next three years and used a cash-only investment strategy instead. You appreciate that risk is risk and that there is no costless way to shift investment risk to someone else. Therefore, you have decided that the opportunity to be paid an investment risk premium outweighs your concern about short-term setbacks in the long-term bond and equities markets.

What to do in VeriPlan to model the purchase of a $400,000 "apples-to-apples" home or a $600,000 upgraded home in three years.

A) Save your current rental housing projection in a separately named file and print useful worksheets.

* Use your current lifetime plan based on continued housing rental and print the graphics and corresponding data worksheets that you want to have available to compare later. VeriPlan graphic and data worksheets are already configured for printing.

* Save a separate electronic copy of your current rental housing projection under a different name, so that you could use it again later, if you wanted to do so.

* Create a new electronic copy with a different file name, and use this file to make the changes below to develop a projection for buying a home in three years.

B) Activate the home purchase tool:

* In the input table for the home purchase tool, make the following entries:

* Use line number 1 of the input table.

Because you do not yet own a home, the mortgage amount displayed in Column E would be zero dollars. Alternatively, any line with zero dollars in Column E could also be used. Note that you must also use the same line number on the debt inputs table, when you enter your mortgage information.

If you own a home already and there is a mortgage or real estate line of credit amount in Column E for any line, then just chose a different line to model this future purchase.

* Enter $400,000 as the current home purchase price in Column A.

* If you are modeling a $600,000 purchase, enter that amount instead.

* Enter 2.00% in Column B, "Additional purchase closing costs"

* Enter 3 years in Column C, "Number of years until purchase."

* Enter -.5% in Column F for the "Annual relative real dollar home price change BEFORE purchase (% per year versus general inflation)."

* Enter 1.75% in Column H for the "Expected total annual home price appreciation AFTER purchase (total % real dollar price appreciation per year)."

* Enter perhaps .50% in Column I for the "Expected annual cost to maintain house structure AFTER purchase (% of asset value per year)" (In effect, this is your long-term major maintenance reserve.)

C) Enter your projected MONTHLY mortgage payments:

In the debt inputs table, enter the terms of the mortgage that you expect to enter into, when you purchase your home. You must use the same line number on this debt input table that you used on the input table of the home purchase tool. Because you have already entered a number of years into the future on the home purchase tool input table, that line number will also be highlighted in orange on the debt inputs table and a self-explanatory notice will display above the debt input table.

Make the following entries:

* Enter a 2 in the column that categorizes this mortgage as an 'investment-oriented debt'

* Enter $320,000 as the current dollar 80% mortgage principal for the $400,000 home purchase.

* (Enter $480,000 as the current 80% mortgage principal for the $600,000 home purchase.)

* Enter 6.00% as the ANNUAL mortgage interest rate

* Enter $1918.56 as the MONTHLY payment in current dollars for the $400,000 home purchase.

* Enter $2,877.84 as the MONTHLY payment in current dollars for the $600,000 home purchase.

* Ignore the accelerated payments column (Any amount higher than the required payment would accelerate repayment.)

* Enter an optional description of this debt.

D) Enter expected real estate taxes:

After you enter expected real estate taxes in Column J, this is all you need to do about projecting real estate taxes for your planned home purchase. VeriPlan will automatically project your future real estate taxes using this percentage.

Concerning inflation, your real estate tax percentage will be applied to the real dollar future purchase price of the home and, therefore, will automatically account for any inflation adjustment prior to purchase that you have made in Column F.

If you expect a different inflationary growth rate for your real estate taxes, after you have purchase this home, then you can enter a future inflationary growth rate for real estate taxes overall on the taxes worksheet.

E) Income Taxes:

You do not need to make any income tax related entries, because VeriPlan will manage the projection of income taxes automatically. This includes the automatic projection of mortgage interest and real estate tax deductions.

F) Adjust your projected annual ordinary living expenses for the long-term

Adjust your total annual expenses to reflect the costs of home ownership rather than the costs of renting throughout your life. Do this by changing your total annual ordinary living expense entry on the expenses worksheet:

From your total annual living expenses, subtract you current annual rent and other rental expenses. These annual expenses equal $22,500, including $18,000 in rent plus the additional $4,500 in housing rental related expenses.

To your total annual living expenses, add ONLY your estimate for additional annually recurring housing ownership expenses such as utilities (electric, gas, trash, and sewer), homeowners and liability insurance, new furnishings, gardening, and other expenses.

Expenses for a $400,000 versus $600,000 home would probably differ significantly. Because of higher insurance premiums, you might assume that your non-mortgage expenses associated home ownership will be $6,000 per year on a $400,000 home versus $4,500 for renting. On a $600,000 home, insurance would be even higher, plus you would have greater utility, furnishing, and gardening costs, so you might perhaps assume costs of $8,000 annually.

DO NOT include any costs related to mortgage payments or real estate taxes, because VeriPlan automatically projects these costs using separate internal logic.

DO NOT include any structural maintenance costs that you already included in Column I of the input table above. This column is entitled: "Expected annual cost to maintain house structure AFTER purchase (% of asset value per year)."

G) Adjust your projected annual ordinary living expenses for the interim period, until the home is purchased

The lifetime living expense adjustments that you made in the previous section will cause VeriPlan to project that you would IMMEDIATELY stop paying rent and associated rental housing expenses. Then, after a full three years, VeriPlan will automatically trigger all aspects of your future home purchase. Therefore, your mortgage expenses will begin in four years. However, note that your non-mortgage housing expenses associated with home ownership will begin in year 1.

Given the situation summarized in the previous paragraph, you need to enter some temporary expense adjustments for years 1, 2, and 3 in the "major planned expenses and year-by-year expense adjustments" input table on the expenses worksheet. Enter any positive or negative cost differences between owning and renting for the first three years of your new projection. If these expense differences over three years were large, and if you did not make these adjustments, then your projected accumulation of asset for a down payment would distorted either negatively or positively.

Here are sample adjustments for these interim expenses:

* Include +$18,000 for rent in years 1, 2, and 3, while you continue to rent.

Because you have already included costs associated with home ownership of $6,000 annually on a $400,000 home or $8,000 on a $600,000 home, you need to offset the net increase for these higher costs during the first three years over the $4,500 annual costs associated with continuing to rent. Therefore, you would reduce expenses by $1,500 or $3,500, respectively, in years 1, 2, and 3.

When you combine items 1 and 2, your net annual adjustment for each of the first three years would be:

+$16,500 on a $400,000 home [ $18,000 + ($4,500 - $6,000) ] or

+$14,500 on a $600,000 home [ $18,000 + ($4,500 - $8,000) ].

H) Saving the down payment:

You do not need to be concerned about your accumulation of financial assets for the down payment and closing costs during the next three years, because VeriPlan does this automatically.

I) Add any additional projected major planned expenses:

If you expect to have one or more "one-time" costs related to home ownership, then use the year-by-year expense adjustments input table on the expenses worksheet. Note that you would not add such additional expenses, when modeling the $400,000 future home purchase, because it is an "apples-to-apples" comparison.

For example, you might expect to purchase new home furnishings during the early years of home ownership. You might expect to spend an extra $10,000 on furnishings each year for three years, after you purchase the home at the beginning of year 4. If so, then enter $10,000 in years 4, 5, and 6 of the input table with the appropriate relative growth rate. The relative growth rate would probably be 0%, because home furnishings are basic consumer goods.

J) Perform what 'what-if' testing on your assumptions

Change any entry anywhere in VeriPlan to test the projected lifetime impact of doing something different than specified above, until you are satisfied with your projection.

Section 10.6: Use the future debt tool (optional)

Excess consumption and the attendant costs of debt can be very destructive. This future debt tool allows you to set an interest rate for any future unfunded consumption that you might incur.

VeriPlan automatically accumulates an unfunded debt with unpaid interest, when your cash, bond & fixed income, and stock & equity financial assets are depleted and your projected expenses exceed your income. If subsequent positive net income becomes available, VeriPlan will automatically retire some or all of this unfunded consumption debt.

This future debt tool enables you to choose a loan interest rate for any potential debt that you might need to incur in the future. You can set and adjust this interest rate below.

In any period, when your expenses exceed your income, you must either take on debt or liquidate assets. From an economic standpoint, periods when expenses exceed income are not without a significant long-term cost. Selling your financial assets, property, or other assets to cover expenses removes the opportunity to earn a market risk premium on those assets in the future. If, instead, you borrow to pay these expenses, you must repay high loan interest expenses and principal in the future. If these alternatives were not available to you, bankruptcy would result.

During some projection years, VeriPlan might indicate that your expenses would exceed your income and it would automatically draw upon your cash, bond, and stock assets to fund this projected gap between expenses and income. Eventually, your cash, bond/fixed income, and stock/equity financial assets might have become completely depleted in making up your cumulative annual expense shortfalls. Such a situation could occur during your earning years or in retirement.

During your lifetime, this situation could reoccur more than once. If your cumulative expenses force you into debt at some point, positive net income earned subsequently might pay off this debt. Alternatively, new assets received through inheritance, for example, could also eliminate this debt. At some later point, the cycle could repeat.

VeriPlan will automatically begin to accrue an "unfunded consumption debt" for you, when

* your current income is inadequate to meet your expenses and

* your cash, bond/fixed income, and stock/equity financial assets are completely depleted.

Unpaid principal and unpaid interest charged at the interest rate you set below will be accumulated automatically as unfunded consumption debt.

In the situation where your projected financial assets were depleted, you could still have property and other assets to liquidate. VeriPlan does not automatically assume that you would choose to sell off your property and other assets to avoid incurring unfunded consumption debt.

VeriPlan would not know the potential liquidity of the property and other assets that you list on the property assets worksheet. Furthermore, it would not be able to assess your future willingness or ability to assume debt as an alternative to liquidating your property or other assets.

Any future decision about asset liquidation that you might make could depend on a variety of factors, including asset salability, capital gains taxes, the need to use the asset, etc. Instead of selling such assets, you might prefer to retain them and to use them as collateral for a future loan.

Because of these realistic considerations, VeriPlan uses an alternative approach. Graphically, VeriPlan projects for you the net impact of your future "unfunded consumption debt" on your portfolio's remaining property assets, after your cash, bond, and stock financial assets been depleted.

When this occurs, VeriPlan's total assets graphic and data output will illustrate the erosion of total value in your asset portfolio caused by any future unfunded consumption debt. The graphics will reflect the portfolio value erosion caused by this debt.

VeriPlan's total assets graphics add the projected "negative value" of your current and future debts to your remaining positively valued property assets. Consult the data output for each projection year, to find the projected negative real dollar values of your future unfunded consumption debt.

When you have other positively valued assets, your debts will not display directly, because of how the graphics drawing facilities of the underlying spreadsheet engine work. Nevertheless, your debts will affect how your positively valued portfolio assets are displayed. Whenever the lower edge of any positively valued asset falls below zero on the "y-axis" of a graphic, then your outstanding debts are the cause. How much your positively valued assets are pulled downward below zero will depend upon the total principal and accrued interest of your outstanding debts.

Furthermore, the higher the interest rate that you chose for your projected unfunded consumption debt, the more rapidly any future unfunded consumption debt will erode the net value of your overall portfolio assets. Your future unfunded consumption debt will not affect the graphical display of your cash, bond/fixed income, and stock/equity financial assets, because your financial assets must be fully depleted, before VeriPlan begins to accrue any future unfunded consumption debt.

Note that your currently outstanding debts and future mortgage loans incurred through use of the home purchase tool will also affect the graphical display of your financial assets and property assets. In VeriPlan, you may have both current debt and anticipated mortgage obligations at the same time as you have positive financial assets. However, if your current net income is not sufficient to meet these required debt payments, then over time VeriPlan will automatically liquidate some or all of your financial assets to meet these debt obligations. Once your financial assets are exhausted, then VeriPlan automatically invokes its unfunded consumption debt logic, as needed.

Your loan interest rate for future unfunded consumption debt:

In this section, you can set and adjust the loan interest rate for any future unfunded consumption debt that you might incur, once your financial assets are depleted.

Note that this should be a "real dollar" interest rate. Typically, an expected real dollar interest rate would be about 3% lower than its corresponding nominal dollar expected interest rate. This difference is based upon the long-term, historical inflation rate for consumer prices.

Initially, VeriPlan comes configured with a 0%, user-adjustable real dollar interest rate. In effect, this 0% real dollar interest rate means that this tool is not turned on for your planning. However, if your planning projection indicates that at certain points during your lifetime you might get into a situation where your cash, bond, and stock financial assets would be depleted and you would have expenses exceeding your income, you really should run a few tests with this tool.

Do not be gentle with this interest rate. Unless you have pre-arranged a credit line, your interest rates could be very high. Think 8% to 10% as a minimum, unless you can really justify a lower interest rate. An 8% to 10% rate could be appropriate for users who are projected to have:

* property and other assets to use as collateral,

* a very good credit rating, and

* a pre-existing loan arrangement established before any financial crisis arose.

If you believe that these qualifications probably would not apply to your projections, then you should consider using a substantially higher interest rate. The results could be rather terrifying! Build up your assets and stay away from the edge.

Some considerations in selecting a loan interest rate for future unfunded consumption debt

Multiple factors can affect the choice of an appropriate loan interest rate for future unfunded consumption debt. You might wish to consider these factors:

Interest rate variability

Over the years, consumer debt interest rates are likely to vary widely, depending upon the general business and monetary environment of the time. The future debt tool uses an average real dollar loan interest rate to accrue interest on future unfunded consumption debt that you could incur at any point during your lifecycle.

While use of an average is a reasonable starting point for projection planning, interest rate variability means that actual real dollar interest rates could be lower, but also might be substantially higher at the time you would need such a loan. The likelihood of wide interest rate variability across time means that you should always test the sensitivity projection of your projections using a reasonably wide range of different interest rates. Because VeriPlan allows you to develop variations instantly, you can quickly test the sensitivity of your plan to a full range of interest rates.

In particular, you should ensure that you test significantly higher interest rates, because higher rates can be financially ruinous. For example, if you think that an average interest rate of 12% would be appropriate for you, then you might also evaluate the impact of 15%, 18%, or even 20+% interest rates.

Bond debt interest rate averages for corporations provide a rate baseline. Interest rates for individuals usually would range from significantly higher to far higher.

On the risk and returns worksheet, you will find VeriPlan's estimate of the long-term bond spread assumption for high-quality corporate debt that VeriPlan uses to estimate real dollar bond/fixed income asset class returns. This rate is somewhat lower than 3% per year. (Remember also that an additional 3 percentage points for expected inflation was already subtracted from this high quality bond/fixed income rate of return assumption.)

While this is a real dollar rate of return, it also measures the long-term average borrowing cost to these corporations before transactions expenses. To pay transactions costs, typically corporations will raise additional funds at the same market interest rates to pay their financial intermediaries.

Other large, but higher risk corporations, possessing valuable assets and positive cash flow, can have much lower quality credit ratings. Some have credit ratings that fall below investment grade into junk bond rating levels. On average over time, to raise debt, these lower rated corporations pay additional percentage interest rate points of 3%, 4%, and higher to raise capital in the credit markets. When added to the 3% real dollar interest cost to very high quality corporations, then total average real dollar interest rates of 6%, 8%, and higher would be the result.

Lower rated corporations still have valuable assets to use as debt collateral and positive cash flows. If they would pay these long-term average real dollar interest rates, then what interest rates should individuals expect realistically, particularly when they have negative cash flows and no financial assets? The answer is that market interest rates for such individuals would be far higher, perhaps astronomical, and highly variable. In fact, credit simply might not be available to such individuals, when the need arose.

Use moderate to high real dollar interest rates, ONLY when you are projected to have substantial property and other assets to use as collateral, and when you have already established a high quality personal credit rating.

Certain factors can help individuals to obtain consumption loans at interest rates that are not completely ruinous. These distinguishing factors include:

* having substantial property or other assets to use as collateral,

* carefully developing a strong credit rating over a long period, and

* putting into place an unused loan arrangement long before any financial difficulty arises.

Ten percent could be a reasonable lower bound for the interest rate assumption for future unfunded consumption debt. However, a 10% real dollar interest rate would ONLY be appropriate for those who are projected to possess property and other assets and to have a very good credit rating.

If you do not anticipate having property and other assets and a very good credit rating in the future, then you should probably use a substantially higher interest rate. (See the discussion below about unsecured consumer debt.)

Arrange for emergency borrowing well in advance

You should not wait for a crisis to attempt to arrange the loan that you might need. If you can secure a long-term credit facility at a reasonable cost, you should do so well in advance of any potential need.

For example, the time to put in place a long-term home equity line of credit is when you have already built up substantial real estate equity, are receiving steady income, and have a good credit rating. Once you obtain such a line of credit, you should leave it unused. On the other hand, if you do use it, you should do so infrequently and then pay down the balance quickly and fully. If you smash this piggy bank too early, it could become part of the problem and not part of the solution.

Typically, interest rates on lines of credit secured by real estate assets will still fluctuate according to market rates in the future, but at least the line of credit would already be in place and available for an emergency. Furthermore, future line of credit interest rates would reflect the value of the real estate collateral that secures it. Such interest rates should be substantially lower than unsecured consumer credit rates.

Develop projections with very high interest rates, when you lack collateral.

Unless you have substantial assets to pledge as collateral and a very good credit rating, you are likely to pay the very high interest rates that are associated with unsecured consumer credit card debts. Without substantial property and/or other assets to use as collateral, it simply would not be reasonable to expect to borrow at lower rates. In such circumstances, real dollar interest rates could range from 15% to 30% annually or higher.

You might think that these suggested average rates are much too high, because you already have consumer credit cards with much lower rates. First, interest rates have been at generational lows, which may have distorted perceptions of much longer-term consumer interest rate averages. Second, if your future income would be inadequate to meet your expenses and your financial assets were depleted, then it is likely that the terms of your credit cards will be at risk, as well. If a credit card company chooses unilaterally to increase dramatically your interest rate or to cancel you credit line altogether, you will have no control of the matter.

Credit card companies, of course, have an obligation to protect themselves from borrowers who cannot meet their obligations. However, the evidence is strong that predatory lending practices by many credit card companies in this largely unregulated industry have ensnared millions of borrowers. Once in debt, many people stay trapped in virtually endless cycles of indebtedness caused by high fees and escalating interest rates. If you have any doubts about this, do a search on the web for articles regarding the Credit Card Accountability Responsibility and Disclosure Act of 2009 widespread credit card industry abuses. Also look on the Federal Reserve System website's Consumer Information section, since the Fed is charged with implementation of this law.

Find the:

Federal Reserve System website Consumer Information section

Millions of Americans have already undermined their ability to build long-term financial security, because they carry significant, unmanageable credit card debts with very high interest rates and costs. While many consumers may become victims of predatory credit card companies, their unaffordable current consumption is at the heart of the issue. Whether caused by loss of income or another personal financial disaster or by lifestyle spending beyond one's means, excess consumption simply makes one far more financially vulnerable.

If nothing else, this future debt tool might help you to appreciate just how rapidly you could be drawn toward financial ruin through consumer debt. Usurious consumer debt interest rates combined with major setbacks such as job loss, health problems, divorce, disability, or other financial disaster can destroy well-conceived lifetime financial plans, if adequate asset buffers are not already in place.

Given your circumstances and these comments, you might decide that it would be appropriate for you to use a very high interest rate assumption in the future debt tool. If this is the case, then you also should quickly take very aggressive steps in your financial affairs to move away from the danger of unsupportable future consumption debt. One of the most important first steps toward financial well-being is to move as rapidly as you can away from relying upon credit debt to meet current consumption needs.

Section 10.7: Using VeriPlan to model a future personal financial crisis

By testing a variety of interest rates in the context of your lifecycle projections, you might develop a better appreciation of the dangers of unsupportable consumption debt.

If VeriPlan's unfunded consumption debt logic were ever invoked, for many users it would be when their financial assets were depleted in retirement. However, this logic also could be activated at any point in your lifecycle projection, when your financial assets were depleted. For example, you might experience a significant financial problem from a future disability crisis, which could involve the loss of expected income and/or much higher, unavoidable expenses.

VeriPlan allows you to model the loss of planned income, by using the year-by-year income adjustments table on the income worksheet. Enter a negative income adjustment for some or all of your earned income for one or more years to see what would happen to your projection. In the same vein, you could model higher than anticipated expenses by using the year-by-year expense adjustment table on the expense worksheet.

An adverse disability situation, such as this, could deplete all your projected financial assets for some period. If so, VeriPlan's would automatically invoke its unfunded consumption debt logic and would use the user-adjustable interest rate for future unfunded consumption debt. If exhaustion of your financial assets were to be temporary, then your net earned income in subsequent years could help you to recover and to repay this debt. To recover from such an adverse situation, your future net earnings would have to be sufficient to pay back both the debt principal plus the accrued interest

However, financial crises are particularly insidious, because of the potential cost of consumption debt. If your projections indicate that you could be susceptible to running out of financial assets, then you should also evaluate a wide range of potential interest rates. While subsequent positive net income might allow you to recover at certain interest rate levels, higher interest rates could prevent a recovery entirely. In such circumstances, VeriPlan's total assets graphics will look like your portfolio fell off a cliff. They starkly graph the real danger of unmanageable consumer debt.

Section 10.8: How VeriPlan projects your current and future debts

VeriPlan uses the following general model, when projecting the financial impact of your current and future debt obligations.

1) YOUR CURRENT DEBTS

* On this debts worksheet, you enter the debt obligations that you currently have outstanding. VeriPlan automatically pays down the principal and interest associated with each of these debts over time, as required. If you wish VeriPlan to project that you would make accelerated debt payments on any of your current debts, you can to do so with this debts worksheet.

2) INFLATION ADJUSTMENTS

* Future payments you would make on debts that you currently owe would be made in nominal dollars, which would be affected by future inflation. Overall, VeriPlan uses real dollars with inflation removed to develop its constant purchasing power projections. Therefore, expected inflation needs to be removed to convert from nominal to real dollars, when projecting the financial impact of future payments on your current debts. VeriPlan does this automatically for you. It automatically adjusts your future debt payments on current debt by 3% annually to remove inflation. This adjustment is based on the compounded U.S. inflation rate for consumer prices from 1928 to the present, which has been very close to 3%.

3) FUTURE HOME MORTGAGE

* If you plan to purchase a home in the future using mortgage financing, then VeriPlan will automatically manage the projected payoff of the mortgage principal and interest associated with this future home purchase. To project this future mortgage debt, VeriPlan uses interrelated entries that you make on this worksheet.

4) FUTURE UNFUNDED CONSUMPTION DEBT

* Using the income, expense, tax, and asset inputs that you make on VeriPlan's various data and assumptions input worksheets, VeriPlan automatically projects your future positive and negative annual cash flows. VeriPlan either adds to or deducts from your cash, bond/fixed income, and stock/equity financial assets, when your annual cash flow is, respectively, either positive or negative.

* In situations when your financial assets are fully depleted and your projected annual expenses exceed projected income, then VeriPlan automatically begins to project an unfunded consumption debt. This unfunded consumption debt is composed of your accrued negative cash flow plus the interest on this debt. You control the future loan interest rate through your rate setting on this worksheet.

5) FUTURE REPAYMENT OF UNFUNDED CONSUMPTION DEBT

* If after incurring any unfunded consumption debt, your cash flow again turns positive, then VeriPlan automatically will begin to pay down the accrued principal and interest on this future unfunded consumption debt. In effect, VeriPlan models your projected unfunded consumption debt as an unlimited line of credit with a user defined interest rate. Neither principal nor accrued interest would be repaid in part or in full, unless you subsequently have positive cash flow.

6) CURRENT VERSUS REASONABLE INVESTMENT COSTS AND UNFUNDED CONSUMPTION DEBT

* Whenever the total balance of your cash, fixed income, or equity financial asset classes is positive, then VeriPlan will assess investment costs depending on whether you select either your current portfolio cost or reasonable costs on the investments costs worksheet. However, once your overall financial assets are depleted, then the investment cost structure does not matter, because your financial assets are gone. Therefore, in projection years when your total financial assets are negative, VeriPlan automatically turns off its current or reasonable investment costs logic, and it turns on its unfunded consumption debt logic.

* If, after you were to incur future unfunded consumption debt, you are projected later to have some positive net income, then VeriPlan would automatically pay down some or all of this unfunded consumption debt. Only after the projected accumulated debt principal and interest has been completely repaid and you are projected to have even more positive financial assets, would VeriPlan automatically reinitiate either the current or reasonable investment cost logic, depending upon your preference.

= ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ =

### Chapter 11: Taxes worksheet

Section 11.1: Your federal income tax filing status

Section 11.2: Taxes and unmarried earner/users in the same household

Section 11.3: Federal income tax rates

Section 11.4: Select your state income tax rates

Section 11.5: Enter your local income tax rates

Section 11.6: Enter differences between your federal, state and local taxable income (optional)

Section 11.7: Enter your federal income tax exemptions and dependent deductions (optional)

Section 11.8: Enter your federal income tax adjustments, which reduce taxable income (optional)

Section 11.9: Enter your long-term federal income tax itemized deductions (optional)

Section 11.10: Enter additional property, real estate, and other assessment taxes (optional)

Section 11.11: Adjust Social Security and Medicare payroll tax rates (optional)

Section 11.12: Adjust federal qualified dividends and long-term capital gains tax rates (optional)

Section 11.13: Federal, state, and local tax credits

Notes:

* VeriPlan is updated at least once a year to incorporate new tax rates and rules. When VeriPlan functionality is upgraded, then the VeriPlan User Guide will also be revised to reflect these new enhancements. However, if an update to VeriPlan only changes numbers and parameters, then the tables in this user guide MAY NOT have been updated with the latest numbers and parameters that are contained in the latest version of VeriPlan.

* The primary annual VeriPlan tax update, typically happens in the Spring, after federal, state, and other government websites have been updated with new information. In particular, updates on state government tax websites tend to happen later than one might expect. The primary reason for this is that state and local tax authorities and their staffs are focused on tax returns for the prior year, until the primary Spring filing deadline has passed. Furthermore, tax authorities do not want to confuse tax filers, by publishing information that does not apply to the current filing year.
Introduction

VeriPlan's projections automatically use the particular federal, state, and local income tax rates and limitations that currently apply to you. VeriPlan also automatically projects your tax exemptions, adjustments, and deductions plus your property and other taxes. To prevent obsolescence, VeriPlan allows you to change these tax rates and tax limits, in case tax laws change.

Using your tax-related settings on this worksheet, VeriPlan projects your lifecycle tax obligations in 8 different tax categories. VeriPlan's automated tax projections for these 8 tax categories are presented on the taxes graphic. You can set tax assumptions and enter personal information about your:

* federal income tax rates

* state and local income tax rates

* Social Security (FICA) and Medicare taxes

* federal dividend and long-term capital gains tax rates

* federal income tax exemptions, adjustments, and deductions

* property and other non-income taxes

This worksheet captures the key tax elements required to develop financial projections that reflect your particular tax situation. It also provides you with significant abilities to modify your tax related data, as your personal situation changes.

If we could have made this sheet more simple, we would have. However, the excessive complexity of the U.S. tax system forces this worksheet to be both extensive and adjustable. As you complete this worksheet, keep in mind that, after their efforts to earn and save money, there are two other factors that probably have the greatest impact on the overwhelming majority of people. These factors are: 1) taxes on income and assets and 2) investment costs.

Once you have entered your personal data into VeriPlan and have begun to evaluate your personal scenarios, this will become very clear to you. Financial and investment plans that ignore taxes and investment costs are just fantasies. VeriPlan can help to reduce the fantasy element in your family's financial lifecycle planning efforts.

On the tax worksheet, VeriPlan provides a variety of bold border data entry boxes for you to enter information about your situation. To find more easily your tax information for entry on this worksheet, please consult copies of your recent personal tax federal, state, and local tax returns. In addition to U.S. federal, state, and local income taxation.

From your projected earned income, VeriPlan will automatically deduct federal and state ordinary income taxes, Social Security taxes (FICA), Medicare taxes, and self-employment taxes. Using the appropriate tax filing status, tax tables, and taxable income, it will automatically determine and deduct these taxes.

In any particular projection year, if positive net earned income remains after your expense, tax, and debt payments, then these positive net earnings will be invested according to your settings on VeriPlan's investment related worksheets. If you have negative net income in any particular year, then this shortfall will be made up through withdrawals from your financial assets, which include cash, bonds/fixed income, and stock/equity assets in taxable and/or tax deferred accounts. Withdrawals will be taken according to your setting on the various worksheets.

In any particular projection year, taxes will be applied in accordance with current federal and state tax laws and rates. Ordinary income taxes and short-term and long-term capital gains taxes will be deducted from asset returns, and net earnings on investment assets will be automatically reinvested. Reinvested asset returns will be net of both these taxes and your projected investment costs. Any tax basis that you may be carrying for a particular asset will also be automatically decreased or increased, as appropriate.

Whenever you would have a current earnings shortfall, after expenses, taxes, and debt payments, then VeriPlan will automatically withdraw the necessary funds from your assets and apply the required distribution taxes. Because most individual tax payers figure their taxes on asset related gains and losses and make asset tax related cash payments in the subsequent year, VeriPlan deducts these cash payments related to asset withdrawals after the beginning of the next year.

VeriPlan will also automatically calculate appropriate taxes related to your asset income. This taxes worksheet does not ask for tax inputs related to asset yields on cash, fixed income, equity, property, real estate, business, or other assets. Separately and automatically, VeriPlan will project ordinary and capital gains taxes associated with distributions and withdrawals related to your assets.

On the stock inputs portion of the financial asset worksheet, you will supply information about annual taxable distributions related to your assets. This information will also be found on your federal tax returns. You will NOT need to supply similar information related to your cash and bonds assets. VeriPlan assumes that cash and bond interest income will equal the projected returns for these asset classes. Cash and bond interest will be taxed in the current year at federal, state, and local ordinary income tax rates.

Tax laws, rules, and regulations are incredibly complex, vary widely, and change frequently. VeriPlan provides methods to project the approximate impact of federal, state, and local taxes on your future financial situation. In addition, VeriPlan provides numerous methods for you to customize and adjust its tax and other assumptions. You should take care to understand and verify that VeriPlan's assumptions reasonably reflect your current tax situation and your expectations about the future.

While VeriPlan may be aware of some unique federal, state, or local tax laws and rules, it simply cannot incorporate them all and maintain its ease-of-use and generality. Note also that we have attempted to implement a "conservative" modeling approach, when a choice is available, that will usually over-state rather than under-state your projected tax burdens given current laws and rules. This means that your continued attention to tax optimization for your particular situation as the years go by may yield modest favorable gains relative to the specific tax assumptions that you have chosen to set in VeriPlan.

NOTE:

* VeriPlan is updated at least once a year to incorporate new tax rates and rules. This typically happens in the Spring, after federal, state, and other government websites are updated with new information. Government website tax updates tend to happen later than one might expect. The primary reason for this is that tax authorities and their staffs are focused on tax returns for the prior year, until the primary Spring filing deadline passes.

* When VeriPlan functionality is upgraded, then the VeriPlan User Guide will also be revised to reflect these new enhancements to VeriPlan. However, if an update to VeriPlan only changed numbers and parameters, then the tables in this user guide MAY NOT have been updated with the latest numbers and parameters that are contained in the latest version of VeriPlan.

Automatically project all of your federal, state, and local taxes

http://www.myfinancialfreedomplan.com

Section 11.1: Your federal income tax filing status

VeriPlan supports the two primary U.S. federal tax filing statuses that are used by the great majority of taxpayers: 'Single' and 'Married, Filing Jointly.'

The other types of tax filing status: Qualifying Widow(er), Married, Filing Separately, and Head of Household usually are not filing classifications that are used for a long period and are not appropriate for lifetime projections. For more information, see below.

You do not need to select the 'Single' or 'Married, Filing Jointly' tax filing status on this worksheet. VeriPlan automatically checks your answer to the question: "Should VeriPlan develop lifecycle projections for 1 or 2 earner/users?" on the income worksheet. Depending on you answer, VeriPlan selects a 'Single' or 'Married, Filing Jointly' tax filing status for you.

This is your current answer to this question on the income worksheet about the number of users:

Your answer to this question cannot be changed here. Instead, you could change it on the income worksheet.

This is the federal tax filing status that VeriPlan will use throughout your projections, unless you change the number of users on the income worksheet:

What to do if you have recently used another tax filing status on your federal income return:

If your current federal tax filing status is one of the following: 'Qualifying Widow(er),' 'Married, Filing Separately,' and 'Head of Household' please consider the following, if you wish to use VeriPlan:

Those who file as a 'Qualifying Widow(er)' should probably develop VeriPlan projections using the 'Single' filing status and should indicate "1" user on the income worksheet. ''Qualifying Widow(er)' is a transitional filing status that could only apply for one to three years. Thereafter, unless you remarry, you would probably file as 'Single' or 'Head of Household,' if you qualify. Most widow(er)s would probably use the "Single" filing status in VeriPlan. For the first few years that they are a "Qualified Widow(er), then their actual tax payment probably would be lower than VeriPlan would project using the 'Single' filing status.

The 'Married, Filing Separately' filing status is sometimes used by still married persons who live separately. If you are in this situation, you should consider whether this status will persist for most of your lifecycle. Then, make the appropriate choice in VeriPlan, concerning whether to develop a projection for one or two users. For others, the 'Married, Filing Separately' filing status is an optimization that may reduce taxes in a particular year for two married persons who are together, when compared to the 'Married, Filing Jointly' filing status. Such persons should just develop VeriPlan projections for two users. In the future, if you may sometimes gain an additional tax advantage from filing as 'Married, Filing Separately,' but the great majority of married taxpayers do not find that filing separately is advantageous. However, in any year that filing as 'Married, Filing Separately, enables lower tax payment, then that advantage would constitute a financial 'upside' for you compared to VeriPlan's tax projections.

Those who qualify under the tax rules to file as 'Head of Household' probably would find that VeriPlan's 'Single' projections would overstate their projected tax obligations substantially, while the 'Married, Filing Jointly' status would understate those obligations substantially. You may wish to run projections with both classifications to understand the outer bounds of VeriPlan's projections. However, VeriPlan's tax settings cannot project more closely your tax obligations, nor could it tell you whether your taxes would be more comparable to taxpayers filing as 'Single' or as 'Married Filing Jointly.'

Section 11.2: Taxes and unmarried earner/users in the same household

Unmarried VeriPlan users in the same household, who do not plan to marry soon, should develop separate projections for one user that would be taxed at 'Single' ordinary income tax rates.

In particular, if you are younger and currently single, you might instead chose "Married, Filing Jointly." You might do this, if you feel it is very likely that you will marry soon and remain so through your lifetime. However, if you chose to use a federal tax filing status that is different than how your currently file, then you also should keep this in mind when you set other parameters in VeriPlan. For example, your earned income, debts, assets, tax-deferrals, expenses, and many other factors can differ significantly for married versus single persons.

If you want to model two unmarried user/earners in VeriPlan, you should understand how VeriPlan manages taxation. VeriPlan's logic is focused on developing appropriate projections for one person filing with "Single" tax status or for two people filing with "Married, Filing Jointly" tax status. If you wish to develop projections for two unmarried earner/users in the same household, who will remain unmarried, you must use a different approach. You would need to develop separate Single filing status projections, and then evaluate the results from those separate VeriPlan projections.

If unmarried persons were to combine their assets into a single VeriPlan projection model, and they were to use either the Single or Married, Filing Jointly filing statuses, then doing this would create very significant projection distortions. Combining financial resources and developing a joint VeriPlan projection and using a married tax filing status above would only be appropriate, if you anticipate marrying soon.

If you do not anticipate that you will marry soon, but you do operate as one household, then you should develop two separate VeriPlan projections with separate income, assets, expenses, debts, etc. that each use the Single tax filing status. You should give care to allocating joint expenses, debts, and other potentially shared items between the two projections to ensure that everything is included, but not double-counted. This use of VeriPlan conforms to the Terms of Use. VeriPlan is licensed "only for personal, non-commercial use by one (1) household." VeriPlan "may be used by you and by the members of your immediate family who reside together in the same household with you."

Section 11.3: Federal income tax rates

Depending up your tax filing status, VeriPlan automatically applies federal income tax rates and breakpoints to every projection. This section lists those tax rates and breakpoints. First, it lists the VeriPlan supplied standard federal tax tables, Next, it supplies similar federal tax tables, which are user changeable.

The standard and the user changeable tax rate and breakpoint tables have the same format. The standard rate table has light yellow boxes, which are not user editable, while the user changeable table has bold border entry boxes. Each contains both federal Schedule X, which is the tax rate schedule for the "Single" filing status and federal Schedule Y-1, which is the same tax rate schedule for both "Married filing jointly" filing status.

Each table has a box indicating the calendar tax year for these tax schedules. If you update the tax rate schedules for a new year, then update the bold border box, too. Because of the significant impact that these tax rates and breakpoints can have on any projection, take care in making any changes.

Federal income tax rate tables provided by VeriPlan:

(Not user editable -- change the table below instead)

Alternative, user-adjustable federal income tax rate tables

If you need to, you can modify the federal tax rates that are listed in the tables above.

Use this two-step process:

* Step One: Carefully follow the directions to edit the bold border federal tax tables below

* Step Two: Use the selector box that follows to activate your modified federal tax tables

Step One: HOW TO MODIFY FEDERAL TAX RATE TABLES BELOW

Depending on your federal tax filing status, modify either the "Single" or the "Married Filing Jointly" federal tax rate table below. If you expect to switch between these tax filing statuses, when you do any "what-if" projection modeling, then you should modify BOTH tax filing status tables below.

From the IRS < http://www.irs.gov/ >, find the federal tax rate tables for the current year which list by filing status the federal:

* taxable income breakpoints,

* cumulative tax payments up to each breakpoint, and

* % tax rates above each breakpoint.

User modifiable federal income tax rate tables:

Enter the federal tax rate information, starting at the bottom of the tables with the highest bracket, and then work upward

If you update the tax rate schedules for a new year, then note the tax year in bold border box below. Because of the significant impact that these tax rates and breakpoints can have on any projection, verify the accuracy of your changes.

Step Two: USE THIS FEDERAL INCOME TAX RATE SELECTOR

* You may switch back and forth between your modified federal tables and the standard VeriPlan supplied tables.

Section 11.4: Select your state income tax rates

VeriPlan automatically applies your state's current variable, flat, or no ordinary income tax rates and limits.

You will need to select your state from the pull-down menu below.

VeriPlan provides recent state income tax rate tables for the 50 United States and the District of Columbia. Below you can choose the state tax rate table that VeriPlan will use to project your state taxes using real, constant purchasing power dollars.

Alternatively, if you wish to modify any state's tax rates, you can. Instead of altering the original state tax data directly, VeriPlan uses the same method provided above for modifying federal tax rates. VeriPlan allows you to fill in an alternative user state tax entry table. When you select it, this alternative state tax rate schedule will be used by VeriPlan to develop projections of your state taxes. Please follow the directions carefully, when completing your customized form. Note that the state tax rate schedules supplied with VeriPlan will remain intact and will not be overwritten. You can use them for reference, when you make your custom changes.

Do not add any local income tax rates in your state income tax rates, because VeriPlan collects information about your local income taxes in a separate section further below.

Select one of the 50 U.S. states or Washington, D.C.

PULL DOWN MENU BELOW: Select one of the fifty U.S. states or the District of Columbia

Note: Currently supplied state income tax rates were the latest year available when VeriPlan was released. Check your state's tax authority website for any updates.

One of the state income tax rate tables provided by VeriPlan:

State tax notes:

The seven highest state tax rate brackets are provided for each state. Microsoft Excel's limits on nested logical functions necessitate limiting graduated state tax calculations to the highest seven brackets. These top seven tax brackets have the greatest effect on your projected annual state taxes. These seven brackets are enough for 45 of the 50 states plus the District of Columbia.

For states with more than 7 brackets, VeriPlan will calculate the taxes by taking a weighted average of the lowest brackets that exceed seven brackets. To the extent that your projected state taxable income in any projection year is below the lowest breakpoint, then VeriPlan's projections would very mildly or trivially overstate your state tax obligations. If your projected annual income is higher than these lower brackets for these six states, then there would be no overstatement at all of projected taxes due. Using this weighted average tax method for the lower brackets for these six states will not have a material impact on your projections, even if your projected income in some years is very low. This information about calculation methods is provided here for those who might be curious.

Alternative, user adjustable state income tax rate tables

If you need to, you can modify your state tax rates, which are listed in the table above.

Use this two-step process:

* Step One: Carefully follow the directions to edit the bold border state tax tables below

* Step Two: Use the selector box that follows to activate your modified state tax tables

Step One: HOW TO MODIFY STATE TAX RATES AND BREAKPOINTS BELOW

In the bold border boxes of the modifiable state tax rate table below, enter tax rates and breakpoints for either the "Single" or the "Married Filing Jointly" tax filing status. If you expect to switch your tax filing status, when you do any "what-if" projection modeling, then you should modify both "single" and "married filing jointly" tax tables below, as needed.

From your state tax authorities, obtain the tax rate tables for the current year which list by filing status the:

* taxable income breakpoints,

* cumulative tax payments up to each breakpoint, and

* % tax rates above each breakpoint.

You can find your state tax authorities with a search engine, or you might try the Federation of Tax Administrator's quick lookup map at: http://www.taxadmin.org/fta/link/default.html

User modifiable state income tax rate tables:

Enter your state tax rate information, starting at the bottom of the tables with the highest bracket, and then work upward

Use your VeriPlan supplied state tax tables as a reference for how your modified chart should look. Some of the dollar or percentage numbers will change from year to year, but the structure is likely to be very similar.

If your state uses fewer than 7 brackets, just enter zeros in the topmost lines.

If your state has a flat tax rate, just enter the percentage rate on the bottom line with an income breakpoint of $0, and $0 cumulative taxes. Leave all other lines above on the table as zeros.

Verify the accuracy of your entries, before activating these tables with the selector below

Step

Two: USE THE STATE INCOME TAX RATE SELECTOR

You may switch back and forth between your modified state tax tables and the standard tables supplied with VeriPlan.

Section 11.5: Enter your local income tax rates

VeriPlan automatically applies any local variable or flat ordinary income tax rates and limits that you supply in this section.

Use the local income tax selector in this section to apply:

* no local taxes,

* flat tax rates,

* variable tax rates, or

* New York City income tax rates, which are provided.

In addition to federal and state income taxes, localities within the states, such as cities or school districts, may also assess taxes on your income. Many local city, school district, or other income taxes are simple flat rate assessments against income. However, in other situations local income taxes are graduated with different tax rates assessed at different income levels. New York City has such a graduated local income tax, which is assessed on residents. VeriPlan provides New York City local tax rates, which can be updated. By following the directions, you can also enter graduated income taxes for any other locality.

In recent years, 14 states have had local city or county level income tax assessments that were in addition to US federal and state income taxes. Check whether any of these taxes would apply to you and whether the assessments are flat or graduated tax rates. For example, from a study these are the AVERAGE 2009 local level income tax assessments based upon total collections divided by total personal income per state jurisdiction: Alabama (.19%), Arkansas (.06%), Delaware (.16%), Indiana (1.16%), Iowa (.3%), Kentucky (.76%), Maryland (2.98%), Michigan (.44%), Missouri (.12%), New Jersey (.09%), New York (1.7%) [state average heavily influenced by NYC income taxes], Ohio (1.82%), Oregon (.36%), and Pennsylvania (1.25%). Source: "2009 State Business Tax Climate Index" Tax Foundation Background Paper Number 58.

Note that this section collects information about your local INCOME based taxes. Other local taxes, such as property taxes, should be entered in the section above entitled: "Your property and real estate taxes."

VeriPlan provides three methods to enter your income local taxes, and you may choose one of them:

* a flat percentage rate on your taxable income

* a flat percentage rate on your income in excess of a certain level

* a graduated, multilevel tax rate system similar to federal income taxes and most state income taxes.

To enter local income taxes rates, fill in the applicable local income tax boxes under one of the three choices and then use the Local Income Tax Selector that follows to activate your choice.

Choice #1: Flat rate local income taxes

Use this data entry box to enter the total percentage of your flat rate local income taxes

If there is a minimum income threshold, before you begin paying these flat rate local income taxes, enter it here.

If there is no minimum income, then enter $0.

Concerning any upper income limits on your local income taxes, you can supply information about your total local taxable income below in the section titled: "Differences between your federal, state and local taxable income." VeriPlan will use this information to limit your income subject to local taxes.

Choice #2: Graduated, user modifiable local income tax rate tables:

If your pay graduated local income taxes in any locale, use the bold border boxes in the table below to enter your local tax rates.

If you pay New York City local income taxes, see Choice #3 below.

Enter your local tax rate information, starting at the bottom of the tables with the highest bracket, and then work upward.

Enter tax rates and breakpoints for either the "Single" or the "Married Filing Jointly" tax filing status. If you expect to switch your tax filing status, when you do any "what-if" projection modeling, then you should modify both "single" and married filing jointly tax tables below.

As a model, you could use the New York City tax tables from Choice #3 below as a reference model for how your chart should look. The dollar or percentage numbers will differ, but the structure is likely to be similar.

If your locality uses fewer than 7 brackets, just leave zeros in the topmost lines.

Verify the accuracy of your entries, before activating this table with the selector below.

Choice #3: New York City graduated income tax rate tables provided by VeriPlan:

For the convenience of those who pay graduated local income taxes in New York City, VeriPlan supplies local income tax rates for NYC. These NYC local tax rate tables can also serve as a model for those who wish to complete the local graduated income tax tables for their own locality above in Choice #2.

If these VeriPlan supplied NYC tax rates need to be modified, you should enter your updates in Choice #2 above, and then enter a 2 in the local income tax selector box below. This will activate the rates that you supply and override VeriPlan's NYC local income tax rates.

LOCAL INCOME TAX METHOD SELECTOR: ACTIVATE YOUR CHOICE WITH THIS LOCAL INCOME TAX SELECTOR

Section 11.6: Enter differences between your federal, state and local taxable income (optional)

Using this taxable income differentiator is optional, but is STRONGLY recommended.

Some states and localities adjust your federal taxable income subject to taxation -- sometimes quite substantially. If you expect that your future state or local taxable income will differ from your federal taxable income, VeriPlan can automatically develop projections that use different federal, state, and local taxable income. If this situation applies to you, enter your recent federal, state, and local taxable income in this section. Then, use the selector to activate this capability.

In other sections of this taxes worksheet, we have collected information to develop a reasonably detailed and representative tax baseline for projecting federal taxes on your projected income. However, the myriad of differences between federal taxation and the tax laws of the various states and localities make standard projection modeling of your state and local taxes a greater challenge. Frequently, certain income tax deductions are allowed by one level of government, but not by another. For example, state and local taxes are itemized deductions for federal income tax purposes, but may not be for state and local income tax purposes.

Fortunately, there is a reasonable projection method that circumvents most differences in taxation among the states and localities. By using the current dollar differences between your federal taxable income and your state and local taxable income and then developing taxable income ratios, VeriPlan can project your state and local income taxes. First, VeriPlan will divide your total state or local taxable income by your federal taxable income to develop two ratios. Next, it will multiply your projected federal taxable income by these two ratios and then by your state and local tax rates, respectively. You will control the state and local tax rates that VeriPlan applies. In additional sections, you will have the opportunity to select or modify your state and local tax rates.

(Note that this will only affect projections of your state and local income taxes, and it will not affect your projected pretax income. Note also, that this method does not collect information on any state and local tax credits, which are applied after your state and local taxes have been calculated using the appropriate rate schedule. These tax credits will lower your state and local tax bill. Thus, VeriPlan's projections are "conservative" to the extent that you will benefit from state or local income tax credits in the future.)

Use the following method to adjust for differences between your federal, state, and local taxable income:

First, consult your most recent federal, state, and local tax returns to determine

A) your total taxable federal income,

B) your total taxable state income, and

C) your total taxable local income.

(If, because of fluctuating income you used an average of several recent years for other assumptions that you entered into VeriPlan, then do the same with these taxable income entries. Also, if for some reason you believe that part of recent differences between your federal, state, and local taxable incomes will not be sustained over the long-term, then make appropriate adjustments. Remember that you are entering these taxable income figures so that VeriPlan can develop taxable income ratios to use across your lifecycle projections.)

Second, enter these federal, state, and local taxable income figures in the three bold border entry boxes below.

Third, use the selector to activate this taxable income difference method.

Step #1: Enter your Federal, State, and Local "Taxable Income" from recent tax filings in these bold border boxes

Enter a taxable income number in each of these three bold border boxes. Then, if you are potentially subject to state and/or local income taxes, you must set the selector in Step #2 below to a 1 (one).

Note that your STATE "Taxable Income" could be higher, lower, or the same as your FEDERAL "Taxable Income"

If you DO NOT have different taxable STATE income, then enter your FEDERAL "Taxable Income" from above.

Note that your LOCAL "Taxable Income" could be higher, lower, or the same as your FEDERAL "Taxable Income"

If you DO NOT have different taxable LOCAL income, then enter your FEDERAL "Taxable Income" from above.

Step #2: Enter a 1 in this box to activate this taxable income differentiator; Enter a 0 to NOT use it.

Note: If you enter incorrect figures for your recent federal, state, or local taxable income and you activate this method, VeriPlan will develop erroneous state and local taxable income ratios, which will distort projections of your state and local income taxes obligations.

Section 11.7: Your federal income tax personal exemption and dependent deductions (optional)

In the bold border boxes below you can enter information about personal U.S. federal income tax exemptions for you and your spouse, if any. VeriPlan also provides bold border boxes to enter the current ages of up to 10 of your dependents, which you should enter in descending order starting with the oldest person and moving down to the youngest.

There are two reasons that you should enter the ages of your dependents. These reasons are that children grow up and elderly dependents die. Both children and the elderly can cease being your dependents from a tax standpoint at some time during your lifecycle projection. VeriPlan will automatically project the number of yearly dependent deductions in your household from a taxation standpoint using the age information that you provide.

Because younger persons will grow up and cease to be dependents, VeriPlan supplies an additional bold border user data entry box for you to enter the average age when you believe that your children will last to be your dependents from the point-of-view of income taxation. You should consult current IRS rules about this matter, but generally, if your children continue with post-secondary education, they may continue to be your dependents into their early twenties.

The other reason for collecting age related information is that you may support elderly persons and, therefore, you may qualify for tax deductions. In the bold border box provided, you should enter the average expected age of death for you older dependents, however unpleasant setting such a number may seem to you. To estimate the age of adult dependents' eventual mortality, you may be the best judge of the situation, their health, and their likely remaining longevity. You might also wish to consult average mortality estimates from actuarial tables. A reference to the IRS's mortality table is provided below the bold border data entry box.

Finally, federal tax laws (regarding practically everything) are complex and subject to change. Therefore, VeriPlan supplies several additional bold border data entry boxes with the federal deduction dollar amounts and phase-out limits that it uses to calculate the value of your federal deductions. If these amounts were to change, you can enter new figures to reflect these changes. Otherwise, simply leave the numbers as they are.

Your maximum potential standard deduction

Blindness exemption for Earner #1 and/or #2 (This will be automatically added to the standard deduction above.)

Number of your exemptions for dependents

Ages of all dependents whom you claim as dependents for federal income tax purposes (Enter from oldest to youngest)

Dependents include any person of any age who legally qualifies as your dependent.

Using the age information for dependents that you supply above, VeriPlan will automatically calculate the value of your federal tax exemptions.

Your dependent deductions will be subject to the age limitations that you set below:

The maximum age limit for child deductions refers to the maximum age for a dependent child at the END of a tax year, after which your dependent child would cease to be claimable as an deduction. This, of course, assumes that all other tax requirements up through this age would be also met. The end of year maximum age is often 18, but could be up to age 23 for dependent children who are still in school. (Note that IRS language said "under age 24 at the beginning of the year" and therefore, IRS maximums would seem to be one year greater than used in this tool, but they really are the same. For VeriPlan's purposes, just subtract 1 from the stated IRS maximum age, if you expect your children to stay in school.)

To arrive at this number you might wish to consult actuarial tables available on the Social Security Administration's website: http://www.ssa.gov/ and more specifically at: http://www.ssa.gov/OACT/STATS/table4c6.html

Find a current link to the Social Security Administration website

Federal annual exemption deduction amounts and phase-out limits (Note: Phase-outs were eliminated in 2010.)

For your information, these are exemption amounts from tax regulations that VeriPlan is using:

If current tax regulations change, you could change these below:

Phase-out parameters:

Section 11.8: Enter your federal income tax adjustments, which reduce taxable income (optional)

VeriPlan can automatically project up to 6 different adjustments to your taxable federal income. VeriPlan also automatically manages differential growth rates and phase-outs related to these 6 taxable income adjustments.

Federal income tax law allows you to make income adjustments that reduce your reportable income and, therefore, reduce your taxes. See Form 1040 for the lines with your currently claimed adjustments. VeriPlan allows you to enter up to six adjustments that you expect will continue for at least a few years. Do not enter any one-time events.

For each of these six income adjustments, VeriPlan provides three bold border data entry boxes for the current dollar amount, the number of years that an adjustment is expected to continue, and an inflation adjustment factor. The inflation adjustment factor would be used to enter any expected negative or positive percentage growth rate difference between expected inflation. If the dollar amount you enter is in real dollars and is expected to grow with the rate of inflation, then enter 0%. If it is in nominal dollars and the dollar amount will not grow, then enter -3% (negative three percent).

DO NOT INCLUDE ANY ADJUSTMENTS FOR:

* IRAs or for self-employed SEP, SIMPLE, and other tax-advantaged retirement plans. Taxes related to such retirement savings plans are calculated automatically by VeriPlan. It uses your inputs on the tax-advantaged plans worksheet to make these automated projection calculations.

* Self-employment taxes. VeriPlan automatically calculates and projects self-employment taxes related to the actively-managed business income that you report for either earner on the income worksheet. Self-employed persons are allowed to take a deduction for 50% of self-employment taxes paid. This deduction is taken as an adjustment to gross income on Form 1040 and not as an itemized deduction on Schedule A. Again, VeriPlan manages this automatically, so you SHOULD NOT enter self-employment taxes as an adjustment in any of the bold border user data entry boxes below.

Six of these reportable income adjusters are provided

Reportable Income Adjustment #1 (There are 5 more like this one.)

Section 11.9: Enter your long-term federal income tax itemized deductions (optional)

VeriPlan automatically projects your multi-year federal income tax deductions.

VeriPlan will automatically choose the maximum or most beneficial of either the standard deduction method or the itemized deduction method in each year of your projections. For VeriPlan to develop its projections, you need to supply the maximum standard deduction that you could have claimed on your most recent tax return. In addition, you need to provide information about your itemized deductions from your recent Form 1040, Schedule A, if you filed one.

VeriPlan's projections use your recent deductions as a baseline to project your future deductions. If you did not use the itemized deduction method, but expect to begin to do so in the near future, you could instead enter estimates of what you itemized deductions will be. (Usually, the purchase of a primary residence and associated mortgage with deductible interest is the triggering event when many begin to itemize their deductions.)

Similar to the method used above for your income adjustments, for most major categories of your itemized deductions on Schedule A, VeriPlan provides three bold border data entry boxes for a) the current dollar amount, b) the number of years that a deduction is expected to continue, and c) an inflation adjustment factor. The inflation adjustment factor would be used to enter any expected negative or positive percentage growth rate difference between expected inflation. If the dollar amount you enter is in real dollars and is expected to grow with the rate of inflation, then enter 0%. If it is in nominal dollars and the dollar amount will be fixed, then enter -3% (negative three percent). If you expect that a particular deduction will continue throughout all years of your projections, just enter 100 in the bold border box for the number of years you expect a deduction to continue.

You do not need to be concerned about any limitations on those categories of itemized deductions that have such limitations. VeriPlan automatically will calculate and project any limitations based on current tax laws. bold border data entry boxes are supplied, which indicate the current limitations that VeriPlan applies to its projections. If the tax laws were to change, you could use these data entry boxes to reflect those changes.

You should note several additional things about how VeriPlan projects your itemized deductions. First, you should exclude any interest that you have paid recently on your primary residence mortgage. VeriPlan will calculate this tax- deductible interest separately using the information that you provide on the yellow-tabbed '5-Your Debts' worksheet. Over the years remaining on this debt, VeriPlan will automatically add this interest to its projections of your itemized deductions. This means that you need not be concerned about projecting deductible interest as a declining proportion of your payments, as your mortgage is paid down.

Also, note that VeriPlan provides bold border data entry boxes with the itemized deduction phase-out limitations from federal tax regulations that it used to develop its projections in prior versions of VeriPlan. Because these limitations were eliminated in the Tax Relief Act of 2010 signed into law by President Obama in December of 2010 and there is reasonable question as to whether these phase-outs will be re-implemented in the current political environment, this phase-out functionality has been inactivated. Also, VeriPlan does not provide data entry boxes for casualty and theft losses from Schedule A. Such expenses should not recur regularly and thus are not useful for projections.

Your Itemized Deductions

If you itemize deductions, enter your itemized deduction totals from selected sections of Form 1040, Schedule A. Ignore any limitations on total deductions, because VeriPlan will manage these limits automatically.

"Medical and Dental Expenses" deductions

* VeriPlan will calculate any income related limitation that would apply.

"Taxes You Paid" deductions

For most users, VeriPlan will automatically calculate any "Taxes You Paid" itemized deductions. Further down this worksheet, you will supply information about these deductible taxes: a) property and real estate taxes, b) state income taxes, and c) local income taxes. For each year of any projection, VeriPlan will automatically calculate these taxes and include them in your federal "taxes you paid" deductions.

However, some VeriPlan users from states and localities, which have lower or no income taxes, may find it advantageous to deduct their annual state and local sales taxes instead. Federal tax law allows them to deduct either the actual sales taxes they paid based upon their receipts or a standard sales tax allowance from tables supplied by the IRS. If a taxpayer elects to deduct their state and local sales taxes, they cannot also deduct their state and local income tax payments. This is an "either-or-and-not-both" choice.

For those taxpayers who elect to deduct their state and local sales taxes rather than their state and local income taxes, VeriPlan allows them to choose this method. First, they need to select the sales tax deduction method using the selector box below. Then, in the box that follows they need to enter the annual amount of their sales tax deductions from their most recent federal tax return. (If you believe that your most recent state and local sales tax deduction was abnormal, then enter an annual average of the past few years, if you have this information.) You do not need to estimate a sales tax growth rate, because VeriPlan will automatically project that your sales tax deductions will be proportional to any growth in your expenses. Also, if you select that sales tax method, VeriPlan will automatically include your projected property and real estate taxes in this federal deduction.

Note: Most users should set this to a "1", unless this tax rule becomes permanent. (Rule has been renewed annually for 2005 to 2011.) If a more permanent multi-year tax law is passed into law, you use this facility for your projections.

Choose to deduct either: 1) your state and local INCOME taxes OR 2) your state and local SALES taxes

With either selection, VeriPlan will automatically add your projected property and real estate taxes

Only if you elect to use the state and local SALES TAX method (a 2 in the selector above), do you need to enter this amount:

* Ignore this box, if instead, you want VeriPlan to deduct your state and local INCOME taxes.

* If you wish to deduct your state and local income taxes, you can simply leave a 1 in the bold border selector box above. VeriPlan will automatically calculate your state income taxes, local income taxes, and property and real estate taxes for your projected deductions. Any dollar amount in the bold border state and local sales tax data entry box will be ignored.

"Interest You Paid" deductions

** EXCLUDE ANY INTEREST PAID ON MORTGAGES AND DEDUCTIBLE LINES OF CREDIT RELATED TO YOUR HOME

(Deductions for interest payments each year that are related to tax-deductible mortgages on your residence(s) will be calculated automatically by VeriPlan and will added to the other deductible interest that you have indicated above. Simply take the total reported on Schedule A and subtract any interest related to tax-deductible mortgages that you reported on your most recent tax return. Tax deductible mortgage interest expense on your residence(s) can be a very significant itemized deduction for many people and usually declines over time. On the debts worksheet, you will be asked to enter all your debts and their repayment terms. The debts worksheet will separately identify up to three tax-deductible debts related to your principal residences.)

* Enter a minus % or plus % versus general consumer inflation. Enter 0% (zero), if the amount of these deductions will probably grow with the general rate of inflation.

"Gifts to Charity" deductions

* Enter a minus % or plus % versus general consumer inflation. Enter 0% (zero), if the amount of these deductions will probably grow with the general rate of inflation.

DO NOT ENTER ANY CASUALTY AND THEFT LOSSES from Schedule A. (See Form 1040, Schedule A)

Such expenses should not recur regularly and thus are not useful for projections.

"Job Expenses and Most Other Miscellaneous Deductions"

* The model will calculate any income related limitation that would apply.

* Enter a minus % or plus % versus general consumer inflation. Enter 0% (zero), if the amount of these deductions will probably grow with the general rate of inflation.

"Other Miscellaneous Deductions"

* Enter a minus % or plus % versus general consumer inflation. Enter 0% (zero), if the amount of these deductions will probably grow with the general rate of inflation.

These are the itemized deduction phase-out limitations from tax regulations that VeriPlan uses:

NOTE: Known as the Pease Amendment which was passed in 1990, itemized deduction phase-outs were eliminated through 2010 to 2012. These high income itemized deduction limitation were reinstated for 2013 and subsequent years.

Section 11.10: Enter additional property, real estate, and other assessment taxes (optional)

VeriPlan automatically projects your total property, real estate, and other assessment taxes. You can also project these property taxes to grow at a rate that is different from inflation.

Each year, you may pay personal property, real estate, and/or other recurring state or local assessment taxes, which are not related to your income. For your projections, VeriPlan uses several sources to derive your property, real estate, and other assessment taxes.

* First, it automatically includes your current annual property and real estate tax entries from the property worksheet.

* Second, it automatically calculates annual real estate taxes on future home purchases, using your percent of purchase price real estate tax entries in Column K of the input table in the home purchase tool on the debts worksheet.

* Third, if there are any other state and local assessment taxes that you have not already recorded on the property or debts worksheets, then you have the opportunity to enter them in this section of the taxes worksheet. Use the bold border user data entry box to enter the current annual amount of any additional state or local assessment tax.

These property, real estate and other assessment taxes will be projected forward and grow relative to the rate of general consumer price inflation, unless you enter a non-zero inflationary growth adjustment in the other bold border data entry box that is provided. Also, each year, VeriPlan automatically will deduct your projected property and real estate taxes from your projected federal adjusted gross income as itemized deductions, when appropriate.

For clarification, note that this category of property, real estate, and other assessment taxes would NOT include any of the following taxes, which should be entered elsewhere:

* sales or utilities taxes, which should be part of your annual expenses on expenses worksheet

* income taxes, exemptions, adjustments, or deductions -- including federal, state, or local income taxes; Social Security (FICA) taxes; and Medicare taxes. (These taxes are entered elsewhere on this worksheet.)

* real estate taxes which are taken as business expenses and reduce business income (Business taxes would reduce business income that you enter on the other income section of the income worksheet.

* taxes related to securities assets and asset transactions, including distributions, dividends, and capital gains taxes, which VeriPlan projections automatically calculate for you, when realized.

Also, future real estate taxes on future home purchases will be added automatically to future years according to your setting on the home purchase tool on the debts worksheet. These future real estate taxes are not included in the number above, because that is an initial setting for your current property taxes.

**DO NOT ADD THESE TAXES BELOW**. They are included automatically from the property and debts worksheets.

* Enter a minus % or plus % versus the general rate of consumer price inflation. Enter 0% (zero), if ALL your property, real estate, and other assessment taxes will probably grow with the general rate of inflation.

* Note that this is a long-term real dollar growth rate that applies to these additional assessment taxes, as well as to the taxes related to your current property and future home purchases.

Section 11.11: Adjust Social Security and Medicare payroll tax rates (optional)

The section lists the FICA (Social Security and Medicare) payroll tax rates and income limits that VeriPlan uses to generate projections. If federal law changes regarding this information, these rates and thresholds are user changeable.

VeriPlan automatically projects either employee or self-employment taxes, as appropriate.

Your tax payments INTO the Social Security (FICA) system:

Your tax payments INTO the Medicare system:

Note that employee contributions to tax deferred plans can reduce the total amount of earned income that is subject to federal and state income taxation. However, these tax-deferred account contributions DO NOT reduce the amount of an employee income, which is subject to current Social Security (FICA) and Medicare taxes.

Self-employment, FICA, and Medicare taxes:

When you enter any annual pre-tax actively-managed / self-employment income in the bold border boxes on the income worksheet, VeriPlan will automatically project and apply self-employment taxes and tax deductions related to this income.

Your self-employment income will taxed at two-times the personal tax rates for FICA (Social Security and Medicare) subject to any applicable income limitations. Also, a 50% income tax deduction is allowed for these self-employment tax payments, which VeriPlan manages automatically. Both these self-employment taxes and deductions would be reported on your Form 1040, Schedule SE. For your regular employment income reported on the income worksheet, VeriPlan will automatically project and apply personal FICA and Medicare taxes at one-times these tax rates, subject to income limitations, and there is no allowable deduction for these personal tax payments. VeriPlan uses the user-adjustable FICA and Medicare tax rates and income limits above to perform these operations.

Taxation of your payments RECEIVED FROM the Social Security Administration:

Tax rules related to payments FROM the Social Security Administration are quite complex. Therefore, VeriPlan uses worst case assumptions regarding the taxability of projected Social Security payments that may be subject to taxation. Projected taxes on future Social Security payments that you receive could be somewhat lower.

These are the "worst case" federal income tax rates that VeriPlan applies to payments from the Social Security Administration. These rates are user changeable in the bold border boxes below, if the law changes.

Section 11.12: Adjust federal qualified dividends and long-term capital gains tax rates (optional)

VeriPlan automatically applies qualified dividend and capital gains taxes.

VeriPlan uses the following federal tax rates and income thresholds to project taxes on qualified dividends and long-term capital gains. If federal law changes regarding this information, these rates and thresholds are user changeable.

Tax rates:

Taxable income thresholds when rates increase:

Section 11.13: Federal, state, and local tax credits

Tax credits usually are not available over the long-term and, thus, VeriPlan does not project them across your lifetime.

From time to time, you may be eligible at the federal, state, or local level to take certain tax credits. Because most tax credits tend to be short-term in nature and are usually offered as governmental incentives to alter your financial decisions, it would not be appropriate to project the receipt of tax credits over a person's lifecycle. Because VeriPlan does not include tax credits in your projections, you should view this as another instance where VeriPlan is designed to be "conservative" in its projection methodology. To the extent that you can take advantage of tax credits over your lifespan, then these tax credits would increase your investment assets and/or your ability to consume.

When you use VeriPlan to evaluate alternate financial decisions, we recommend that you compare alternatives net of any applicable tax credits. For example, at certain income levels there are tax credits available for educational funding. If preliminary VeriPlan projections indicate that you would probably be able to take advantage of such tax credits, then you should reduce your projected expenditures to the extent of any tax credits that you expect to utilize. You would use VeriPlan and these projected net cash requirements net to compare alternative savings and investment vehicles, which could build assets in anticipation of these educational expenditures.

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### Chapter 12: Retirement worksheet

Section 12.1: Enter your planned retirement ages

Section 12.2: Adjust your ordinary living expenses for retirement (optional)

Section 12.3: Adjust the growth rate of your living expenses in retirement (optional)

Section 12.4: Enter your Social Security retirement payments and your initial payment age (optional)

Section 12.5: Setting initial Social Security retirement payment ages

Section 12.6: Reduce the Social Security Administration's payment projections (optional)

Section 12.7: Enter your pensions and annuities (optional)

Section 12.8: The pension and annuity input table

Section 12.9: Change your real dollar earnings potential after age 65 (optional)
Introduction

Use this retirement worksheet to set and adjust your intended retirement ages. You can also select to retire simultaneously or to retire in separate years, when each earner reaches his or her planned retirement age. You can also adjust your expected ordinary living expenses in retirement and the growth rate of those expenses during retirement relative to the rate of inflation.

With this retirement worksheet, you can enter your current or projected retirement income entitlements from the U.S. Social Security Administration for one or both primary earner/users. You can decide whether you want VeriPlan to project automatically that your initial Social Security payments would be based on the planned retirement age of either earner/user. Alternatively, you can choose when Social Security payments will begin for either earner -- at any age from 62 to 70.

Because of the uncertainty that surrounds the long-term funding viability of the U.S. Social Security system, you may scale back your Social Security retirement payment expectations on a percentage basis, if you would like to do so.

If you expect to have pension and/or annuity income, you can enter information about your pensions and annuities below.

Finally, this retirement worksheet presents the real income decline assumptions that VeriPlan uses for persons who choose to continue to work well beyond the 'normal' retirement age. These assumptions address the increasing difficulty that much older workers tend to have in maintaining their total dollar earnings capacity. VeriPlan allows you to make your own adjustments to these earnings decline assumptions, if you wish to do so.

In addition to the retirement entries and user controls for you on this worksheet, VeriPlan also provides the tax-advantaged plans worksheet that can help you with your retirement planning. That tax-advantaged plans worksheet collects information about your employer-sponsored defined contribution plans. It also explains how VeriPlan projections automate the tax rules associated with traditional IRAs and Roth IRAs. The tax-advantaged plans worksheet also provides two powerful tools that allow you to control your projected contributions to traditional and Roth IRAs and employer-sponsored retirement plans

To a very great extent, VeriPlan has automated the development of your projections by incorporating current tax laws and rules associated with tax-advantaged retirement incentive programs. While simultaneously providing powerful "what-if" user retirement planning controls, VeriPlan hides the substantial complexity of the tax laws that are associated with personal and employer-sponsored defined contribution retirement plans.

In addition, the methods provided on this worksheet for projecting your ordinary living expenses in retirement, you could also use VeriPlan's supplementary mechanism for projecting year-by-year "major planned expenses". Found on the expenses worksheet, this major planned expense facility can help you to model additional significant retirement expenses that you may anticipate, which are would not occur annually. An example of such supplementary expenses would be the costs of taking one-month overseas trips or cruises during every second year of the first twenty years of your retirement.

Make your own comprehensive retirement financial plan with all retirement

income, expenses, Social Security, pensions, annuities, IRAs, etc.

http://www.theskilledinvestor.com/VeriPlan/financial-planning/

Section 12.1: Enter your planned retirement ages

In this section you should enter planned retirement ages for Earner #1 and Earner #2, and you can indicate whether or not retirement is planned to occur simultaneously, if there are two earners.

The retirement age settings you make here will affect the wage and salary income and the actively-managed business income sources that you have listed on the income worksheet.

The retirement ages that you set will cause VeriPlan to stop projecting any further earned income for Earner #1 or #2, independently of one another. For each earner's retirement age entered below, VeriPlan will project that his or her salary and actively-managed business income sources will cease at the end of the year immediately prior to the planned retirement age.

These retirement age settings will NOT affect any year-by-year income adjustments that you have entered for Earner #1 or Earner #2 in Section 4 of the income worksheet.

These retirement age settings also will NOT affect any income sources that you entered on the as other income on the income worksheet. Instead of these other income sources ending at retirement, on that worksheet, you are asked to indicate the number of years from the present that each of these other income source is expected to continue.

Concerning any pensions and annuities that you enter below on this worksheet, you are asked to indicate:

* which earner each pension or annuity applies to,

* the earliest age that each payment could be received, and

* whether or not a payment is triggered by retirement age.

If you indicate that any pension or annuity payment is related to retirement age, then the age entered below will trigger VeriPlan to project payment income, if the age is equal to or greater than the minimum age required for that pension or annuity payment.

SET RETIREMENT AGES THAT ARE EQUAL TO OR GREATER THAN INITIAL AGE ON THE INCOME WORKSHEET

Earner #1

* This should be a whole number up to age 100, that is equal to or greater than the Earner #1's "Initial Age."

* If Earner #1 is retired now, just enter the "Initial Age" that you entered on the income worksheet.

Earner #2

* This should be a whole number up to age 100, that is equal to or greater than the Earner #2's "Initial Age."

* If Earner #2 is retired now, just enter the "Initial Age" that you entered on the income worksheet.

Note that the retirement age of Earner #2 here will be ignored, if simultaneous retirement is selected below.

If there is no Earner #2, just enter the retirement age of Earner #1.

If there are two earners, both earners could retire simultaneously. Alternatively, Earner #2 might retire at a different age, and VeriPlan will automatically manage these differences in planned retirement ages.

* If there is no Earner #2, then just enter a 1.

Section 12.2: Adjust your ordinary living expenses for retirement (optional)

In this section, you can adjust your ordinary living expenses in retirement relative to your projected expenses during the year that precedes the retirement of Earner #1.

Unless you make adjustments in this section and/or in the following section, VeriPlan will project that upon retirement your ordinary expenses from the expenses worksheet will equal your living expenses immediately prior to the retirement of Earner #1. Any adjustment to the real dollar growth rate of your living expenses that you set on the expenses worksheet will also cease, as well.

Unless you make adjustments below, during retirement your living expenses would remain the same in real, constant purchasing power dollar terms throughout your retirement. To adjust the level of your retirement expenses, in this section, VeriPlan allows you to make a one-time adjustment to your projected overall real dollar living expenditure level relative to your projected expenses in the year prior to the retirement.

After retirement, VeriPlan will project that your retirement-adjusted living expenditure level would continue to grow with the rate of inflation. In effect, all of VeriPlan's projections test whether your income and assets in retirement might be adequate to sustain a constant purchasing power expenditure budget, until Earner #1 reaches age 100. However, if you want to project that your retirement living expenses would grow or decline relative to the rate of general consumer price inflation, VeriPlan also allows you to model growth rate differences in following section.

Set this control to adjust your ordinary living expenses in retirement

For example, if you expect a 5% decline in your ordinary living expenses in real, constant purchasing power terms, then enter 95% in the bold border user data entry box above.

For the majority of persons, this living expense adjustment would probably be in the range of 90% to 100%, but could be higher or lower. Please read the discussion below carefully.

Estimating living expenses in retirement relative to living expenses prior to retirement

It is important to take some care in making retirement expense adjustment estimates for your particular situation. Advisors' estimates range widely for this ratio of expenses in retirement versus expenses just prior to retirement. Depending upon the source and the assumptions being used, you can find estimates ranging from 60% to 100% and even higher. Such a wide range in rules-of-thumb regarding retirement expenses versus pre-retirement expenses, could lead to a very wide range of possible projection outcomes. Retirement expense assumptions that are too low or too high can make lifecycle plans appear to be either feasible or not feasible, when the opposite may be true.

The academic finance literature on income replacement rates in retirement is helpful in thinking about the projected expense ratio in retirement that you might use in VeriPlan. Studies demonstrate that for the average person, consumption of everyday goods and services decreases in retirement. However, these declines are usually mild and not very significant relative to total expenses. Furthermore, a minority of retirees will even increase their expenditure rates in retirement, at least initially. Because the pre- and post-retirement ordinary expenditure drop off is probably less than 10% for the majority of retirees, that is why VeriPlan suggests above a ratio of 90% to 100% for most retirees' projections.

So why is there a large range in rules-of-thumb regarding retirement expenditure percentages? When you look more closely, you find two large factors account for a very significant amount of the pre- versus post-retirement expenditure drop off. These factors are:

* much lower taxes, including reductions in federal, state, and local income taxes and in Social Security, self-employment, and Medicare taxes, and

* the significant cessation or reduction in savings and investments for retirement.

In addition, people tend to save a modest amount on clothing, transportation, and other work-related expenses, when they retire. However, these expense reductions tend to be far less significant than are lower taxes and savings cessation.

When you develop a percentage estimate for your expenses in retirement for use above in VeriPlan, you do not need to take into consideration any projected changes in either your pre- and post-retirement tax payments and/or your savings decline or cessation. VeriPlan's design automatically manages the projection of taxes and savings both pre- and post-retirement with separate but fully integrated projection logic.

Changes in taxes are probably the largest factor accounting for variations in advisors' retirement expense rules-of- thumb. Concerning taxes, VeriPlan automates all tax calculations in your projections both pre- and post-retirement. Because VeriPlan automates your tax projections, you simply can ignore taxes as a topic to consider, when you estimate your ordinary living expenses ratio for retirement. VeriPlan's tax projection facilities and logic are documented on other worksheets and in this _VeriPlan User Manual_.

Regarding the normal cessation or decline of new savings and investments in retirement, VeriPlan's automated design also permits you to ignore these factors, when you estimate your ordinary expenses ratio for retirement. Typically, when people retire they cease or significantly lower their rate of new savings and new investments. For example, IRA and employer-sponsored defined benefit contributions must cease. If a person has no compensation, he legally cannot make any new contributions to such plans. In addition, many people pay off their mortgages prior to retirement, which, in effect, pre-funds some of their expenditures for housing in retirement.

In its projections for you, VeriPlan automates your saving and investing from your free cash flow, and it automatically pays down your mortgage and other debts. Even in retirement, if you are projected to have free cash flow in excess of your expenses, then VeriPlan's automated savings, investment, and debt payment logic would continue to add to your assets. Therefore, similar to its automation of your tax projections, VeriPlan automatically manages projections of your decline and cessation of new savings and investments. In doing so, you can also ignore these factors, which simplifies the estimation of your retirement expense ratio.

If your planned retirement is relatively near, you may have an opportunity to evaluate your current expenditures and make estimates of which may or may not continue in retirement. You can also consider whether you will have any significant and recurring new expenses. In deciding upon your retirement expense adjustment, you should also evaluate any substantial work related benefits that are not paid directly by you, which might need to be added to your retirement budget.

If your potential retirement is in the much more distant future, you will not have the opportunity to evaluate your real expenditures. Therefore, your expense ratio setting above may be more speculative. Nevertheless, evaluating VeriPlan's projection graphics and data could give you more insight. Furthermore, VeriPlan's ability to perform instant 'what if' testing allows you to consider the potential impact of different retirement expense ratios on your lifecycle plan.

Section 12.3: Adjust the growth rate of your living expenses in retirement (optional)

In this section, you can set the expected real dollar growth rate of your expenses in retirement.

In lifetime financial planning, it would be preferable to mildly over-estimate rather than under-estimate your ordinary living expenses in retirement. Academic studies have indicated that rates of expenditures in retirement typically decline over the course of retirement. However, whether this expenditure reduction is caused by reduced needs and wants versus inadequate assets and retirement income is not a settled issue. The numbers simply show a fall-off in total annual real dollar expenditures with greater age.

VeriPlan's projections of level, constant purchasing power expenditure budgets throughout retirement, would tend to be relatively conservative, if you had adequate financial resources and your real dollar expenses were actually to fall voluntarily during your retirement. Nevertheless, given the myriad of other factors that could affect financial resource adequacy in retirement, you may wish to guard against false comfort. That is why VeriPlan's default for expense projections after retirement is to project annual expense budgets that are level or have constant purchasing power.

However, you are not obligated to use a fixed expense budget for your retirement projections in VeriPlan. Instead, you may wish to experiment with alternative retirement expense growth rates, which are lower or even higher than expected consumer price inflation. The user control in this section allows you to do this.

In the bold border user date entry box below, simply enter a small positive or negative annual percentage change relative to the rate of inflation. Then, VeriPlan will automatically and steadily adjust your annual retirement expense budget in real terms upward or downward, respectively. This control is similar in operation to the control that VeriPlan provides for expense growth during normal working years on the expenses worksheet.

How much would you expect your retirement expenses to grow or decline relative to the inflation rate?

If you expect your expenses to grow with the rate of inflation, then enter 0%.

If you use this tool to make a retirement expense growth rate adjustment, that adjustment would usually be within the -2% to +2% per year range -- even though annual adjustment entries between -5% and +5% are allowed. You should not under- or over-estimate retirement expense growth or decline in real dollar terms. Because academic studies indicate that expenses normally fall in retirement, a small negative adjustment would be more typical. However, affordability and financial solvency are still key issues. If your financial resources are exhausted before your demise, then any projected growth rate would be irrelevant.

As discussed on the expenses worksheet, VeriPlan provides an inflation adjustment tool for your working years, which allows you to grow your ordinary living expenses at a rate that is different than inflation up until the retirement age of Earner #1. Thereafter, unless you use a non-zero value in this section for this post-retirement expense growth tool, VeriPlan would project that your ordinary living expenses would grow at a rate equal to inflation up until age 100. This retirement inflation rate adjustment would take effect in your projections and override VeriPlan's default logic starting with the age that Earner #1 plans to retire. Earner #1's projected retirement age can be any age -- before, after, or equal to age 65, as long as it is equal to are greater than his or her current age.

Section 12.4: Enter your Social Security retirement payments and initial payment age (optional)

In this section, you can set the current levels of your entitlements for future Social Security retirement payments, or for current Social Security retirement payments, if you are already accepting such payments. You can also choose whether Social Security payments would begin at the planned retirement age of Earner #1 or at a different age.

VeriPlan projects your future family Social Security payments based upon the entitlements of Earner #1 and Earner #2. To develop your projections, VeriPlan requires you to input Social Security retirement payment estimates in today's dollars for the initial payments that you would receive, if you accepted payments at ages 62, 66/67, or 70. You can get these payment estimates from the U.S. Social Security Administration relatively easily.

With these three Social Security Administration retirement payment estimates for beginning to receive retirement payments at ages 62, 66/67, or 70, VeriPlan uses an interpolation method to determine the amount of the payment, if you chose to begin Social Security retirement payments at other ages between 62 and 70. This allows VeriPlan to automate the projection of your Social Security retirement income payments. Using the various settings in this section, Earner #1 and Earner #2 can choose to begin payments in the year of their actual retirement or to choose a particular age at which to begin payments that is not related to when actual retirement begins.

The 'full or normal' Social Security retirement age is gradually increasing

Currently, the low end of this initial Social Security retirement payment range is age 62 (really age 62 and one month) and the high end is age 70. Regardless of age, these upper and lower age boundaries apply to all younger and older working persons covered by Social Security.

HOWEVER, THE 'MIDDLE' OF THIS AGE RANGE -- ALSO KNOW AS THE "NORMAL OR FULL" SOCIAL SECURITY RETIREMENT AGE -- IS NOT THE SAME FOR YOUNGER AND OLDER WORKERS. This full Social Security retirement age is being increased gradually. A person born in mid-1957 could receive full payments at age 66 and one-half. The full retirement ages of persons who are older were closer to or equal to age 66. The full retirement ages of persons who are younger were closer to or equal to age 67.

In the middle bold border data entry box below for the age 66/67 payment, all you need to do is to enter the middle estimate that you get from the Social Security Administration. Because VeriPlan's projections operate on an annual cycle, VeriPlan uses age 66 as the full retirement age for those born in 1957 or before and uses age 67 as the full retirement age for those born after 1957. For your information, the full retirement age for those born in 1957 is at the midpoint between ages 66 and 67. When you enter your three Social Security payment estimates for each earner below, you will be asked whether each earner was born in 1957 or before or was born after 1957. VeriPlan will then handle the rest of your Social Security retirement payment projections automatically using interpolation for other ages.

How to obtain estimates of your U.S. Social Security retirement payments at ages 62, 66/67, and 70

There are two alternate methods to do this:

* Use a payment estimate calculator on the website of the U.S. Social Security Administration

* Obtain a printed annual statement in the mail from the U.S. Social Security Administration, if you have at least 40 'credits,' which requires a work history of at least 10 years.

Obtain these payment estimates for retirement at ages 62, 66/67, and 70, and enter them in the three bold border user data entry boxes below.

Make sure that the estimates you obtain are in "today's dollars."

If you use a benefits calculator on the Social Security Administration website, select the "today's dollars" option. These website calculators also allow the option to calculate benefits stated in "inflated (future) dollars." However, you should NOT select this "inflated (future) dollars" option, when obtaining your inputs, because VeriPlan manages inflation automatically. If you get a printed annual statement from the Social Security Administration, the estimates you receive will already be in "today's dollars."

It will not necessary to make any inflation or cost of living adjustments for these payment estimates. The Social Security Administration provides current dollar estimates, which will adjust with inflation until you retire. Once you begin receiving payments, cost-of-living adjustments are made thereafter. This approach is fully consistent with VeriPlan's constant purchasing power or real dollar projection modeling methods.

1) Use a payment estimate calculator on the website of the U.S. Social Security Administration

* Take the following steps to use a Social Security Administration on-line calculator:

* Go to the website at: http://www.ssa.gov/

* Look for the "Retirement" section and click on "Calculate Your Benefits"

* Pick a calculator. The "Quick Calculator" can supply the required estimates. Or use another, if you want to obtain more refined estimates.

* Follow the directions and enter your 'Date of Birth' and 'Earnings in the Current Year.'

* Select the "Today's dollars" button. (DO NOT USE the "inflated (future) dollars" option.)

* Write down the three MONTHLY PAYMENT ('benefit') estimates for ages 62, 66/67, and 70

* Enter those estimates in the three bold border user data entry boxes below.

Find a link to Social Security Administration on-line calculators

2) Obtain a printed annual statement in the mail from the U.S. Social Security Administration

If you have an established work history of at least ten years and have earned 40 'credits', then you can receive annual statements from the U.S. Social Security Administration via the U.S. Postal Service. With a sufficient work history this statement will provide the age 62, 66/67 and 70 MONTHLY PAYMENT estimates that you need to enter below.

If you have had earned income in the past from which Social Security (FICA) taxes were taken, you should get on the list to receive this an annual statement. If you are not getting it, contact the Social Security Administration, to ensure that they have a current address for you and will send you this annual statement.

It is a very good idea to get each Earner's statement every year, so that you can verify that the Social Security Administration has an accurate record of your earnings history. If some of your earnings history is not recorded, you may be able to correct this situation. While a minimum of 40 credits -- obtained at a maximum rate of four per year depending on your taxable compensation -- is required for a benefit estimate, this is not the whole story. If a substantial part of your earnings history is missing, then this could reduce your Social Security retirement benefits. For example, retirement payments are determined using the 35 highest inflation indexed compensation for the working years from ages 22 to 62. Therefore, any more than 5 missing or zero compensation years, and your payments could be lowered. A 2005 study by the Center for Retirement Research at Boston College reported that the average working man and woman, respectively, have 6 and 13 years of zero earnings in their records. The causes could either be years without earnings or missing records.

EARNER #1 -- Enter your MONTHLY age 62, 66/67, and 70 Social Security retirement payment estimates

EARNER #1 -- Determining the nearest age between 66 or 67 of "full or normal" Social Security retirement age

EARNER #2 -- Enter your MONTHLY age 62, 66/67, and 70 Social Security retirement payment estimates

EARNER #2 -- Determining the nearest age between 66 or 67 of "full or normal" Social Security retirement age

Note: Do not reduce your entries above, because of any concerns that you may have about the financial viability of the Social Security system. Enter the amounts that the U.S. Social Security Administration currently provides to you. You will have an opportunity in the next section below to set a risk adjustment factor regarding whether you expect to receive your full Social Security retirement payment, when you are retired.

Note that your eligibility for higher payments would rise in between the ages represented by the three age-related bold border data entry boxes above, depending upon the age you would actually begin receiving payments. Therefore, VeriPlan's projection method is mildly conservative at the upper ends of the ranges between 62 to 66/67 and 66/67 to 69. VeriPlan uses this method, because your annual Social Security statements only provide payment estimates for ages 62, 66, and 70, which makes it easier for you to supply the entries for the three bold border boxes above.

The Social Security Administration's formulas are complex, but they do have on-line benefit calculators that you could use with some effort to estimate more refined payments for specific retirement ages. If you are relatively close to retirement and a more precise estimate of your payment at a particular retirement age is important to you, then you could determine that payment on-line at the Social Security Administrations website: http://www.ssa.gov/ Then, you could enter this payment into the bold border boxes above. However, if you do this, remember that if later you alter your retirement age, then the payment estimate you entered could overstate rather than understate your annual payment throughout all years of your retirement up to age 100. From a planning standpoint it would be better to understate rather than overstate you likely payment.

What to do, if you are already retired and receive Social Security retirement payments.

If you are already retired and you have already begun to receive Social Security retirement payments, just enter the same monthly amount that you are currently receive in each of the three bold border boxes above. Social Security payments are indexed to consumer price inflation. Because VeriPlan uses real, constant consumption dollars, which are indexed to consumer price inflation, your payment entries above can be used in each year of your VeriPlan projection without adjustments.

Section 12.5: Setting initial Social Security retirement payment ages

Age 70 is the latest age that VeriPlan will wait until it automatically triggers your initial Social Security retirement payments to begin. However, if you set an retirement age less than 70 for Earner #1 above in Section 2, or if you set another age under 70 using VeriPlan's initial Social Security payment age control below, then VeriPlan would use an age lower than 70 to trigger your initial payments.

The planned retirement ages of Earners #1 or #2 will trigger initial Social Security payments before age 70... unless, you choose below an initial payment age that is different from Earner #1's retirement age.

Unless you activate the initial Social Security payment age control below and pick a specific age to begin receiving Social Security retirement payments, then VeriPlan will use the lower of the target retirement age of Earner #1 above in Section 2 or age 70 to trigger the start of Social Security retirement payments. The retirement age for Earner #1 that you entered above would determine which one of the three payment levels from the bold border boxes above will be used in your projections.

EARNER #1 -- Do you want to use an initial Social Security payment age that is different than Earner #1's retirement age?

EARNER #1 -- What alternative Earner #1 age for initial Social Security retirement payments do you want to use?

Age entries are restricted from age 62, which is the earliest that payments are possible, up to age 70, which is the latest that it would make financial sense to delay receiving current payments in exchange for higher future payments.

EARNER #2 -- Do you want to use an initial Social Security payment age that is different than Earner #2's retirement age?

EARNER #2 -- What alternative Earner #2 age for initial Social Security retirement payments do you want to use?

Age entries are restricted from age 62, which is the earliest that payments are possible, up to age 70, which is the latest that it would make financial sense to delay receiving current payments in exchange for higher future payments.

Section 12.6: Reduce the Social Security Administration's payment projections (optional)

There are significant concerns about the long-term financial solvency of the Social Security system, and it may be prudent to make certain downward adjustments.

In this section, you can scale back the amount of your projected Social Security payments, if you wish. VeriPlan provides an adjustment below which allows you to reduce your Social Security estimates by a percentage of your choosing.

By how much should VeriPlan reduce payment estimates from the Social Security Administration?

For example, if you enter 15% above, then VeriPlan will reduce the applicable Social Security payments that you entered in the section above by 15%. Stated another way, VeriPlan would project that your retirement payments will be 85% of the dollar payment in the section above that would apply, depending upon the retirement age of Earner #1.

Social Security Administration estimated benefits statements, which were issued in recent years included the following notice: "Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so in the future. The law governing benefit amounts may change, because, by 2037, the payroll taxes collected will be enough to pay only about 76 percent of scheduled benefits."

Shoring up the Social Security system financially will involve increased taxes, reduced payments, and/or delaying the age that payments commence. The personal retirement savings account proposals that were debated in 2005, would have done nothing to enhance the future solvency of the Social Security trust fund or to address the similar looming financial problems with the Medicare system. Benefit reductions in one form or another seem inevitable, if taxes are not increased. Paying more taxes in your working years would mean you would build fewer financial assets, unless you cut back your consumption to maintain your savings rate. There is no free retirement lunch.

To avoid speculating about the specific form of any potential changes to the Social Security system, VeriPlan's projections will assume that tax rates will remain the same into the future. Instead, it provides this straight-forward Social Security retirement payments reduction factor, as a more understandable means to model potential payment reductions.

Any payment reduction factor is entirely a matter of your opinion. The reduction factor that you choose above should reflect primarily the time you have until your planned retirement. Consider first that the average person's retirement is expected to last several decades, over which Social Security retirement payments would be made. For example, a person 10 years away from retirement with two or three decades of payments in retirement might choose a reduction of 10% versus Social Security's estimated payments. Young people who are many decades from retirement would probably use higher payment reductions, than those who are in or nearing retirement. For each additional 10 years until retirement, add perhaps another 5% to 10% to the reduction.

Setting this payment reduction factor is, of course entirely speculative, and the reduction figures above might be close to or wide from what actually becomes enacted into law at some point in the future. Keep in mind that Social Security currently has a surplus relative to current payment obligations, which inevitably will be drawn down over several decades as increasing numbers of people retire and live longer. At some point in a few decades, unless changes are made, this surplus will be exhausted and payment entitlements will exceed payroll tax collections by increasingly wide margins as the baby boom generation moves through the Social Security retirement system.

This funding situation says absolutely nothing about the quality of the construction of the Social Security retirement system in a steady state environment. In general, the Social Security system has served the U.S. well for many decades and can continue doing so far beyond the lifespan of anyone currently living. However, the movement of the exceptionally large baby boom generation cohort through the system does mean that adjustments will need to be made to maintain solvency in the system. Alterations are inevitable, such as increasing the full retirement age to reflect increasing life spans, increasing taxes on those currently employed, lowering benefit payments overall, trimming benefits through means testing, limiting cost of living adjustments, and/or other proposals. The Social Security needs to survive and to keep the seniors or today and tomorrow out of dire poverty in their declining years. A rational solution to system funding seems elusive in the current economic and political environment, but eventually the US will solve this problem.

Section 12.7: Enter your pensions and annuities (optional)

In the input table in below, you can enter information on up to 10 pensions and annuities for Earner #1 and/or Earner #2.

Regarding your annuities, if you have signed contracts, then you should enter information about these contracts in the table below. **ENTER ONLY SPECIFIED AND COMMITTED PAYMENTS TO BE RECEIVED ON A MONTHLY BASIS.**

Regarding your pensions, ENTER ONLY SPECIFIED AND COMMITTED RETIREMENT PAYMENTS TO BE RECEIVED ON A MONTHLY BASIS from employer sponsored "defined benefit" pension plans.

In a "defined benefit" pension plan, an employer commits to make specified payments during retirement.

These "defined benefit" plans are different from personal or employer sponsored "defined contribution" retirement plans, such as IRAs and 401(k)s, into which employees and/or employers might make contributions. However, in a "defined contribution" plan, future payments are not specified nor are future payments guaranteed. The future value of a "defined contribution" plan depends upon your contributions, any employer contributions, investment appreciation, administrative and investment costs, withdrawal rates, etc.)

Elsewhere, VeriPlan provides places for you to enter information related to your "defined contribution" plan assets.

Regarding your potential future personal contributions and your employer's contributions to "defined contribution" retirement plans, such as IRAs and 401(k)s, you can enter your personal eligibility and your preferences for future contributions on the tax-advantaged plans worksheet.

For your current "defined contribution" asset holdings, such as cash, bond, stock, or other assets held in your 401(k), 403(b), IRA, KEOGH, or similar accounts, enter these assets on the appropriate asset worksheet. The appropriate asset input table to use will depend on the kind of investment asset that you own, and not the type of account. The type of account is coded, as defined in the next note.

Note that for each of your individual assets that you enter on its asset class worksheets, VeriPlan has a column to indicate whether it is a currently taxable asset (coded 1), a tax-deferred asset (coded 0), or a Roth 'tax-now-not-later' asset (coded 2). VeriPlan projects each of your assets separately and uses these account taxability code entries to determine if and when each of your assets will be taxed. VeriPlan explains how it does this on the tax-advantaged plan worksheet.

Do not enter any expected Social Security payments on the input table below. Instead Social Security information is collected in a section above on this worksheet.

Section 12.8: The pension and annuity input table

You should only enter MONTHLY payment values into Column C of the table below. Only if your enter a monthly dollar payment amount into Column C, do you need to be concerned with setting the proper values in any of the other columns for that particular row. When Column C is set to zero dollars, VeriPlan ignore any values in the other columns.

For further information on making entries to this table, see the column-by-column instructions BELOW this table. Type in all your entries -- DO NOT COPY-AND-PASTE ANY ENTRIES ON THIS CHART!

* Enter MONTHLY AND NOT ANNUAL PAYMENT AMOUNTS in Column C.

Notes about the columns of the pension and annuity input table

Column A -- Indicate if for Earner #1 or for Earner#2

* VeriPlan automatically relates payments to user ages, which may differ. Therefore, enter a 1 or a 2 to specify Earner #1 or Earner #2, respectively.

Column B -- Name of Pension or Annuity Enter names of providers to distinguish between pension and annuity sources.

Column C -- MONTHLY payment expected (ENTER $/MONTH)

* Enter only MONTHLY expected payments. VeriPlan will automatically convert to annual amounts.

Column D -- ENTER Number of Years that payments would continue (Enter 100, if perpetual)

* Some payments may be limited by time and others will not be. VeriPlan will automatically calculate the duration of payments.

Column E -- Do payments begin at retirement? (ENTER 0 for No; ENTER 1 for Yes)

* VeriPlan will automatically relate your pension or annuity either to each earner's planned retirement age or to Column F's commencement age. If you have indicated in Column E that payments for a particular pension or annuity will begin at the retirement age of either Earner #1 or Earner #2, then any age entered for that particular pension or annuity in Column F will be ignored. (You set your planned retirement ages near the top of this worksheet.)

Column F -- Age that payments will begin, IF NOT at Retirement (ENTER AGE EQUAL TO OR GREATER THAN INITIAL AGE OF EARNER)

* If you entered a zero in Column E, then VeriPlan will begin payments at the age you specify in Column F for the particular earner specified in Column A. A cell will turn red, when you enter a number below one's initial age.

Column G -- % of each payment, which on average would be taxable (ENTER %)

* Taxation of pensions and annuities can be highly complex. Do your best to estimate the average percentage of expected payments that will be subject to taxation.

* (In column G, remember to type your number with a % sign and verify that your percentage entry is what you intend.)

* The Impact of Inflation BEFORE and AFTER Payments Begin (Columns H and I)

* Pension and annuity payments may or may not increase in relationship to inflation up to and beyond the point that you expect to begin to receive payments.

* Inflation adjustments to Column H and Column I will usually be zero or below (negative). Purchasing power protection in excess of inflation would be very rare and certainly would be something that your pension or annuity provider would emphasize to you. On the other hand the lack of or less than adequate purchasing power protection might tend to be obscured.

Column H -- Rate of real payment growth or decline UNTIL payments begin (ENTER a %)

* (In column H, remember to type your number with a % sign and verify that your percentage entry is what you intend.)

* Enter 0% (zero percent), if expected payments will rise with consumer inflation up until the point that they begin.

* Alternatively, enter -3% (negative three percent), if expected payments are currently quoted in nominal or non-inflation protected dollars.

* If partial inflation protection is provided, then enter a percentage in between -3% and 0%.

Column I -- Rate of real payment growth or decline AFTER payments begin (ENTER a %)

* (In column I, remember to type your number with a % sign and verify that your percentage entry is what you intend.)

* Enter 0% (zero percent), if expected payments will rise with consumer inflation after the point that they begin.

* Alternatively, enter -3% (negative three percent), if payments would receive no inflation after they commenced.

* If partial inflation protection is provided after payments begin, then enter a percentage in between -3% and 0%.

Column J -- Notes Use Column J for any descriptive or special information that you wish to record.

Section 12.9: Change your real dollar earnings potential after age 65 (optional)

Much older workers may face significant erosion of real dollar wage rates. In this section, you can adjust VeriPlan's assumptions about real dollar wages for ages over 65.

The personal constraints of aging and the many significant societal disincentives against continuing to work beyond age 65 limit potential real wage growth for older workers. Older workers tend usually to experience a decline in real wages -- often a very significant real wage decline.

Therefore, as a default, VeriPlan will project an erosion in real earnings ability should either Earner #1 or #2 work beyond normal retirement age. With its default settings below, VeriPlan would project that the unadjusted* real wages of Earner #1 and #2 would decline in real dollar terms beginning at age 66. VeriPlan assumes a much steeper decline in real dollar income during very old age, because workers usually have a reduced inclination and/or ability to perform the same volume of work, as they did earlier in life.

Notes:

You can use positive numbers below and assume an increase in the earnings rate and

These earned income assumptions will NOT affect any earned income adjustments that you might make for either Earner/User on the income worksheet.

You are not obligated to accept VeriPlan's assumptions about this subject. If you intend to work significantly beyond Age 65, you can adjust VeriPlan's real wage decline assumptions in the bold border data entry boxes in the table below to the left. You can get a better understanding of the effects of these real wage decline assumptions, by inspecting the income graphic and the data output.

Your adjustments will override VeriPlan's standard initial assumptions, which are listed below in the adjacent table below to the right. VeriPlan's initial assumptions are listed, in case you wish to restore VeriPlan's original assumptions by re-entering them into the bold border boxes, after you have experimented with changes.

**In the bold border user data entry table below, enter annual real wage decline or increase assumptions for EITHER earner as percentage numbers INCLUDING the percent sign, using percentages from -100% to 100%.** To speed your data entry, VeriPlan uses a single annual real wage decline assumption across each half-decade. For example, if you enter -5% in the 81 to 85 age range for Earner #2, VeriPlan would lower Earner #2's real wages from age 81 to 82 by 5% and would repeat this process for each of these five years.

While VeriPlan's percentage drop-offs in the yellow table above may appear rather severe, few very old workers are able to earn wage rates comparable to what they earned in their "prime" earning years. Most will also work fewer hours, if they have a choice. Even very old professional workers, who are still in high demand and able to command competitive hourly rates, will experience substantial total real wage declines, if they reduce the volume of work that they do.

If you do not wish to use any real wage decline assumptions over age 65, then set all values in the bold border user data entry table above to 0%. If you expect stronger earnings rates you wish to assume an increase in real wages over age 65, you can easily do that. Simply use positive percentage values in the table above that are greater than 0%. Refer to the income graphic to view the impact of the over 65 wage rate assumptions that you enter here.

For your reference, remember that VeriPlan will project that your real or non-inflationary dollar earned wage and salary income and actively-managed business income will grow UP TO AGE 65 according to the real growth rates that you entered on the income worksheet.

For your reference, your assumptions for:

You CANNOT change these percentages here. They can only be changed on of the income worksheet.

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Subscribe to the Free Monthly:

 " **What Works in Personal Finance Newsletter "**

http://www.theskilledinvestor.com/VeriPlan/financial-planning/

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### Chapter 13: Tax-advantaged Retirement Plans worksheet

Section 13.1: Introduction to VeriPlan's contribution limitation tools

Section 13.2: Maximum contribution limits to employer-sponsored defined contribution plans

Section 13.3: Enter contribution limits for your employer-sponsored retirement plans (optional)

Section 13.4: Dollar-based employer-sponsored retirement plan contribution limits

Section 13.5: "Percent-of-income-based" employer-sponsored retirement plan contribution limits

Section 13.6: Set the total contribution limitation tool (optional)

Section 13.7: Set the Roth contribution limitation tool (optional)

Section 13.8: Change annual contribution limits for traditional and Roth IRAs (optional)

Section 13.9: Summary of 2012 Traditional IRA and Roth IRA contribution and deduction rules

Section 13.10: Change income tax deduction limits for traditional IRA contributions (optional)

Section 13.11: Change contribution limits for Roth 401(k), 403(b), and 457 plans (optional)

Section 13.12: Change age limits that affect tax-advantaged plans (optional)

Section 13.13: Change early withdrawal penalties (optional)

Section 13.14: Evaluating alternative tax-advantaged investment strategies

Section 13.15: Traditional plans usually provide net lifetime advantages over Roth plans

Section 13.16: Roth contribution and conversion calculator

Section 13.17: A note on Roth IRA conversions during low income years

Section 13.18: Transactions timing and priorities for traditional & Roth tax-advantaged accounts

Section 13.19: Graphical spikes related to tax-advantaged retirement investments

Section 13.20: Commentary -- the labyrinth of tax-advantaged plan rules

Overview

VeriPlan automatically projects your contributions, income tax deductions, and income taxes for traditional IRAs, Roth IRAs, and employer-sponsored tax-advantaged employment plans, including both your personal and your employer contributions.

To the extent possible, VeriPlan has automated your lifecycle projections regarding the various employer plans and personal accounts that allow you to defer taxation or to avoid future taxation altogether.

VeriPlan has fully automated the projection of your IRA contributions, deductions, asset growth, withdrawals, and taxation, regarding traditional tax-deferred IRA accounts and Roth 'tax-now-not-later' IRA accounts.

Your preferences below will control your projected annual contributions from your positive net income and/or your taxable financial assets into tax-advantaged retirement plans, up to current annual legal limits of all plans into which you would be eligible to make contributions.

In addition, VeriPlan provides contribution limitation controls below, which allow you to set your preferences about how much of your future contributions would be invested into traditional 'tax-deferred' retirement accounts versus Roth 'tax-initially-not-later' retirement accounts.

Please refer to the sections below for more information about tax-advantaged retirement plans, including IRAs and employer sponsored plans. This chapter also discusses tradeoffs between various tax-advantaged retirement accounts and describes how VeriPlan automates the projection of lifetime contributions and withdrawals related to tax-advantaged retirement accounts.

If you participate in any employer pension plans, which are known as 'defined benefit' plans, you should enter information about them on the retirement worksheet.

This worksheet is also NOT for information about your CURRENT asset holdings in traditional or Roth tax-advantaged IRA or employer-sponsored defined contribution plans Roth accounts. Enter your current holdings on the assets worksheets.

VeriPlan automatically projects your lifetime tax-advantaged contributions, tax deductions, associated tax payments, and tax-advantaged account withdrawals. It implements legal limits, when required, that may include limitations related to:

* annual contribution maximums for types of tax-advantaged accounts on a dollar and/or percentage basis

* the amount of your compensation or the amount of your adjusted gross income

* age limits, including minimum ages, maximum ages, ages for catch-up contributions, and retirement ages

Age-related IRA factors are documented

Your retirement age settings on the retirement worksheet will determine when your earned income will cease. Thus, VeriPlan will use the retirement ages you plan for Earner #1 and #2, and it will terminate your contributions to employer-sponsored tax-advantaged accounts at those ages.

Automated tax-advantaged retirement savings and investment projections

http://www.myfinancialfreedomplan.com

Section 13.1: Introduction to VeriPlan's contribution limitation tools

In addition to VeriPlan's automatic contribution limitation method when projected assets are not available to make contributions, VeriPlan offers two more contribution controls for you to use. When you use the two tax-advantaged annual contribution control tools that VeriPlan explains in sections below, you can perform what-if testing and compare the projected impact of recognizing taxes earlier versus later in your projected financial lifecycle. These tools help you to calibrate your potential use of tax-advantaged investment accounts.

1) Total contribution limitation tool

With this mechanism you can control your total projected contributions to both traditional and Roth accounts. When you use this tool, VeriPlan will make contributions to your traditional tax-deferred and Roth tax-initially-not-later accounts only in years in which you are projected to have positive net cash flow. This tool allows you to make up to the maximum legal contribution that could be funded from current positive cash flow, but it can prevent the conversion of your existing taxable assets into tax-advantaged assets.

You use this tool by setting your projected contributions to be a percent of your projected positive net cash flow -- potentially up to the legal maximums.

If you do not activate this tool, then VeriPlan will make contributions in any year that you have: a) positive net cash flow and/or b) taxable cash, fixed income, or equity financial assets that can be converted.

2) Roth contribution limitation tool

This second mechanism allows you to control the proportion of your projected contributions that would be contributed to Roth retirement accounts -- potentially up to the current legal maximums. This Roth contribution limitation tool can be used in conjunction with or independently of the total contribution limitation tool.

U.S. tax laws concerning tax-advantaged retirement plans are extraordinarily convoluted. VeriPlan has automated your lifetime projections regarding the various employer plans and personal accounts that allow you to defer taxation or to avoid future taxation altogether.

On the tax-advantaged plans worksheet you will be able to enter information about the maximum limits on your contributions to the employer-sponsored defined contribution plans that are available for Earner #1 and Earner #2. The worksheet is where you will make entries about your right to participate in and make contributions to employer-sponsored plans. Once you make your employer-sponsored plan entries on this worksheet, then VeriPlan will automatically project contributions, deductions, asset growth, withdrawals, and taxation associated with these plans.

In addition, VeriPlan has fully automated the projection of your IRA contributions, deductions, asset growth, withdrawals, and taxation, regarding traditional tax-deferred IRA accounts and Roth 'tax-initially-not-later' IRA accounts. For these functions to operate, you DO NOT need to make entries in VeriPlan associated with the IRA tax rules. VeriPlan has documented its tax rules related to IRA contributions and deductions in sections lower on this worksheet. If the tax laws change in the future, VeriPlan provides bold border user data entry boxes that allow you to change contribution limits.

On this worksheet, VeriPlan also provides two user controls for 'what-if' retirement planning. These powerful controls allow you to vary your projected contributions to employer-sponsored plans and IRA accounts and to adjust the proportions of your contributions made to tax-deferred versus Roth 'tax now, not later' accounts.

In future projection years, VeriPlan will automatically combine your existing assets with your projected future contributions and deposits into asset accounts with similar taxability. VeriPlan will automatically defer taxes on each asset that is held in a 'traditional' tax-advantaged account, until withdrawals from your traditional tax-advantaged accounts are either necessary to cover your future expenses or are legally mandated. In contrast, VeriPlan will never tax projected future returns and withdrawals related to your assets held in Roth 'tax-initially-not-later' accounts.

Your tax-advantaged contributions will be invested according to your settings both on this worksheet and on the asset allocation worksheet. VeriPlan simultaneously implements your tax-advantaged data entries and preferences from this tool, while it also automatically maintains your preferred asset allocation across all your cash, bond, and equity financial asset holdings according to the asset allocation preference settings that you make on the asset allocation worksheet. VeriPlan does this through an automated annual year end portfolio rebalancing process, which rebalances assets in your taxable and tax-advantaged accounts, including your holdings in traditional tax-deferred and Roth accounts.

VeriPlan automatically chooses the highest tax-advantaged contribution available to you subject to legal limits and to any additional limits that you might set with these tools.

You can use VeriPlan's tax-advantaged contribution limitation controls to restrict your projected traditional and Roth tax- advantaged account participation or to analyze the financial effects of not participating at all.

For your employer-sponsored plans and your IRAs, you do not need to worry about whether you would have sufficient projected taxable compensation to fund a contribution in any projection year, because VeriPlan will automatically determine whether or not you do. In addition, because VeriPlan chooses the highest annual contribution available, to you subject to your preferred limitations, you do not need to be concerned about having made possibly redundant entries in any of the bold border user data entry boxes anywhere in VeriPlan. VeriPlan will select only the highest legally available contributions, and it will not make duplicative contributions that would not legally be available to you.

Whether or not you currently participate in any of the tax-advantaged programs available to you, you may wish to consider doing so, if you are projected to have sufficient compensation and a legal right to make contributions in any particular year, and if you would like potentially to lower your current and/or future income tax obligations. VeriPlan automatically projects your new contributions and the build-up of your assets in your taxable, traditional tax-deferred, and Roth accounts. Furthermore, to meet your projected expenses in years when income is not adequate, VeriPlan automatically manages withdrawals in a priority order from your taxable, traditional tax-deferred, and then Roth 'tax-initially-not-later' accounts, respectively, over your lifecycle.

VeriPlan automates and hides as much of the complexity of the tax-advantaged retirement incentives tax code as it reasonably can.

It would be a significant understatement to say that current U.S. tax rules related to tax-advantaged investing are complex. Therefore, the tax-advantaged plans worksheet also states the current limitations on contributions to and deductions from the types of tax-advantaged plans that are used most prevalently by individuals. companion

Tax-advantaged accounts are structured to encourage personal savings and investing toward retirement. There are a variety of age limits, compensation requirements, gross income limitations, contribution phase outs, deduction phase outs, and tax treatments. Because the rules regarding traditional IRAs and Roth IRAs can be confusing, VeriPlan has provided a chart on the tax-advantaged plans worksheet, which summarizes current traditional IRA rules and Roth IRA rules as VeriPlan understands them from IRS documents. VeriPlan implements this IRA rule set internally and automatically develops projections based on these rules.

VeriPlan allows you to model and project how much you intend to contribute to individual and employer-sponsored tax-advantaged accounts in future years. VeriPlan automatically projects both your contributions and your employers' contributions into these plans and your allowable tax deductions related to your projected contributions. Because the tax rules are very complex, VeriPlan has documented its assumptions in this _VeriPlan User Manual_ and on the tax-advantaged plans worksheet, concerning how your projections are developed. We offer an apology for the level of detail provided, however, it is the complexity of tax code and not VeriPlan that prompts this level of detailed documentation.

Section 13.2: Maximum contribution limits to employer-sponsored defined contribution plans

This section provides information about maximum contribution limits for the various employer-sponsored tax-advantaged plans that may be available to you.

In the section below, you will be able to specify the potential legal maximum annual limits on contributions that you and your employer could deposit into your tax-advantaged defined contribution accounts overall. These legal annual limitations will depend upon the 401(k), 403(b), SEP, Keogh, or other employer-sponsored tax-deferral plans, which may be available to you.

Maximums could be specified either in terms of a maximum annual dollar limitation or in terms of a maximum percentage of compensation limitation up to an annual dollar maximum.

Given the maximums that you enter below, VeriPlan automatically will calculate the largest available tax-deferral. VeriPlan then projects your future contributions limited by your projected annual net income and your preferences regarding other limits that you set below using controls further down on the worksheet.

VeriPlan will automatically calculate tax deductions against your income related to your contributions to employer- sponsored retirement plans. While you may change employers in the future, it is likely that similar retirement plans will be available from your subsequent employer. VeriPlan develops projections that assume you will roll-over your employer-sponsored retirement plan assets into another retirement plan, when you change employers or retire. Unless needed to pay current expense in the absence of alternative taxable assets, it is generally suboptimal to convert tax-advantaged assets into taxable assets and pay taxes on the proceeds, when you leave an employer.

You can find your maximum contribution limits for the various tax-advantaged plans that are available to you from your plan administrator and/or from the IRS. You could check the IRS website http://www.irs.gov or IRS publications. The IRS website provides an extensive "Frequently Asked Questions" section at http://www.irs.gov/faqs/index.html. The following are some of the IRS keyword terms that may be helpful in using the IRS's Q&A: "401(k) Pension Plan", "403(b) Pension Plan", "Maximum Contribution", "Qualified Plan", "Retirement Plan" and "Roth". The IRS site also has a search function that may be helpful. You can also find downloadable IRS publications at <http://www.irs.gov/formspubs/index.html>

Find a current link to the IRS website's Frequently Asked Questions

IRS maximum contribution limits for selected plans

This table lists contribution limits for some employer-sponsored plans. These numbers are not user updatable and are not linked to VeriPlan's internal logic. DO NOT RELY UPON THIS INFORMATION. THESE ARE GENERAL NUMBERS THAT MAY NOT APPLY TO YOUR PARTICULAR PLAN. YOU SHOULD CHECK YOUR EMPLOYER'S PLAN FOR THE CORRECT NUMBERS THAT APPLY TO YOU. Note: In 2013, some contribution limits will fall back to 2001 levels, if not extended by Congress.

Qualified defined-contribution plans -- lower of:

SEPs -- lower of:

Traditional 401(k), 403(b), 457, and SARSEP plans (but not SIMPLE plans):

SIMPLE plans

Designated Roth 401(k), Roth 403(b), and Roth 457 plans:

Section 13.3: Enter contribution limits for your employer-sponsored retirement plans (optional)

This section allows you to set your maximum annual personal and employer contribution limits for the employer-sponsored tax-advantaged plans that are currently available to you and that you expect will be available to you during your working career.

Regardless of the level of your current participation in these plans or whether you currently participate at all, you should enter information about any employer-sponsored plans in which you and/or your spouse are eligible to participate. When you provide this information, VeriPlan can automatically develop projections for you that will model the lifecycle financial effects of your participation ranging from 0% up to your allowable maximum legal participation level.

The maximum contributions to employer-sponsored plans that you enter below will be the maximum limits for traditional 'tax-deferred' employer plans. If your projected compensation in any year is positive, VeriPlan would make a contribution up to the maximum legal contribution limit, if your settings this worksheet indicate that you want to make these contributions. Then, VeriPlan will automatically reduce your taxable compensation by this contribution and calculate your federal, state, and local income taxes using this lower annual compensation level.

Traditional 'tax-deferred' plans can shelter your current compensation from income taxes in exchange for eventually paying ordinary income taxes on these contributions and on any future asset appreciation. Contributions into Roth tax-initially-not-later' plans do not shelter current income from income taxes, but appreciation, distributions, and withdrawals are never taxed in the future. VeriPlan provides a Roth contribution user control for you to adjust how much you would prefer to contribute to traditional 'tax-deferred' versus Roth 'tax-initially-not-later' plans.

Below, VeriPlan provides a series of bold border data entry boxes to enter your information on maximum personal and employer contributions into employer-sponsored retirement plans. Two separate groups of bold border user data entry boxes have been provided. Each has the same arrangement. The first group is for Earner #1, and the second group is for Earner #2. The worksheet provides specific instructions on how to enter the appropriate legal annual limits for both personal and employer contributions into dollar-based and percentage-based tax-advantaged plans. If any type of program is not available to you, simply enter $0 or 0% in the bold border box. A notes box is provided for each, so that you can record the type of account you are referring to.

Your entries for maximum annual personal contributions to employer-sponsored retirement plans

Because VeriPlan will use these entries to project your potential contributions to employer sponsored retirement plans during your working years, enter any plan maximums, if you intend to work for employers who offer such retirement plans during your career.

Enter the annual dollar and/or percentage maximums that would apply to Earner #1 and #2 below. VeriPlan will automatically evaluate all limits and calculate the largest potential tax-advantaged contribution that is available to either earner.

Most retirement plan participants are subject to annual maximum dollar contribution limitations and not maximum contributions that are limited by percentage of gross income. (These percentages relate to total annual maximum contribution limitations and not to any percentage paycheck withholding schema, during the course of any year.)

Enter (or just leave) a 0 or 0% in any bold border box that is not applicable to you.

These are NOT pensions. These are NOT IRAs, which you open and manage yourself. See Section 4 for IRA entries.

Section 13.4: Dollar-based employer-sponsored retirement plan contribution limits

If either earner is eligible to participate in an employer-sponsored plan with an annual maximum contribution limit that is solely limited by total dollars and not by percentages, then you should enter these maximum annual dollar limits in the "Maximum Dollar Contribution Method" boxes.

Most employees are subject to maximum dollar limits and not percentage limits. Percentage of gross income plan maximums are not common and usually are associated with business owner retirement plans.

Two bold border dollar contribution method data entry boxes are provided -- one for personal dollar limited contributions and one for employer dollar limited contributions. An employer-sponsored and dollar limited "defined contribution" program might include a 401(k), 403(b), SARSEP, SIMPLE, 501(c)(18)(D), 547, and/or federal employee Thrift Savings Plan.

If your employer contributes a dollar maximum, then enter that figure in the bold border box titled: "Maximum annual potential EMPLOYER tax-advantaged DOLLAR contribution limit." If your contributions permit, VeriPlan's projections will assume that you would capture your employers' matching contributions dollar for dollar up to your employers' maximums.

Earner #1's Maximum annual dollar-based employer-sponsored plan contributions

*The lesser of the personal dollar maximum and the employer matching maximum is used in projections.

Earner #2's Maximum annual dollar-based employer-sponsored plan contributions

If there is no Earner/User #2, then VeriPlan will ignore any entries for Earner #2 here. VeriPlan determines whether there is an Earner/User #2, by checking your answer to the question: " _Should VeriPlan develop lifetime projections for 1 or 2 earner/users?"_ on the income worksheet. This is your current answer to this question:

* Your answer cannot be changed here. Instead, you can change it on the income worksheet.

Maximum annual dollar-based employer-sponsored plan contributions – Earner #2

* The lesser of the personal dollar maximum and the employer matching maximum is used in projections.

Section 13.5: "Percent-of-income-based" employer-sponsored retirement plan contribution limits

Employer plans that limit maximum contributions using both percent of income and annual dollar limits

You might be eligible to participate in a plan that is based on a maximum percentage of earned income or business income up to an annual maximum dollar contribution limit. If an earner is eligible for such a program, enter both the maximum percent of income contribution rate and the maximum annual dollar limit. (These percentages relate to annual contribution limitations and not to any paycheck withholding schema during the year.) If the employer makes additional contributions on an earner's behalf, then also enter the corresponding percentage of income and annual dollar maximum contribution limits for the employer's contribution.

Note that, if you were to enter your tax-advantaged plan's maximum annual dollar contribution and in the limitations section that follows also enter 100% as the percent of income that could be contributed into that plan, then this method would operate the same as the maximum annual dollar limited method described above.

Earner #1's Maximum annual percentage-based employer-sponsored plan contributions

With retirement plans using annual percentage limitations, the maximum contribution limitation is proportional to gross income up to certain maximum income thresholds. Percentage plans are not common and usually are associated with business owner retirement plans.

You must enter BOTH percentage of gross income AND annual dollar contribution limits for these plans.

Earner #2's Maximum annual percentage-based employer-sponsored plan contributions

With retirement plans using annual percentage limitations, the maximum contribution limitation is proportional to gross income up to certain maximum income thresholds. Percentage plans are not common and usually are associated with business owner retirement plans.

You must enter BOTH percentage of gross income AND annual dollar contribution limits for these plans.

* Plan contribution maximums are not related to any particular company's paycheck withholding methods

The general plan contribution maximums for a particular retirement plan are governed by the applicable law and not a particular employer's policies. For example, if your retirement plan is a 401(k) plan, then US law and IRS annual contribution maximums will govern both the maximum annual contribution and the maximum additional annual contribution for workers over 50 years of age. Only the maximum amount of employer matching dollar contributions would be determined by your particular employer.

Employers have a myriad of dollar-per-paycheck or percentage-of-paycheck withholding methods designed for plan participants to make retirement plan contributions over the course of a full year or to make those maximum contributions more quickly, if a participant chooses to do so. All of the dollar and percentage contribution maximums that you would enter below are SOLELY related to the maximum amount that you could contribute, if you chose a paycheck withholding method designed to contribute the available annual maximums within any year. By focusing solely on annual contribution maximum limitations (dollar or percentage), VeriPlan is only concerned here with setting annual maximums.

If you choose to participate in these tax-advantaged retirement plans, VeriPlan presumes that you are doing so because you have decided that these plans offer a significant advantage to your lifetime financial plan, and therefore you want to plan to make the maximum contributions that you could. VeriPlan provides a variety of methods for you to determine whether tax-advantaged contributions of one form or another would tend to be advantageous to you, which they are for most people. VeriPlan also provides a variety of automated contribution limitation tools, if you wish to evaluate the projected impact of various limitations to future contributions below these potential maximums. Furthermore, this _VeriPlan User Manual_ also explains how VeriPlan automatically projects your lifetime contributions to, the asset appreciation of, and any needed or required withdrawals from your tax-advantaged retirement plans, including employer sponsored plans and IRAs.

VeriPlan automates the analysis of tax-advantaged retirement plan investing

VeriPlan is the most economical retirement financial planning software available

For more information, go to: **http://www.theskilledinvestor.com/VeriPlan/financial-planning/**

Section 13.6: Set the total contribution limitation tool (optional)

The total contribution limitation tool allows you to set your personal limitation on tax-advantaged account deposits, as a percent of your annual positive net cash flows.

Limiting traditional and Roth tax-advantaged plans contributions to years with positive net cash flow

VeriPlan's ability to develop projection revisions instantly allows you to analyze and to tune your taxable versus tax- deferred financial asset investment strategy. While many VeriPlan users will want to make maximum use of tax advantaged investing opportunities, others may want to impose additional limitations. Some users will want to ensure that they will always have financial assets in both taxable and tax-advantaged accounts. This total contribution limitation tool allows such users to achieve this objective.

You should to decide whether you wish to maintain any, some, or a lot of taxable assets in proportion to your tax advantaged financial assets. Where to set the balance is a matter of personal choice. While the advantages of tax advantaged investing are obvious, there are some pitfalls to avoid.

For example, you may acquire substantial tax-advantaged assets and very few taxable assets over time. If substantial planned or unplanned expenses occur, then you might have to liquidate tax-advantaged assets and pay taxes at ordinary income tax rates when you would prefer not to. Furthermore, if this happens under the age of 59 and 1/2, then you might incur federal and possibly even state early withdrawal penalties. Note, however, that scientific investment studies indicate that the financial advantages of tax-advantaged investing are sufficiently strong that they compensate relatively quickly for the taxes and penalties associated with withdrawals from tax-advantaged accounts, when unanticipated expenses must be paid.

Activating this total contribution limitation tool

You must enter a 1 (one) in the bold border user entry box below to activate this tool. If you do not, the percentage below will be ignored, and VeriPlan will revert to its default, which is to make contributions until your taxable assets have been exhausted.

* Entering a 1 means that you would have to have positive projected net cash flow to make contributions in a particular year.

* Entering a 0 means that you could have either positive projected net cash flow and/or positive projected taxable cash, fixed income, or equity financial assets to make contributions in a particular year.

Setting your Percentage Limitation for this total contribution limitation tool

To calibrate this tool, simply enter a positive percentage into the bold border user data entry box below. Whenever you change this percentage, VeriPlan will instantly develop a new projection for you to evaluate.

Set your personal limitation on tax-advantaged account deposits as a percent of your annual positive net cash flow

Note that this tool's percentage limitation refers to your projected available annual net cash flow after expense, tax, and debt payments. It is NOT a percentage of your maximum legally allowable contributions across all tax-advantaged plans in which you may be eligible to participate. Your legally allowable maximum contributions could be lower or higher. Maximum contributions depend upon compensation and other factors.

Using the total contribution limitation tool with percentages from 0% to 100%.

By activating this total contribution limitation tool you can develop a range of projections to determine whether you wish to limit your allowable contributions to years of positive net income after expense, tax, and debt payments and after scheduled taxable investments. If you set the tool to 100%, then VeriPlan will invest all of your projected positive net cash flow into tax-advantaged accounts up to the legal contribution limits.

Of course, you are not required to make the maximum contributions, and you may not wish to project that you will invest all of your available positive net cash flow into tax-advantaged or Roth 'tax-initially-not-later' accounts. While it is generally advantageous to defer taxation when possible, some people may wish to use this tool to limit their potential new annual deposits into tax-advantaged and Roth accounts to a level that is below 100% of their projected positive cash flow. You could, for example, run projections with this limiting tool set to 100%, 50%, 0%, or any percentage in between. Then, you could note and compare your total projected financial assets at certain ages in the future for these various projections.

If the legal tax-advantaged contribution limits are lower than the dollar deposit that your percent of positive net cash flow setting above would allow, then VeriPlan will automatically limit your deposits to the legal maximums. If your net cash flow in any year would allow you to make the maximum legal deposit, but your percent setting here would determine a contribution below the maximum, then this lower tax-advantaged contribution will be made.

If for some reason, you do not wish to have VeriPlan make any tax-advantaged or Roth 'tax-initially-not-later' deposits for you at any point in your lifecycle projection, even if you have positive net income after debt payments, you can do this. If this is the case, all you need to do is to set this total contribution limitation tool's percentage to zero percent. Then, all your projected positive net income after debt payments will be deposited into taxable accounts, and these assets will be taxed according to the personalized tax assumptions that you set in VeriPlan.

If your net positive cash flow exceeds the maximum annual limits on tax-advantaged deposits, then VeriPlan will automatically deposit any excess into your taxable accounts. In years of negative net cash flow, VeriPlan will not make any tax-advantaged account deposits, even though your gross compensation might allow such deposits. When you set this tool at 100% or lower, VeriPlan will calculate that you would already be drawing down your assets in years with projected negative net income and presumably would not want to incur more taxes due to even greater withdrawals. Therefore, VeriPlan will avoid new tax-advantaged deposits and the higher asset withdrawals that would be required to fund those tax-advantaged deposits.

The total contribution limitation tool will also accept percentages from 100% to 1000%.

This tool will also accept percentages in excess of 100%. Those VeriPlan users who already hold taxable assets may wish to model the gradual conversion of these assets into tax-advantaged or Roth tax-initially-not-later assets. If you have proportionately more taxable assets than you would prefer, then over time you might be able to fund additional tax- deferred contributions with transfers from your taxable assets. If your projected net income is lower than your maximum tax-advantaged contributions limits, you might experiment with settings greater than 100%. Then, VeriPlan will automatically contribute all positive annual net income into tax-advantaged accounts in those years, plus it will also convert some taxable assets, pay associated taxes, and make additional tax-advantaged contributions up to the allowable limits.

The maximum setting for this tool is 1000% or ten times your annual positive net cash flow. Allowing percentages greater than 100% gives you greater flexibility in modeling, if you do not want to use VeriPlan's default without this tool, which would always convert all taxable assets, if possible. When you set a percentage in excess of 100% with this tool, VeriPlan will steadily convert your taxable assets into tax-advantaged assets. Once all of your taxable assets have been are converted, VeriPlan stop for that year. If in subsequent years, your positive cash flow is sufficiently high to exceed the percentage limit you set with this tool and/or your legal contribution limits, then VeriPlan will make additional taxable investments for you this unused positive cash flow. In subsequent years, these new taxable assets might be converted into tax-advantaged assets, if your settings and legal limits would allow such a conversion.

Section 13.7: Set the Roth contribution limitation tool (optional)

The Roth contribution limitation tool allows you to set the percentage that future Roth retirement plan contributions would be of your total annual contributions into both traditional and Roth tax-advantaged plan accounts.

VeriPlan can automatically project your future deposits into tax-advantaged accounts according to your preferred split between traditional 'tax-deferred' versus Roth 'tax-initially-not-later' accounts. This Roth contribution limitation tool determines that division. (Note that this tool will not affect the assets that you already hold in your existing traditional and Roth retirement accounts.)

You should also indicate your eligibility for "designated" Roth 401(k), 403(b), and 457 plans and change your contribution limits below.

You should understand the differences between investing in traditional tax-advantaged accounts and in Roth accounts. While this tool worksheet provides a general overview, you should do further research until you have a good understanding of the tradeoffs. You could consult with your tax advisor, and the IRS website provides publications and answers to frequently asked questions that may be helpful. (Read the IRS "category" and "keyword" lists to determine how to find answers to frequently asked questions. Also, use the IRS website search facility.)

Find a current link to IRS website's Frequently Asked Questions

Find a current link to Publications on the IRS website

In general, with traditional tax-advantaged accounts, you and your spouse can deposit portions of your current compensation into these accounts. In doing so, you may be able to reduce your current income tax payments. In these accounts, your assets can appreciate in value over time and distributions will not be taxed, as long as your gains remain in the account. There are age limitations for deposits and early withdrawal payments, if you do not conform to the tax rules. Mandatory withdrawals are required beyond certain ages and withdrawals are taxed at ordinary income tax rates rather than capital gains tax rates.

In general, with Roth accounts, you and your spouse can deposit after-tax portions of current compensation into these accounts. Your new annual deposits into Roth accounts will not reduce your current income tax obligations. As with traditional tax-advantaged accounts, your assets could appreciate in value over time and distributions will not be taxed, as long as your gains remain in the account. However, if you stay within the rules regarding early withdrawals, minimum deposit periods, etc., your future Roth gains will not be taxed, when you withdraw funds. Furthermore, withdrawals are not required and there is no age limit on deposits, as long as you have adequate current year compensation.

Whether traditional and/or Roth tax-advantaged account contributions would be better will depend upon your tax situation, your preferences, and your goals. VeriPlan can help you to model the tradeoffs with this tool.

Set your preference for the percentage that Roth contributions would be of your total annual contributions to both traditional and Roth retirement accounts

Note that Roth contributions will be made with after-tax rather than pre-tax compensation. VeriPlan will automatically test for sufficient income and other limitations. If the percentage you chose would result in reaching your annual maximum allowable deposits for Roth accounts, then any excess will instead be deposited into other tax-advantaged accounts up to allowable limits for that year.

VeriPlan's Roth contribution limitation tool accepts a percentage input that is anywhere from 0% up to 100%. It will not accept percentages higher than 100%. This tool can be used with or without activating the total contribution limitation tool in the section above.

Certain kinds of traditional tax-deferred plans allow contributions that exceed the Roth IRA, 401(k), 403(b), and 457 contribution limits. Because legal contribution limits currently are more stringent for Roth accounts than for traditional tax-deferred accounts, in any given year the actual Roth contribution percentage will be equal to or less than the percentage you set with this tool. This will depend upon your positive net income and the legal limits. VeriPlan handles all these factors automatically.

Can you make contributions to a Roth employer-sponsored retirement plan? (optional)

Designated Roth 401(k), 403(b), and 457 accounts

In addition to Roth IRAs, "designated" Roth 401(k), 403(b), and 457 accounts have become available in recent years. tax year. These designated Roth 401(k), 403(b), and 457 accounts have similarities and differences with Roth IRA accounts. In general, these accounts are funded with after-tax dollars and earnings and appreciation are never-taxed, if they are managed properly.

In effect, a "designated Roth" 401(k), 403(b), or 457 is an added feature of these regular employer-sponsored plans, which effectively add on a separate Roth account. Because they could be appealing, particularly to higher income workers who want to shelter future asset appreciation from taxes, these designated Roth options reasonably can be expected to become widely available. However, 401(k), 403(b), and 457 employer plans are themselves not universally available yet -- particularly for employees in smaller businesses. These plans are more complex and more costly to set up than certain other employer-sponsored defined contribution plans.

Given this situation, VeriPlan allows you to decide whether or not your projections should assume that a designated Roth 401(k), 403(b), or 457 account will be available to you to make contributions during your working years. If you indicate below that you want your projections to assume that a designated Roth 401(k), 403(b), or 457 account will be available to Earner #1 AND/OR Earner #2, then VeriPlan will incorporate this opportunity into your projections automatically. If you do not, then VeriPlan will assume that only Roth IRAs will be available to you. Even if you do not expect a designated Roth 401(k), 403(b), or 457 plan will become available to you soon, you could still use the selectors below to test the potential value of such a plan to you. If appealing, this analysis could give you some motivation to lobby your employer to provide this option or to find a new employer who does.

Do you want VeriPlan to develop projections for you that assume you can contribute to a designated Roth 401(k), 403(b), or 457 employer-sponsored plan?

>> FOR EARNER #1, should VeriPlan assume that a designated 401(k), 403(b), or 457 plan would be available?

>> FOR EARNER #2, should VeriPlan assume that a designated 401(k), 403(b), or 457 plan would be available?

VeriPlan determines whether there is an Earner/User #2, by checking your answer to the question: "Should VeriPlan develop lifecycle projections for 1 or 2 "earner/users"?" on the income worksheet.

This is your current answer to this question:

Your answer to this question cannot be changed here. Instead, you can change it on the income worksheet.

Notes about designated Roth 401(k), 403(b), and 457 accounts

Note that current laws DO allow employer matching contribution for these designated Roth 401(k), 403(b), and 457 accounts. However, the regulations DO NOT allow for employer matching contributions to be deposited into designated Roth 401(k), 403(b), and 457 accounts. Instead, employer contributions must be made into traditional tax advantaged accounts, from which funds must be withdrawn and taxed eventually. VeriPlan performs these employer matching contribution calculations for you automatically using the information that you supply about your employers' matching contributions above on worksheet.

If properly managed, designated Roth 401(k), 403(b), and 457 assets can be rolled over into a Roth IRA account without incurring taxes during that roll-over or subsequently. There are some procedural potholes that need to be navigated properly. For example, because of a Roth IRA five-year holding period requirement, it would be a very good thing to establish a separate Roth IRA account with even a minimum balance to satisfy this five-year requirement in advance. If this were done over five years in advance of any anticipated rollover of funds from a designated Roth 401(k), 403(b), or 457 account, then this Roth holding period requirement should have already been satisfied for any Roth IRA account. You should consult your tax professional and/or check IRS information for more detailed and current information on this holding period and other requirements.

Roth IRA contributions

Anyone with compensation who conforms to the tax rules and limitations associated with Roth IRA accounts can make deposits into a Roth IRA account. Therefore, everyone who can participate in a traditional tax- deferred IRA account could possibly have a Roth IRA, if he meet the additional requirements, such as income limitations. Roth IRAs may not be available to certain higher income persons, because of these maximum income limitations restricting contributions. In some circumstances, such as for contributions on compensation earned over the age of 70.5, only a Roth IRA would be available. Please review the requirements for Roth IRAs on the IRA tax rules table below on this worksheet.

VeriPlan implements the Roth IRA tax rules automatically for you. If you set the Roth contribution limitation tool above to any percentage greater than 0%, then VeriPlan would automatically make some Roth contributions for you, subject of course, to any other applicable limitations.

Tradeoffs between traditional 'tax-deferred', and Roth 'tax-initially-not-later' investing

This section discusses some tradeoffs with tax-advantaged investing and how VeriPlan helps you to analyze them within the context of your lifetime projections.

With tax-advantaged investment accounts, the essential personal economic tradeoff relates to the relative value of paying income taxes now versus paying them either later or never. The value of this tradeoff will vary from person to person, and a proper analysis must be done within the context of your projected lifetime personal financial circumstances. These are the two fundamental questions that arise from the opportunity to use traditional tax-deferred and/or Roth tax-initially-not-later investment accounts.

Using traditional tax-deferred accounts, would it be better for you TO TAKE an allowable deduction now to reduce your current income tax payments, while you defer into the future the payment of ordinary taxes on any future growth in your assets?

Using Roth 'tax-initially-not-later' accounts, alternatively (or simultaneously using other allowed contributions), would it be better for you NOT TO TAKE an available income tax deduction now and, instead, to pay higher income taxes currently so that you would not have to pay any taxes appreciation, distributions, and withdrawals related to these assets in the future?

What to do is highly dependent upon your current and future financial circumstances and the variable tax rates that you may face over your lifecycle. VeriPlan automates much of this evaluation for you. With VeriPlan you can focus on personal analysis and decision-making, because all the computational details are hidden.

Too much of a good thing

If people stay both within the tax rules and within their personal financial means, tax-advantaged investing generally is a good thing for most people at most times. However, too much of a good thing can sometimes be problematic. In particular, funding contributions generally requires sufficient positive cash flow -- that is, positive net income after payments for expenses, taxes, debts, and previously committed regular investments. If your annual contributions to tax advantaged accounts exceed your positive current cash flow or net income, then some or all of your contributions would have to be funded either from your taxable accounts, from your tax-advantaged accounts, and/or via additional debt obligations.

If you contribute more than your current annual cash flow at times when you also hold taxable assets, then some of your taxable assets would need to be sold to fund the current tax-advantaged account contributions that exceeded your current cash flow. In the process, you might or might not incur substantial taxes. Converting taxable assets into tax- deferred or 'tax-initially-not-later' assets can be a good idea, if the capital gains taxes that must realized now are less than the reduction you may achieve in your ordinary income taxes by making a currently deductible contribution. Furthermore, you might save substantially more in the future on your income taxes, as well.

However, if you only have tax-advantaged assets and hold no taxable assets, then funding any new tax-advantaged contributions in excess of positive cash flow becomes problematic. Liquidating one tax-advantaged asset to fund additional contributions for another tax-advantaged account offers no gain. Doing this can result in additional current ordinary income tax realization and sometimes federal and state early withdrawal penalties. Additional tax-advantaged contributions that cause you to swap one tax-advantaged asset for another are pointless and most often counterproductive.

Therefore, VeriPlan has been designed to avoid this situation automatically. In projection years when you have no taxable cash, fixed income, or equity financial assets to begin with and you would have had to begin liquidating some of your tax-advantaged accounts to cover projected expenses, then VeriPlan will automatically stop making contributions to your tax-advantaged accounts.

By limiting projected traditional tax-deferred and Roth tax-initially-not-later contributions to the legal limits \-- subject to your ability to convert only your taxable cash, fixed income, and equity financial assets -- VeriPlan will automatically project the maximum advantage for your tax-advantaged investment opportunities across your lifecycle. For those with substantial positive net income and/or substantial taxable financial assets, VeriPlan will contribute as much as possible to tax-advantaged accounts. If your net income exceeds your annual tax-advantaged contribution maximums, then VeriPlan will automatically deposit any excess new investment funds into your taxable financial asset accounts. If your contribution maximums tend to exceed your projected annual positive net income, then VeriPlan would steadily convert your taxable financial assets into traditional tax-advantaged and Roth tax-initially-not-later financial assets, until they are exhausted. Then, it will stop to avoid converting assets that are already tax-advantaged.

Section 13.8: Change annual contribution limits for traditional and Roth IRAs (optional)

This section provides a table that summarizes IRA tax rules. It also allows you to update VeriPlan, if IRA contribution limits change.

YOU DO NOT NEED TO CHANGE ANY NUMBERS IN THE SECTIONS BELOW, UNLESS THE TAX LAWS CHANGE

This section provides user updatable information about your potential maximum contributions into Independent Retirement Arrangement (IRA) accounts, including both traditional IRA and Roth IRA accounts. Whether or not you or your spouse may participate in employer-sponsored tax-advantaged programs, you can also make annual contributions to an IRA, if you and/or your spouse has sufficient compensation in that year. (Whether or not these contributions are deductible on your income taxes is managed automatically and is discussed below.)

VeriPlan uses current tax rules to develop projections that take into account automatically :

  * the maximum potential contributions for you, if single, or for you and your spouse, if married.

  * your compensation

  * any additional catch-up contributions that you can make over age 50

VeriPlan automatically projects your future contributions into traditional IRA accounts and Roth IRA accounts, while it automatically takes into account contribution limitations, tax deductibility, and applicable taxes on withdrawals net of any tax basis. Most of the information in this section is educational. In addition, below you can change the parameters that VeriPlan uses to develop its IRA projections, if the tax laws change in the future.

The tax rules about traditional IRAs and Roth IRAs are complex.

The tax rules for traditional and Roth IRAs are very complex, and anyone could easy become confused by the rules. A careful reading of the 104 page IRS Publication 590, "Individual Retirement Arrangements (IRAs)" would make anyone's head hurt.

THE IRA RULES AND NUMBERS IN THE CHART TO THE RIGHT ARE FOR YOUR REFERENCE. >>>

THE NUMBERS CANNOT BE CHANGED DIRECTLY IN THE CHART TO THE RIGHT. INSTEAD, KEY NUMBERS CAN BE CHANGED AND UPDATED IN THE BOLD BORDER USER DATA ENTRY BOXES BELOW ON THIS WORKSHEET. IF YOU CHANGE ANY OF THE FIGURES IN THE BOLD BORDER BOXES BELOW, THEN VERIPLAN WILL USE YOUR REVISIONS TO DEVELOP PROJECTIONS FOR YOU. THIS ALLOWS YOU TO MAINTAIN CURRENT TAX INFORMATION, IF THE TAX RULES CHANGE, AND IT HELPS TO PREVENT APPLICATION OBSOLESCENCE.

Note: In 2013, traditional and Roth IRA contribution limits fall back to 2001 levels, unless amended by Congress.

Section 13.9: Summary of Traditional IRA and Roth IRA contribution and deduction rules

(Note that this chart is broken into four parts below)

(The table below shows the first two columns in the table and additional columns that are to the right of the columns shown in the table above.)

(The table below shows the first two columns in the table and additional columns that are to the right of the columns shown in the table above.)

(The table below shows the first two columns in the table and additional columns that are to the right of the columns shown in the table above.)

Footnotes:

A retirement plan at work would be a defined contribution plan or a defined benefit (pension) plan. Whether or not you participate does not matter. It only matters, if you are covered. The deductibility of your traditional IRA contribution may be affected, if you or your spouse are covered by an employer-sponsored retirement plan at work. Roth IRA contributions are not deductible, so coverage by a plan at work is irrelevant.

To make any IRA contribution, you or your spouse must have compensation that is equal to or greater than the contribution. Compensation includes wages, salary, commissions, active self-employment or partnership income (no losses), alimony and separate maintenance payments.

If your annual modified Adjusted Gross Income (AGI) exceeds certain levels, IRS rules may limit or eliminate your income tax deductions for your contribution to a traditional IRA account or your contributions to a Roth IRA account. VeriPlan projects your Adjusted Gross Income without modifications, because the IRS factors that go into the AGI modifications either would be immaterial for the great majority of taxpayers and/or would apply for only a few years, during the projections of most taxpayers.

Annual per person contribution limits for traditional IRA accounts

CHANGE ONLY, IF TAX LAWS CHANGE:

Currently, you may contribute to a traditional IRA account up to age 70.5, but you and/or your spouse must have joint earned compensation that is equal to or greater than your IRA contribution. Your taxable compensation income related to IRA maximum limits consists of your wage, salary, commission, and self-employment income, which VeriPlan also collects on the income worksheet.

In the relatively unlikely event that either the 70.5 contribution cutoff age or the 50 year age for catch-up contributions were to change in the future, you can set the new age(s) further down on this worksheet.

Age limitations on IRA contributions

With a traditional IRA, contributions can be made up until age 70.5, but they and are not capped by taxable income. In contrast, Roth IRA contributions do not have an age cap, but there are taxable income limits that restrict your contributions. For both types of IRAs you must have sufficient annual compensation.

Annual per person contribution limits for Roth IRA accounts

CHANGE ONLY, IF TAX LAWS CHANGE:

There is no upper age limit for contributing to a Roth IRA account, but you must have earned compensation that is equal to or greater than your Roth IRA contribution.

Roth IRA contribution phase-out limits related to your modified Adjusted Gross Income

If your annual modified Adjusted Gross Income (AGI) exceeds certain levels, IRS rules may limit or eliminate your contributions to a Roth IRA by using a modified AGI phase-out range. The level of these phase-outs depends upon filing status. In its projections, VeriPlan uses a projection of your Adjusted Gross Income without modifications, because the IRS factors that go into the AGI modifications either would be immaterial and/or would apply for only a few years during the projections of most taxpayers.

CHANGE ONLY, IF TAX LAWS CHANGE:

Section 13.10: Change income tax deduction limits for traditional IRA contributions (optional)

This section allows you to update VeriPlan, if IRA tax deduction rules change.

YOU DO NOT NEED TO CHANGE ANY NUMBERS IN THIS SECTION, UNLESS TAX LAWS CHANGE

The most simple rule about the deductibility of IRA contributions is that Roth IRA contributions are never deductible. Therefore, this section will focus on the income tax deductibility of your contributions to traditional IRA accounts.

Traditional IRA deductibility limits can depend upon tax filing status, whether you or your spouse are covered by and eligible to participate in an employer-sponsored retirement plan (whether or not you do so), and the amount of your modified Adjusted Gross Income. VeriPlan's projections manages these limits automatically. For more detailed information on these deductibility limitations, see the chart on this worksheet.

Limitations on the deductibility of your IRA contributions

To develop your projections, VeriPlan uses the following user updatable income tax deductibility limits related to your IRA contributions. Update this information, if these figures change. You can find current year figures on the IRS website using the website search facility. Be careful to distinguish between IRS limits on contributions versus limits on income tax deductions. With traditional IRAs, some or all of your contributions may be deductible and may reduce your reportable income. However, if you do not qualify for deductions, you can still make contributions. You simply cannot deduct traditional IRA contributions that exceed the deductibility limits. Roth IRA contributions are always made with after-tax dollars and are never deductible. VeriPlan develops projections that automatically account for these rules using the current tax laws.

Find a link to IRA Frequently Asked Questions on the IRS website

Deductibility limitations on IRA contributions

If your annual modified Adjusted Gross Income (AGI) exceeds certain levels, IRS rules may limit or eliminate the deductibility of your traditional IRA contributions by using a modified AGI phase-out range. The level of these phase-outs depends upon filing status and whether you or your spouse are covered by a retirement plan at work. In its projections, VeriPlan uses a projection of your Adjusted Gross Income without modifications, because the IRS factors that go into the AGI modifications either would be immaterial and/or would apply for only a few years during the projections of most taxpayers. (Do not confuse potentially limited deductions on contributions to traditional IRA accounts, with potentially limited contributions to Roth IRA accounts, which are never deductible. Limits in both situations are based on various levels of modified AGI.)

IRA Deductibility, if you personally ARE NOT COVERED by a retirement plan at work

If you are single, head of a household, or a qualifying widow(er) you can take a full deduction.

If you are married filing jointly or separately, and your spouse IS NOT covered by a retirement plan at work, you can take a full deduction.

However, if your spouse IS covered by a retirement plan at work, then your deduction may be partially or fully eliminated depending upon your modified AGI. Here is the modified AGI phase-out range for the deductibility of your IRA contributions:

CHANGE ONLY, IF TAX LAWS CHANGE:

IRA Deductibility, if you personally ARE COVERED by a retirement plan at work

If you are single or head of a household, then your deduction may be partially or fully eliminated depending upon your modified AGI. Here is the modified AGI phase-out range for the deductibility of your IRA contributions:

CHANGE ONLY, IF TAX LAWS CHANGE:

If you are married, filing jointly, then your deduction may be partially or fully eliminated depending upon your modified AGI, IF EITHER YOU OR YOUR SPOUSE ARE COVERED BY A RETIREMENT PLAN AT WORK. Here is the modified AGI phase-out range for the deductibility of your and your spouse's IRA contributions:

CHANGE ONLY, IF TAX LAWS CHANGE:

Section 13.11: Change contribution limits for Roth 401(k), 403(b), and 457 plans (optional)

VeriPlan uses the following user updatable contribution limits to develop your projections.

Update this information, if these figures change. You can find current year figures on the IRS website using the website search facility. Be careful to distinguish between IRS limits on maximum annual contributions versus deductions.

Find a link to search the IRS FAQ for "designated Roth" plans

Maximum Contribution Limits for "designated Roth" 401(k), 403(b), and 457 plans.

CHANGE ONLY, IF TAX LAWS CHANGE:

There is no upper age limit for contributing to a designated Roth 401(k), 403(b), or 457 account. However, you must continue to work as an employee and have earned compensation that is equal to or greater than your contribution. Other restrictions may apply.

There are no income related annual contribution phase-outs for designated Roth 401(k), 403(b), or 457 accounts.

Section 13.12: Change age limits that affect tax-advantaged plans (optional)

This section allows you to update VeriPlan, if the age limits for tax-advantaged plans change.

YOU DO NOT NEED TO CHANGE ANY NUMBERS IN THIS SECTION, UNLESS THE TAX LAWS CHANGE

Minimum 'catch-up' contribution age for traditional and Roth tax-advantaged accounts

Currently, 50 years is the minimum age at which tax regulations allow a plan participant to make additional annual 'CATCH-UP' CONTRIBUTIONS into traditional and Roth tax-advantaged accounts. In various user data entry boxes above, VeriPlan allows you to enter and change the amount of these catch-up contributions.

In the relatively unlikely event that this minimum age is changed in the future, you can reset it here. If your data and settings in VeriPlan would allow you to make these additional contributions and they indicate that you want to do so, then those additional projected contributions will be made for your automatically.

CHANGE ONLY, IF TAX LAWS CHANGE:

The maximum age for allowable contributions into traditional tax-advantaged accounts

This is the IRS's maximum age for contributions into qualified deferred tax accounts from your earned income. In the relatively unlikely event that this age will be changed in the near future, reset it here.

CHANGE ONLY, IF TAX LAWS CHANGE:

Regarding your deposits into Roth 'tax-initially-not-later' accounts, there currently is no maximum age for these account deposits. However, you must have sufficient current compensation to make after-tax deposits from that compensation, and you must meet other requirements.

Section 13.13: Change early withdrawal penalties (optional)

This section allows you to update VeriPlan, if federal early withdrawal penalties change. You can also enter a state early withdrawal penalty, if your state imposes one as well.

At the federal level, early withdrawals from defined contribution plans usually are subject to a 10% early withdrawal penalty, if assets are withdrawn prior to age 59 and 1/2. There are some limited exceptions to this penalty for which you might qualify. However, for purposes of your projections, VeriPlan will assume that any withdrawals at age 59 or before will cause you to be subject to these penalties, unless you change the 10% figure in the bold border data entry box below.

If your projections indicate that you could be subject to these penalties and you need more information, see IRS Publication 575 "Pension and Annuity Income." ( http://www.irs.gov )

Federal penalty for early withdrawals from defined contribution plans

CHANGE ONLY, IF TAX LAWS CHANGE:

Most users will leave this number at 10%. If you are exempt from early withdrawal penalties, enter 0%.

If federal tax laws change, then enter the revised penalty percentage.

If the federal age limit on early withdrawal penalties changes, enter it here. Otherwise, leave this as 59.5 years.

Additional State penalty for early withdrawals from defined contribution plans (user supplied)

Certain states jump on the penalty bandwagon and assess an additional penalty for these early withdrawals. For example, California has assessed a 2.5% penalty. If your state assesses such a penalty, enter that penalty in the bold border data entry box below. If your projections indicate that you may be subject to the federal penalty, VeriPlan will also deduct automatically any state penalty that you enter below.

We have not yet found a consolidated public information source that collects information for all the states regarding state level early withdrawal penalties related to defined contribution plans. If you know your state's penalty percentage, if any, enter it in the bold border user data entry box below. Note that any additional, state level early withdrawal penalty would be important, if your projections indicate that you would need to take early withdrawals before the age limit above (currently 59.5). If this is the case, then you should find out whether your state imposes such a penalty. As a starting point, you could locate your state tax administrator through the Federation of Tax Administrators at http://www.taxadmin.org To find your state's tax website, click on "Links" in the left-hand column and then click on your state on the map. The direct link to the map is http://www.taxadmin.org/fta/link/

Find a link to the Federation of Tax Administrators website

If you are exempt from early withdrawal penalties, then this figure should be 0%.

If you state assesses a penalty, then enter it here.

If your projections indicate that you would need to make early withdrawals from qualified retirement account assets to cover any income to expense shortfall, VeriPlan will automatically apply these penalties. However, you also should note that VeriPlan first will automatically exhaust your taxable assets before making such early withdrawals from your tax- deferred asset accounts. For a summary of how this works in VeriPlan, see the section above entitled "Tradeoffs between taxable, traditional 'tax-deferred', and Roth 'tax-initially-not-later' investing," related to this tax-advantaged plans worksheet.

Certain annuity contracts are subject to early withdrawal penalties, but the rules are more complex than those for qualified retirement plans. On the retirement worksheet, you can determine when to accept payments from your annuities. Therefore, VeriPlan will not arbitrarily assess early withdrawal penalties on your annuity payments based upon age.

Section 13.14: Evaluating alternative tax-advantaged investment strategies

This section explains how to use VeriPlan's tax-advantaged retirement plan tools, facilities, and graphics to evaluate alternative lifetime retirement tax savings strategies.

To understand the impact of various tax-deferral strategies, chose different percentage settings for the total contribution limitation tool and/or the Roth contribution limitation tool on the tax-advantaged plans worksheet. Then, compare projected annual taxes and assets across your lifecycle projection. A "first cut" comparison is to compare total financial assets at one or more ages in the future using different settings for these tools. The more efficient lifecycle strategy would the one with greater assets.

However, many factors are at play and tax-deferral is not tax elimination. Therefore, the value of either traditional tax deferral or of paying higher current taxes to eliminate future taxes through Roth accounts will vary by the particular circumstances of individuals and families. If you make substantial changes to your plan -- particularly changes that would result in more substantial asset growth and higher asset taxes in retirement, then you may want to reevaluate tax tradeoffs with these tools.

For example, if your current means of acquiring and holding assets is characterized by relatively high investment costs, you might choose instead to shift to a much lower cost strategy. If you did so, then your projections could indicate substantially higher assets and higher asset taxes in the future. Furthermore, you might project that you would allocate higher portions of your financial assets to cash and fixed income holdings during retirement. The returns on such assets would be taxed at ordinary income tax rates in the future and your margin tax rates could be significantly higher than you had projected previously. Changes such as these can sometimes shift the relative advantage between traditional and Roth tax-advantaged asset strategies.

Regarding tax projections in particular, you can evaluate tax tradeoffs more closely by looking at the taxes graphic and its data worksheet output. These tax graphic and tax data worksheets present the breakdown of various taxes including "Federal Earned & Interest Income Taxes" and "Ordinary Federal, State, & Local Taxes on Tax-Deferred Withdrawals."

First, evaluate the baseline projected tax payment pattern by setting the total contribution limitation tool to 0%, and then look at the pattern of your projected taxes over you lifecycle. Compare the taxes in the two tax categories referenced above. Then choose a much higher percentage for comparison and look at the graphic again. Also, write down the tax amounts from the tax data worksheet for various ages in the future to get a more quantitative comparison. This is the general approach, and you can compare as many other settings as you wish. You can also change your settings on the Roth contribution limitation tool and do a similar evaluation. Note that while the graphics can give you a quick visual comparison, it is important to compare the projected numbers at selected ages in the future to understand more clearly the potential financial tradeoffs overall.

If you wish to understand the division of your cash, bond/fixed income, and stock/equity assets between taxable and tax-advantaged accounts in VeriPlan's projections, please refer to the tax asset graphic and the tax assets data output worksheet. This graphic is titled: "Taxable, Traditional Tax-Advantaged, & Roth Tax-Advantaged Financial Assets."

By evaluating the various other VeriPlan projection graphics and the data output worksheet, you can also develop a better understanding of how various income levels, expenses, and tax rates might affect your taxable and tax-advantaged financial assets across your lifecycle.

In summary, when used separately or in combination the total contribution limitation tool and the Roth contribution limitation tool provide powerful modeling and decision support controls related to your projected contributions to tax-advantaged accounts across your lifecycle. Because VeriPlan hides all the complexity, this user "tune-able" mechanism allows you to experiment with your projections without getting bogged down trying to keep current tax rules straight. VeriPlan automatically and transparently develops projections that conform to current tax law, while it hides the complexity. Behind the scenes, VeriPlan automatically manages tax-deferral rules; variable tax rates; projected future income and expenses; investment asset growth and reallocation; federal, state, and local tax payments, and many other factors. VeriPlan handles all these factors for you, which allows you to focus on analysis and decision-making.

Section 13.15: Traditional plans usually provide net lifetime advantages over Roth plans

This section compares traditional 'tax-deferred' accounts to Roth 'tax-initially-not-later' accounts. You can use VeriPlan to evaluate the tradeoffs between these accounts by testing different settings for VeriPlan's total contribution limitation tool and its Roth contribution limitation tool.

This section also points out the opportunity to do Roth IRA conversions during low income years, even if Roth contributions would not normally be advantageous to you.

VeriPlan automates the evaluation of Roth retirement account investments

Comprehensive retirement financial planning software

that accounts for retirement account taxation

The projections of most taxpayers tend to indicate that traditional tax-advantaged plans provide more tax advantages that Roth accounts do. The simple reason is that the projected value of current tax avoidance on compensation outweighs the value of future tax avoidance with Roth accounts. However, this may not be the case for many people, so an analysis of the trade-offs using VeriPlan's projections of your particular financial circumstances can help you to analyze the trade-offs.

Most taxpayers find traditional tax-deferred plans to be more advantageous compared to Roth plans, because traditional tax-deferred plans can significantly reduce current federal, state, and local income tax payments. Sometimes this reduction in currently taxed compensation will even lower the total marginal tax rate that a taxpayer incurs presently. In effect, these tax savings reduce current cash outflows allowing taxpayers to retain more combined assets in tax-advantaged and taxable accounts. In turn, these greater retained assets can appreciate over the years, and the assets in tax-deferred accounts will be sheltered from taxation until withdrawn. Even if a greater amount tax- deferred assets would be exposed to ordinary income taxes in the future, current tax reductions can still be more valuable compared to the Roth alternative investment strategy.

Because VeriPlan uses real or constant purchasing power dollars across your lifecycle projections, you can compare alternative traditional and Roth tax-advantaged investment strategies. While most people will not find it would be advantageous to pay higher current taxes at possibly higher marginal tax rates to fund a Roth account, there are certain taxpayers who do find advantages with Roth accounts. For example, when projecting current tax rules into the future, most taxpayers will find that marginal income tax rates will be higher for them during their higher earning years than they would pay in retirement, when income exposed to income taxation will be lower. However, this is not necessarily the case for all employed persons. Some persons may anticipate that asset growth will cause higher ordinary income tax recognition in the future using current tax rates.

Furthermore, some may even speculate that marginal ordinary income tax rates themselves may rise some years or decades in the future, when your assets in traditional tax-deferred accounts must be withdrawn. Such a situation could make assets in Roth 'tax-initially-not-later' accounts relatively more appealing than assets held in traditional tax-deferred accounts. VeriPlan does not speculate about changing tax rates. If you project that you will have substantial future assets, you can make your own judgment. In general, total tax rates and relative tax rates assessed across socio- economic classes reflect political processes and compromises. Clearly, the U.S. Social Security and Medicare systems require changes. Whether those changes will be in the form of benefit reductions and/or increased taxes is anyone's guess. If taxes were increased, how would they be apportioned? Could such changes directly or indirectly affect even the rules that would be applied to those assets held in traditional and Roth accounts? This is another situation where no one has an accurate crystal ball.

From an estate planning perspective, assets held in Roth accounts may have an additional appeal. If your VeriPlan projections indicate that you could leave an estate of reasonably substantial value, then certain of your heirs might benefit, if they inherited some of those assets from you in Roth accounts. Current tax laws may allow your heirs to retain assets in inherited Roth accounts, where those assets could continue to grow without being subjected to taxes. The estate planning rules are complex, so this is another reason why you may wish to consult with an estate planning attorney, if you expect to leave an estate with moderate or greater value.

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Section 13.16: Roth contribution and conversion calculator

Using VeriPlan to evaluate Roth retirement account contribution and conversion trade-offs

Your Roth account investment decision could involve current Roth conversions and/or a series of future annual Roth account contributions. The opportunity to convert into Roth IRA assets is just one slice of the overall Roth investment puzzle. The viability of your Roth investment strategy decision will depend upon your lifetime income, expenses, debts, asset appreciation, investment costs, and a wide range of taxes related to your income, investments, and properties.

Therefore, you should solidify your decisions about other goals and objectives in your lifetime financial plan first. In effect, a proper Roth decision is a tax optimization built upon a developed lifetime financial plan. Interim financial planning decisions, such as home purchases, consumption management, early retirement, and many other family financial planning factors can dramatically affect the wisdom of your lifetime Roth tax optimization decision. Any financial planning analysis performed that disregards these other factors is dubious at best.

Your lifetime annual Roth retirement contribution strategy

Before I describe how to model a traditional  IRA to Roth IRA conversion of retirement assets that you already own, let me quickly summarize VeriPlan's fully automated annual Roth contributions facilities. VeriPlan fully automates the lifetime projection process for traditional versus Roth contributions into IRA, 401k, and 403b plans during your working years.

VeriPlan provides a very easy to use tool that allows you to vary the percentage of your potential future contributions that you would make to traditional and/or Roth retirement plans. All you have to do is to set the percentage from 0% to 100% of your total annual tax-advantaged retirement account contributions that you would contribute to Roth accounts.

VeriPlan handles the rest automatically. For your traditional tax-advantaged accounts and your Roth tax-advantaged accounts, VeriPlan checks all the legal contribution limits related to projected minimum and maximum allowable annual income, the impact of qualified work plans on IRA deductibility, spousal contributions, over 55 catch-up contributions, etc. All of these parameters are user changeable, if tax laws were change in the future or if you wanted to test the impact of different limits and restrictions. VeriPlan automatically manages contributions taxation, asset growth, annual asset re-balancing, withdrawals taxation, etc. for these Roth accounts, as well as for all of your other cash, bond, and equity assets in taxable account and in traditional tax-advantaged accounts.

With this highly automated Roth contribution modeling tool, all you have to do is to set various percentages of Roth contributions and use the scenario comparison methods detailed in the section immediately following. Because this annual Roth contributions facility is so automated, you should use this facility to test the potential benefits of contributing none, some, or all of your available retirement plan contributions into Roth accounts rather than traditional retirement accounts.

Modeling Roth conversions will require you to do direct adjustments to your asset entries in VeriPlan. Therefore, VeriPlan's automated annual Roth retirement contributions tool can be very useful to use first. The results will give you a quick indication of whether traditional IRA asset conversions into Roth accounts might or might not be attractive, as well. (However, for those whose annual taxable income exceeds Roth contribution limits, this tool will not provide such an indication. If you have relatively high income, then you may not be able to make annual Roth retirement contributions, but you still may be able to convert your current Roth IRA assets. (See IRS Publications 560 and 590.)

Specifics on how to model annual traditional and Roth retirement plan contributions with VeriPlan

This section provides specifics on how to use VeriPlan's automated traditional IRA, designated 401(k), 403(b), and  Roth IRA savings calculator functions for optimizing annual contributions with respect to taxes. First, refine your family's baseline VeriPlan model to reflect all of your other important pre-retirement family financial goals, objectives, and plans. Then, use VeriPlan's "Tax-Advantaged Plan Tool" to optimize your retirement contributions tax strategy to boost your available assets in retirement.

Go to VeriPlan's "Tax-Advantaged Plan Tool" page to make your choices about future contributions into traditional versus Roth accounts. Set the percentage of your total allowable annual retirement plan contributions that you would like to invest in Roth accounts during your working years. If one or both earners are eligible to participate in designated Roth 401k or Roth 403b retirement plans, then just indicate the maximum contributions allowed. Also, enter any maximum matching dollar amounts that your employer might provide. If you do, VeriPlan will automatically model your future annual allowable contributions into designated Roth 401k and Roth 403b plans, with employer contributions, as well.

With VeriPlan, you can easily determine whether or not future Roth contributions are likely be advantageous to your family. You can tune these contribution proportions from 100% traditional contributions (and 0% Roth qualified employer retirement plan contributions) up to 100% Roth contributions (and 0% traditional qualified employer retirement plan contributions). Or, you can choose any percentage in between for an annual combination of traditional and Roth contributions up to allowable limits.

Everything is automated with this annual Roth contributions projection facility. Just set the parameters and everything else will just ripple through your fully integrated VeriPlan model. Such integrated and automated computations would include future year-by-year asset deposits and withdrawals as required between various account types; asset allocations and rebalancing; asset taxes; investment costs; etc. VeriPlan would quickly execute projection calculations for all model factors affected by your choice between traditional and/or Roth account annual contributions over your lifetimes.

Try as many alternate scenarios as you wish and compare total projected future asset values at arbitrary future ages. Note differences in scenario asset values. Note their magnitude. View the Tax Assets graphic for the proportions of financial assets projected in taxable, traditional tax-advantaged, and Roth accounts over the years. View the Transactions graphic to understand net annual flows between your taxable and traditional and Roth tax-advantaged accounts.

If your total projected financial assets would be exhausted before you are 100, carefully note the age at which this is projected to occur. (Note that financial assets are your cash, bonds, and stock assets in taxable, traditional retirement accounts, and Roth retirement accounts. Financial assets do not include your real estate and other assets.)

Compare the projected age that your financial assets would be exhausted, between the two scenarios. Your choice of traditional versus Roth assets could significantly impact how long your financial assets would last, one way or the other. Keep in mind that the age that your financial assets are exhausted is an important indicator of your optimal retirement tax strategy.

Also, obviously if and when you run out of financial assets, you would need to have other assets, such as real estate equity or property than could be accessed or sold, to cover your living expenses. Otherwise you would be destitute. VeriPlan automatically projects the anticipated growth of your real estate and other property assets and graphs their value in layers on top of your cash, bond, and stock financial assets.

If you see that VeriPlan projects that you would have financial assets remaining at age 100, then this really becomes an estate planning subject, and future estate planning and estate taxes on your residual assets are highly uncertain. In fact, VeriPlan's projections act as an annual estimator of your gross estate at any age.

You probably do not wish to predict/plan the date of death for you and your spouse, and VeriPlan does not require you to do so. Regarding your accumulated excess assets at any age, just realize that VeriPlan will automatically project everything for you through age 100. For example, VeriPlan will automatically transfer the RMD each year out of your traditional retirement plan accounts and will apply the appropriate federal, state, and local income taxes. If your annual taxable "required minimum distribution" (RMD) from your traditional retirement accounts exceeds your annual living expenses plus RMD taxes and other taxes, then any excess will be transferred automatically into your taxable financial asset accounts. Otherwise, if your living expenses and taxes exceed the RMD, VeriPlan will automatically draw down your taxable accounts (and then Roth accounts, if your taxable financial assets are exhausted) to make up the difference.

Using VeriPlan to evaluate a one-time traditional IRA retirement account to  Roth IRA conversion

Concerning the evaluation of one-time Roth IRA conversions, again, keep one model instance open as your comparison baseline. Then, open another instance of the same VeriPlan file, and go to any of the cash, bond, or equity assets on the corresponding input tables. In developing any VeriPlan financial projection planning model, all current cash, bond, stock, property, and other asset holdings information would already have been entered into the appropriate financial data entry pages.

Decide on the amount to be converted from any of the traditional tax-advantaged plan cash, bond, or stock assets that are already entered into the model. Which type of financial asset or the particular financial asset you choose is not very relevant, for testing purposes. This is the case, because VeriPlan will automatically rebalance your asset portfolio at the beginning of the second projection year and the beginnings of all subsequent projection years up to age 100, according to your settings in one of the five flexible and automated asset allocation models that VeriPlan provides. However, if you are seriously considering a conversion, then select the account that you intend to convert. Note that VeriPlan is user up-datable over time, and you can use it to model the future value of your portfolio, and you can update your portfolio in VeriPlan to reflect asset acquisitions and disposals.

If you want to convert the full asset value of a single retirement account or several accounts to a Roth IRA, just change the "0″ (for traditional tax-advantaged assets) to a "2″ (for Roth tax-advantaged assets) in the asset tax-ability column. If the conversion would be just a portion of the assets in that financial account row, simply make a new row for the same asset account. Then, apportion the current asset values between the two rows — one row with a "0″ in the asset tax-ability column (for the remaining traditional tax-advantaged assets) and the other row with a "2″ in its asset tax-ability column (for the Roth tax-advantaged assets that would be converted).

Now, choose how to pay the conversion taxes. If your total taxable cash holdings exceed your preferred minimum emergency cash reserves, then just reduce those amounts in VeriPlan to reflect the federal, state, and local taxes that you would need to pay. Otherwise pick the taxable bonds or stocks you would sell to pay the taxes on the Roth IRA conversion.

While Roth conversions funded by existing taxable assets are obviously much more preferable, if taxable assets are inadequate to fund the total taxes due, then some traditional tax-advantaged account assets could also be sold instead. If Roth conversion taxes were to be funded from existing traditional tax-advantaged retirement asset accounts, then these adjustments would simply be made to traditional tax-deferred account assets rather than taxable assets in VeriPlan. Remember to allow for some additional withdrawal amount to cover the taxes that would be due on these retirement account withdrawals.

While not necessarily prohibitive, note that having to withdraw additional traditional retirement assets is a potential red flag related to the wisdom of such a conversion. Of course, you can use VeriPlan to evaluate the trade-offs, but withdrawing traditional retirement assets to pay Roth IRA conversion taxes will raise the payback hurdle at the front-end that you would need to overcome to justify the conversion. Furthermore, not only do the increased taxes up front raise the hurdle, these withdrawals also reduce the amount of assets you have in your traditional retirement plans. In turn, fewer traditional retirement account assets would mean less appreciation, lower RMDs in retirement, and fewer taxes related to these smaller RMDs. This would reduce the future benefit of tax avoidance and lessen the value of doing a Roth IRA conversion.

Finally, note that if you are under age 59 and 1/2 then and additional 10% early withdrawal penalty might be due on IRA withdrawals that were not rolled over, but instead, were used to pay Roth conversion taxes. Also, a few states assess additional early withdrawal penalties. For example, California adds a 2.5% penalty. Obviously, early withdrawal penalties would significantly raise total front end taxes and reduce the appeal of doing a conversion. Nevertheless, you can still model these early withdrawal penalties in VeriPlan in the manner described above.

As summarized in earlier sections, to analyze the trade-offs, all you would need to do next is to compare the projected total financial asset values of the different scenario models at the same arbitrary future age, e.g. 80 years, 95 years, etc. Note differences in scenario asset values. Note their magnitude. Compare the age at which your cash, bond, and stock financial assets would be exhausted, if your cash, bond, and stock financial assets would run out prior to age 100.

If you want to adjust the long-term tax rates for federal taxes, for any state taxes, or for any locality, just make the changes on the "Your Taxes" page. All income, expense, debt, tax, and asset modeling assumptions are user changeable. All documentation is fully integrated within VeriPlan. VeriPlan's financial data and parameters are all user adjustable. No black box — no rigid, one size fits all assumptions.

If VeriPlan indicates that a Roth IRA conversion could be attractive, run pro-forma tax returns to verify your assumptions about taxes due

A traditional  IRA conversion to Roth retirement account conversion requires a reasonably accurate estimate of the taxes that would be due related to the conversion. While you can model a guesstimate of the taxes due in VeriPlan by reducing your current asset as described in the prior section, you should do pro forma tax returns before doing a conversion.

The more involved part of the Roth IRA conversion analysis is separate from the internal logic of VeriPlan. Since the up-front tax payment is the disincentive to convert to a Roth account, it is important to carefully evaluate the taxes due for the current year (or over two years, if splitting tax payments over two years is available to you). There are several ways to do this, but all of them essentially imply that you do a pro forma draft of the tax returns that you would file in the springtime.

Whether or not you have decided to use VeriPlan, some free Roth conversion tool on the Internet, or the modeling software that a financial adviser has, getting a proper estimate of taxes due is one of the first orders of business. If you decide to go ahead with a Roth conversion, it will involve some retirement account paperwork to implement the conversion. Eventually you will need to file your tax returns anyway. If you decide later on that doing the conversion was not what you really wanted to do, then you may be able to reverse (re-characterize) the transaction before your tax returns are due. However, to reverse a Roth IRA conversion will require some more time-consuming paperwork.

So, why not just draft your pro forma income tax returns before you make a final decision and start the conversion paperwork process? If you have a good understanding of income tax laws, you can estimate how much total tax would be due related to the amount of Roth assets that you want to convert. This is even easier, if you develop your own tax returns using a home tax return program such as TurboTax.

If you are not comfortable with doing this yourself, then your friendly CPA would probably be happy to run some tax estimates for you. Your tax accountant probably would be thrilled to do this for you, if you asked for this analysis when it was not in the middle of peak tax filing season for real income tax returns.

While you should consult IRA Publications 560 and 590, make sure that your current year tax estimate reflects any federal, state, and/or local taxes due on the conversion amount less any proportional tax basis that you may have across your various traditional tax-advantaged retirement accounts for IRAs.

Attention should also be paid to any asset tax basis which might be associated with the tax-advantaged asset holdings. Appropriate decrements for any proportional tax basis should be taken out. (Note that VeriPlan supports lifetime asset tax-basis modeling as a fully automated background process.)

Section 13.17: A note on Roth IRA conversions during low-income years

Even if ordinarily Roth contributions would not be financially appealing to you relative to making traditional retirement account contributions, there are situations when you may be able to acquire Roth retirement assets much more tax cost effectively. In lower income years (and thus lower income tax years) before or during retirement, you may find that converting some of your existing traditional account assets into Roth retirement account assets could be attractive.

You would still have to pay applicable federal, state, and local income taxes on whatever amount that you choose to convert into Roth assets, but your marginal income tax rates would be lower in low income years. In addition, many people have relatively high ongoing itemized deductions year after year, such as mortgage interest and real estate tax payments. In normal income years, these ongoing itemized deductions repeatedly provide a valuable tax shield by reducing taxable income. However, in low-income or no-income years, these ongoing itemized deductions would be "wasted." Roth conversions provide a way to create taxable income and use these itemized deductions that otherwise might be wasted in low-income years.

For example, if in your particular career, you experience substantial earned income fluctuations from year to year or you suffer from occasional bouts of unemployment, Roth conversions can be attractive in those years. In addition, if you are able to retire early, this implies that you have substantial savings for your retirement. In the earlier years of your retirement, before taxable Social Security, pension, and/or annuity payments began, which would push up your taxable income, you may have lower tax Roth conversion opportunities.

As long as you own assets in taxable accounts to meet your living expenses, you can take advantage of lower tax Roth conversions during these low-income years. Of course, those taxable assets should have a relatively high tax basis that would allow you to avoid paying taxes when those assets are covered to cash. If you already have cash in taxable accounts to meet your expenses for the full year, then using this cash would not incur any taxes.

If you had other investment assets in taxable accounts that had a high tax basis, then you could pay your expenses with those assets without causing very much taxable income. In addition, if any unrealized gains were long-term capital gains, then the taxes due would likely be modest. Federal long-term capital gains tax rates are already relatively low compared to ordinary income tax rates, and the lower your taxable income the lower the long-term capital gains tax rate would be.

This note is provided to stimulate your thoughts about using Roth accounts without needing to project any future Roth investments funded from your future compensation and modeled using VeriPlan's Roth contribution limitation tool above. Such possible IRA rollovers are one-time asset conversion events that you can also analyze in VeriPlan. You would perform this analysis by separating your currently held assets in VeriPlan and by changing the account taxability coding on the yellow-tabbed cash, fixed income, and/or equity 'Your Assets' worksheets.

To do this properly, you would need to follow these steps:

* Determine the total amount of IRA assets that you want to convert to a Roth IRA.

* On each of the cash, fixed income, and equity 'Your Assets' worksheets, add a new asset perhaps called "Roth conversion test for cash (fixed income or equity)".

* Multiply the total amount that you want to convert by your current asset allocation target percentages for your cash, fixed income, and equity assets, which you can find on the asset allocation worksheet.

* Enter these figures on the new "Roth conversion test for cash (fixed income or equity)" asset lines.

* Reduce the tax-deferred cash, fixed income, and equity asset accounts from which you would take these conversion assets by the same amount that you are adding to these new assets.

* Copy down to these new "Roth conversion test for cash (fixed income or equity)" assets the same sales load, investment cost and asset turnover percentages from the account that they came from.

If you had any tax basis in any of these accounts, then apportion that tax basis between the accounts on the same worksheet.

Once you have set up and separated these assets, then all you do is toggle the taxability coding between 'tax-deferred' = 0 and Roth 'tax-initially-not-later' = 2. To do this properly you must change these taxability codes to be the same for each of your cash, fixed income, and equity "Roth conversion test" assets. As with any comparative analysis using VeriPlan, pick a future age and compare your projected asset totals. The difference in values would be the projected lifetime value of the conversion to you in real dollar terms. Any additional taxes you might pay to do the conversion in the current year should be subtracted from this projected lifecycle value.

Section 13.18: Transactions timing and priorities for traditional & Roth tax-advantaged accounts

This section discusses VeriPlan's tax-advantaged contribution and withdrawal priorities and their timing. You should understand two design priorities about how VeriPlan adds contributions to and withdraws funds from your traditional and Roth tax-advantaged accounts.

Contribution Priorities

Regarding priorities for depositing a portion of your projected annual net cash flow, VeriPlan is designed automatically to deposit all funds into traditional tax-advantaged accounts using pre-tax compensation dollars. With Roth contribution limitation tool above, you are given the ability to override this automatic process. With this Roth percentage control you can override VeriPlan's automatic deposits into traditional tax-deferred accounts, and instead make some future deposits into Roth 'tax-initially-not-later' accounts up to the current deposit limits that are applicable to you.

(Note that this logic does not affect your current holdings of traditional tax-advantaged versus Roth accounts, which will be projected automatically according the types of accounts in which you indicate these assets are already held on the financial assets worksheet.)

While many VeriPlan users will want to reduce current taxation by depositing pre-tax compensation dollars into a traditional tax-advantaged account, those accounts face mandatory withdrawals after age 70.5 that are designed to liquidate most of the balances in these accounts prior to death and to trigger the payment of ordinary income taxes on those distributions. VeriPlan automatically projects these processes for you.

However, other VeriPlan users may want instead to make deposits into Roth accounts using after-tax compensation dollars. While they may incur higher current taxes, these users consider that the value of future tax avoidance via a Roth 'tax-initially-not-later' account to be sufficiently appealing to justify the payment of higher income taxes currently.

Because mandatory withdrawals from Roth accounts are not required, they can create certain advantages. For those who do not need to make withdrawals to cover expenses, it could be advantageous to keep their assets in a Roth account growing tax-free. For these people, a traditional tax-advantaged account would require future mandatory distributions and taxes. Because they do not need the funds for expenses, then these people would have to reinvest distributions from a traditional tax- deferred account in a taxable account and pay applicable taxes thereafter. For those who are projected not to need the funds for living expenses, another potentially significant advantage of a Roth account is that Roth accounts can be inherited and can continue to grow tax-free for the heir and to be gradually withdrawn in relationship to the heir's expected longevity.

Withdrawal Priorities

Regarding withdrawals from traditional 'tax-deferred' versus Roth 'tax-initially-not-later' accounts, VeriPlan automatically withdraws funds from your traditional tax-advantaged accounts according to the schedule required by federal tax regulations. If you need to withdraw additional funds for expenses, then VeriPlan will withdraw those funds from your traditional tax-advantaged accounts before making withdrawals from your Roth accounts.

When there is a projected shortfall between your income in a particular year versus your projected expenses, taxes, and debt payments, then automatically VeriPlan will first withdraw funds from your taxable financial asset accounts (cash, bonds, and stocks), as required to fund the shortfall. Once your taxable financial assets have been exhausted, then automatically VeriPlan will begin to withdraw needed funds from your traditional tax-advantaged accounts to cover such living expenses and taxes. Once your traditional tax-advantaged accounts have been exhausted, then VeriPlan will begin making withdrawals from your Roth accounts automatically.

Because VeriPlan does not have sufficient information about the potential liquidity of your property assets, these assets are not involved in VeriPlan's automated reallocation processes. Therefore, they are not automatically liquidated once your taxable, traditional tax-advantaged and Roth accounts have been exhausted. Nevertheless, the VeriPlan graphics that include your total assets, will visually project how long your property assets might last, if liquidated to meet expenses and taxes. These graphics first show the gradual disposal of your other assets and then your property assets, in response to negative net cash flow situation that most people experience in retirement.

Federal, state, and local income taxes on tax-advantaged account withdrawals will be calculated automatically according to your particular tax situation using current variable or fixed tax rates. If withdrawals from tax-advantaged or Roth accounts occur prior to age 60, then the 10% federal penalty on withdrawals before age 59.5 will be assessed plus any additional penalty that your state may impose. Furthermore, VeriPlan will also automatically project and adjust for any tax basis that you may have in your traditional tax-advantaged and Roth tax-initially-not-later' accounts.

(Note that VeriPlan will collect your inputs regarding your current tax basis on the yellow-tabbed 'Your Assets' worksheets, when you enter information about your holdings in traditional tax-advantaged and Roth 'tax-initially-not-later' accounts. The effects on your tax basis of your projected future contributions, reinvested distributions, and withdrawals will be calculated automatically.)

Regarding the trade-offs between first withdrawing funds from your traditional tax-advantaged accounts before your Roth tax-initially-not-later accounts, this aspect of VeriPlan's design would accelerate tax recognition, if your expenses and taxes exceed IRS mandated withdrawals in retirement. Thus, by potentially accelerating future tax recognition, this is a conservative design tradeoff choice. In the future, of course, if you wished, you would have the alternative of first withdrawing funds from your Roth 'tax-initially- not-later' accounts to fund expense shortfalls that exceed mandatory withdrawals, before you took funds from your traditional tax-advantaged accounts. However, to have designed VeriPlan with a priority to withdraw Roth funds first would mean that some or all of your Roth assets would be removed from tax-initially-not-later' status, while tax regulations would simultaneously force most of your traditional tax-advantaged account assets to be withdrawn and taxed, as well. Particularly for those who wish to project that they would leave some positive level of estate value at whatever age of demise they might choose to plan for, then much of the advantage of passing on Roth 'tax-initially-not-later' account assets to heirs could be lost. While this summarizes the primary reasons for this design choice within VeriPlan, if you wish to understand more deeply the implications of this priority to your estate, you should consult with an estate planning attorney.

Transactions Timing

For the current year, VeriPlan automatically calculates the tax shield or tax reduction provided by projected contributions into traditional 'tax-deferred' accounts.

Similarly, it also calculates the current year tax obligation associated with any withdrawals from any traditional 'tax-deferred' accounts.

Note that Roth contributions in the current year do not provide a tax shield, nor are withdrawals taxed, when done properly.

VeriPlan makes deposits into and withdrawals from traditional and Roth tax-advantaged accounts after the start of the following year. These "cash-flow" transactions are reflected in the tax-advantaged financial asset transactions information on the transactions graphic and corresponding data worksheet.

Section 13.19: Graphical spikes related to tax-advantaged retirement investments

Sometimes, you may see positive or negative "projection spikes" in the first year or two of your projection, and at retirement, when your earned income is projected to decline or cease. These projection spikes are related to VeriPlan's tax-advantaged employer-sponsored retirement plan logic and tools. Particularly when your recent contributions to these plans differs from your projected contributions, there can be differences in the amount of taxes assessed. Also, there may be a delay until VeriPlan's automated features can begin to project future retirement plan contributions at the alternative rates that you prefer.

These effects are related to different taxes on earned income that are caused by your choices about projected contributions to employer-sponsored tax-advantaged retirement plans (e.g. 401k, 403b, 457, Keogh, SARSEP, SIMPLE, and other such employer retirement plans, but not pensions, annuities or IRAs). Unfortunately, it is an understatement that the ridiculous complexity of US tax incentives related to retirement investment incentives makes lifetime projection modeling a challenge.

These projection spikes may be seen on some of VeriPlan's graphics and corresponding data tables and can first be traced to the TAXES graphic, when looking at the various graphics. These tax effects will automatically ripple through many other VeriPlan graphics (and data tables), such as CASH FLOW, SAVINGS, ASSET FLOWS, WITHDRAWALS, TAX ASSETS, and TRANSACTIONS graphics. These spikes may also be detectable in investment asset projection graphics and data tables, when there are few cash, bond, and stock assets initially. Higher amounts of current financial assets can mask these effects, because legally permissible annual retirement plan contributions can be small relative to already owned financial investment assets.

(Note that these early year projection spikes are not related to any initial positive or negative asset class percentage changes on the ALLOCATION graphic. Initial asset allocation percentage changes occur when you choose an asset allocation strategy that differs from the makeup of your current financial asset portfolio. See the asset allocation worksheet to understand how VeriPlan develops lifetime projections of your assets using its various automated and user-adjustable asset allocation models.)

Tax-advantaged retirement plan investments can have a very significant impact on your lifetime finances. Therefore, VeriPlan supplies a variety of automated tools that allow you to analyze these impacts and to decide what you want to do. Your decisions about:

* whether or not to contribute to these employer-sponsored retirement plans,

* how much to contribute to these employer retirement plans,

* whether to contribute to traditional tax-advantaged plans versus Roth plans (when Roth plans are available to you), and

* how much of your assets you want to hold in these retirement plans versus in taxable accounts

have long-term impacts that simply cannot be understated. Deferred taxation with compounded investment returns and/or the avoidance of future taxation on retirement investments altogether can have very powerful effects on lifetime finances.

In summary and as a default, VeriPlan is set up to maximize lifetime contributions into traditional tax-advantaged employer retirement plans that avoid current taxes on earned income and defer taxation on asset appreciation, until mandatory withdrawals in retirement. To make these maximum allowable contributions, VeriPlan will draw from projected positive cash flow and/or taxable financial assets. Of course, you can change any of VeriPlan's default assumptions to analyze alternative strategies, but "out of the gate," VeriPlan maximizes traditional tax-advantaged retirement plans and their tax-deferral characteristics.

More specifically concerning these projection spikes, the first reason you might see an initial projection spike may be related to your most recent annual employer-sponsored retirement plan contributions. Your actual prior year contributions to these plans, which you enter on the income worksheet may not have been the maximum contributions permitted with respect to your earned income. In this situation, VeriPlan's subsequent projection years would plan for higher contributions, which would lower your projected taxes when you choose to make "traditional" contributions. Therefore, the initial year of your projections would differ from the years that followed.

The second reason you may see projection spikes in the first year or two of a projection relates to your retirement plan inputs on VeriPlan's tax-advantaged plan worksheet. To implement some of its automated retirement plan features and tools, VeriPlan must analyze all factors affecting any single projection year, calculate maximum allowable contributions for that year, and then reflect cash flows at the beginning of the following year or sometime assess taxes in the subsequent year. While these computations work smoothly over a series of years, this can cause initial projection cash flow data spikes.

The third reason for projection spikes is that not only do you need sufficient earned income to make whatever retirement plan contributions would be allowed by law, you also need a source of cash to make these contributions. The tools on tax-advantaged plan worksheet handle all of this for you automatically. For example, unless you tell VeriPlan to restrict your annual contributions only to projection years with sufficient positive cash flow from earned income, then VeriPlan will also look to your taxable financial assets as an additional source of cash to fund these retirement plan contributions. Doing this requires VeriPlan to determine whether there are sufficient assets at the end of the year, which also causes retirement plan contribution cash flows to be made at the beginning of the second year, and this can cause potential data spikes. (This also demonstrates that everything under the covers in VeriPlan is fully integrated with everything else.)

Finally, note that there are other situations in which you could see one or a series of spikes in any year or a series of years of a projection. This is usually caused by situations in which taxable account cash, bond, and stock assets have been exhausted and additional asset withdrawals are needed to meet negative cash flows. When this happens, VeriPlan will automatically withdraw tax-advantaged account assets, which can increase taxes, because traditional retirement plan assets are taxed upon withdrawal. (This is not the case with Roth assets, which are not taxed upon withdrawal. VeriPlan automatically tracks traditional versus Roth account assets and taxes them or does not tax them accordingly.)

Section 13.20: Commentary -- the labyrinth of tax-advantaged plan rules

This section concludes with this brief commentary. US federal laws about tax-advantaged retirement plans are ridiculously and unnecessarily complex. If the rules seem confusing to you, you have plenty of company. With the retirement security of millions of baby boomers and those who follow them in such jeopardy, your government should simplify these tax incentives.

VeriPlan has endeavored to model the important aspects of current tax laws related to tax-advantaged employer plan and personal account contributions and deductions. Building tax-advantaged plan functionality into VeriPlan's automated lifecycle projection model in a manner that could be useful to most U.S. citizens was an extraordinarily challenge. Convoluted U.S. tax-advantaged plan laws are the root cause of this difficulty. If our government expects its citizens to act responsibly, to plan rationally, and to provide for an increasing portion of their own future financial welfare in retirement, then it ought to provide its citizens with a straightforward and understandable set of tax incentives for retirement savings and investing.

For example, anyone would pity the seventy-year old senior citizen: a) whose spouse is covered by a retirement plan at work, b) who personally has earned income and has elected to receive Social Security payments, and c) who wants to decide whether to contribute to an IRA. To calculate how much, if any, of his contribution would be deductible, he would have to understand and navigate a complicated seven page worksheet including examples in Appendix B of Publication 590.

Of course, he would have already needed to figure out that he could not contribute to a 'traditional' IRA, if he had reached the age of 70 and 1/2 by the end of the calendar tax year. Oops, his birthday was June 17, so he could not contribute. Then, if he persisted, he might figure out that he could contribute to a Roth IRA beyond that age. With further reading he would find that he would certainly not be able to deduct his contribution. He also might figure out that he might not be able to make any contribution at all, if he and his wife's 'modified adjusted gross income' was too high.

Yes, these senior citizens both are working! Many older people are very productive, enjoy what they do, and want to stay in the workforce at least part-time. This situation represents the type of behavior that should be encouraged, when one considers that the U.S. Social Security and Medicare systems currently are not financially viable over the long-term. Increasingly, older persons may choose to or need to work rather than retire. Whether the government should offer additional incentives is one question. But, certainly the incentives that it already offers should be understandable to ordinary intelligent citizens.

If you review VeriPlan's IRA rules chart on the tax-advantaged plans worksheet, it should be clear that any person of any age could easily be befuddled by these complex rules. As they must, IRS publications clarify in great detail the many nuances of the tax laws. Unfortunately, they fail to provide sufficient overview information to summarize the big picture. Nowhere in Publication 590 will you find a chart of general tax rules about traditional IRAs and Roth IRAs like the one provided on VeriPlan's tax-advantaged plans worksheet.

The unnecessary complexity of rules regarding tax-deferral and retirement planning that taxpayers have to navigate are not confined to this IRS publication. Publication 590 makes reference to IRS Publication 560, "Retirement Plans for Small Business" and to three others, and Publication 590 points to a long list of other forms and forms instructions. Furthermore, there is a very large amount of additional material on the IRS website. Our excessively complex tax structure is simply a counterproductive national embarrassment, and our citizens deserve better.

Is this the fault of the IRS? Not at all. The IRS just implements the ridiculous and tasteless retirement incentives stew that the US Congress has slopped into our collective bowls over the years.

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### Chapter 14: Asset Allocation worksheet

Section 14.1: Choose one of VeriPlan's five asset allocation projection methods

Section 14.2: Method 1) A constant allocation based on your current portfolio asset class percentages (default)

Section 14.3: Method 2) A constant allocation for an investor with average risk tolerance (optional)

Section 14.4: Method 3) A constant allocation for investors with risk tolerance higher or lower than average (optional)

Section 14.5: Introduction to Methods #4 and #5: Age related, sliding scale equity asset allocation methods

Section 14.6: Method 4) A declining lifetime % allocation to equity assets, with a constant % of cash assets (optional)

Section 14.7: Method 5) A declining lifetime % allocation to equity assets, with a constant cash-to-bond ratio (optional)

Section 14.8: Current portfolio rebalancing tool (optional)

Section 14.9: Using Asset Allocation Method #3 with borrowing or negative financial asset positions
Introduction

Your asset allocation strategy allows you to align the risk of your investment portfolio with your relative risk tolerance. VeriPlan provides five user selectable and adjustable lifetime asset allocation strategies that can align your risk tolerance with the investment risk of your projected financial asset portfolio.

The cash, fixed income, and equities financial asset classes have different expected risk and return characteristics. Asset allocation is the apportionment of your investment portfolio into one or more of these three classes of market- traded financial assets. Through asset allocation, you choose the overall level of exposure to expected investment risk and return in your portfolio.

For more information on investment returns and risk, see the risk and returns worksheet sections that discuss projections versus predictions, long-term historical asset class returns, and the "global credit crunch-severe recession-near-depression-and-recovery" of 2007 to the present (and counting).

VeriPlan provides five selectable asset allocation methods. These allocation methods provide unprecedented planning flexibility in analyzing and choosing a financial asset allocation strategy that matches your preferences about investment risk and return over your lifetime. When used in combination with other facilities provided by VeriPlan, such as the "what-if" asset class adjustments on the risk and returns worksheet, you can get a much better understanding of the interplay of risk and return across financial asset classes within the context of your particular circumstances, as projected across your lifetime.

At the end of the first year of any projection, VeriPlan will perform its first annual reallocation process using the asset allocation method and settings that you have chosen. Your initial financial asset holdings are not be reallocated at the outset of the first year. This initial reallocation at the end of the first year and all subsequent annual reallocations will also incorporate growth in the value of your assets, net earned income, withdrawals, taxes, investment costs, and many other factors.

VeriPlan uses this approach, because reallocation can be unnecessarily costly in terms of investment costs and taxes. Investment reallocation should be an on-going process that anticipates the need to reallocate and takes advantage of opportunities to reduce reallocation costs and taxes during the year. For example, if you know your year-end targets, you can purchase and/or sell assets for other reasons during the year with an eye toward getting closer to your end-of-year asset allocation targets.

After you have chosen your asset allocation setting below, you can check to see graphically the lifetime asset allocation percentages that you are using. For any asset allocation method, just look at the allocation graphic and corresponding data output. to understand how VeriPlan has allocated your assets across the years. VeriPlan automatically develops these graphics directly from the annual beginning balances of your projected cash, fixed income, and equity assets, after VeriPlan's automatic annual reallocations have been performed. This allocation graphic is not simply derived from your percentage inputs, but rather reflects the percentages calculated from your projected asset balances.

Note that because of the one year deferral of the initial annual asset allocation, the allocation graphic may show a downward or upward spike for cash and/or fixed income assets in the first year. Furthermore, the graphic will have upward sloping lines from zero values in the year before your projection begins. These lines will rise up to the initial projection year values from zero in the year before the beginning of your projection model. This is simply an artifact of how Microsoft Excel draws this type of filled and stacked area graphic.

VeriPlan's asset allocation methods enforce some necessary constraints on the settings that you may choose. These constraints are necessary to maintain VeriPlan's data integrity. In particular, when you make certain offsetting percentage adjustments, they must offset so that the resulting overall asset allocation percentages will always total 100%.

For more information about investment asset allocation, see the Pasadena Financial Planner website.

 Find an extensive INVESTMENT ASSET CLASS article on the Pasadena Financial Planner website

Section 14.1: Choose one of VeriPlan's five asset allocation projection methods

You can select and activate one of VeriPlan's five asset allocation methods, by entering its number in this section. To make any personalized adjustments to the method you select, go to the section for that method below.

For each of these asset allocation methods, VeriPlan provides a section below, which describes it and allows you to make any user settings that are allowed by that asset allocation method.

Select one of VeriPlan's five asset allocation methods with this bold border user data entry box.

Enter a whole number that corresponds to the number of the asset allocation method that you would like to use.

The method selected will be applied to all subsequent projections, until changed.

User adjustable asset allocation strategy analysis

Section 14.2: Method 1) A constant allocation based on your current portfolio asset class percentages (default)

Method #1 automatically uses your portfolio's current asset allocation across your lifecycle. You might prefer your current asset allocation, or you might want to use it for comparisons. Method #1 is VeriPlan's default method, which assumes that you already are invested with the allocation that you prefer. Since this may not be the case, at any time you can select another asset allocation method and analyze the differences in your lifetime projections.

Method #1 will calculate and maintain the cash, fixed income, and equity asset allocation percentages of your current portfolio throughout your lifecycle projections. If you are satisfied with your current allocation strategy and never intend to change it, then this method will allow you to continue your current strategy across your lifecycle. Alternatively, you may wish to switch back and forth to compare your current asset allocation strategy to VeriPlan's other methods.

To use Method #1, enter a 1 in the bold border data entry box in the "2) Select one of VeriPlan's five Asset Allocation Methods" section above. VeriPlan will automatically perform all other calculations.

These are the asset allocation percentages of your current portfolio.

Section 14.3: Method 2) A constant allocation for an investor with average risk tolerance (optional)

Method #2 uses the asset allocation of the average investor, which is explained below. This method provides a constant asset allocation over your lifecycle, and no user adjustments are required beyond simply choosing it above.

Method #2 uses these asset allocation percentages *

* These percentages are not user adjustable in Method #2. To modify these average investor allocation percentages, you should instead use Method #3.

To use Method #2, simply enter a 2 in the bold border user data entry box in method selection section above.

If you believe you are an average investor with an average risk tolerance and average risk-return expectations, then you may wish to use Method #2's average percentage asset allocation for your lifetime projections. For Method #2, VeriPlan begins with the premise that the average investor holds the average asset allocation. VeriPlan uses the average asset allocation for the average U.S. investor for the twelve-year period from 2000 to 2011 based upon mutual fund asset ownership percentages of the cash, fixed income, and equity asset classes. Because relative asset class proportions will vary across market cycles, a 12-year average approximates the mid-cycle percentages and smoothens out the effects of market cycle fluctuations over these years. This would be more appropriate to use than the cyclical market crest or market trough percentages.

Note that the data shown in the tables below may have been updated in VeriPlan in subsequent years.

This chart shows the percentages of financial assets held in mutual funds from 2000 to 2011. The Investment Company Institute (ICI) Factbook provides annual data on the relative proportions of mutual funds held in various asset classes. ICI mutual fund data represent about one-quarter to one-third of total US personal financial assets. (Note that hybrid mutual fund assets reported by the ICI were divided evenly and added to the bond and stock fund categories.)

Source: Investment Company Institute Annual Factbooks

Here is some more information that is useful in approximating the average asset allocation of the average investor. The approximate midpoint in the most recent market cycle before the recent credit crisis and recession of 2008 onward occurred in about the middle of 2004. The U.S. Federal Reserve tracks the total amount of personal assets held directly or indirectly for the benefit of individuals. In mid-2004, the Federal reported total personal asset ownership of $26.9 trillion. The following table provides information on the asset allocation implied by this Federal Reserve data, which measured about three times the amount of assets held in just mutual funds. The Federal Reserve data effectively measures all US personal financial assets -- either held directly or indirectly through retirement plans, trusts, etc. The Federal Reserve data show asset allocation percentages that are quite similar to those of 2004 mutual fund holdings and are quite similar to the full ten year averages for mutual fund holdings alone.

Source: Federal Reserve Bank 2004

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Section 14.4: Method 3) A constant allocation for investors with risk tolerance higher or lower than average (optional)

Use Method #3, if you want to adjust the average asset allocation of Method #2 to reflect your lesser or greater risk tolerance compared to the average investor. This method provides a constant asset allocation over your lifetime.

Make your financial asset class adjustments in the boxes provided. Before and after percentages are provided for you to check your adjustments easily.

Negative financial asset class percentages are allowed. This is explained below in a section that discusses both using a leveraged investment strategy and that doing so is probably inappropriate for most investors.

People vary in their preferences related to the risk and return tradeoffs inherent in investing. Asset allocation Method #3 allows you to make fixed percentage lifetime adjustments to the average investor's asset allocation percentages in Method #2. Adjustments that you make with this method will be held constant throughout your lifetime projections.

This method will be used by many investors, because investors vary in their personal tolerance for risk. Some people are more satisfied with lower expected portfolio returns, because lower returns tend to be associated with lower volatility in portfolio values over time. Others are willing to accept higher volatility or risk with the hope that their portfolio returns will be higher. This is a matter of personal risk tolerance and is influenced by a wider variety of personal and family financial characteristics.

For example, if you believe that your tolerance for investment risk is higher than that of the average investor, you might want to increase your equities allocation in the hope of earning a higher return. While also understanding that the higher returns of equities historically have generally have been associated with higher volatility or risk, you might decide to increase your equities allocation by 20 percentage points, for example. However, if you increase your allocation to equities, you also must reduce your overall allocation to cash and/or to fixed income assets by 20% in total, as well.

If you feel you are less risk tolerant than the average investor, you might do the opposite and reduce your exposure to equities and increase your percentage holdings of cash and/or fixed income assets. You would expect lower risk and lower returns.

The magnitude of adjustments below or above the averages are a matter of your degree of risk intolerance or risk tolerance relative to the average investor.

Using Method #3: STEP ONE

To use Method #3, you must enter a "3" in the bold border data entry box above in the method selection section

Using Method #3: STEP TWO

Next, into the bold border user data entry boxes below, enter your offsetting negative and positive percentage adjustments to the asset allocation percentages that are used for the average investor in Method #2 above.

Your positive and negative percentage asset allocation adjustments to these primary financial asset classes MUST BE OFF-SETTING AND TOTAL 0%, WHEN ADDED TOGETHER. If your adjustments do not total 0%, VeriPlan will issue an error notice below. If you do not correct this situation, VeriPlan will not generate an invalid projection. Instead, it will revert automatically to Asset Allocation Method Number 2 for an average investor.

PRIOR TO YOUR ADJUSTMENTS BELOW, these were the average investor's asset allocation percentages from Method #2.

Your Positive and Negative % Adjustments to Method #2

Example:

AFTER YOUR ADJUSTMENTS, these are the constant allocation percentages that will be used for Method #3.

Method #3 can be used with borrowing or negative financial asset positions, sometimes known as 'short' versus 'long' asset positions. For more on this topic, below see the section below entitled: "Using Asset Allocation Method #3 with borrowing or negative financial asset positions."

Section 14.5: Introduction to Methods #4 and #5: Age related, sliding scale equity asset allocation methods

VeriPlan provides two sliding scale equity asset allocation methods. Method #4 maintains a constant percentage of cash, while your bond allocation increases and your equity allocation declines. In Method #5, your equity allocation declines, while your total allocation to cash and fixed income assets increases. A constant proportion is always maintained between your cash and fixed income assets.

VeriPlan provides two asset allocation methods that use a full lifetime sliding scale to reduce exposure to equity asset risk as a person ages:

Method #4: A declining lifetime % allocation to equity assets, with a constant % of cash assets (optional)

Method #5: A declining lifetime % allocation to equity assets, with a constant cash-to-bond ratio (optional)

These sliding scale methods are provided for your experimentation and adoption, if you feel comfortable with them. Despite a presumption by many people that risk intolerance and age must be positively correlated, you should note that it is not a given for everyone, that they should adopt a sliding scale asset allocation method that decreases exposure to equity returns and risk, as one ages.

The asset allocation that one might chose depends, of course, on one's risk preference, and personal risk preferences may change over one's lifecycle. However, risk preference may also depend upon one's level of wealth, upon how likely it is that one's income and assets will cover expected expenses, and on other factors. For some, increasing wealth and declining expenses can counteract a presumption that their investment strategy must necessarily become more conservative with age. Also regarding taxes, for example, married individuals want to leave a substantial estate to their surviving spouse, whenever possible. Tax laws allow the tax basis of appreciated equity assets will be reset to current market values upon death. Compared to ongoing taxes that must be paid on interest from cash and fixed income assets held in taxable accounts and taxed at ordinary income tax rates, such tax laws create an incentive to hold more equity assets for capital appreciation and tax avoidance reasons later in life.

From another perspective, increasing longevity also raises questions about declining age-related allocations to equities. Greater life spans increase risks that families will fail to build adequate retirement assets and be able to sustain what they have throughout retirement. While possibly counterintuitive and despite the heightened investment risks, holding equity assets across a lifecycle increasingly might become more of an uncomfortable necessity for those who wish to have sufficient assets across their full lifecycles. (Of course, saving substantially more is a lower risk solution for those with the discipline to do so.)

Because of these and other reasons, VeriPlan also provides information on one's projected portfolio safety factor through its Portfolio Safety Tool. VeriPlan defines a portfolio safety factor as the number of years that your cash and shorter-term fixed income financial assets would cover necessary expenses -- without any earned income, Social Security, pensions, annuities, or other earned income sources. This provides a measure of how long one's relatively "safer" projected financial assets would cover expenses, if one suffered a total loss of earned income when the equities market also declined dramatically, and you did not wish to liquidate your equity holdings to meet expected expenses during this period.

Section 14.6: Method 4) A declining lifetime % allocation to equity assets, with a constant % of cash assets (optional)

With Method #4, you can increase your fixed income asset allocation and decrease your equity asset allocation across your lifecycle, while you maintain a constant percentage of your total assets in cash.

With this method, after you have set a fixed allocation to the cash asset class, you select an initial "base number" to determine the proportion of the stock - equities asset class to bond - fixed income asset class. VeriPlan will then subtract your age from this base number each year to determine your percentage allocation to the equity asset class. The higher the base number, the higher your initial percentage allocation to equities will be. As your allocation to equity assets falls, your allocation to fixed income assets will rise over the years.

For example, if you fix Cash at 10%, and select an initial base number of 120 and you are 40 years old, VeriPlan initially will set Cash at 10%, Equities at 72% (90% x (120-40)), and Fixed Income at 18%. At the age of 60, your allocations would be 10% Cash, Equities at 54% (.9 x (120-60)), and Fixed Income at 36%.

Using Method #4: STEP ONE

To use Method #4, first enter a 4 in the bold border user data entry box in Section 1 above which is entitled: "Choose one of VeriPlan's five asset allocation projection methods"

Using Method #4: STEP TWO

Set the portion of your financial assets that you wish to HOLD AS CASH throughout the lifetime projections

Using Method #4: STEP THREE

Set the Base Number -- Set the Stock - Equity Asset Class allocation by entering a Base Number here.

Each year Earner #1's age will be subtracted from this Base Number, and the equities percentage allocation will drop.

This initial number will depend upon a) your current age, b) how large or small you wish your initial allocation to equity assets to be, and c) the portion of assets you have designated to be held in cash. You should experiment with various settings and review the allocation graphic.

For example, enter a base number that is 100 higher than Earner #1's age, if you want to start with all of your non-cash financial assets to be held in equities and to decline thereafter. Enter a base number that is 50 higher than Earner #1's age, if you want to start with half of your non-cash assets in equities and the other half in fixed income, etc.

You may enter higher or lower base numbers. VeriPlan will ensure that the equity asset allocation will never be greater than 100% or lower than 0% of your non-cash financial assets. For example, if you enter a base number that is 110 higher than Earner #1's age, then VeriPlan will hold your non-cash allocation all in equities for 10 years and then drop the equity allocation and increase the fixed income allocation each year thereafter.

Section 14.7: Method 5) A declining lifetime % allocation to equity assets, with a constant cash-to-bond ratio (optional)

With Method #5, you can hold the ratio of your cash and fixed income assets constant, while you reduce your percentage exposure to equity assets and increase your total exposure to cash and fixed income assets across your lifetime.

Therefore, cash and fixed income assets will both increase proportionally over the years as a share of total assets, while the complementary overall proportion of equities will decline.

To use this method, you will set the ratio between cash and fixed income assets that you want. Then, you will use an age-related mechanism that is similar to Method #4 to reduce your equities allocation over time. To determine the proportion of equity assets to cash + fixed income assets, you will select an initial base number, and VeriPlan will subtract your age from that base number to determine the declining allocation to equities over time. The increasing cash + fixed income asset allocation percentage will be the complement of the declining equities allocation percentage. As the allocation to equities falls over the years, the allocation to cash + fixed income assets will rise.

For example, if you fix cash as 30% of cash + fixed income assets, and select an initial number of 120 and you are 40 years old, the model will set equities at 80% (120-40) initially, cash at 6% (20% x 30%), and fixed income at 14% (20% x 70%).

At age 60, the allocations would be 60% equities (120-60), cash at 12% (40% x 30%), and fixed income at 28% (40% x 70%).

Using Method #5: STEP ONE

To use Method #5, first enter a 5 in the bold border user data entry box in Section 1 above which is entitled: "Choose one of VeriPlan's five asset allocation projection methods"

Using Method #5: STEP TWO

Set the constant portion of your CASH assets as a percent of your CASH + FIXED INCOME assets

Using Method #5: STEP THREE

Set the Base Number -- Set the equity asset allocation by entering a Base Number here.

Each year Earner #1's age will be subtracted from this Base Number, and the equities allocation will drop by 1 percentage point.

This initial number will depend both upon a) your current age, b) how large or small you wish your initial allocation to equity assets to be, and c) the portion of assets you have designated to be held in cash. You should experiment with various settings and review the allocation graphic, after you make your selections above.

For example, enter a base number that is 100 higher than Earner #1's age, if you want to start with 100% equities and decline 1% annually. Enter a base number that is 50 higher than Earner #1's age, if you want to start at 50% equities, etc.

You may enter higher or lower base numbers. The model will ensure that the equity asset allocation will never be greater than 100% or lower than 0%. For example, if you enter a base number that is 110 higher than Earner #1's age, then VeriPlan will hold the allocation to equities at 100% for 10 years and then drop the equity allocation by 1% each year thereafter.

Section 14.8: Current portfolio rebalancing tool (optional)

This tool can aid you in reallocating your currently held cash, bond, and stock financial assets, according to your chosen asset allocation model above on this worksheet. The section draws information from other parts of VeriPlan, but it does not affect any other parts of VeriPlan.

This tool is provided here as a convenience, should you decide that you want to reallocate your currently held financial assets after you have settled upon a long-term financial planning model. This section can help you to estimate the total amounts of cash, bonds, and stock that would need to be invested across your taxable investment accounts and across your traditional and Roth tax-advantaged accounts to implement the asset allocation model that you want to adopt.

Using the information from this current portfolio rebalancing tool, you can more easily decide the numerical transactions that you would need to make to rebalance your current assets into your target allocations. Once you have actually made these portfolio modifications, then you should enter those adjusted asset holdings on the financial assets worksheet. As you do this the portfolio percentages of your current financial assets will converge on the initial percentages you have chosen in the VeriPlan asset allocation method that you have selected.

To help improve upon investment tax optimization, this current portfolio rebalancing tool also takes into account the distribution of your financial assets across taxable accounts, traditional tax-advantaged retirement accounts, and Roth tax-advantaged retirement accounts.

For more information about asset allocation and asset tax optimization, read the article entitled "Asset allocation, investment asset tax location, and emergency cash management," which can be found on the _Pasadena Financial Planner_ website here:

 Find the Investment Tax Location article on the Pasadena Financial Planner website

CURRENT cash, bond & equity financial asset holdings by account taxability

This table shows dollar values and percent of total financial assets for your current financial assets, which are split out by account taxability. (All percentages are % of total current financial assets.)

Taxable account holdings

Traditional tax-advantaged retirement account holdings

Roth tax-advantaged retirement account holdings

All financial assets

PLANNED first year cash, bond & equity financial asset allocation

This table shows your planned financial asset allocation by the end of the first year following reallocations. In this table, you should enter your US Domestic versus International split percentages for both the bond/ fixed income and stock/equity asset classes. Your percentage splits must total 100% within asset classes.

Use the table below to decide how to distribute your financial assets by asset class and account taxability

To improve upon investment tax optimization, this spreadsheet helps you to distribute of your financial assets within the major financial asset classes AND across taxable accounts, traditional tax-advantaged retirement accounts, and Roth tax-advantaged retirement accounts.

Distributing assets between asset classes and across accounts with different tax characteristics is an iterative process. How your assets are distributed depends upon BOTH your planned overall asset allocation model and the amount of assets that you have in accounts with differing tax treatment.

In the table below, you will enter the percentage distribution of assets within 5 financial asset categories: 1) International Stocks/Equities, 2) Domestic Stocks/Equities, 3) International Bonds/Fixed Income, 4) Domestic Bonds/Fixed Income, and 5) Cash securities.

Within each of these five major financial asset classes, you will use percentages that total 100% to distribute your planned investments across available accounts with different tax characteristics.

At the bottom of the table is a guide that measures whether your allocations within asset classes reconcile to your overall allocation model. Use this information to converge on very low percentage deviations and dollar deviations. When your deviations are under 1% in each category, you are close enough, given that typical rebalancing policies are usually than that -- often in the 5% range.

Using the Results:

When you have completed your adjustments below, you would read down the columns entitled "Total $ to invest for this asset class and account type." These dollar figures would mean that "I would invest a total of ($X) in (asset class name) investment funds within my (taxation-type) accounts."

Within each combination of asset class type and account taxability type, you would select one or more investment funds of your choosing.

Simplification hints when using the table below:

First, read carefully and understand the article entitled "Asset allocation, investment asset "tax location", and emergency cash management," which explains the logic of asset tax location. Look above for links to this article.

Start with your bond allocation and assign 100% of bonds to traditional tax-advantaged accounts. If you have enough assets in traditional tax-advantaged accounts to consume your full bond allocation, then you are done with allocating your bonds. If you do not, then some of your bonds will need to be allocated to taxable or Roth accounts.

Decide how much transactional cash you need to have in taxable accounts and assign a percentage that gives you roughly that dollar amount in taxable accounts.

If you still have room in traditional tax-advantaged accounts, next allocate some or all of the your emergency and investment cash to your traditional tax-advantaged accounts. If all this cash can be accommodated in your traditional tax-advantaged accounts, then you are done with allocating your cash. Otherwise, the remaining cash would go into your taxable or Roth accounts. (Read the article to understand how to get access to emergency cash held this way.)

Begin to allocate your international stock and US domestic stock allocations to your taxable accounts. If all of your allocation fits into your taxable accounts, then you are done with them. If not all of your equity allocations can be accommodated in your taxable accounts, then some of these equity allocations will need to be allocated to your traditional and/or Roth tax-advantaged accounts.

Whenever you have a choice of allocating equity assets, bonds, or cash to Roth tax-advantaged accounts, put equity assets into your Roth accounts. Given that equity assets are usually expected to grow faster in total value than bonds or cash, you would prefer to grow a larger balance in your Roth accounts and a smaller balance in your traditional tax-advantaged accounts to reduce future required minimum distributions from traditional accounts.

Be patient as you do your trial-and-error iterations to converge on your final model. Note that one of the reasons why this is not completely straightforward is that you are using percentages within an asset class and are distributing them across account taxability where the amount of assets will vary from one account taxability type to another, as well.

Refer to the bottom section of the table below (named: "% and $ deviations by account taxability for your entries in this table"), as you converge on your overall asset distribution by account taxability.

Total dollar allocations within asset class and across accounts with different tax characteristics

% and $ deviations by account taxability for your entries in the table above

This sub- table provides rebalancing convergence information. Make adjustments above and these numbers will change.

Section 14.9: Using Asset Allocation Method #3 with borrowing or negative financial asset positions

Asset Allocation Method #3 permits negative asset positions or borrowing. This allows you to project a leveraged or margined equity investment strategy. This section explains how to implement this strategy in your VeriPlan projections, and it discusses some of the implications of using such a strategy. This section also provides strong cautions about engaging in such a strategy, because of the much higher risks that are involved.

Because of personal investment risk aversion, the great majority of VeriPlan users will probably wish to maintain only positive or 'long' positions throughout their lifecycle projections. For them, maintaining a zero or positive percentage allocation in each of their cash, fixed income, and equity financial asset classes will impose a long-only strategy in their projections. However, when using Asset Allocation Method #3 above, VeriPlan does not require that you choose only positive or 'long' positions for all of your financial asset classes. Some of your financial asset classes can have negative or 'short' asset holdings. These negative and positive percentage adjustments still must offset and total zero percent.

If you are a very highly risk tolerant investor, Method #3 can calculate leveraged lifecycle projections with borrowing. This method can project the lifecycle results for aggressive or more risky investment strategies that use borrowing or leverage to create equity positions that exceed 100% of your net assets. Because the historical equity asset class total return has exceeded the total returns that have been paid on the cash and fixed income asset classes, leveraged strategies usually involve negative or borrowed cash and/or bond positions to fund leveraged or greater than 100% holdings in equities. Risk tolerant investors use leverage with the expectation that they will capitalize on differences in the relative risk premiums paid to different asset classes over time.

The remainder of this section will provide several cautions about adopting a leveraged investment strategy, and then it provides instructions on how to use VeriPlan to develop leveraged projections, if you are still interested.

These next three paragraphs provide a cautionary high-level discussion about using leveraged financial asset investment strategies. These cautions relate to 1) sustaining leveraged strategies during equity market downturns, 2) borrowing rates associated with leveraged strategies, and 3) risks to collateral used to borrow funds for leveraged investment strategies:

You probably should avoid leveraged investment strategies, if you do not have a thorough understanding of: A) your personal penchant for investment risk taking, B) your ability to sustain such strategies through stock market downturns (Managing upturns is easy.), and C) reasonable expectations about expected investment risk and return tradeoffs across the financial asset classes. When you analyze any VeriPlan projection that involves net negative cash plus bond-fixed income asset positions, you should note that there is zero safety margin across your lifetime projections. You will have no net cash or bond-fixed income assets to draw upon, your employment prospects need to be highly stable and/or your living expenses need to be relatively modest. Otherwise, if equity markets were to retreat substantially or borrowing costs were to rise unexpectedly in the future, funding your living expense short-fall will require you to liquidate equity assets at an unappealing discount. This is one of the primary reasons that most investors avoid leveraged equity positions.

Leveraged strategies are appealing, only if the expected difference between the total equity return and the net cost of borrowing is wide. The asset class risk premium information on the risk and returns worksheet indicates that only a few percentage points separates bond and equity risk returns. While a difference of a few percentage points compounded annually could lead to a huge asset return differential, individual investors cannot borrow at rates equal to expected total bond asset class returns. Therefore, borrowing costs can narrow or eliminate any expected equity to bond asset class return differential. In fact, if borrowing costs are high enough, then the expected return of a leveraged strategy could be both lower than a long-only strategy, while the concomitant risks are dramatically higher. The corporate yield spread chart on the risk and returns worksheet shows that yield margins increase dramatically on lower grade corporate debt. Even using personal equity or real estate as collateral, individual investors usually must borrow at rates that have a much larger spread than lower grade corporate bonds. For example, recently when cash returns were under 1%, investment banks were charging closer to 10% on their margin accounts -- even when equity securities were collateral and these accounts were subject potentially to margin calls and forced liquidation.

In addition to high interest rates associated with a leveraged investment strategy that individual investors may face, they also expose themselves to additional risks through debt collateral requirements. Based upon their signatures alone, few, if any, investors can obtain advantageous interest rates that would justify using a leveraged investment strategy. Instead, to obtain 'more reasonable' interest rates, they must put up valuable collateral, such as the value of the stocks held, real estate, or other assets that have substantial, unencumbered value. Despite high margin interest rate charges, the equity held in margin trading accounts also provides collateral to protect the interests of the investment bank. Investment banks are protected from all but the most severe market panics through their ability to make margin calls and liquidate assets that clients hold. While many, many thousands of individual investors lost everything in the 1929 stock market crash, margin calls and account liquidations protected the banks. Not a single investment bank went out of business due to loses on individual investor's margin accounts. Another major source of collateral is real estate. Individual investors sometimes use real estate lines of credit to borrow funds that are then invested in the equities markets with or without additional margin interest borrowing. Severe market downturns could decimate an equity trading account. When this happens, the individual has lost his investment assets, but still retains the higher real estate debt. If the equity market downturn is directly associated with an economic shock that also affects an individual's employment, then his real estate assets also could be in much greater jeopardy.

These caveats aside, if a leveraged strategy is of interest to you, then VeriPlan can develop projections for you to analyze. If you wish to explore leveraged asset allocation strategies, do the following:

* Step 1: Experiment with the settings above in Method #3, and enter a negative number that will reduce the cash asset allocation percentage to zero percent. (You should eliminate all cash holdings, because VeriPlan will model your leveraged position with a negative bond - fixed income asset class position. The negative return on this short bond position, in effect, will measure your borrowing cost for the overall leveraged strategy.)

* Step 2: Increase the percentage for equities and lower the percentage for bonds in Method #3. Your percentage settings must offset, and they must total 0%. You bond setting must be negative for you to have a leveraged portfolio. The net negative percentage for your bonds will indicate the portion of your total financial assets that will be borrowed. Note that your settings in Method #3 will be constant throughout your lifecycle projection. You can view the results on the allocation graphic. Above the 0% line, this allocation graphic will show 100% equities, and, in addition, below the 0% line, it will show the percent of equities that are borrowed.

* Step 3: Set an "interest rate" for borrowed capital by adjusting the total return for the bond/fixed income asset class. You can do this in the portfolio risk tool on the risk and returns worksheet. Use the asset class total return adjuster in and not the projection variance tool to increase the total return of the bond/fixed income asset class. Your bond percentage adjustment there should be positive. (Because the bond asset allocation above is negative, VeriPlan will treat a positive bond total return rate as a negative return that is equivalent to your expected interest rate on the debt.) With the portfolio risk tool, you should increase the total expected bond asset class return by an amount that would convert it into an effective interest rate. Adding several percent might not be unreasonable, but keep in mind any remaining spread between total equity and total bond returns. Also, the total bond rate you set with your adjustments should be a real dollar "interest rate," which would be approximately three percent lower than a nominal interest rate would be.

* Step 4: Experiment with a variety of bond total return rates and compare the outcomes to other scenarios where you simply hold a 100% or lower equity allocation. Frankly, without also adjusting the equity total return higher -- perhaps unreasonably -- to maintain a positive return margin over your bond "interest rate," it will be difficult to set a realistic borrowing rate and still have enough return left to justify all the additional risk.

Keep in mind that the return rate adjustments that you make, when evaluating a leveraged investment strategy, will be applied across your lifecycle, where there inevitably will be numerous minor and major equity market setbacks. A reading of the scientific investment literature indicates that over very long periods an asset allocation that very heavily emphasizes equity returns can still benefit from a minority allocation to the bond/fixed income asset class. These findings contradict the supposed wisdom of holding greater than 100% equities in a leveraged strategy, when realistic measures of the cost of borrowing are taken into account. In reality, though, one might question the potential superiority of any leveraged strategy. Only large institutional investors might borrow at sufficiently attractive rates to make these higher risk leveraged strategies possibly feasible. The much higher interest rates at which individual investors must borrow would seem inevitably to doom leveraged strategies to inferior absolute performance. When risk-adjusted performance measures are employed, then inferior risk-adjusted performance seems to be an even greater likelihood.

Note that when you use negative settings for some asset classes in Method #3, these negative asset positions can distort how some of VeriPlan's graphics are displayed. On asset related graphics, in particular, negative asset positions will display in manner that is similar to asset graphics which include debts. Negative asset holdings, are equivalent to debts and will not display visibly on the graphics. Instead, these negative asset holdings will pull the lower edge of your positive asset positions down below the zero assets line. Whenever your assets are displayed below the zero dollar assets line, this indicates that negative asset positions are part of your portfolio and/or that your debt holdings are included with your assets on the graphic. However, no colored bar corresponding to any negative asset or debt will display, as long as your overall net asset holdings are positive. Your asset classes with positive values will instead display with their lower colored bands beginning below zero to the extent that your portfolio holds negative assets in certain asset classes.

= ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ = ~ =

### Chapter 15: Portfolio Risk and Returns worksheet

Section 15.1: Set the projection variance tool (optional)

Section 15.2: Set the asset class return adjuster tool (optional)

Section 15.3: Set the current portfolio revaluation tool (optional)

Section 15.4: Set the portfolio safety margin tool (optional)

Section 15.5: VeriPlan's portfolio safety margin tool: definition and output

Section 15.6: Risk-adjusted portfolio returns and the safety margin dilemma

Section 15.7: Taxation and the Portfolio Safety Tool

Section 15.8: Risk-free rate of return assumptions used by VeriPlan (information)

Section 15.9: Pre-tax return assumptions for the cash, bond, and stock financial asset classes (information)

Section 15.10: Total real growth assumptions for your property and other assets (information)

Section 15.11: How VeriPlan measures the price volatility or risk of your asset classes (information)

Section 15.12: Data sources for VeriPlan's return assumptions

Section 15.13: Overview of historical asset class returns

Section 15.14: Nobody and no tool can predict the future

Section 15.15: Projections versus predictions

Section 15.16: VeriPlan's taxable asset return assumptions and tax exempt assets

Overview

VeriPlan provides three combinable methods to develop projections with asset class return assumptions that differ from VeriPlan's "centerline" assumptions:

* The projection variance tool allows you to vary asset class returns in proportion to their historical volatility or risk.

* The asset class return adjuster allows you to vary financial asset growth rates on a one-by-one basis.

* The current portfolio revaluation tool to understand the potential effect of substantial near-term asset value changes.

If you wish to change the financial asset class growth rates that are used by VeriPlan upward or downward, use the projection variance tool and/or the B) asset class return adjuster tool. Both tools can be used simultaneously, like other VeriPlan user settings and tools.

Securities price volatility or variance is the proxy measure of how relatively risky one financial asset or asset class is compared to another. VeriPlan's centerline projections provide personally customized views of the future that are both in line with the long-term historical trend and modeled in the context of your particular financial situation. By using the adjustments provided on this worksheet, you may gain additional insights about your projected financial affairs under different investment asset class return scenarios.

For more information on the asset class growth rate assumptions that VeriPlan uses for its centerline projections, see sections below in this chapter. Note that this chapter also discusses projections versus predictions, long-term historical asset class returns, and the "global credit crunch-severe recession-near depression-recovery" of 2007 to 2010 (and counting). Background information on VeriPlan's price volatility or risk assumptions can be found below in the section: "How VeriPlan estimates the price volatility or risk of your asset classes."

Some VeriPlan users might want to understand how substantial near-term changes to the value of their current portfolio might affect their lifecycle projections. The current portfolio revaluation tool provides an efficient means to revalue your current portfolio, so that your projection baseline starts with lower or higher asset class values.

No financial or investment model can "forecast" or "predict" the future and VeriPlan does not attempt to do so. That is why VeriPlan uses the term "projection" to clarify that historical averages are used to develop its centerline projections.

IN ABSOLUTELY NO SENSE ARE ANY PROJECTIONS FROM THIS TOOL PREDICTIONS.

(Repeat this to yourself until you believe this statement.) VeriPlan is for concerned individuals who want comprehensive, detailed, and internally coherent projections of personal financial scenarios that COULD unfold. It is a personal decision support tool to better understand financial inter-relationships for families and to explore alternative financial decisions that could be taken now. Instead of viewing these projections as predictions, ask yourself how you would manage, if a particular projection were to come true as your lifecycle evolves.

When reliable foresight is not possible, as an alternative, you can use rationally based scenario planning techniques to understand better how you might manage in a variety of possible future situations. After testing a reasonably wide variety of scenarios using your personal data, if you are comfortable that you would be able to manage your future financial affairs, then this tool will have serve to validate your current personal financial practices. Alternatively, if you do not feel comfortable about how you might manage in the future under the various circumstances presented in VeriPlan's projections, then this tool might help you to explore alternative financial behaviors that you could begin now that might put you in a better position in the future.

Section 15.1: Set the projection variance tool (optional)

The projection variance tool automates the development of projections that use asset class appreciation assumptions, which are systematically lower or higher than VeriPlan's centerline assumptions. This method is consistent with risk-adjusted, asset valuation theory. After a satisfactory centerline projection has been developed, every VeriPlan user should test both negative and positive return scenarios surrounding this centerline projection.

This projection variance tool allows you to set how much you wish to vary, downward or upward, VeriPlan's centerline asset class growth rates. It provides a simple method to vary the relative growth rates of your asset classes in a manner that is proportional to the relative risk or price volatility of each of your asset classes. In effect, this tool allows you to test projections where asset returns across all asset classes are generally worse or generally better than they have been in the long-term historical past.

You can investigate the various impacts of minor-to-major, negative-to-positive deviations around the centerline projection growth rates that are supplied with VeriPlan. Instead of guessing how much to vary the returns of each asset class, VeriPlan automatically calculates these adjustments for you.

For each asset class, VeriPlan develops a relative risk measure that is based on the statistical standard deviation of long-term historical asset class price volatility. VeriPlan multiplies these asset class risk measures times a projection scaling percentage that you set below. The result is a negative or positive return scaling factor, which is proportional to the risk or volatility of each asset class. Finally, VeriPlan uses these factors to adjust downward or upward its centerline rates of total return for each asset class.

More information on these asset class price volatility or risk measures can be found below in the section titled: "How VeriPlan estimates the price volatility or risk of your asset classes."

While this projection variance tool does not force you to do so, whenever you investigate a particular variation that is either below or above the centerline historical trend, you should also evaluate the corresponding mirror image projection in the opposite direction.

If you investigate only negative or positive deviations, without understanding their counterparts, then you are planning with a consistently pessimistic or optimistic bias relative to the long-term historical trend.

Using VeriPlan's projection variance tool, involves two steps:

STEP 1: Choose a "below" or "above" average projection with this PROJECTION SELECTOR

Use this bold border user data entry box to choose a variation that is below or above historical averages:

STEP 2: Determine the SCALING FACTOR for your adjustments to VeriPlan's historical centerline averages

Use this bold border user data entry box to enter a POSITIVE SCALING PERCENTAGE (usually from 0% to 10%).

Note that applying a small portion of the variance might not seem like it will have much impact, but it will. Because these small adjustments compound over the years, they can have a significant long-term impact on a projection.

You should experiment with this scaling factor by inspecting the resulting asset class adjustments shown in the blue boxes in the chart below.

For example, if you would like to try a projection where the return of the equity asset class is reduced, first set the PROJECTION SELECTOR in Step #1 above to a -1 (negative one). Then experiment with the SCALING PERCENTAGE above. Adjust the scaling percentage, until your equity adjustment in the blue equity asset class box below is close to -.50%. When the equity rate adjustment is set where you want it to be, then the other return adjustments that are shown in blue boxes for all the other asset classes will already be set automatically in proportion to the relative volatility of each asset class.

In a similar manner, of course, you could pay attention to any of the other blue asset class boxes, when calibrating your adjustment benchmark rate. Then, the returns for the remaining asset classes would adjust automatically relative to the asset class adjustment that you are paying attention to. In summary, this tool will always derive return adjustments that are proportional to relative historical asset class risk.

Asset class return adjustments for projections below and above historical centerline projection averages

This table shows the risk-adjusted return adjustments on projected returns for these asset classes. It also indicates any adjustments that you may have made using the asset class return adjuster tool below.

NOTE THAT THE RETURN ASSUMPTIONS BELOW RESULT FROM YOUR ADJUSTMENTS IN THE BOLD BORDER BOXES ABOVE IN THIS SECTION AND FROM ANY OTHER ADJUSTMENTS THAT YOU MAY HAVE MADE IN THE BOLD BORDER BOXES OF THE ASSET CLASS RETURN ADJUSTER TOOL BELOW. THEY ARE NOT DIRECTLY USER CHANGEABLE HERE.

Cash asset class

Bond/Fixed Income asset class

Stock/Equity asset class

Property and Real Estate asset class

Other Assets asset class

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Section 15.2: Set the asset class return adjuster tool (optional)

This asset class return adjuster tool enables you to make arbitrary adjustments to VeriPlan's real dollar centerline total return projection assumptions for the cash/cash equivalents, bond/fixed income, and stock/equity financial asset classes on a one-by-one basis. Your judgmental return adjustments can be combined with the systematic adjustments that you make with the projection variance tool above.
Introduction

Users should exercise caution when using this adjuster and also should have a reasonably deep understanding of the myriad of issues that surround historical asset class returns and of the various scientific methods for determining reasonable expectations about future returns.

No matter how much data is collected and analyzed by academics and amateur or professional investors, no one has a crystal ball that works. The best information that is available is the price and price volatility history drawn from the highly complex and ever-changing securities markets. VeriPlan has tried to do a reasonably thorough job of developing and describing the growth assumptions that it uses, but it makes absolutely no warranty or promise of any kind that this historical data has any predictive abilities whatsoever. VeriPlan never was and never will be designed to help anyone "beat the markets," which is an impossible endeavor that usually leads to inferior results primarily due to excess costs and taxes.

Instead, VeriPlan is designed to be a personal financial planning and decision support tool that helps individuals to understand how their overall financial and investment situation might (versus will) look as their lifecycle unfolds. Its richness of features, personal customizability, and flexibility allows users to perform intelligent "what if" scenario testing and to think about how they might manage across variety of potential future outcomes that are constructed coherently.

The above caveats are stated, because when you make arbitrary adjustments to historical returns, you begin a voyage divorced from the history of asset pricing in efficient, auction-based securities markets. While the future is unpredictable, making arbitrary adjustments to past history is fraught with additional problems. How do you know that your adjustments are "right"? Just because you have a gut feeling that growth assumptions are too high or too low -- particularly compared to the returns of another asset class -- do you have a rational and scientific basis for making such an adjustment? Will securities market participants in the future move closer to your view of the way the investment world and asset pricing should be? If they do, then you may get a transfer of capital from them as relative asset values adjust. If not, you might very well be the one making the asset transfer to other market participants.

Also, since VeriPlan uses constant growth parameters across the years of a projection, relatively small percentage changes can have a compounded effect as the years accumulate. Keep this in mind when using any adjustments.

Changing VeriPlan's "cash and cash equivalents" asset class total return assumption

In this section, make your judgmental adjustment to the real dollar total return assumption for the cash asset class.

In the single bold border data entry box within the table below, make your negative or positive percentile adjustment to the cash asset class total return assumption. Note that your negative or positive percentile adjustment is either additive or subtractive. It is not a multiplier. Whenever you have a non-zero entry in the bold border box below, VeriPlan automatically will use your adjustment for every projection, until you reenter 0% again.

This cash returns table, without the adjustment, comes from the historical asset returns section lower on this worksheet.

If you make any negative or positive adjustment, that adjustment should be very small -- a tenth of a percent or so. Even small percentage changes can have significant cumulative effects, when compounded over a lifetime.

Cash Asset Class -- Projected Total Annual Real Returns (%/year) [before any investment costs or taxes]

Changing VeriPlan's "bond/fixed income" asset class total return assumption

In this section, make your judgmental adjustment to the real dollar total return assumption for the bond & fixed income asset class.

In the single bold border entry box within the table below, make your negative or positive percentile adjustment to the bond - fixed income asset class total return assumption. Note that your negative or positive percentile adjustment is either additive or subtractive. It is not a multiplier. Whenever you have a non-zero entry in the bold border box below, VeriPlan automatically will use your adjustment for every projection, until you reenter 0% again.

This bond/fixed income returns table, without the adjustment, comes from the historical asset returns section lower on this worksheet.

If you make any negative or positive adjustment, that adjustment should be small -- a fraction of a percent. Even small percentage changes can have significant cumulative effects, when compounded over a lifetime.

Bond/Fixed Income asset class -- Projected Total Real Returns (%/year) [before any investment costs or taxes]

If you increase the corporate bond spread significantly, this implies that you are willing to take on increasing amounts of bond risk. Bonds that pay higher spreads usually have 1) lower quality ratings, 2) higher expected default risks, and 3) increased difficulties to diversify. However, the scientific investment literature indicates that historically they have also paid a proportionately increasing risk premium.

For your background, this chart provides the US taxable corporate bond spreads for the January 1997 to August 2003 on bonds with maturities of 7 to 10 years. The information is drawn from the paper by Amato and Remolona referenced in a section on historical asset returns in this chapter. This paper is one thoughtful example among numerous other academic papers regarding the components of bond returns. This information may provide some insight into the relative spreads over T-bonds depending on ratings quality.

From the table above you can see that you could select lower quality bonds with risk levels and yield spreads that could eclipse the average historical risk premium that has been paid on equity assets. However, most bond investors seek relative safety compared to the higher volatility of equity returns. Thus, they tend to prefer higher quality rated bonds with much lower yield spreads over the T-bond risk free rate of return. Because of this, VeriPlan uses the yield spread of AA rated taxable corporate bonds for the 1987 to 2003 period, as its centerline asset class total return projection assumption.

Changing VeriPlan's "stock/equity" asset class total return assumption

In this section, make your judgmental adjustment to the real dollar total return assumption for the stock & equity asset class.

In the single bold border entry box within the table below, make your negative or positive percentile adjustment to the stock - equity asset class total return assumption. Note that your negative or positive percentile adjustment is either additive or subtractive. It is not a multiplier. Whenever you have a non-zero entry in the bold border box below, VeriPlan automatically will use your adjustment for every projection, until you reenter 0% again.

This stock/equity returns table, without the adjustment, comes from the historical asset returns section lower on this worksheet.

If you make any negative or positive adjustment, that adjustment should be small -- usually a fraction of a percent. Even small percentage changes can have significant cumulative effects, when compounded over a lifetime.

Stock/Equity asset class -- Projected Total Annual Real Returns [before any investment costs or taxes]

There has been very considerable ambiguity and controversy about the factors that produced the equity risk premium which the US stock markets have paid historically. Particularly since the market bubble crash of 2001-2003, there has been a wide range of opinions about what the forward or expected equity risk premium should be. When speculating about the equity risk premium that might materialize in the future, many participants have advocated a downward adjustment to the historical number.

Many others have argued for a continuation of similar rates, but few have advocated for an upward adjustment to the measured historical risk premium or excess return. Since no one has a crystal ball, who may be right or wrong in this controversy can only be sorted out with the passage of time. While this adjustment allows you to test how adjustments to the expected equity risk premium assumption might impact your projections, but it cannot tell you what will happen. Again, remember that using relatively small negative or positive adjustments is recommended, because the impact of these adjustments will compound over your lifecycle projections.

For more information about the equity risk premium, please refer to these articles at _The Skilled Investor_ website.

 Find RETURNS AND RISK PREMIUMS articles on The Skilled Investor website

Changing Your Property Assets and Other Assets growth rate assumptions

Rather than making return adjustments in this section to your property and other assets, instead, go to the property worksheet and make your changes there directly.

Because your property assets and other assets presumably are not traded on competitive securities exchanges, VeriPlan asks you to make your own best estimations of both fair market value and growth prospects for each of your property and other assets.

For the assets you hold in the property assets and other assets class, VeriPlan uses your individual fair market value and growth prospects entries to develop valuation weighted average growth rates for each asset class. For your information, the table below lists your current valuation-weighted average growth assumptions. They are not directly changeable below. Instead, if you can change any of your entries directly on the property assets worksheet, then the numbers in the table below will change automatically.

Property asset class** -- Projected Total Annual Real Returns [before any investment costs or taxes]

The information if your information and is not directly changeable here.

Other Assets Class** -- Projected Total Annual Real Returns [before any investment costs or taxes]

The information if your information and is not directly changeable here.

** Note that the "Property asset class" is the weighted average for the first 10 data entry lines on the property worksheet and the "Other Assets class" is the weighted average for the second 10 data entry lines on the property worksheet. This may be useful if you have used the property worksheet to differentiate between real estate and other kinds of property assets.

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Section 15.3: Set the current portfolio revaluation tool (optional)

This current portfolio revaluation tool provides an efficient means to revalue your current portfolio, so that your projection baseline can start with lower or higher asset class values.

Some VeriPlan users may want to understand how substantial near-term changes to the value of their current portfolio might affect their lifecycle projections. This current portfolio revaluation tool provides an efficient means to revalue your current portfolio, so that your projection baseline can start with lower or higher asset class values.

For any of VeriPlan's five primary asset classes, this tool enables you to increase or decrease the value of your current portfolio holdings by percentages that you choose. This means you can alter the value of your current portfolio without adjusting your individual asset entries on the various yellow-tabbed 'Your Assets' worksheets.

This tool revalues ONLY your current portfolio assets. It does not alter any of VeriPlan's other projection logic related to your future income, expenses, debts, taxes, asset allocation, asset returns, or investment costs.

This tool automatically works in conjunction with any of VeriPlan's other tools and worksheet settings. You could use this tool simultaneously with the projection variance tool and the asset class return adjuster tool on this worksheet. However, exercise caution, if you use such combinations. For example, if you use this tool to reduce substantially the value of your current holdings in an asset class, then an increase in future growth rates might be as appropriate or even more appropriate than a decrease in future growth rates.

Normally, you would use your portfolio's current securities market values, when you develop your centerline projections in VeriPlan. This current portfolio revaluation tool should be used in your alternative, "what-if" scenario planning. It can test the robustness of your centerline lifecycle plan for near-term events that could change the value of your portfolio both substantially and enduringly. For example, if you were to evaluate the timing of an impending retirement, you might wish to understand the lifecycle impact of a large and enduring near-term change to the value of your portfolio.

Certain other cautions are in also order, when you use this tool. Current securities market values are the 'best available' assessment of forward looking risk-adjusted asset values. This tool allows you to use different values, which might not be the 'best available.' For more discussion on this topic, please read the section below entitled "A caution about deviating from current securities market values."

Your current portfolio revaluation percentages

For each of the five primary asset classes, you can enter a percentage adjustment. VeriPlan will automatically adjust the value of every asset that you currently hold in that asset class. You can use different adjustment values in any or all of the five asset classes, and you can mix positive and negative adjustments.

While people are usually concerned about a substantial and enduring decline in the value of their portfolio securities, this tool also allows you to test the potential for substantial unanticipated near-term increases in asset class values.

You make your adjustments in the bold border user data entry boxes below. For example, if you enter -15% for your adjustment of an asset class, then VeriPlan would revalue each asset in that asset class by multiplying the asset values you had already entered on the respective financial asset or property worksheet by (100%-15%) or 85%. If you enter +25%, then VeriPlan would revalue each asset in that asset class by multiplying your current asset value entries by (100%+25%) or 125%.

Whenever you enter a non-zero percentage adjustment, reminder notices will appear automatically on the financial assets and property assets worksheets.

Your CASH asset class Adjustment

Adjusting cash values would be done very infrequently, if ever. This adjustment has been included primarily for reasons of functional completeness. However, if you intend to hold a large portion of your assets in cash, you could use this adjustment with additional return reductions in the projection variance tool above to model an event that would boost inflation beyond current expectations both substantially and enduringly.

Your BOND-FIXED INCOME asset class Adjustment

Bond market valuation is complex, but generally, bond market prices are related inversely to interest rate expectations. Domestic and international bond interest rates are influenced by economic grow, economic capacity utilization, inflationary expectations, monetary policy, and the return requirements of securities owners.

Your STOCK-EQUITY asset class Adjustment

Overall equities market prices anticipate business cycles and demonstrated long-term cyclical patterns. Equities have shown a general tendency to revert toward very-long term averages, as measured by indicators such as price-earnings ratios. Nevertheless, by definition any system that demonstrates cyclicality must revert toward or deviate from an average value. Furthermore, average values are not stable and cyclicality itself causes the cycle average to be revised continuously. The scientific finance literature provides paltry evidence that many investors, and especially individual investors, have consistently capitalized by accurately anticipating changes in these equity cycles. Whether the market will revert toward the norm or deviate farther from the average lacks a predictable answer at any point.

Despite these observations, it may be useful in scenario planning to pay attention to where equity market values are in the current cycle relative to the long-term historical average, when you are planning for your financial future. The current value of one's equity portfolio relative to cyclical averages can significantly affect the feasibility of your personal financial plan. Because individuals have some flexibility to adjust their earning and consumption behaviors, they might take alternate actions depending on where they think equity market values might be in a cyclical pattern.

Your PROPERTY - REAL ESTATE asset class Adjustment

Compared to the cash, bond, and stock financial asset classes, your property and real estate assets tend to lack current market values. Without easily available market prices, you provide VeriPlan with your best estimate of the fair market value of each of your properties. Furthermore, most individual investors tend to hold property and real estate assets that are geographically concentrated and are subject to variable local conditions. Given this situation, any adjustment that you make with this tool would be highly speculative.

Your OTHER ASSETS asset class Adjustment

See the comments above about property asset adjustments. While your 'other assets' may not be as concentrated geographically, as your property assets, any adjustment that you make with this tool would still be highly speculative.

** Note that the "Property/Real Estate asset class" is the weighted average for the first 10 data entry lines on the property worksheet and the "Other Assets class" is the weighted average for the second 10 data entry lines on the property worksheet. This may be useful if you have used the property worksheet to differentiate between real estate and other kinds of property assets.

Section 15.4: Set the portfolio safety margin tool (optional)

VeriPlan's portfolio safety tool projects how long your cash and shorter-term fixed income assets would cover projected expenses, if ALL of your expected income sources ceased. This measures your projected capacity to weather severe financial risks that could materialize, but are not likely to materialize. In effect this is a stress test of the unusual situation where all personal income sources ceased, while the stock market experienced a significant downturn, and you needed to fund needed living expenses solely from your cash and shorter-term bond investment assets.

When planning for a more secure financial future, some individuals are worried about the safety margin provided by the assets that they already have acquired and the assets that they hope to add in the future. A significant concern that many people share relates to the possibility of a major and extended setback in the market value particularly of the equities portion of their portfolio (a stock market crash), while they might also experience a simultaneous drop in or complete loss of personal income.

This portfolio safety tool compares your projected annual expenses with the total cash and shorter-term bond and fixed income assets that you are projected to own in a particular year. This tool calculates the safety margin that these assets might provide in an very adverse situation. It divides your projected cash and shorter-term fixed income assets in each year by your projected necessary expense run rate. VeriPlan develops an expense coverage ratio that is measured as "years of expense coverage."

The SAFETY MARGIN graphic plots these annual ratios across your lifecycle projections, and the GRAPHICS DATA worksheet provides that data for this graphic. Note also that this tool's inputs will affect ONLY the SAFETY MARGIN graphic and its data. All other graphics and data worksheets are unaffected.

This portfolio safety tool projects financial risk capacity rather than risk tolerance. A person with a very substantial asset buffer might feel either financially risk tolerant or risk intolerant. Possessing assets may or may not alter a person's views about investment risk. And, if so, more assets could make some persons more tolerant of investment risk and others less tolerant of such risks.

Your portfolio safety margin settings

In this section, you estimate how much you could reduce expenses in a financial crisis. You can also remove some of your projected bond & fixed income assets from consideration due to long maturity.

STEP 1: Enter your expected reductions of ORDINARY and MAJOR PLANNED EXPENSES

Because you might be able to reduce or eliminate some of your ordinary and major planned expenses in difficult times, enter below your assumptions about your ability to reduce expenses.

Use these bold border user data entry boxes to indicate the percent of your annual ORDINARY and MAJOR PLANNED EXPENSES that you think you could typically eliminate, if you lost all expected income sources that are not directly related to your assets, while the equity markets simultaneously suffered a major and sustained downturn. Your ordinary expenses are those that you entered in Section 1 of the expenses worksheet. Your major planned expenses are those expenses that you entered in Section 3 of that worksheet.

Note also that these expenditure reductions apply ONLY to the safety margin graphic and to its data on the graphics data worksheet. These expense reduction assumptions will not impact any of VeriPlan's other inputs or outputs. VeriPlan's centerline projections with your adjustments will continue to be developed according to the descriptions provided on VeriPlan's various other worksheets.

STEP 2: Enter the percent of your Fixed Income Assets that you wish to exclude because of long maturity

Some percent of your total bond/fixed income assets might not be as readily available due to very long-term maturities, which potentially could restrict your ability to liquidate them without a significant loss. (The concern here is not salability, but having to sustain undesired losses to fund current expenses, if you did sell on duration bonds.)

Use this bold border user data entry box to estimate the percentage of you total fixed income assets with very long maturities.

Note that the best way to set this parameter is to decide how many years you wish to plan for a severe equity market downturn at any point in the future. For example, if you wanted to plan for a major market downturn that endured for five years, and you expect that typically 40% of your fixed income portfolio will have an asset maturity of greater than 5 years (when the debt principal is to be repaid), then enter 40% in the box above.

Section 15.5: VeriPlan's portfolio safety margin tool: definition and output

This portfolio safety tool projects expense coverage by your liquid assets in each year of your projections. It projects the number of years forward from that point that your projected cash and fixed income financial assets would cover your projected annual run rate for necessary expenses, if you did not receive any earned income, Social Security, pensions, annuities, or other expected income payments.

In other words, how long could you last, if all your income sources ceased, and you were forced to use the more liquid assets that you held at the time to cover for an extended period your necessary ordinary living expenses, required major planned expenses, and debt payment expenses? How long could your cash and fixed income assets last without you having to liquidate \-- presumably at a significant discount -- any of your equity, property, real estate, or other assets?

Presumably, you would not want to not be forced to liquidate any equity assets, real estate/property, or other more risky assets, because it is more likely that their value then would be significantly depressed. Instead, you might rather wish to ride out the market cycle, until you either obtained new employment to cover current expenses and/or financial market prices for more risky assets had substantially recovered.

Note, of course, that this strategy would cause you to alter your asset allocation plan. A precipitous fall in the market value of more risky asset classes would cause you to become over-weighted in cash and fixed income assets compared to your previous preferences. However, as time passed and you consumed cash and fixed income assets, as the market values of more risky assets recovered, your asset allocation would toward the direction of your preferred allocation.

To determine your projected annual run rate of necessary expenses, VeriPlan first reduces your projected annual expenses by downward adjustments that you can make using this tool. Using your entries in the bold border user data entry boxes on this worksheet, these downward adjustments to your ordinary and major planned expenses reflect how much you expect you could reduce total expenses under very difficult financial circumstances.

Then, for each projection year VeriPlan calculates your average annual forward-rolling expense rate, using your adjusted expense projections. This rolling annual expense rate is the average of your necessary expenses for the current projection year plus the four projection years that follow. Finally, to project your safety margin, VeriPlan divides this necessary expense run rate by the annual projected beginning balances of your holdings of cash and of more liquid fixed income assets. Your projected safety margin is measured as the number years that these assets would cover your necessary expense run rate in the absence of any other income.

If you intend to hold some of your fixed income assets in bonds or bond funds that have very long maturity, you should cut back on the percentage of your total fixed income assets that you would rely upon being able to liquidate in this type of financial crisis. Obviously, the remainder of your projected fixed income assets would still be in your portfolio -- you simply would treat them more like your other more risky assets. You would not count on being able to sell your long maturity bonds and fixed income assets without suffering a more substantial loss of value. While it may not be true that longer-term bond values would be significantly depressed simultaneously with equity assets, the purpose of this portfolio safety tool is to focus solely on projecting necessary expense coverage by your relatively safe assets. It projects the safety provided by those assets in your portfolio that tend to have a stable, cash-like net asset value or that yield cash and automatically self-liquidate relatively quickly, like short-term fixed income assets.

Section 15.6: Risk-adjusted portfolio returns and the safety margin dilemma

Individuals face a dilemma. Both less risky and more risky investment strategies may not achieve desired results for different reasons. When assessing investment strategies with different risk levels, it can be helpful to understand how the "safer" portion of portfolio assets might evolve across your lifetime.

When making investment decisions, individuals are confronted by the dilemma that more conservative investments historically have yielded substantially lower returns that riskier investments. With risk-adjusted market returns, you cannot have your cake and eat it too. If you take on higher risk, you can save and invest less, because the assets you hold are expected to grow at a more rapid rate. However, the outcome is less certain. Conversely, if you expose yourself to less investment risk, you must plan to save and invest more, but the outcome is more certain. How to strike a personally appropriate balance between risk and return is part science and part art. There are no easy answers, because both the shorter-term and longer-term future are fundamentally unknowable.

It may not be sufficient for you simply to estimate your level of anxiety over investment risk and then set an allocation between more or less risky assets that reflects what is comfortable to you. Many people will never be comfortable with investment risk, until they have a very substantial wealth buffer. Even then, many such persons may never be at ease. For many investors, unless they incur more significant investment risks than more conservative and comfortable investment strategies usually deliver, they are unlikely to be able to build adequate assets to escape from the rational or irrational fear of financial ruin that could be brought about by major stock market reversals in the future.

You can test this by experimenting with various settings in VeriPlan. It will soon become clear that heavily conservative asset allocations focused on cash and fixed income assets tend to grow slower than equities using very long-term relative asset class growth rates. Long-term success with such conservative allocations, relies far more on a continued high rate of saving, which requires greater discipline to sustain year-after-year and decade-after-decade. Conversely, equity focused strategies rely more upon growth in asset values, although these strategies still tend to require significant savings -- just at lower rates.

A partial solution to this dilemma for some investors is to understand better how different levels of exposure to investment risk could affect portfolio values over their lifecycle. VeriPlan allows you to do this using the five different asset allocation methods, which are described on the asset allocation tools worksheet. However, more knowledge only helps some investors to sleep better at night. For all investors, real uncertainty is still there concerning what will actually happen, as opposed to what could happen.

Another way to address investment risk-return tradeoffs and personal risk tolerance is to project a family's ability to meet its financial obligations using assets that would tend to hold their value better through adverse, dire, and extended periods of down economic cycles and depressed securities markets. As a method to manage the inevitable anxiety, it is potentially useful to project how large a liquid asset buffer you might build over time.

This portfolio safety tool can provide insights about your potential future by projecting asset buffers that you might hold at various points across your lifetime. When you experiment with VeriPlan's asset allocation tools in conjunction with this portfolio safety tool, you can get a much better feel for the interactions between risk-adjusted asset class returns and the safety margin provided by more liquid assets across time.

Note that you can also use this portfolio safety tool in conjunction with all other portfolio projection functionality provided by VeriPlan. For example, if you wish to alter the investment growth rates that are used by VeriPlan, you can do so using the other risk and returns tools. The impact of any changes that you make to projected asset growth rates will also be reflected in these portfolio safety margin calculations and the safety margin graphic.

Section 15.7: Taxation and the Portfolio Safety Tool

This section discusses some tax implications related to liquidating financial assets in a personal financial crisis.

Regarding taxation, note that the impact of taxation on asset liquidations is not taken into account in the development of VeriPlan's safety margin factor. For most people, taxes in such situations are likely not to be a terribly important factor -- particularly compared to the loss of income. When people have a significant loss of income, yet they have assets to rely upon, opportunities are created to rearrange one's financial affairs. Prior to a significant and unanticipated decline in earned income, a person is likely to have structured their finances to take advantage of tax minimization opportunities, such as tax deductions, tax-deferred investing, etc. When income is dramatically reduced, marginal tax rates and taxes paid usually are reduced significantly and tax deductions can go unutilized.

Therefore, people with assets might be able to rearrange assets within and between taxable and tax-advantaged accounts without incurring significant or perhaps any taxes in the process of these making these rearrangements. (Of course, they need to keep transactions costs to a minimum.) For example, a loss of income may be an opportunity to convert traditional IRA assets to Roth IRAs, recognizing taxes at significantly lower rates or perhaps avoiding taxes altogether, if circumstances and underutilized deductions permit.

Because in each projection year, VeriPlan recognizes the net interest or asset earnings yield on both cash and fixed income assets for current taxation purposes, these assets will carry a high basis in your taxable accounts within VeriPlan. Therefore, liquidating taxable cash and fixed income assets is likely to involve much lower or zero taxes, when earned income unexpectedly drops significantly.

Finally, it is generally more optimal from a taxation standpoint to maintain your allocations to cash and fixed income assets --versus your allocations to equities-- in tax-deferred accounts, when possible. The reason relates to ordinary income tax rates on cash and fixed income assets versus possible lower tax rates via long-term capital gains taxation on equity assets.

However, when one is under age 60 and faces the kind of financial crisis addressed by this Portfolio Safety Tool, there is a concern about federal and possibly state early withdrawal penalties from tax-advantaged accounts. This creates a quandary. Should some or a substantial amount of cash and fixed income assets be maintained in taxable accounts to avoid the potential of having to pay early withdrawal penalties in a personal financial crisis? In general, this concern can be overblown.

First, if a younger person has assets in both taxable and tax-advantaged accounts, he should find it possible to rearrange assets so that cash and fixed income assets can be withdrawn from taxable accounts to avoid early withdrawal penalties. This would require some buying and selling that could be sensitive both to the tax basis in various accounts and to wash sale rules. However, rearranging between taxable and tax-advantaged accounts should be achievable with relatively low taxes and expenses. This would be feasible, if low-cost investments and low transactions cost custody accounts were utilized, and if the living expenses to be covered were not so lavish as to require withdrawals that push one into higher tax brackets. Taxes and tax rates in these circumstances should already be far lower, because the loss of planned and presumably taxable income sources is the reason why asset withdrawals would be required in the first place.

Second, when a younger person holds most of his assets in tax-advantaged accounts and must liquidate some of them to meet expenses his expenses, he would be subject to early withdrawal penalties, unless he qualifies under the few exceptions that are available. This can be a reasonable risk that a younger person takes in holding a high percentage of assets in tax-advantaged versus taxable accounts. For the younger investor facing high current earned income tax rates, the advantages of tax-advantaged versus taxable investing are likely to outweigh strongly the risks of possible early liquidations, which force an early withdrawal penalty. From the standpoint of probabilities, this is demonstrated in "Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing" by Robert M. Dammon, Chester S. Spatt, and Harold H. Zhang in The Journal of Finance, Vol. LIX, No. 3, June 2004.

Find a current link to this 'Optimal Asset Location...' .pdf document

Section 15.8: Risk-free rate of return assumptions used by VeriPlan (information)

"Risk free" investments in short-term and long-term U.S. government obligations provide a baseline historical rate of return for a very conservative asset investment strategy. VeriPlan reduces nominal risk free returns by the compounded historical inflation rate to obtain 'real dollar' risk free rates of return. Real dollar returns provide a measure of constant purchasing power over time.

Instead of taking on additional investment risk in search of a higher return, you always have the alternative of placing your money in safer investments. The riskless asset is usually defined as the return on the U.S. government's short-term treasury bills or long-term treasury bonds, which are expected to have a zero risk of default. The return that these riskless assets pay are known as the short- or long-term "risk free rate of return," which is often abbreviated as the RFR.

To develop its projections, VeriPlan combines A) long-term historical averages for either the short-term or the long- term risk free rate of return with B) the average historical risk premiums that have been paid by securities markets on the Cash, Bond/Fixed Income, and Stock/Equity asset classes.

For the short-term and long-term RFR, VeriPlan uses the compounded or geometric average real interest rate on the annualized return on three month short-term U.S. Treasury T-bills and ten year long-term U.S. treasury T-bonds, respectively, for about the past 80 years, after inflation has been extracted. The tables below lists these nominal and real short-term and long-term RFRs. See section four below for more information on data sources.

The Short-term Real Dollar Risk Free Rate of Return assumption used by VeriPlan for projections:

The Long-term Real Dollar Risk Free Rate of Return assumption used by VeriPlan for projections:

With long-term bonds or fixed income securities, the average risk free rate of return on U.S. government bonds has been higher that short-term rates. Investors require a higher rate of return to commit their capital for a longer period. While the default risk on U.S. government treasury bonds is considered extremely small and thus "risk free," investors are still subject to changes in inflation rates, concerns about the future value of invested principal, and uncertainty about the future reinvestment interest rate.

For more information about the risk free rate of return, please this article at _The Skilled Investor_ website.

 Click here to find RISK FREE RETURN articles on _The Skilled Investor_ website

Section 15.9: Pre-tax return assumptions for the cash, bond, and stock financial asset classes (information)

This section defines VeriPlan's total real dollar return assumptions for the cash, bond, and stock asset classes. Historical asset class 'risk premiums' measure the long-term returns earned for bearing the investment risks of each of the financial asset classes. Together, asset class 'risk premiums' plus real dollar risk free rates of return measure the total real dollar returns that have been realized historically by the primary asset classes over long periods. VeriPlan uses these total, real dollar financial asset class returns in its centerline projections.

Historically, U.S. securities markets have paid "risk premiums" to attract investment capital. Virtually all investors are risk averse and otherwise would not commit their capital without expecting a return proportional to the perceived risk. Therefore, the expected risk premium tends to be proportional to the risk that the investor expects to assume while holding a security. When measured in retrospect, average securities returns for asset classes that have differed in risk have been shown to pay returns that are proportional to the investment risk. Investment risk measured by greater or smaller relative volatility or asset price fluctuations over time.

A risk premium is simply the average excess market return that is paid over time for risk bearing. A risk premium is measured as the historical excess return that has been paid above the risk free rate of return. Similar risk premiums have been paid to hold assets with similar risk and return characteristics, although there have been very significant variations over time.

For more information about historical asset class returns, please read the numerous articles on this subject available at _The Skilled Investor_ website.

 Find ASSET CLASS RETURN articles on _The Skilled Investor_ website

While a risk premium is most often discussed with respect to equities, cash assets also earn a slight premium for the risk incurred. For non-US. T-bill cash investment vehicles, the additional risk is actually quite small and is largely due to varying concerns about the credit worthiness of the issuer, if the issuer is not the U.S. government. Nevertheless, such concerns command a relatively small risk premium. Cash investment maturities are short, which reduces the duration of risk exposure and financial conditions imposed by the market on issuers are relatively stringent.

Note that while one should always be concerned about credit worthiness, with cash assets an investor also needs to be very vigilant about the fees that are charged. For cash equivalent assets, there tends to be a much wider range of fees charged on individual investors' deposits, when compared to the much narrower range of gross risk premiums earned by these somewhat risky cash investments.

The table below lists the historical real dollar return to cash that VeriPlan uses as its growth rate assumption for projecting the gross value of cash assets in its centerline projections. This total real return combines the average real short-term RFR plus the average real incremental return to cash assets drawn from the long term historical record. Note that this is the real cash return that, on average, has been earned above the compounded long-term inflation rate. The compounded inflation rate has averaged very close to 3% annually over the past 85+ years -- sometimes, of course, with wide variations.

Cash Asset Class -- Projected Total Annual Real Returns (%/year) [before any investment costs or taxes]

Projected compounded total (pre-tax; pre-cost) real returns on bond/fixed income assets

When investors seek higher interest rates than the expected yield on government bonds, they purchase non- governmental corporate taxable debt securities and take on additional risks, which require additional compensation. These additional risks primarily relate to the credit worthiness and default risk of non-governmental issuers.

The taxable bond markets have tended to pay an average risk premium that exceeds both the incremental taxes incurred and associated higher risks of default, when compared to investing strictly in US T-bonds. However, the average bond holding individual investor has a very limited tolerance for additional risk. Therefore, to develop its centerline projections, VeriPlan uses the rather modest average spread above the long-term risk free rate of return, which has been paid on ten-year taxable corporate bonds with AA quality ratings.

The table below lists the total real dollar return to high quality taxable corporate bonds that VeriPlan uses as its for projecting the gross value of your bonds and fixed income assets in your centerline projections. This total real return combines the average real long-term RFR plus the average real incremental return to high quality long-term bond and fixed income assets drawn from the historical record. Similar to the cash asset class, this bond and fixed income asset class assumption uses real dollars with the long-term historical annual inflation rate of close to 3% removed.

Bond/Fixed Income Asset Class -- Projected Total Annual Real Returns (%/year) [before any investment costs or taxes]

VeriPlan's total real dollar return assumption for the bond/fixed income asset class reflects the historical rate of return achieved by high quality corporate bonds.

The long-term risk free rate of return for US T-Bonds is based upon the period since 1928. This annual average high-quality corporate bond spread assumption used by VeriPlan is for the shorter 1987 to 2003 period. The availability of properly adjusted corporate bond spread estimates in academic papers necessitated the use of this shorter fifteen year period.

If you hold fixed income investments that are exempt from federal or state income taxation, you might want to understand how VeriPlan reconciles projections based upon taxable bond return rates with tax exempt bonds. Please see the section below entitled: "A note on VeriPlan's taxable asset return assumptions and tax exempt assets."

Choosing a reasonable taxable bond spread is more arbitrary than defining short- or long-term risk free rates of return. There are numerous complicating factors affecting bond valuations, such as variations in tax rates, taxability at different levels of government debt quality ratings, time to maturity, default risks, diversification risks, callability, etc. Bond valuation is anything but straightforward. Instead of attempting to discuss this topic in greater detail here, for the more intrepid among you, please see the references to academic papers on bond spreads listed in section six below. The references listed at the back of these papers can lead you to additional sources.

Projected compounded total (pre-tax; pre-cost) real returns on stock/equity assets

VeriPlan's total real dollar return assumption for the stock/equity asset class reflects the historical rate of return achieved by large capitalization U. S. stocks.

Regarding stock or equity securities, there is a very extensive scientific finance literature discussing past and future equity risk premiums that have been and might be paid. Numerous academic studies have been conducted, and an extensive discussion continues. Obviously, this subject is vital to any professional or amateur investor. Underlying much of this discussion is a search of ways to develop potentially informative or predictive indicators about the future.

Predictability is the holy grail of equity returns, but this particular investment grail is likely always to be as elusive as the grail of legend. The past can be informative. However, the future is completely unpredictable. Anyone who claims or implies that he can make you richer will probably make you poorer. (This is a probability assessment and not a prediction.)

With these caveats in mind, the table below presents the total return assumption that VeriPlan uses to develop its centerline projections for the stock/equity asset class. This total return is composed of the long-term real risk free return on US T-bonds plus the average historical equity risk premium over the long-term RFR.

Stock/Equity Asset Class -- Projected Total Annual Real Returns [before any investment costs or taxes]

For more information about the equity risk premium, please refer to these articles at _The Skilled Investor_ website.

 Find EQUITY RETURN articles on _The Skilled Investor_ website

Section 15.10: Total real growth assumptions for your property and other assets (information)

You provide VeriPlan with current value and growth estimates for your property and other assets, which are not currently priced on real time securities markets. Using this information, VeriPlan will automatically project the future value of your property and other assets net of your investment costs.

VeriPlan allows you to enter expected return and growth information about your non-financial investment holdings on the property worksheet. Such non-financial assets are your property, real estate, and other investments including personal businesses, private equity interests, limited partnerships, etc.

Because your property and other assets may lack current fair market values that can be measured from real-time securities markets, and because they often are subject to extended lock up periods, VeriPlan treats your property and other assets separately from your more liquid cash, fixed income, and equity financial asset classes. For your non- publicly traded property and other assets, VeriPlan uses your judgmental estimates about the current fair market values and growth rate prospects for these assets. VeriPlan automatically projects the future values of these property and other assets. Projected appreciation is reduced by the rates of investment costs that you indicate.

Keep in mind that, all other things being equal, an asset that lacks a public market will trade privately at a sometimes substantial discount compared to a similar publicly traded asset. When in doubt, intentionally applying a discount to reduce current values would be a reasonable and conservative financial planning practice.

From the estimates that you provide, VeriPlan automatically develops valuation weighted average growth rates for your property and other assets net of your projected annual investment costs related to those assets. Also, lacking a market pricing mechanism to measure asset price volatility, VeriPlan uses an alternative mechanism, which is described above on this worksheet.

All net cash flows related to your earned income, withdrawals, living expenses, debt payments, ordinary taxes, and financial asset capital gains distributions are added to or taken from your cash, fixed income, and equity financial asset classes. Your property and other assets are assumed to be held perpetually. VeriPlan makes no assumptions about projected sales dates or conversion of these assets into other assets. Your interests in hedge funds, limited partnerships, and other alternative private capital investments may be subject to significant lockup periods and sales disincentives. Similarly, if you have an actively-managed private business, it could take years to prepare to sell and sell.

Therefore, VeriPlan's projected values for your property and other assets are 'gross' with respect to any potential accrued capital gains taxes and sales expenses. VeriPlan's projected values for your property and other assets would be subject to long-term capital gains taxes upon any future disposition, if you do not utilize some device to reduce or eliminate capital gains taxes. Concerning projected sales costs, these would also diminish VeriPlan's projected asset values for your property and other assets. However, if you know that you are very likely to pay future sales expenses as a percent of the gross realized sales value of an asset upon disposition, you can anticipate these future charges by discounting the current value by that percentage sales expense. VeriPlan will then project net rather than gross sales values for such property and other assets.

For example, single-family homes typically cost the seller about 8% of gross sales proceeds to sell, which includes about 6% in sales commissions and 2% in other expenses. Therefore, you could anticipate these sales expenses by reducing the current fair market value estimate that you enter into VeriPlan to 92% of current estimate gross fair market value. (100% gross proceeds minus 8% sales costs equals 92% net proceeds.) Because percent of sales expenses scale with changes in valuation, by starting with values that are net of anticipated sales costs, then your projected property and other assets will only be gross with respect to future capital gains taxes, which you may be able to avoid anyway.

Section 15.11: How VeriPlan measures the price volatility or risk of your asset classes (information)

This section provides supporting data and describes the volatility or risk measures that VeriPlan uses with the projection variance tool. It also provides information about the ratios of historical risk to historical return for each asset class. VeriPlan uses these ratios to scale the "below average" and "above average" projection scenarios in the projection variance tool above.

Note that these volatility rates and ratios are used ONLY by the projection variance tool. They are NOT used by the asset class return adjuster tool below, since you make your own adjustments directly to the asset class rates of return yourself, when you use the asset class return adjuster tool.

Price volatility measures for your Cash, Bond/Fixed Income, and Stock/Equity assets

Generally, investment risk is measured by the amount that prices of an asset fluctuate in the public securities markets over time. The wider the fluctuations relative to the average price, the higher the risk. When comparing two assets or two asset classes, levels of fluctuations in the past are expected to be indicative of relative price fluctuations in the future. The statistical standard deviation of price fluctuations over time is the most common measurement of price volatility or risk.

VeriPlan uses historical measures of asset price volatility solely to adjust its projected asset class rates of return in the projection variance tool above. VeriPlan uses relative asset class price volatility or risk as a means to scale asset growth rates proportionately. Instead, of using arbitrary adjustments VeriPlan follows the well-established principle that investment risk and return are related. In general, the higher the risk, higher the return.

Whenever possible, it is preferable to use price volatility data which is drawn from the same historical period that is used to measure total return rates. Additionally and whenever possible, the same time period should be used to develop measures for all asset classes. Furthermore, since securities price volatility tends to fluctuate across the economic business cycle, this is an additional reason to use a reasonably long measurement period, whenever possible. Averages for longer periods tend to even out changes in variability across economic cycles.

In practice, completely comparable long-term historical data are sometimes difficult obtain. Long-term historical volatility or price fluctuation data are readily available for the T-bill, T-bond, and equity markets. For similarly long time periods, this is not the case for other cash equivalent rates or taxable corporate bonds. Therefore, VeriPlan uses the standard deviations of the long-term T-bill and T-bond assets as its volatility measures of the cash and bond asset classes. Because the spread on cash equivalent assets versus the short-term T-bill risk free rate of return is very narrow, it is likely that this method only understates the incremental risk on cash assets by a small amount. The somewhat wider spread of high quality corporate bond returns to T-bond returns means that incremental risk would also be higher. However, for purposes of proportional scaling of long-term historical return rates, it must serve as an acceptable proxy in lieu of better long-term data.

Historical Securities Price Volatility -- Asset Class Standard Deviations

This table presents the VeriPlan's risk data for the Cash, Bond, and Equity asset classes since 1928.

Price volatility measures for your property and other assets

Since there is no volatility history for your property and other assets, VeriPlan estimates the risk for these asset classes, by using the ratio of your expected returns for these asset classes to the historical return of the equity asset class. Note that VeriPlan will distinguish between property/real estate assets and other assets only if you segregate them on the property worksheet input table. You can segregate them by entering your real estate assets on lines 1 to 10 and other types of property assets on lines 11 to 20 of that property worksheet input table. If you do this, your real estate assets will be projected and graphed separately from your other assets.

The risk or standard deviations of your property and other assets cannot be measured from the history of market price movements, because there is none. Therefore, to estimate the risk of these assets, VeriPlan performs the following automatically operations. First, VeriPlan:

divides the overall valuation-weighted average of the projected real growth rates that you have entered on the first ten lines (graphed as "property" assets) and second ten lines (graphed as "other" assets) on the input table of the property worksheet

by the real dollar total expected return for the equity asset class, which is found on this worksheet. Then, this ratio is multiplied by the standard deviation for the equity asset class above. These computed implied volatility percentages are listed in the table below.

This computed method means that, if you estimate that the growth rate for a particular property or other asset will be lower/higher than equities, then VeriPlan will compute an implied price volatility that is lower/higher than equities, respectively. For example, if you estimate higher real dollar growth that VeriPlan's average real dollar growth rate for equities, then VeriPlan will in turn estimate higher volatility or risk. Therefore, the value of that asset would fall/rise more rapidly than equity assets would, depending on whether you select a below average or above average projection in the projection variance tool above and depending on the magnitude of adjustment that you select with the scaling factor.

Automatically computed valuation-weighted implied volatility for your Property Assets and Other Assets

Ratios of price volatility to total returns for your asset classes

This section provides the ratios of volatility to total real return for each asset class.

Measuring the volatility of asset class price fluctuations demonstrates that, in an absolute sense, equities are more volatile than bond or fixed income securities, and fixed income securities are more volatile when compared to cash assets. However, there still are significant fluctuations around the returns for each of these asset classes over time. This is demonstrated by the ratios of the historical standard deviations of asset classes to historical asset class returns, which are presented in the table below. These volatility to return ratios are used above in the projection variance tool to scale projected total returns of the various asset classes.

Ratios of the Annual Volatility of Real Returns to Compounded Average Asset Class Total Returns

(Note that these are "volatility-to-return" ratios and not percentages.)

Section 15.12: Data sources for VeriPlan's return assumptions

This section documents the primary sources of VeriPlan's asset return assumptions. Current links to these sources are maintained for you on The Skilled Investor website. Google "Scholar" is another way for you to find objective financial research.

There are a very wide variety of sources that address the subject of long-term historical asset class returns and risk premiums. This section makes reference to some of the more useful sources that were consulted to develop VeriPlan's return assumptions.

Inflation data

* Consumer Price Index-Urban Wage Earners and Clerical Workers; U.S. Department Of Labor -- Bureau of Labor Statistics; ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

Risk Free Rates of Return

* St. Louis Federal Reserve database (FRED); <http://research.stlouisfed.org/>

* Professor Aswath Damodaran, New York University Stern School; Professor Damodaran's excellent site provides numerous useful data sets and valuation tools. Damodaran Online: <http://pages.stern.nyu.edu/~adamodar/>

* The equity risk premium literature discusses risk free rates of return extensively.

Returns on cash assets

* iMoneyNet -- Money Fund Information; <http://www.imoneynet.com/>

Returns on bond/fixed income assets

* Compared to the equity risk premium literature, material on the pre-tax, long duration corporate bond market premium is less plentiful. Two papers to start with are:

* Edwin J. Elton, Martin J. Gruber, Deepak Agrawal, and Christopher Mann, "Explaining the Rate Spread on Corporate Bonds," The Journal of Finance; VOL. LVI, No. 1; February 2001, p. 247-277;  http://pages.stern.nyu.edu/~eelton/working_papers/explaining_rate_final_JF.pdf

* Jeffery D. Amato and Eli M. Remolona, "The Credit Spread Puzzle," BIS Quarterly Review, December 2003, p 51-63; <http://www.bis.org/publ/qtrpdf/r_qt0312e.pdf>

Equity risk premiums

* An immense literature exists. A large, though not exhaustive, compilation can be found in: Richard A. Derrig and Elisha D. Orr, "Equity Risk Premium: Expectations Great and Small", North American Actuarial Journal, Vol. 8, no. 1, [vp]. Jan 2004; <http://www.derrig.com/research/ERPExpectationsGreatandSmall.pdf>

For a variety of related articles, see _The Skilled Investor_ website:

 Find RETURN PREMIUM articles on _The Skilled Investor_ website

 Find SECURITIES VALUATION articles on _The Skilled Investor_ website

If you are interested in further research involving objective academic research on these subjects, the best approach for someone without access to paid academic research services is to use Google Scholar. 1) go to google.com, 2) select " more >> ," and 3) click on " Scholar ." Google Scholar provides access to many academic working papers and articles published in academic journals. It eliminates the problem of having to sort through the blizzard of other, non- academic listings that would surface, if you used the main Google site. Experiment with key words and see what you find. If you choose to do this, you should have spare time, patience, and some educational background in economics, finance, business, and/or mathematics.

Section 15.13: Overview of historical asset class returns

VeriPlan fully automates the projection of your portfolio's asset value growth, using long-term historical rates of return. VeriPlan is already configured with the annual asset class growth rate assumptions needed to develop its projections for the financial assets in your investment portfolio. This worksheet lists these annual historical asset class growth rates for the Cash, Bond/Fixed Income, and Stock/Equity asset classes. VeriPlan refers to all projections that are based upon these long-term historical return averages as "centerline" projections.

VeriPlan's centerline projections provide personally customized views of the future that are both a) in line with the very long-term historical trend and b) modeled in the context of your current financial situation and intentions. This worksheet describes the various data, assumptions, and sources used to develop VeriPlan's centerline asset class growth assumptions.

VeriPlan's centerline asset growth rates will apply automatically to any assets that you enter on the user profile financial assets worksheets. Furthermore, these rates will apply automatically to all projected additional investments funded from net savings and to all reinvested cash, bond, and stock asset returns net of investment costs and taxes. Concerning growth rates for your assets listed on the property and other assets worksheet, see the section below entitled: "Centerline real growth assumptions for your property and other assets."

All asset class return assumptions discussed below are "gross" annual return rates. In addition, these growth assumptions use "real" dollars with inflation removed.

VeriPlan uses these gross, real dollar asset class return rates to project automatically the annually compounded value of your financial asset portfolio net of any investment costs and taxes. To understand how VeriPlan manages investment costs, see the investment costs worksheet. To understand how VeriPlan manages asset taxes, see the taxes worksheet and the tax-advantaged plans worksheet.

Annual US Asset Class Investment Returns Since 1928 (real %/year)

For your background information, VeriPlan provides both a graphic and data table of very long-term historical US asset class total investment returns. These total returns are calendar year returns, including both interest or dividends and capital appreciation. These data sources have been transformed for their use within VeriPlan. In particular, the US 3-Month Treasury Bill, US 10-Year Treasury Bond, and S&P 500 Stock Indexes have been transformed from "nominal dollar" percentage returns to "real dollar" percentage returns. This means that the percentage annual inflation rate figures on the chart have already been subtracted from the investment asset class returns that are graphed.

These historical asset class returns series are used to calculate A) the historical real dollar "compounded or geometric average" asset class returns measures and B) the historical statistical standard deviation asset class volatility measures, which are used in VeriPlan's default projections. These compounded asset class returns parameters can be changed downward or upward by the user.

When interpreting these historical asset class returns, note the asymmetric nature of percentage change data relative to absolute dollar returns data. For example, when an asset begins at a particular dollar value and then increases in value by 100%, it only needs to fall by 50% from that increased dollar value to return to the original dollar value. Conversely, when an asset begins at a particular dollar value and then falls in value by 50%, it must increase in value by 100% from that decreased dollar value to return to the original dollar value.

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Section 15.14: Nobody and no tool can predict the future.

The future is fundamentally unpredictable. Period. The future of finance and investing is particularly unpredictable. Anyone claiming or implying that they can predict is just blowing smoke. If their predictive smoke claims to benefit you, be far more suspicious. VeriPlan makes no claims whatsoever to be predictive. VeriPlan is not a crystal ball. Instead, VeriPlan is a sophisticated, personalized financial decision support tool.

Anyone who claims or implies that they can predict the future or that they can assess probabilities about what will happen financially is over-reaching at best. You should not develop any false comfort that you can predict the future yourself, nor should you expect that VeriPlan or any other financial tool can predict what will happen.

VeriPlan does not attempt to predict the future in any way, nor does it attempt to assess probabilities about the future. Instead, based on the range of your inputs and assumptions, VeriPlan produces internally coherent, mathematical projection scenarios. VeriPlan projects hypothetical illustrations that are based on the long-term historical trend line with or without your adjustments to that historical trend line.

VeriPlan's projections model your current financial affairs and your intentions regarding the future. They incorporate your projected earnings, expenses, net savings, debts, and asset portfolio. VeriPlan's projections use that historical risk premiums paid on asset classes, a model of your current federal, state, and local taxes, and your inputs about your current investment costs.

VeriPlan's documentation allows you to understand how its projections are developed. Furthermore, it allows you to adjust projected return rates both scientifically and arbitrarily so that you can analyze a wide range of more pessimistic and more optimistic projection scenarios. This scenario planning capability helps you evaluate how you might manage over the long-term, if the future were to deviate consistently from the long-term historical trend.

The bottom line is that you cannot, VeriPlan cannot, and no other tool can predict the future. Therefore, you should not get too enamored with any future oriented graphics or charts about your financial affairs. VeriPlan's projections illustrate coherent scenarios, and they can be useful of thinking and planning. Nevertheless, they cannot provide a map into the future.

Throughout your life, the ongoing decisions that you make as your financial circumstances change is the only way that you can actually know your personal financial map. You can prepare for the future, but not predict it. As an evolving toolkit, VeriPlan can help you to role-play about what you may need to do in the present to get to your future goals, as you travel along this journey.

VeriPlan is a planning scenario generation engine that is fully user controlled. By reading the documentation in this user manual and in VeriPlan, you can understand how VeriPlan automates financial scenario planning for you and you can develop your own lifetime financial plan.

_The Skilled Investor_ website provides additional articles on personal financial and investment planning.

 Click here for FINANCIAL PLANNING PROCESS articles on _The Skilled Investor_ website

Section 15.15: Projections versus predictions

Nobody can predict future asset values. That is what investment risk is all about. You may hope, but you can never be sure. VeriPlan's projections are not predictive, and it is not a crystal ball. Instead, VeriPlan is a sophisticated scenario planning engine that individuals can customize to their particular financial situation and lifecycle planning needs.

VeriPlan produces personalized projections based upon your financial inputs and your settings on its various tools and other features.

VERIPLAN DOES NOT PREDICT ANYTHING. YOU HAVE ABSOLUTELY NO ASSURANCE WHATSOEVER THAT THE FUTURE OR YOUR FUTURE FINANCIAL AFFAIRS WILL TURN OUT TO BE ANYTHING LIKE THE PROJECTIONS THAT VERIPLAN DEVELOPS FOR YOU.

Investors simply cannot choose their gross investment returns. Only the consensus about asset values across investors in the future, which will be reflected in the ever-evolving, forward-looking, and risk-adjusting worldwide securities markets, will decide what your portfolio might be worth in the future. You only can control: a) how much you earn and add to your portfolio through your savings, b) how well you control your expenditures to reduce the need to make withdrawals, c) how much you earn by exposing your investment assets to risk, and d) how efficiently you buy, hold, and sell assets with respect to investment costs and taxation.

What remains are questions for investment oracles, and there never have been and never will be any true investment oracles who could/will predict the future consistently. However, there will always be future-oriented song and dance men -- some on stage and some in finance. Despite the direct or implied claims of many in the investment industry to greater investment prowess, accurate and reliable investment foresight is within no one's power. If such foresight were truly possible, then persons with these accurate crystal balls could adopt strategies that quickly would allow them to control vast amounts of the world's assets without incurring proportionate risks.

However, the overwhelming majority of the wealthy working in the financial industry seem to draw their riches from fees on other people's money rather than from superior skill. Relatively few seem to rely upon superior, skill-based strategies to invest their own money. If some professionals possess true skill rather than luck, the scientific investment literature demonstrates that it is virtually impossible to pick them out of the crowd beforehand. Furthermore, if they were to charge even average industry fees, it likely would not be profitable to hire them to work on your behalf anyway.

VeriPlan is not an oracle, nor does it intend to or attempt to sing or dance about the future. Its objective is to develop coherent projections based upon your inputs and the assumptions and functionality that are described in VeriPlan. Nothing more. No financial or investment model can "forecast" or "predict" the future and VeriPlan does not attempt to do so. That is why VeriPlan uses the term "projection" to clarify that historical averages are used to develop its centerline projections.

When reliable foresight is not possible, as an alternative, you can use rationally based scenario planning techniques to understand better how you might manage in a variety of future financial situations. On this risk and returns worksheet, you can do your own personal scenario planning by altering VeriPlan's centerline asset class growth rates. With this worksheet, VeriPlan allows you to generate more pessimistic and more optimistic investment return projections than the centerline projections based upon historical returns.

A caution about deviating from current securities market values

Markets tend to set 'best available' current asset values. Because this tool allows you to revalue your current portfolio arbitrarily, it might appear to violate some of the fundamental tenets of market-based asset valuation theory. Choosing values that are different from current securities market prices could imply that the securities markets do not set reasonable forward-looking, risk-adjusted consensus values.

If you believe that current securities market values are either too low or too high, that is simply your opinion. It does not mean that you or the markets are either right or wrong. Your opinion may be just as valid as anyone's opinion is. To the extent that you are better informed, more thorough in your analysis, and reasonably dispassionate, you may have more insight about values than other market participants do. Alternatively, you could have less.

What counts is the market's aggregate consensus of value across all potential participants who might have an interest in buying and selling securities. Through this opinion aggregation process related to supply and demand, the securities markets set current 'best available' estimates of future values. However, market prices can only reflect the current and average risk-adjusted return expectation across all investors. Markets participants cannot predict positive and negative events with any certainty.

Market prices respond to changes in supply and demand, and these changes depend upon new events with new information. Some investors might expect a certain event, while others expect the opposite. Other events that happen may be completely unexpected. Very widely expected events tend not to change market prices. Unexpected events and events expected by only a narrow segment of investors tend to change values.

Anyone is free to disagree with market prices. However, prices will adjust in the direction of a particular opinion, only when more market participants change their minds and reach similar conclusions. In general, only when new positive or negative information becomes known in the future do market participants adjust their opinions about securities values and change their supply and demand behavior.

In conclusion, if you were to use this tool to adjust values for all your centerline projections, because you think that current market prices are 'wrong,' then, in effect, you have chosen to ignore the markets and to do your financial planning in more of a vacuum. Securities markets tend to be "right" far more often than particular investors are.

If, instead, you use this tool to test alternative scenarios and to understand the robustness of your financial plan, then its use would not contradict current market pricing. You are simply scenario planning, in case, some major and enduring risk event becomes a certainty in the near-term rather than just a possibility.

VeriPlan's asset returns and the "Global Credit Crunch, Severe Recession, Near Depression, and Recovery"

On this risk and returns worksheet, you will note that VeriPlan uses historical cash, bond, and stock asset class returns data for the years since 1928.

If you would like to understand US historical asset class returns and inflation and the asset class return data that VeriPlan uses, when you do not change the return assumptions provided, look at the returns since 1928 graphic and corresponding data table. This information will give you a sense of both historical annual returns and asset class returns volatility.

The recent "global credit crunch-severe recession-near depression-recovery" severely impacted bond, stock, real estate, and other investment asset values, as the world suffered a systemic breakdown of its financial system. Whether the world will learn anything useful or corrective from this near debacle remains an open question. While asset values have recovered substantially, a great deal of uncertainty and fear persists, especially among individual investors who want to plan their families' financial futures.

From an economic point-of-view, the years since 1928 represent a period in the cyclical economy and capital markets beginning prior to both the economic and asset markets peaks at the end of the 1920s. Therefore, particularly regarding stocks, the average return and risk data used by VeriPlan include most of the run up in asset values for the post World War I expansion during the 1920s. It includes some, but certainly not all of valuation run-up prior to the market crash at the end of 1929. This full period since 1928 does, however, include the full impact of the collapse of the stock market and the ensuing and very long-lasting Great Depression. If you look at the data provided for the years of the Great Depression you can plainly see the debacle that a poorly managed financial crisis can produce. If you want to get a better understanding of why the US Federal Reserve after 2008 has been so concerned about deflation when the media conversion is so focused on future inflation, just look at the inflation data for 1930 to 1933 when consumer prices kept falling and the economy imploded.

This data set since 1928 begins on an upward growth slope prior to a major cyclical economic and market peak. This data does not begin at either an economic or financial market trough or peak. In a similar vein, the end point of this data series may also a similar mid-point in an upward sloping economic and financial markets expansion. In addition, note that the data used includes the dot com bubble, the dot com crash, and the relatively mild recession and weak "jobless" recovery following the dot com crash. Furthermore this data set includes the much more economically pervasive real estate bubble, derivatives abuses, and over-leveraging that brought on the recent global credit crunch in 2007 and beyond. However, despite all the pain and particularly the high and enduring rate of joblessness, the financial markets have already made a very significant recovery.

While no one can predict the future, from a long-term historical macroeconomic sense, the economy and financial markets appear to be to the upward slope similar to the middle to later part of the 1920s -- or to any upward sloping financial recovery and growth cycle. Whether we are headed for a long period of economic expansion and general prosperity or another financial crisis down the road is anyone's call. (But, if you hear someone claim with the accustomed bravado that they "know" what the future holds financially, and incidentally, they just happen have a nifty financial product to sell you that will supposedly cure that ill for you, put on your running shoes and make your get-away as quickly as you can!)

In many senses, the 1928 stating point and recent ending point of the long-term historical data represent roughly and seemingly similar points in economic and financial market cycles. Using data through 2007 and 2008 includes the business cycle peak cut short by the credit crunch crash. Low points in the equities markets were experienced in March of 2009, and the period since 2009 has included a substantial asset value recovery.

Note that the most recent economic recession was a reaction to rather than a cause of the credit crisis. This crisis began in the supposedly "conservative" bond markets, when investors finally woke up to the true, toxic value of supposedly high grade mortgage bond derivatives pushed by a cynical securities industry. This bond debacle was compounded horribly by massive leverage and capital reserves that were themselves composed of toxic and over-valued mortgage bond derivatives. We are currently living through what will eventually become economic and financial market history. However, we simply do not know where the asset valuation level and calendar year mid-point of the next expansion will be. Some predict "Armageddon - get your gold and guns," some predict a very long 1930s style recovery, and some predict a more rapid economic snap back. Nobody really knows what will happen. Nobody can know until it becomes history. That is the essential dilemma of investing. We collectively are flying blindly through the fog of the future.

Therefore, for VeriPlan's historical baseline asset class return and risk variance assumptions, 1928 is the data starting point and very recent data is the end point. They were chosen because they represent similar points in economic and market cycles. In effect, the period since 1928 includes numerous full economic and market cycles. Measuring performance over full market cycles is better than using peak to trough or trough to peak historical data. However, if your crystal ball is clearer to you, and you prefer to use higher or lower asset returns, just change them on this risk and returns worksheet.

Section 15.16: VeriPlan's taxable asset return assumptions and tax exempt assets

Tax exempt assets achieve lower gross market returns than their taxable counterparts. Rational, higher taxed investors buy these securities, because they expect to achieve a higher net after-tax return.

VeriPlan's projections use historical, taxable asset class rates of returns, even if you hold tax exempt assets. If your future tax situation would provide the opportunity, you might achieve better than projected results by holding tax exempt securities. However, the reverse could be the case, if your tax savings do not overcome the market's asset return discount on tax exempt securities.

Some cash and fixed income investment assets are not subject to federal or state income taxes. Such instruments earn lower pre-tax yields from the markets, but their lower yields may sometimes be compensated for through personal tax savings. Only persons with certain advantageous tax situations, however, can achieve sufficient tax savings to overcome the reduced pre-tax returns paid by the securities markets.

Generally, the pre-tax yields or market prices of certain bond/fixed income investments, such as US Treasury bills, US Treasury bonds, agency issuances, state debt, and municipal bonds are lower than their fully taxed alternatives. Bond market prices respond to supply and demand for different types of government debt that may or may not be subject to taxation at varying levels. Buyers of these debt instruments adjust their demand in relationship to the tax advantages that they expect. The lower average pre-tax yields paid by these markets reflect the improved after-tax returns anticipated by these buyers.

Regarding asset taxes, VeriPlan's standard projection method is to project pre-tax cash, bond, and equity asset class returns for taxable assets. VeriPlan projects pre-tax returns based upon the total compounded average historical asset class return assumptions discussed in the sections above. VeriPlan then reduces these total returns by the taxes that would apply in each projection year based upon your particular tax situation at the time.

VeriPlan taxes any asset yields that must be recognized for tax purposes in the current year. It defers taxes on yields, when allowable. VeriPlan uses your current federal, state, and local variable and/or flat tax rates, and it takes into consideration the projected exemptions, deductions, tax basis, and other tax items that you enter on the taxes worksheet and on the tax-advantaged plans worksheet.

For your cash and bond/fixed income assets, VeriPlan taxes their total projected yields each year, if these assets are held in accounts that are subject to current taxes. No short- or long-term capital gains or losses are assumed on cash or fixed income assets. In practice, only fixed income assets are likely to have any capital gains or losses. However, capital gains and losses on fixed income assets are usually a relatively small part of total yields, and these gains and losses tend to cancel out over time.

Using this approach, VeriPlan's projection methods avoid concerns about whether you should own taxable and/or tax- exempt fixed income assets. VeriPlan only requires that you supply the current fair market value of the bond assets that you hold. Coupon rates, current yields, and taxability considerations regarding your current holdings are not required. While you would be able to provide such details for your current holdings, there is no way that you could estimate the taxable versus tax-exempt composition of your bond portfolio holdings years ahead.

VeriPlan's after-tax projection results on taxable assets should be comparable to the net results achieved from buying lower return tax advantaged bonds and then paying lower taxes -- if you were to hold tax-exempt instruments appropriately, which many individual investors do not. In fact, VeriPlan's approach may be advantageous, because VeriPlan projects capturing net after-tax returns on taxable market yields across your lifecycle that are in line with your evolving future tax situation. Instead of assuming that you will always hold some lower yielding tax-exempt bonds, that may or may not be beneficial, VeriPlan projects that you will always have access potentially to the bond market's higher taxable returns. If your tax rates are low, you will do better. If your tax rates are higher at points, VeriPlan will assess higher tax rates. Anyway, in the future, you will always have the option to purchase tax exempt bonds, when they are appropriate.

Regarding stock and equity assets, differences in taxability are less important. Governments can issue tax-advantaged debt. The federal, state, and local governments, however, cannot issue equity ownership shares. You simply cannot directly buy ownership of the government. (The subjects of lobbying and campaign financing are beyond the scope of this commentary.) In effect, all equities are similar from a taxability standpoint. For example, the qualified dividend paid by one corporation is taxed the same as the qualified dividend paid by another.

Of course, there are tax-exempt equity buyers, such as pensions and trusts, which are not subject to the same taxes as individuals. Overall, the actions of these tax-exempt investors can affect market values. Nevertheless, their impact on equity prices tends to be general rather than heavily skewed toward selected types of equities, as in the bond markets.

Concerning the stock and equity asset class, VeriPlan's method of projecting pretax returns and then taxing returns according to your projected tax situation is the appropriate model for individual investors. Using the stock and equity entries that you make on the financial assets worksheet, VeriPlan will tax the proportion of your expected returns that you expect to receive in the current year. Any remaining unrecognized returns for the current year will be deferred, whether or not they are held in a taxable or tax-deferred account. These deferred returns will only be taxed as long-term capital gains in the future, if they must be withdrawn from a taxable account. When the appreciated equity assets are withdrawn from a tax-deferred account, VeriPlan will assess ordinary income tax rates rather than long-term capital gains rates.

Comprehensive and economical do-it-yourself financial planning software

For more information, see: **http://www.theskilledinvestor.com/VeriPlan/financial-planning/**

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### Chapter 16: Investment Costs worksheet

Section 16.1: Enter maximum investment costs that are reasonable to you (optional)

Section 16.2: Commit to a reasonable cost investment strategy (optional)

Section 16.3: Project returns lost to excessive sales loads (optional)

Section 16.4: Where to find investment expense information about your financial assets

Section 16.5: Paying less to get more

Section 16.6: Where to direct the recurring gift of your excessive investment costs?

Section 16.7: Why do investment cost-inefficiencies seem so large? (Because they are!)

Overview

Excessive investment costs are a huge problem for the average investor. VeriPlan's projections automatically analyze the impact of five types of investment expenses across your lifetime:

* Fees to buy investments (e.g. front-end purchase "loads")

* Investment portfolio management fees (e.g. the management expense ratio)

* Annual marketing and sales fees (e.g. 12b-1 fees for investment funds)

* Fund trading costs (e.g. portfolio trading and market impact costs indicated by portfolio turnover)

* Personal account custody fees, commissions, and advisory fees (e.g. annual percent of asset charges on account balances for advice and client services, which are in addition to portfolio management charges; Alternatively these charges could be the annualized percentage cost of transactions commissions paid directly to buy and sell securities.)

VeriPlan allows you to compare automatically the lifecycle investment costs of your current portfolio with investment costs that you believe are reasonable. In particular, VeriPlan allows you to compare full lifetime investment costs:

* that reflect the costs of your current portfolio, or

* that are based on the investment costs that you believe are reasonable to pay.

VeriPlan has automated the projection and analysis of investment costs across your lifecycle projections. As its default, VeriPlan automatically evaluates the investment cost entries that you provide for your individual asset holdings on the financial assets and property assets worksheets. You are not required to do anything beyond listing the cost characteristics of your portfolio, when you list your holdings. VeriPlan handles the rest automatically, unless you decide that your investment costs are too high and you make changes to your portfolio and update your holdings in VeriPlan. You should note that 95+% of investors pay grossly excessive investment costs and should reduce them ASAP.

VeriPlan will automatically maintain the characteristics of your current assets including expected asset class returns and volatility, expected after-tax yields, evolving tax basis, current investment cost-efficiency, etc. The investment cost-efficiency associated with your current asset portfolio will determine your portfolio's overall cost-efficiency throughout your lifetime projections. Unless you activate some of the controls provided on this investment costs worksheet, VeriPlan will assume that you will continue your current investment cost practices.

As its default assumption, VeriPlan instantly develops projections that assume you will continue to acquire assets throughout your lifetime using the same level of cost-efficiency or cost-inefficiency that is apparent from your current portfolio. The investment cost tools below also allow you to override this default cost-efficiency projection method and instead to develop projections that reflect investment costs that seem more reasonable to you.

Because investment costs and taxes diminish your actual returns, VeriPlan calculates your projected portfolio assets net of the costs and taxes you are expected to pay. Concerning your particular investment costs, VeriPlan measures the individual costs of the investments that you currently hold in your portfolio. You enter these investment costs when you list your assets on financial asset and property asset worksheets. For each of the asset classes, VeriPlan will automatically develop lifecycle projections that reduce your future gross returns by the cost characteristics of the holdings in your current portfolio. In effect, VeriPlan will assume that you will maintain and continue to acquire investments that are as cost- efficient or as cost-inefficient as the investments you own now.

However, VeriPlan's cost-inefficiency projections based on your current portfolio might induce you to make changes. If you decide to change your decisions regarding the investment costs that you are willing to pay, you will begin to purchase additional assets with lower costs and/or dispose of the higher cost assets that you hold currently. When you change your investment acquisition behavior, you should enter these new lower cost investments into VeriPlan and remove those with higher costs that you have sold. VeriPlan will automatically develop subsequent projections that reflect these revised costs.

For your cash, bond/fixed income, and stock/equity financial assets, VeriPlan will project the foregone value of the potential annual returns and cumulative assets that you are expected to lose to unnecessary investment costs over your lifetime. For these three major financial asset classes, VeriPlan will measure your potential lost annual returns and cumulative assets associated with five types of excessive investment costs. In each projection year, VeriPlan automatically reduces the real long-term percentage growth rates for each asset class in your tangible or retained financial asset portfolio by the annual percent of assets that you pay in investment costs on your portfolio each year.

VeriPlan's investment cost tools provide cost-efficiency information about your portfolio and allows you to set what you believe are reasonable maximum costs that you would be willing pay for particular types of investment services. By allowing you to develop projections with your reasonable cost settings, you can become a much more cost-conscious consumer of investment products and services.

VeriPlan then classifies, as cost-inefficiencies, any costs that are greater than your personal reasonable maximums. You can set these maximum costs in the section below, which is entitled: "Maximum investment costs that are reasonable to you." Using your maximum reasonable costs, VeriPlan will compare the cost characteristics of your current portfolio with your judgment of maximum reasonable costs. While VeriPlan will still develop projections based upon the cost characteristics of your current portfolio, it will classify any cost that exceed your reasonable maximums to be cost-inefficiencies.

To measure the assets that you would lose to excessive costs, VeriPlan will also calculate automatically the cumulative lost returns for these costs, including the returns that could have been earned on the foregone value of these lost assets. Lost annual returns and cumulative assets associated with your investment cost-inefficiencies are projected relative to what you believe are reasonable investment costs to pay. The higher you set your assumptions about reasonable investment costs to pay, then the lower VeriPlan's projected cost-inefficiencies will be. If you set your reasonable cost assumptions higher than those associated with your current investment portfolio, then VeriPlan will project no cost-inefficiencies associated with your future financial asset returns and portfolio.

These lost annual returns and lost cumulative financial assets are presented in several output graphics and on the corresponding output data worksheet. Once you have entered cost information about your portfolio and completed other necessary data entry into VeriPlan, then you can review these five cost-efficiency graphics and corresponding data tables to understand the relative cost-efficiency of your current investment practices.

A description of these graphics and data tables can be found on the graphics worksheet. Since these lost assets are projected to be gone, they are not reflected in the value of any of VeriPlan's other asset graphics or data worksheets, which project your tangible or retained cash, bond, and equity assets.) If you need information about sources to consult to obtain the necessary cost information about your assets, please refer to the section in this chapter entitled: "Where to find investment expense information about your financial assets."

You are not required to use the current cost structure of your portfolio to develop VeriPlan's centerline projections. As an alternative, VeriPlan can instead automatically develop centerline projections for you that are based upon your maximum reasonable costs rather than the cost characteristics of your current portfolio. You do this simply by setting the selector below. When you choose to use your reasonable costs to develop centerline projections, then all of VeriPlan's projection graphics and data worksheets will reflect your reasonable investment cost settings.

When you use your reasonable investment cost settings, and then view VeriPlan's cost-effectiveness graphics, you will find that they show only your projected returns and cumulative assets without any cost-inefficiencies. If your reasonable investment cost settings are lower than those of your current portfolio, then you will also see that your investment returns and cumulative portfolio values will be also higher on other VeriPlan graphics. This is because, VeriPlan has replaced the cost characteristics of your existing portfolio and is now using your reasonable investment cost assumptions in its core projection logic. This is instantly reversible, just by changing the cost selector below.

When VeriPlan uses your reasonable cost assumptions to develop your centerline projections, you should note that your total annual returns and cumulative assets would not be as high as were shown on VeriPlan's cost-inefficiency graphics, when you were using more cost-inefficient projection assumptions based on your current portfolio. Because VeriPlan will now project that you would hold on to those returns and assets that would have gotten away due to higher investment costs, then you would also be paying higher taxes on these greater assets. Your ordinary expenses will not change, but your asset-related taxes would increase, and this eliminates some of the projected gains.

VeriPlan allows you to set your personal reasonable investment cost maximums for each of the five kinds of investment costs described here. In addition, your cash, bond/fixed income, and stock/equity asset classes can each have different maximum cost settings for each of these five types of costs.

Legally mandated ten-year cost disclosures on investment fees both incompletely and barely measure the full lifetime impact of the investment fees and costs that are paid by an individual investor on his cash, fixed income, and equity assets. A minimum level of investment costs is necessary and unavoidable, but this minimum level is quite small compared to how much the average investor will pay in investment costs over a lifetime. Disclosures focus only the dollars paid for visible investment fees. Hidden investment costs are ignored, and the potential value to you of these assets lost year after year to excessive expenses is never clarified. Furthermore, investment costs related to sales loads disappear entirely. Sales loads cause assets to be erased from your portfolio without any trace at the outset. The potential that these lost sales load assets had to contribute to your portfolio and to grow over your lifecycle remains hidden.

VeriPlan's corrects the problems with limited disclosure, lost assets, and hidden costs by permitting you to compare costs associated with your current portfolio to your entries below regarding what you believe are reasonable investment costs to pay. This tool projects your portfolio's full lifecycle investment cost-inefficiencies, which are the opportunity cost to you of continuing to pay excessive fees. To illustrate this opportunity cost, VeriPlan projects the value of your annual investment cost-inefficiencies and what you could have been earned cumulatively, if you had kept, invested, and compounded these lost assets using a cost-efficient strategy. For most investors, their expected opportunity costs are huge, and they may be startled when they finally understand the projected magnitude of these controllable cost-inefficiencies over their lifecycle.

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Some of your maximum reasonable cost settings could relate to paying advisors, if you choose to use financial and investment advisors. Because advisor compensation is an important and complex topic, this worksheet has a separate section below in this chapter that you may wish to review, as you determine your maximum investment cost settings. See the below entitled: "Paying a good financial advisor for good advice." Also, you might read the numerous articles on this subject available at The Skilled Investor website.

 Find PAYMENT OF ADVISORS articles on _The Skilled Investor_ website

Finally, some people may believe that if they pay more for an investment, they will get more in the long-term. Paying more and getting more should always be the case with pencils, hamburgers, lumber, cars, beer, etc., where unit prices are known. However, investment securities prices are determined on real-time markets, and result from speculation about valuation. These values depend completely on unknowable future events. There is no scientific evidence that you will get more when you pay more to invest. In fact, the opposite has been proven to be true. For further information, see the section below entitled: "Pay less to get more." Also, read the numerous articles on this subject available at _The Skilled Investor_ website.

 Find INVESTMENT RETURN articles on _The Skilled Investor_ website

For your property and other assets, VeriPlan does not separately identify cost-inefficiencies. However, it does project asset values which reflect the investment returns and costs that you provide. Property and other assets are often subject to much less efficient markets and usually involve higher costs, when they are purchased and/or sold. VeriPlan assumes that you will hold your property and other assets throughout your projections. Depending upon the recurring investment costs that you enter on VeriPlan's property worksheet, VeriPlan projects returns and cumulative asset values that are net of the costs that you have entered.

Section 16.1: Enter maximum investment costs that are reasonable to you (optional)

Use this section to set the investment costs that you believe are reasonable to pay. You can set your reasonable investment cost assumptions by the type of cost and by financial asset class.

All investment costs could be considered investment cost-inefficiencies. You could drive out as many costs from your investment portfolio as possible, and there still would be minimal costs. Even the most cost-conscious investor must pay a small amount of investment costs -- but only a very small amount. Therefore, VeriPlan measures cost-inefficiencies on a relative rather than absolute basis.

VeriPlan allows you to set maximum acceptable investment cost levels and to decide what is and is not an investment cost-inefficiency. You can set investment cost levels in VeriPlan that you believe are reasonable to pay. Then, VeriPlan will automatically project, as cost-inefficiencies, only those costs that exceed the maximum reasonable cost levels that you are willing to pay.

In this section, VeriPlan comes configured with low % default reasonable investment cost settings. Actual costs for a very low-cost, passive, broad index investment strategy would be slightly more than zero % per year. You can change these cost settings to match your personal preferences. Suggested low-cost settings are noted just under the reasonable cost assumptions table below, so that you could restore them. Note also that VeriPlan will validate your entries and impose upper limits on user data entries that are well above the already high costs charged in the industry.

If you set your personally acceptable maximum costs at levels which are below your current portfolio's valuation weighted average costs for each type of cost and asset class, then VeriPlan will automatically calculate your incremental losses due to these excessive costs. VeriPlan will display your yearly and cumulative losses on its graphics and data worksheets.

If you choose any personal maximum asset class cost settings that exceed your current portfolio's valuation weighted average costs, then VeriPlan will simply project zero inefficiency for that type of investment cost for that asset class.

The higher you set your maximum reasonable investment costs in this section, the lower your projected cost-inefficiencies will be on those graphics and data worksheets. For information about why these graphics show such large cost-inefficiencies for most investors, see the discussion in Section 7, which is entitled: "Why do the investment cost-inefficiencies on these graphics seem so large to many VeriPlan users?"

VeriPlan's investment cost analysis features are designed to illustrate to you the full lifetime opportunity cost of your current portfolio's investment cost-inefficiencies. If you have entered the costs associated with your current portfolio on the financial assets worksheet, then all VeriPlan projections will automatically reflect the cost-inefficiencies of your current portfolio. The reasonable investment cost settings that you enter in this section of this tool will not affect VeriPlan's projections, unless you fail to enter any cost data related to your portfolio. In that event, VeriPlan will automatically use whatever costs are entered in the reasonable investment cost assumptions table below. Since the default values supplied with VeriPlan are very low, then at least your projections are using very minimal costs rather than zero costs.

In addition to developing projections that reflect either your historical investment costs or reasonable investment costs from this section, there is another way to affect how VeriPlan models investment costs for you. If you do indeed:

* adopt a more cost-efficient investment strategy in practice,

* sell more costly investments and replace them with less costly investments, and

* enter your revised asset holdings revisions on the financial assets worksheet.

Then, VeriPlan will automatically reduce your projected future costs to reflect the more cost-efficient structure of your modified portfolio holdings.

Entering the maximum investment cost assumptions that you believe are reasonable

You can test the impact of a wide variety of investment costs on your portfolio projections by setting acceptable investment costs below by type of cost and asset class. After entering below the maximum fees that you believe are reasonable to pay, you can review VeriPlan's efficiency and lost assets graphics to decide how much investment costs might eat into the long-term growth potential of your projected portfolio.

Use the bold border user data entry boxes below to enter of FEE, EXPENSE, AND SALES LOAD PERCENTAGES.

Non-recurring Investment Costs

Annually Recurring Investment Costs

VeriPlan's initial reasonable cost assumptions:

* Maximum Front-end Sales Load = 0% for each of the three financial asset classes

* Maximum Asset Management Fee = .30% for Cash; .20% for Bonds; .10% for Stocks

* Maximum Sales Fee = 0% for each of the three financial asset classes

* Maximum Portfolio Turnover = 30% for Bonds, 10% for Stocks

* Maximum Asset Custody, Commission, and Advisory Fees = .1% for Cash; .1% for Bonds; .1% for Stocks

Notes: Enter your Maximum Front-end Sales Load assumptions for purchases:

VeriPlan offers extensive functionality to estimate and project the financial impacts of both past and future sales load payments. Please refer to the section below entitled: "The returns you lose to excessive sales loads."

If you believe that it is reasonable to compensate your advisor though the payment of a front-end load charge, then enter the load percentages above in the respective asset classes that you think are reasonable. The front-end percentage load that you pay will reduce the amount that is invested on your behalf.

Note that there are several forms of load charges: front-end loads, back-end loads, and/or higher expense ratios. This tool measures front-end loads. The true cost of back-end loads are much more speculative due to asset value fluctuations. If you have chosen to pay a back-end load rather than a front-end load, you should nevertheless enter here the front-end end load charge that would have applied. From the investment bank's perspective, these front- and back-end loads are roughly equivalent. By using front-end loads, you can get a reasonable understanding of the long-term impact of paying loads on your investment portfolio.

Purchase loads have evolved over time to be one of the major forms of compensation for financial services personnel who work with individual investors. The financial services industry, including investment securities, financial advice and planning, insurance, etc., is a highly competitive industry that reaches out to individuals with assets. Its marketing programs and sales representatives try hard to induce people to purchase a wide variety of products and services. While the terms "advice," "counsel," "recommendation," "trust," "relationship," etc. are used constantly, the industry representatives that individual clients encounter are either: A) sales people, or B) independent industry professionals that have industry sales people who sell to them, as well. Individual clients are sold to directly by brokers or indirectly by financial advisors. Most people are unwilling to pay directly to be sold to. Therefore, the industry directly compensates all its brokers and most independent advisors to sell its products. Ultimately individuals are the source of this funding, but the money flows indirectly. First, the load is taken out of their initial investment. That load charge is routed through firms in the industry, and some but not all of it is paid to these brokers and advisors. The remainder is retained by these firms to cover their costs and to make a profit.

Many people purchase investments with loads, because they have been advised that loaded funds will outperform other funds. There is no support in the scientific finance literature for this assertion about superior returns. For more on this subject, read below the section entitled: "Pay less to get more." You are not expected to earn more if you pay a load. In fact, none of the money that you pay for loads is returned to the investment fund itself. So, even if paying more could possibly fund improved investment results, which is not supported in the scientific literature, loads simply are not spent to improve investment results. In fact, the dollar amount that you invest in a fund will be reduced exactly by the dollar amount of the load that you pay. Loads are solely to pay the person who is making the purchase recommendation and to pay his firm. If you believe that the advice you are getting from an advisor is valuable, then paying a load is simply an indirect alternative to you writing a check to your advisor for his services. If you pay loads, then this investment cost tool will provide a projection of the real dollar costs over your lifecycle of doing so. It measures both the cost of the initial loads and the cumulative lost future returns on the funds that you spend on loads rather than on additional investments. Finally, think of the word itself. Does a "load" pulled by an animal, speed up or slow down its progress? There is a reason that loads are called loads.

Notes: Enter your Annual Maximum Asset Management Fee assumptions

* Very low annual asset management fees for passive broad index investments can be found for each asset class. Average fees tend to be higher for cash assets, because of the higher transactional services associated with cash accounts. Also, be wary of situations where asset management fees appear low, but hidden costs eat away at gross asset returns -- in effect, the cash asset is not paying a full market return.

* When bonds are purchased individually and not held to maturity, it is very difficult for individual investors to obtain low fees. In effect, bonds are purchased by individual investors at retail prices and sold back to the industry at wholesale prices. Bond funds offer the most cost-effective means to acquire bonds, and lower cost funds tend to yield better net returns. More information on the subject is available at The Skilled Investor website.

 Find BOND EXPENSE articles on _The Skilled Investor_ website

Most publicly traded equities are available on highly efficient, real-time markets. Again, passively managed mutual funds and exchange traded funds offer the lowest costs to individual investors versus the self-assembly of a broadly diversified equity portfolio. More information on the subject is available at The Skilled Investor website.

 Find INVESTMENT EXPENSE CONTROL articles on _The Skilled Investor_ website

Notes: Enter your Annual Maximum Sales Fee assumptions

* In addition to or instead of load fees, certain funds charge an annual sales and marketing fee, usually known as a 12b-1 fee. If you believe that it is reasonable to pay such a fee, then enter it here. You can always avoid these fees by purchasing funds without them.

Notes: Enter your Annual Maximum Portfolio Turnover assumptions

* Investment funds incur portfolio transaction charges and sometimes their trading can adversely affect securities market prices, as they trade. The true costs to individual investors of such fund transactions are generally hidden. They are real costs that reduce fund returns, but they are not provided to investors. Instead, these costs are grouped with other funds and reported to the U.S. Securities and Exchange Commission in reports receiving little public visibility.

* While trading costs are not directly visible, a fund's level of portfolio turnover provides a rough approximation of the magnitude of these costs. There is not a one-to-one correlation between fund transactions costs and turnover rates, but there is no other easy way to estimate these costs short of very laborious research. Since these costs are real and diminish investor's assets, ignoring them is not a reasonable alternative.

On the financial assets worksheet, you supply the annual portfolio turnover rate for each of your bond and stock holdings. From these inputs VeriPlan derives a weighted average turnover rate for your portfolio. A study that looked at stock fund costs in detail, found that the average equity mutual fund had 106% annual turnover and .65% in annual hidden trading costs. VeriPlan uses the ratio .65%/106% and multiplies an equity asset's turnover rate times this ratio to derive an estimate of the hidden trading costs. You should note that there is no directly comparable study of bond market trading costs, but there are numerous studies which indicate that bond market trading is generally more costly than the equity market trading. For bonds, VeriPlan uses the same cost ratio as the equity markets, but scales this cost downward by multiplying it by the ratio of gross historical bond market to equity market returns. This may underestimate true bond market portfolio trading costs, but still it provides a useful, albeit imperfect, measure. More information on the subject is available at The Skilled Investor website.

 Find TRADING COST articles on _The Skilled Investor_ website

VeriPlan is configured initially with these Maximum Portfolio Turnover assumptions: 30% for Bonds, and 10% for Stocks. Typically, the turnover of passively managed equity index mutual funds is very low -- often in the single digit percentages. Bond turnover tends to be higher and is also influenced by the average duration or maturity of the bonds that a fund holds. Because cash assets tend to be much shorter duration, cash turnover rates are naturally very high, and turnover is less useful as a relative efficiency measure. Therefore, VeriPlan does not attempt to estimate trading cost-inefficiencies for cash assets.

Notes: Enter your Annual Maximum Asset Custody, Commission, and Advisory Fees assumptions

VeriPlan is configured initially with these maximum asset Custody, Commission, and Advisory Fee assumptions: .1% for Cash, .1% for Bonds, and .1% for Stocks. VeriPlan sets these cost maximums at .1%, because individual investors have the opportunity to purchase directly very low cost cash, bond, and stock investments from a wide variety of passively managed funds that do charge very little for transactions and custody of direct purchases. Any investor can call an 800 number and request an investment packet. Alternatively, they can download investment forms from the Internet, complete them, attach a check, and mail in their investment. They do not incur initial purchase loads. Usually direct purchasers only pay a very modest fixed dollar annual charge for custody services that is waived above modest dollar account value levels. With a bit of personal initiative this is the low cost route for individual investors. Individuals do not need to pay a percentage of their assets simply to purchase and own highly competitive, low cost investments.

Alternatively, many investors prefer to pay an annual percent of their assets to receive financial and investment advice and to obtain related services and assistance. If you choose to compensate your broker or advisor in this manner, then enter the maximum percentages of your cash, bond, and stock assets that you think are reasonable to pay for this advice and ongoing servicing. Also, you may wish to read the section below in this chapter entitled: "Paying a good advisor for good advice," when you decide on the level of fees that you believe are reasonable to pay.

Many investors pay asset holding, custody, or 'wrap account' fees which are usually charged as a percent of average asset value in the account. Usually these fees are justified by a set of services being provided, which may range from safe asset custody and administration to investment advice. These fees can be quite substantial particularly considering that they often are not associated with comprehensive financial planning services and may be only one of many other fees that are assessed against these investor assets.

For example, many investors have 'wrap-fee' agreements with brokerage firms in which they typically are charged .75% to 2.0% of total assets, whether or not they trade actively or whether or not they are receiving productive investment advice. With a substantial asset balance, these holding fee percentages may decline, but reduced fees are usually only available on balances of many hundreds of thousands of dollars or more. To move client assets from accounts with transactions charges to fee-based arrangements has been a major priority of the retail arms of investment banks over the past decade.

In past years of double-digit returns, such asset fee arrangements might not have seemed to matter very much, but times have changed. Unless significant broker attention and true advisory value-added is being received, one might question these payments. An equivalent to almost any investment that could be purchased through a wrap-fee account can be obtained far cheaper either through direct purchase or through a discount brokers charging on a transactional basis. While such fees should be a concern to any investor, they should be of particular concern to those investors holding proportionately more cash and fixed income assets.

Furthermore, investors need to be aware of multiple layers of costs potentially associated with these asset custody arrangements. If an investor pays an asset custody fee that buys advice, yet that advice directs him to purchase investments with sales loads and higher recurring asset management fees, then he subjects himself to triple costs at a minimum. If the underlying investment philosophy behind the advice is to try to 'beat-the-market,' then higher hidden asset management transactions costs could further erode investor returns. Also, the greater uncertainty about future outcomes with these active strategies would increase the risk that an investor would not achieve his long-term financial goals.

Notes: Your adjusted assumptions for expected gross real asset class returns (NO USER ENTRIES)

These gross return assumptions reflect VeriPlan's centerline asset class returns, which are discussed on the risk and returns worksheet. These gross returns also include any of the return adjustments that you may have made on the risk and returns worksheet.

The negative value-added of the financial services industry

The financial industry is a parasite on the assets of investors and overall it delivers a "negative value-added" with respect to its investment costs. On average, the more an investor pays, the less they keep in the long-term. The academic research literature clearly demonstrates that cost reduction is highly beneficial to investors. The investment research literature also demonstrates that individual investors have no reliable mechanisms to pick investments beforehand that will yield superior investment returns -- except lower costs.

Historical investment returns normalized for investment costs tell investors absolutely nothing of value in choosing one investments over another. On the other hand, choosing low-cost investments has been demonstrated to be a reliable means to achieve superior returns averaged across the investor population. Nevertheless, if you look at search engine statistics about the phrases that people are searching for related to investments, there is roughly a 100 to 1 ratio between search terms that are associated with superior historical returns compared to investment costs. Like sheep to slaughter, this will continue indefinitely unless individuals wake up and start taking steps to cut their investment costs to the bone.

You should not just ignore the situation, if the investment costs for your portfolio in VeriPlan are inaccurate. The recommended approach is simply to take the issue of investment costs seriously, do the research on your current portfolio, enter appropriate investment cost figures in your current assets profile, do the analysis, wake up, and take action. In addition, get rid of higher cost investments and substitute very low cost, very broadly diversified, completely passively managed index mutual funds and exchange-traded funds (ETFs). Then, enter these lower cost investment assets on the financial assets worksheet.

You should understand that 95+% of investors will have costs that substantially exceed the reasonable cost defaults supplied with VeriPlan in the table above. If you want to develop projections without bothering to enter the actual investment cost data for your current portfolio on the financial assets worksheet, you could use the table above to apply higher than minimum costs across your entire portfolio. (Conversely, if you do not want VeriPlan to apply even these minimal costs to your portfolio, then just set all assumptions in the table above to zero.)

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Section 16.2: Commit to a reasonable cost investment strategy (optional)

In this section you can make a choice as to whether VeriPlan will use:

* the investment costs of your existing portfolio, which are summarized below in this section, OR

* your reasonable investment cost settings from the section above to develop your centerline lifecycle projections and any variations upon them.

As a default, VeriPlan uses the current cost structure of your investment portfolio to develop your projections. However, if you wish you can use the selector below to have VeriPlan develop your centerline projections using your reasonable cost settings from above. When you set this selector to use your reasonable cost settings, then not just VeriPlan's investment cost-efficiency graphics will be affected, but all other graphics and data worksheets will reflect these reasonable cost settings.

Choosing between your current investment costs and your reasonable cost settings

You must enter a 1 (one) in the bold border entry box below to activate this tool. If you do not, any entries you have made for reasonable costs above in Section 3 will be ignored.

Notes:

If you set reasonable investment costs in the section above, which are higher than the weighted average costs derived from your current investment portfolio, then VeriPlan will use the lower of your actual or reasonable costs.

You can develop lifetime projections without making any entries on the financial assets worksheet. VeriPlan will automatically use the reasonable cost settings above for any asset class without asset entries. This will affect future financial assets invested from positive net cash flow. Once one or more assets has been entered for an asset class on the financial assets worksheet, then VeriPlan will automatically use the cost characteristics of those asset entries, unless you set the selector above to a "1".

CAUTION: If you set the selector above to have VeriPlan develop projections using your reasonable, and presumably lower, cost settings in the section above, then the recurring investment costs associated with your actual portfolio would still be higher than the costs that VeriPlan would project for you. If you choose to focus on financial projections with more reasonable and lower costs, then you would, of course, also need to take steps to lower the actual investment costs of the financial assets in the investment portfolio that you own in the future.

Investment cost and return assumptions for your current projection

Weighted average investment costs (%) calculated from EITHER: "Current Portfolio Costs" OR "Reasonable Investment Costs" (Numbers displayed in this table will depend upon your choice of current or reasonable investment costs above.)

Section 16.3: Project returns lost to excessive sales loads (optional)

Sales loads and other 12b-1 fees just pay financial advisors to recommend more expensive mutual funds and ETFs

Our friendly donkey asks, "Do you think this makes me faster? Why do you think they call it a load anyway?"

Investment sales loads compensate industry representatives to sell investments. Despite claims that loaded investments are "good" or "better," sales loads have no impact on the gross investment performance of the underlying investment. Before costs, loaded and unloaded investment returns are the same. However, after you pay a load, you own less of the investment asset. Why do you think, these fees are called "loads?"

If you really think that financial advisors can pick better funds for you, you need to read "Assessing the costs and benefits of brokers in the mutual fund industry" by Professors Bergstresser, Chalmers, and Tufano. In their conclusion, they state that: "We begin with a positive hypothesis: the prominence of funds sold through brokers implies that brokers provide consumers with valued services. Our study has identified few, if any, of these benefits."

Find "Assessing the costs and benefits of brokers in the mutual fund industry"

Sales load charges on investment purchases differ from the financial service industry's numerous other recurring methods for charging retail consumers. Therefore, VeriPlan projects opportunity costs related to sales load cost- inefficiencies differently than for your other excessive investment expenses.

The lifetime impacts of other recurring investment expenses can be projected with relatively straightforward methods. Recurring fees, such as asset management fees, 12b-1 marketing fees, and advisory/asset custody fees, are charged periodically, as a percent of an investor's assets. The current value of your portfolio reflects the impact of the cost-inefficiencies associated with your past investment practices. If these recurring investment costs are excessive, then it is likely that the growth of your portfolio will be stunted.

Consider first how recurring investment costs impact your portfolio of retained assets. The relative cost-efficiency of your past investment strategy, greatly influences whether you have more or fewer assets. The financial assets that you retain in your portfolio are net of any sales load charges and any annually recurring investment costs that you have already paid. In effect the value of your current portfolio reflects the cost-efficiency of your past investment practices. VeriPlan focuses on the cost-efficiency or cost-inefficiency of your future investment cost practices, because you can do something about investment costs going forward.

It seems odd to need to state this, but your currently retained assets are YOUR assets. Nevertheless, through multiple types of charges, the financial services industry will assess various percentages for their services against YOUR retained portfolio assets each and every year, if you permit them to do so. Whether the value of your assets increases or declines in the securities markets has little influence on these fee arrangements. By billing as a percent of your assets, the industry gets paid as long as you still have assets.

The simple fact that you have retained assets creates the opportunity to assess investment fees year after year. As long as the industry's annual fees are less than 100% of your assets, it is at least possible for you to retain some assets until the following year. Obviously, any rational investor would rebel at such confiscatory charges. However, the average investor typically pays in total between 2% and 3% of his portfolio assets in total investment expenses each and every year. Because total investment fees charged across the industry keep growing, it seems that the average investor pays these recurring fees willingly, if not either naively or grudgingly.

Typical recurring annual investment fees are less than average historical returns, so the industry takes "just" a portion of your returns. Nevertheless, paying 2% to 3% of portfolio assets yearly for total recurring investment expenses will expenses will consume a very substantial part of gross market returns. Net market returns after 2% to 3% expenses still would allow the average investor's portfolio to appreciate modestly. In effect, the industry's recurring investment charges allow individual investors' net portfolio values to appreciate modestly. On average, net returns are trimmed significantly without fatally wounding these golden geese.

VeriPlan uses front-end load percentages to develop your cost-effectiveness projections

Sales loads appear in many guises, including front-end loads, back-end loads, and/or higher annual fees. VeriPlan uses front-end loads to model and project the lifecycle impact of load charges.

Sales loads are less straightforward to analyze for investment cost-effectiveness. Unlikely recurring charges against current assets, sales loads represent assets that do not get into your investment portfolio in the first place. They disappear before the process of taxing future investment returns can even begin.

To simplify sales load cost analysis, VeriPlan uses only front-end loads to develop its cost-efficiency projections. Brokerage firms understand well the behaviors of their individual investor customers. While brokerage firms provide apparent choices to pay front-end versus back-end loads with higher and lower annual investment fees, you can expect that the pricing of these alternatives probably will be neutral on a risk-adjusted basis. It is likely that brokerage firms price their loads to be roughly equivalent on an expected profits basis.

Therefore, VeriPlan assumes that A, B, and C share class load charges are priced on a reasonably equivalent risk- adjusted basis, given average retail investor holding periods, historical asset appreciation, volatility, and other factors. Even though VeriPlan focuses solely on front-end load charges for reasons of simplicity in modeling, investors who have selected another type of load charge will still find that VeriPlan's sales load cost projections are useful. If you committed to pay a load other than a front-end load, you should still enter what the front-end load percentage would have been among the choices that were given to you on VeriPlan's 'Your Assets' worksheets.

Concerning the mechanics of a front-end sales load, when you pay a front-end load, some of your total payment is deducted at the beginning of the investment process. Depending upon the percentage of the front-end load charged, the amount invested on your behalf is reduced by the load charge. If you write a check for $1,000 and the front-end load is 6%, then the sales load will be $60 and the remaining $940 would be invested for you. If you want to have $1,000 actually be invested with a 6% load charge, then you must write a check for $1063.98. The front-end load formula used is: "Total $ Investment & Load charge" = "Actual $ Investment" / (1 ? "% Load").

Note: If you do not select lower reasonable investment costs in Section 4 above, VeriPlan will automatically assess the weighted average sales load percentages that you have paid in the past against some of your projected new asset purchases. These sale loads will be assessed on new bond and stock investments in years in which you are projected to have positive cash flow. Loads will not be assessed on your new investments in cash assets, although (outrageously) some investors pay sales loads on cash investments via financial intermediaries. Investors certainly pay sales loads on cash, when they invest in supposed bond and stock funds that hold large cash positions!

Additionally, VeriPlan does not assess purchase related sales loads on reinvested asset returns. Years ago the financial industry had the audacity to assess sales loads on reinvested asset returns, but it stopped that practice. Instead, it now has the audacity to jack up the annual management fees with embedded 12b-1 fees that get paid to financial advisor sales intermediaries. If you think that these 12b-1 fees, which are just converted front-end sales loads, are not a problem, then consider this statistic. In the ten years following the turn of the century, US mutual funds investors have paid over $100 Billion in 12-1 fees. That is B for billion, or one-tenth of a trillion dollars! Do you think that these fees might be a drag on investors' net returns? Why do you think they are trying not call them "loads" anymore?

Sales loads create 'phantom' assets and lost returns that VeriPlan will track for you automatically

Front-end sales loads cause assets to disappear at the outset and to be forgotten about in subsequent performance evaluations. VeriPlan does not forget about loads. Instead, it automatically projects the lifecycle value of the assets and returns lost through paying loads.

Many justifications for loads might be offered during the sales process, but once a front-end load is charged, your diminished portfolio will 'forget' about the load charge for the rest of your life. Loads become 'phantom' assets, which are rarely spoken of or measured subsequently, even though you may remember that you paid them in the past. The future performance of your reduced investment portfolio may be benchmarked against some index, but the load charges that you paid would no longer be a part of this evaluation. VeriPlan will not forget about the loads you have paid and will pay and the phantom lost assets related to these load charges. (Note that in effect, back-end loads also create similar phantom assets. With a 2% back-end load, for example, the charge will remain visible while you retain a particular holding and then will slip away, when the asset is sold.)

To illustrate the possible opportunity costs of paying loads, VeriPlan projects the annual value of returns lost to sales load cost-inefficiencies, which exceed sales load charges that you consider to be reasonable. It automatically calculates what you could have been earned cumulatively, if instead you had kept, invested, and compounded these sales load charges using a more cost-efficient strategy.

Concerning how it projects cost-inefficiencies related to sales loads, VeriPlan automatically tracks and projects load costs associated with: a) any reinvested capital gains distributions that you may receive related to the individual investments already in your current portfolio and b) any future assets that you may acquire when you have positive annual cash flow. To accomplish this VeriPlan tracks and accumulates a phantom asset for your investment load payments across your lifecycle. This phantom sales load asset is modeled like other investment cost-inefficiency assets in VeriPlan.

For capital gains distributions related to your asset holdings, VeriPlan automatically charges the same load percentage that you paid to acquire that asset in the past. For VeriPlan new asset purchases, it assesses load charges for each asset class. VeriPlan calculates the weighted average load that you paid in the past for all holdings within each of your cash, fixed income, and equity financial assets classes. Then, VeriPlan uses this figure to project future load charges.

Paying a sales load may be the method you prefer to compensate you broker or advisor

Sales loads are one of the ways you might choose to compensate an advisor, and the industry will tell you that this is why you pay loads. If you want to compensate your advisor through sales loads, VeriPlan can help you to understand the full lifetime cost to you.

As discussed elsewhere on this worksheet, a sales load might be the method that you prefer to compensate your broker or advisor. If the sales load charged is reasonable for the services delivered, then you may consider this to be a convenient compensation method. A key question is whether the investment sales load charges that you pay are reasonable within the context of your lifecycle financial affairs. You may wish to have a better understanding of the lifecycle cost of sales loads so that you can assess whether the cost is commensurate with the value of the advice that you receive. VeriPlan helps you to assess the financial lifecycle costs of the loads that you intend to pay in the future based upon your history of having paid investment sales loads in the past and your settings for reasonable sales loads above on this worksheet. That is why VeriPlan collects information on its financial assets worksheets about the tax basis of each of your holdings and any sales load percentages associated with acquiring each holding in your current portfolio. The other reason VeriPlan collects tax basis information is to track the future tax shield that would be provided by the tax basis of your current portfolio.

If you are not concerned about the lifecycle costs of sales loads and you intend to continue to pay them when you acquire more assets in the future, then VeriPlan can easily accommodate your wishes. In the reasonable cost assumption table above on this worksheet, simply set the cash, bond/fixed income, and/or stock/equity load percentages at a level that is higher than the average asset class loads that you have paid historically. VeriPlan would then project zero sales load related cost-inefficiencies for your portfolio.

Further down in this section, VeriPlan lists the weighted averages by asset class of the sales load percentages that you have paid to acquire your current portfolio. VeriPlan automatically checks to see whether the percentages that you consider reasonable exceed the actual expenses associated with your current portfolio. If they do, it simply projects zero cost-inefficiency for an asset class. Therefore, you could enter any sales load percentage above in the reasonable costs section that is greater than your historical average up to 100%, and VeriPlan will not project any cost-inefficiency for that asset class.

Average sales load percentages that you have paid for past purchases and might pay on future purchases

This section lists the sales load percentages, by asset class, that VeriPlan is using currently to develop your projections. VeriPlan will project lifetime investment costs to you related to sales loads that you have paid in the past, and might pay in the future.

VeriPlan presents information about both your past and future sales load costs, because both are important to understand. However, sales loads that you have paid in the past represent phantom assets that are entirely gone from your portfolio, which you cannot retrieve. Regarding sales loads that you may pay in the future, you can control these potential costs.

Sales load charges are encountered frequently with fixed income and equity investments. When you purchase a load-bearing investment, these sales loads compensate your broker or advisor and his firm. Sales loads on money market funds are relatively rare, but they actually do exist. Therefore, for consistency, VeriPlan collects information from you about that sales load percentages that you have paid on each of your portfolio holdings across all your asset classes.

Unless you instruct VeriPlan to use your reasonable cost assumptions above, then VeriPlan will assume that you will continue to pay sales loads on your future investment purchases at the rate you have in the past. The following boxes show the average sales load percentages that you have paid in the past weighted within each of your financial asset classes. In calculating these sales load percentages, VeriPlan weights its calculations by the current value of individual asset in that asset class, whether or not a sales load was actually paid to acquire that asset. Current accounts with zero loads paid will reduce the weighted average of an asset class.

Actual valuation weighted average sales load percentages for your financial asset classes:

The maximum sales loads from Section 3 that you consider are reasonable to pay:

Excessive sales load percentages that you have paid in the past:

If your reasonable maximum equals or exceeds your actual average sales loads, the percentage above will be zero.

The shadow of sales loads that you have paid in the past

VeriPlan does not forget about sales loads that you have paid in the past. VeriPlan uses your current portfolio's tax basis, load percentages paid, and turnover frequency to estimate the value of the sales loads that you have paid in the past. This section also lists the current total tax basis for each of your financial asset classes.

In addition to sales load charges on future purchases and distributions, what about potential future lost returns on the past sales loads charges that never made it into your portfolio originally, when you purchased the assets that you have now? If it is possible to quantify these lost assets? If so, would it be proper to do so? VeriPlan believes that lost load-related assets can and should be measured as a potential cost-inefficiency. These original sales loads charges effectively were 100% charges on the assets, which were not accompany the original investment. Of course, the current value of your portfolio will have been diminished by the original load that was taken and then continuously reduced by returns lost on these phantom assets up to the present.

What about future returns on these assets lost to past sales load payments? Should we ignore them entirely? Recurring industry fees require an asset base against which to assess those charges, but those assets are permitted to grow if these fees do not exceed the market return. Sales load consume original asset principal and never allow a future return. With a load the asset is simply gone. With a recurring charge, the asset remains, but its growth is stunted. If both phantom assets and current portfolio assets were retained, both could grow at the same market rate less cost inefficiencies. We can still project the gross and net growth of current portfolio assets. We should be able to do the same with these phantom assets lost to past sales load charges.

VeriPlan can measure and project automatically an approximate value for the phantom sales load assets lost to your portfolio. If visible cost-inefficiency patterns can be projected to continue into the future, then so can a pattern of past inefficiency with respect to sales loads. An inefficiently managed investment portfolio was diminished and will continue to be diminished in the future by both visible costs and load charges that slipped off the radar screen.

If a reasonable estimation method is available, it would be appropriate to project the future lifetime returns that you have lost to excessive sales load charges that you may have paid in the past. VeriPlan provides such an estimation method, which relies upon the tax basis information that you supply on the financial assets worksheet.

Note that you cannot recapture any of these future lost returns associated with any excessive load payments that you made in the past, because these assets were removed from your portfolio when you made the purchase. They have become 'phantom' assets and are long gone. When VeriPlan projects the future opportunity cost of your lost returns on excessive loads that you have paid in the past, there is no action that you could take to retrieve these lost returns or lost assets. However, you might make different decisions about sales loads in the future. If you understand more clearly, the lifecycle opportunity costs of having paid sales loads that you believe were excessive, you might make more optimal decisions going forward.

Using the tax basis of your current investments, VeriPlan develops a lower bound estimate of your past sales load payments. Once it has estimated the value of your lost sales load payment assets, then VeriPlan can project the future annual returns that you might have earned on these lost assets with a more cost-efficient strategy.

For each of the assets that you enter on VeriPlan's financial assets worksheet, you are asked to supply a current estimate of your total tax basis. The tax basis of your assets should include your original capital contribution plus any loads that you paid to acquire each asset that you currently hold. Furthermore, your total tax basis for each assets might have increased over time to reflect any new investments and reinvested distributions. If you paid loads on these new investments and reinvested distributions, then your current tax basis should also include these subsequent sales load payments.

"Gee," you say, "I have not been tracking my sales loads and other investment expenses as part of my investment asset tax basis." Well, you should be. Particularly, if you pay loads regularly, trade more frequently, and have more substantial assets, these expenses can mount up. Since many investment expenses, such as sales loads on purchases, are not currently deductible, they must be added to your tax basis. Eventually, such investment expenses can reduce your tax bill. If you do not maintain accurate current records, then you are more likely to overlook these expenses with the passage of time and disposal of records. (See IRS Publication 550, "Investment Income and Expenses" for more information.) Nevertheless, even if you have not keep good records on investment expenses, if you enter the cash amount that you invested and the front-end load percentage paid, VeriPlan will still develop a reasonable, albeit, slightly lower estimate of the sales loads you may have paid in the past.

These are the overall tax basis totals for each of your financial asset classes:

How VeriPlan estimates the cost of excessive sales loads that you have paid in the past

To develop its cost-efficiency projections related to your past sales load payments, VeriPlan:

* separates assets within each of your asset classes into two groups: 1) assets held in taxable accounts plus Roth 'tax-now-not-later' accounts and 2) assets held in traditional 'tax-deferred' accounts. (This is necessary, because the information in the tax basis tends to differs between these two groups.)

* calculates your total tax basis within the two groups above for each asset class (Elsewhere, this user manual explains how VeriPlan adjusts the tax basis in your traditional 'tax-deferred' accounts.);

* within each of these two groups in each asset class, it multiplies your tax basis for that group by the weighted average sales load percentage for that group;

* projects the annual lost returns that you might have earned with a more reasonable cost investment strategy, using the combined estimates of assets lost to excessive past sales loads within each financial asset class.

When VeriPlan develops these projections, it compares your entries in the section above, regarding reasonable load charges to pay to the weighted average load charges that you did pay. If you set reasonable sales load percentages for any asset class, which are equal to or greater than your weighted average of sales loads you have paid in the past, then VeriPlan will project no cost-inefficiencies.

Note also that there is a mild complication in using your reported tax basis to develop estimates of your past excessive load payments. However, VeriPlan automatically manages this complication behind the scenes, so this does not require any action on your part. The information contained in the tax basis for your taxable accounts and Roth 'tax-now-not-later' accounts differs from the information contained in the tax basis for your traditional tax-deferred accounts. Therefore, VeriPlan estimates the past sales loads you have paid on your taxable accounts and Roth 'tax-now-not-later' accounts separately and differently from your traditional tax-deferred accounts. The next two paragraphs explain how VeriPlan manages these differences.

For both your taxable accounts and Roth 'tax-now-not-later' accounts, extracting your tax basis is straightforward and follows the standard methods described in this section. However, for assets in your traditional tax-deferred accounts, an additional adjustment is required. The total tax basis in your tax-deferred accounts would tend to be substantially lower due to the tax shield provided in these accounts. This means that sales load payments would be a much larger portion of your tax basis, than the sales load percentages that you report for these accounts would imply.

Therefore, for each financial asset class, VeriPlan estimates an adjusted tax basis for your tax-deferred accounts without the tax shield provided by 'tax-deferral'. For your tax-deferred accounts, VeriPlan assumes that the ratio of the adjusted tax basis to total asset value would be the same as the ratio of the unadjusted tax basis to total asset value in your taxable accounts. Then, VeriPlan multiplies this adjusted tax basis by the weighted average sales load percentage that you report for your tax-deferred accounts in that asset class. Obviously, this adjustment method might increase inaccuracy. Nevertheless, it has the virtue of being fully automated, and again its purpose is solely illustrative. These calculations affect no other part of VeriPlan. Also, there is nothing that you can do to change the fact that past excessive sales load payments are gone forever, except to decide what to do about sales loads on future purchases.

Repeated sales load charges due to turnover of your financial asset portfolio

You may have paid multiple sales loads on the same assets when bought and sold them in the past. In this section, you should indicate the number of times that you have paid a sales load, when you turned over your current portfolio.

VeriPlan's method of estimating your past sales load charges, described above, assumes implicitly that you paid a sales load only one time, when you bought an asset. Thereafter, you simply held that asset in your portfolio. If instead, if you have bought and sold assets and have paid repeated sales load charges, then your historical sales load costs would be higher. If your financial asset portfolio has turned over and has involved multiple sales load payments, then by asset class over the life of your portfolio, you should enter your estimates of these turnover factors in the bold border user data boxes below.

How many times have you paid sales loads, within these groups and asset classes?

If you estimate that you have paid loads 2 and 1/2 half times across all your load bearing assets within an asset class group, then you should enter 2.5 for that group. At a minimum, this turnover factor would be a 1 (one) for all those assets in your portfolio that have involved a purchase load. (Assets without loads should simply be ignored, when you make your turnover estimates. VeriPlan automatically excludes them.)

Even if you agreed to some other form of load charge, such as a back-end load, when you agreed to purchase your investments that involved loads, just assume that you paid a load at the front-end when you make your turnover load-bearing turnover estimates above.

Given your entries on the financial assets worksheet about sales load percentages paid and about the tax basis of your assets, plus your turnover estimates above, these are VeriPlan's estimates by asset class of the total sales loads that you have paid in the past.

Your estimated excessive sales load payments in the past by financial asset class

Section 16.4: Where to find investment expense information about your financial assets

When you list each of your current assets on the 'Your Profile' worksheets, you tell VeriPlan about the investment costs that you have paid. This section discusses how you can collect cost information about your current investments.

There may be multiple sources to find information about the five investment costs that this investment cost tool measures. When you find these investment costs for your particular holdings, you should enter them on the financial assets worksheet. You should also enter similar investment costs for your property and other assets on the property assets worksheet. However, if an asset is not traded on an exchange or valued based on exchange-traded assets, you will only be able to obtain cost information from the providers. Also note that VeriPlan does not collect data for all five costs are collected for each type of asset. For example, Cash asset turnover is not a useful indicator for costs, therefore is not collected by VeriPlan. See the data input columns and notes on the various input worksheets for your assets to understand the differences.

Every investment, whether publicly or privately traded, should have a Prospectus and other disclosure materials that may include information on:

* initial costs to purchase/loads:

* annual investment management fees,

* annual sales charges, and

* account holding, transactions, and advisory fees.

These materials may include information on portfolio turnover, as well. Because these are legally mandated documents, they can be your best source of cost information, but you sometimes need to dig through the small print.

For virtually all investments, you would have purchased them through some type of broker or advisor. This broker should be able to provide accurate information about your investment costs. The written statements of your full-service or discount broker may provide some of this investment cost information.

For publicly traded investments -- those that trade on the various public exchanges -- you may have other additional web-based sources to gather investment cost information.

Morningstar is a leading source of reasonably detailed information on many publicly traded investments -- particularly regarding investment funds such as mutual funds, exchange traded funds, annuities, separate accounts, etc. While Morningstar charges various subscription fees for certain services, the Morningstar.com website offers a significant amount of information that does not require a subscription fee. Because websites often change, it is not possible to list specific Internet links that will remain usable over time. Instead, if you wish to use Morningstar.com, simply go there and select first the category of investment that you are researching. Next, either choose one of the many screening tools that are offered or and use the website's search facilities. (Note that I have no relationship with Morningstar.com and receive no compensation from them.)

Find a current link to the Morningstar website

If you use Morningstar.com, you may find that the site is a source of much potentially useful information. However, Morningstar also offers some aggregated and simplified information that you should understand better before using. In particular, Morningstar's five-star Ratings have become ubiquitous in the industry. The stars seem to have influenced heavily both individual investors and how the industry sells to them. For additional information, The Skilled Investor website has published numerous articles about Morningstar. These articles summarize published research which indicates that the Morningstar Rating system is of quite questionable value in making investment selection decisions.

 Find MORNINGSTAR RATING articles on _The Skilled Investor_ website

Costs of company profit sharing, ESOP, 401k, stock bonus, or money purchase pension plans

Finding information about the costs of employer-sponsored defined contribution plans is difficult, because for years weak regulations have allowed the financial industry to obscure these costs and gouge millions of retirement plan participants. This has made it difficult for both employers and plan participants to understand the true costs of these retirement plans. Particularly at smaller companies where fewer people are paying attention, some of these retirement savings plans carry simply outrageous visible and hidden fees. With new US Department of Labor regulations requiring fee disclosures, we will soon have a much better understanding of these fees starting in 2012. For information on these new regulations, see:

 US Department of Labor Fact Sheet: Final Rule to Improve Transparency

 of Fees and Expenses to Workers in 401(k)-Type Retirement Plans

If you have investments in a company profit sharing, ESOP, 401k, stock bonus, or money purchase pension plan that has over 100 employees enrolled, you may be able to find information online about the expenses of your plan. These profit sharing, ESOP, 401k, stock bonus, or money purchase pension plans must file a Form 5500 with the Department of Labor. A firm named Brightscope.com has put this form 5500 information online. Brightscope.com says that their database contains over 55,000 plans and covers over 90% of total invested assets in company sponsored 401(k) retirement plans.

To find out about the plan expenses of any company in the brightscope.com database, you must register with brightscope.com by giving your name, an email address, and a password, and then you must confirm an automated email that is sent to your email account. Registration is free and you do not need to be affiliated with any company. You can look up any company, as if for example, you were a job seeker and wanted to understand about any company's plan investment cost efficiency. However, make sure that you look up the company that is most important to you first, because you are limited to five free fee reports.

After you have logged into your brightscope.com account, search for a particular company by name. On the company overview page, select the "Brightscope Rating" tab near the top. Look for the little pie chart, followed by a link entitled "<Name of Company> Personal Fee Report" and click the link. In the "Your Fees" click "Select Investments" and add some particular investments and investment dollar amounts, and then click the "Submit Investments" tab at the bottom. Finally, click the link named "View Detailed Calculations" for a breakout of all the expenses.

Find a link to Brightscope.com

Section 16.5: Paying less to get more

The paradox of investing is that trying harder tends not to pay off, because it costs too much to try to beat the market. The expected gross returns of active and passive investors are the same, but the passive investor's net, after-cost returns are superior. Trying harder means spending more money and more time without a rational expectation of a positive payoff. The scientific investment literature indicates that opposite is true. The scientific evidence demonstrates that passive, low cost investors obtain better net results, largely because their costs are lower. Our relatively efficient, real time securities markets are funded primarily by the high costs paid by a seemingly endless supply of active investors. Cost minimizing passive investors are economic "free riders" who benefit from the much higher costs of all these active investors. Furthermore, passive investors experience lower volatility or risk, because their results tend to cluster in a much narrower band around the market return.

Many individual investors hope that, if they pay higher investment fees, they will get higher investment returns. Unfortunately, for the average investor the opposite tends to be true -- particularly after investment costs and taxes are taken into account.

Over the long-term, very broadly diversified, passive investment strategies tend to yield gross portfolio returns equaling the gross return of the broad securities markets. In addition, if these strategies are also highly cost-effective and tax- conscious, then net long-term portfolio returns will only be slightly lower than gross market returns due to the minimal costs and taxes associated with passive market index strategies.

VeriPlan projects the lifetime value of cutting your investment expenses to the bone

In contrast, the scientific investment literature has repeatedly demonstrated that active investment strategies most often lead to inferior rather than superior net risk-adjusted returns. The main reasons are fourfold.

First, the securities industry offers products to make a profit. If you are willing to pay more because you think superior past performance will persist, the industry is willing to accept your money. Since a very large part of the investing public naively chases historical performance, the industry has mastered this game. If they make more in fees now, they are happy. If past performance does not persist, they have no skin in your game. However, they always have another batch of funds, some of which happened to do better in the past. Would you like to try one of them now with your diminished assets?

Second, actively managed investment strategies require high cost professionals to develop and high trading costs to execute. The more you try to win the more it costs.

Third, the industry incurs very significant sales and marketing costs to convince investors to take a chance and commit their money. If you become a customer, you get the privilege of paying to been sold to, when you pay initial sales loads charges and annual sales fees.

Fourth, by targeting subsets of the overall securities market, on average active strategies will incur additional investment risks without additional compensation. The scientific investment literature has shown that markets pay risk premiums over the long-term, but they tend not to provide risk compensation for betting on subsets of available securities. In effect, active strategies take more risk without increased risk compensation compared to fully diversified passive investment strategies. In the short-term, some investors will be lucky, but others will not. Over the long-term, however, good and bad luck tends to even out, and active investors tend to fall behind not. Over the long-term, costs and taxes. Meanwhile, they take a bumpier road in terms of portfolio price volatility or risk.

Incidentally, a very short, clearly-written, and excellent paper on active management written by William F. Sharpe is available. Its title is "The Arithmetic of Active Management." Dr. Sharpe is a Stanford University Professor Emeritus and co-recipient of the Nobel Prize in Economic Sciences (1990). His article was published in 1991 in The Financial Analysts' Journal (Vol. 47, No. 1, January/February 1991. pp. 7-9). Professor Sharpe convincingly argues that in any period mathematically the performance of the average actively-managed fund must trail the performance of the average passively-managed fund by the average difference in fund management costs. In January 2011, this article was available on Professor Sharpe's website.

 Find Professor Sharpe's website

Find the "The Arithmetic of Active Management"

The scientific investment literature provides pitifully little encouragement that individual investors can:

* predict the future course of markets and individual securities prices

* select a securities portfolio that will beat the market consistently, and/or

* identify and hire investment managers who will deliver superior performance net of their added costs.

While there is very substantial variation in the returns achieved by one individual investor or professional investment manager, when compared to another, failure or success is overwhelmingly due to luck rather than skill. Risk-adjusted securities market prices resulting from real-time competition among armies of high and low skill investors tends to make everyone mediocre over the long-term.

Luck dominates, when informed investors on both sides set market prices that continuously balance supply and demand and rapidly adjust as new positive and negative information becomes known. Sustained securities selection prowess is very, very scarce, and certainly it is not available for individual investors to hire at a reasonable price that leaves them a net profit.

Superior and sustained skill-based performance net of costs and taxes has been too elusive to find after hundreds of scientifically constructed securities market studies. While lucky past winners may tout their historical prowess, the scientific investment literature has repeatedly demonstrated that better past performance simply is not a predictor of future performance. The small print of the legally required, "protect-your-behind" securities disclosures is actually correct.

All the securities industry's promotional "We're Been Better Historically Than the Other Guy" marketing messages just draw your attention toward meaningless superior historical performance charts or stars that are predominantly accidental. Surprising to most investors, it turns out that only the very worst of past performance tends to be a very slight indicator of future performance. Relatively poor past investment performance slightly predicts relatively poor future investment performance. Again, excessive costs seem to be the main culprit associated with past poor performance leading to poor future performance.

The average active individual investor is clearly less knowledgeable and skilled than the average active professional investor. The scientific investment literature indicates that, on their own, the average active individual investor who self-assembles a portfolio composed of individually purchased stocks and bonds will continue to make systematic errors, which will cause him to trail the performance of the average professional manager. In doing somewhat better, it is likely that professionals do better partly at the expense of amateurs.

For example, individual investors tend to sell their winners quickly and hold on to their losers practically forever, and most professionals know to do just the opposite. Since very slight price trend persistence has been detected in securities some prices over time, professionals have tended to capture more value through this practice, and individuals have captured less. Nevertheless, scientific studies have not shown that professionals or amateurs can pick securities in the first place that will eventually demonstrate this price trend persistence. Professionals just seem to do a better job of harvesting returns from the winners that they have been lucky enough to pick.

The logical conclusion might seem that, as portfolio managers, individual investors should relegate themselves to the sidelines and hire active professionals to play for them. There is strong scientific evidence that the average investor does a very poor job of managing his personal portfolio of individual securities. In the process, he fails to adequately diversify and his returns badly trail a passive index fund strategy. Almost all individual investors should fire themselves as portfolio managers and buy funds instead.

To achieve diversification economically, individual investors are almost compelled to buy mutual funds and exchange traded funds. In doing so they must hire professionals. Nevertheless, individual investors still do not have to buy the higher cost actively managed funds, when numerous and much lower cost passively-managed funds are available.

The scientific investment literature has also shown that efforts to identify active managers who will consistently beat the market have been futile. Counting the number of years a fund manager has been with a fund, judging where she went to school, estimating the number of gray hairs on his balding head, or other such factors have not distinguished which active manager will do better or worse in the future.

While active professionals generally do better than amateurs overall, their added costs far exceed their value-added. Individual investors face a simple cost-benefit dilemma. The average actively managed professional fund prices its services well above its value-added in terms of increased returns. Since there is no reliable means to detect beforehand which professional or fund will actually deliver superior performance, the average individual investor inevitably will pay more and get less.

The only way escape this dilemma is to avoid playing this beat-the-markets game entirely. Instead, the more reliable, albeit still risky, road to higher expected long-term risk-adjusted returns involves targeting a passive market return, while aggressively driving down investment costs and avoiding unnecessary investment taxes. Relatively efficient securities markets allow passive market index investors to take a free ride on the higher costs paid by active investors.

Active investors pay the significant costs of making securities market prices relatively efficient and the market's return awfully hard to beat. Passive investors ride to the same destination, but their lower priced tickets mean that they are more likely to have fatter wallets at the end of the journey. Chance will still be a significant factor. However, the range of variation in success or failure for the investors who targeted a passive, index return will tends to be much narrower than those who paid a lot extra again and again to keep swinging for the fences.

Section 16.6: Where to direct the recurring gift of your excessive investment costs?

Excessive investment costs are very real, and they represent both current inefficiencies and future lost returns on 'phantom' asset that you no longer own. In effect, excessive investment costs are a gift that you give without a corresponding benefit. If you believe you might be giving such a current and future gift through excessive investment expenses, this section asks about your preferred beneficiary.

The cost-efficiency of your investment portfolio is one of the most important and controllable factors influencing your financial success or failure over your lifetime. Many individual investors are astonished when they learn just how much excessive investment costs could diminish their assets over their lives. The good news is that investment costs and, to a lesser extent, investment-related taxes are two of the personal investment management factors over which individual investors have the most control. Abundant evidence in the scientific investment literature demonstrates that aggressive control of investment costs and taxes can lead to significant long-term improvements in the welfare of investors.

This investment cost worksheet projects both the lost annual returns on you tangible portfolio and the lost returns on the "phantom" portfolio that you give away by paying investment costs that are too high. While your annual losses due to higher than necessary or reasonable investment costs can be very significant, it is the cumulative and compounded lost investment earnings on these inefficiencies year after year that would really undermine your personal assets. VeriPlan measures not just your annual losses, but the value of your cumulative real dollar asset losses over your lifecycle.

For its cost-efficiency and lost assets graphics and associated data worksheets, VeriPlan automatically calculates the potential annual earnings that you would lose on these cumulative lost assets. To project your lost returns, VeriPlan subtracts the reasonable investment cost percentages that you enter above from the corresponding long-term historical asset class return percentages and then multiplies your cumulative lost returns by these net return percentages. These lost earnings on your cumulative lost returns are then added to your cumulative lost returns in the following year, and the process is repeated through age 100.

While you may have gradually and unwittingly transferred the cumulative value of these phantom assets to someone else, they still exist in the world. They are just not registered in your name. As the years go by, these inefficiencies or opportunity costs grow even after all your tangible retained cash, bond, and equity assets have been exhausted. Over a lifetime, what seems like just "a percent or two or so" can mean the difference between poverty in retirement and a substantial estate for many, many people.

To understand the personal importance of excessive investment costs, you might think of these excessive investment costs as a seemingly small annual percentage of your assets that you choose to transfer as a gift to someone else's account every year of your life. In turn, that recipient would accumulate those funds and make cost- efficient investments with them using the same asset allocation that you use.

Each year, he would earn a return equal to the gross returns of these asset classes minus your settings for maximum reasonable costs above, and he will reinvest those earnings into this phantom asset account. This is the true meaning of the personal opportunity costs associated with excessive investment costs. The real questions for the each individual investor should be: "to whom do I want to make this repeated gift of excess costs? \-- to my family? -- to my favorite charities? -- to the financial services industry?"

To illustrate the potential long-term value of this annual investment asset "gift" that you might accumulate through a more cost-efficient investment strategy, we assume that the recipient would reinvest all returns and would not withdraw any earnings and/or principal for ordinary consumption. If your gift assets caused an increase in the recipient's consumption and funds were withdrawn solely for ordinary living expenses, then the asset growth demonstrated in VeriPlan's cost-effectiveness graphics would be diminished. Some of your gift would pass to the providers of these consumption goods and services.

Alternatively, the recipient of your assets could make withdrawals to fund activities that would truly be investment- oriented. For example, in comparison to the education that they might otherwise have received, your gift funds might provide more education and/or education of a higher quality for your grand-children and great-grandchildren. In this situation, the diminished gift assets could be offset partially or fully by the higher lifetime earning potential of these children.

Furthermore, your gift assets could be given to charities of your choosing, which might alter the world in a manner that met your approval. Therefore, the asset value illustrated by VeriPlan's cost-effectiveness graphics might become manifest in many different forms. The central theme is that these gift assets could be held for purposes about which you are more likely to approve, rather than simply be ceded to strangers through excessive investment charges.

Section 16.7: Why do investment cost-inefficiencies seem so large? (Because they are!)

Investment costs may seem very large to many investors, because they are very large. In naïve pursuit of superior returns, the average investor pays far too much without achieving his objective. In fact, excessive costs related to this pursuit are very damaging. Investment costs are not "just a few percent." Instead, excessive investment costs represent a substantial portion of annual portfolio returns. Year after year excessive, 'percent-of-assets' investment fees erode the portfolios of millions of unwitting individual investors. VeriPlan can help individual investors to wake up to the seriousness of this problem.

Average investment costs for the average investor are a very significant and largely unproductive portion of annual asset returns. A typical investor's projected lifecycle cost-inefficiencies seem to be very large, because they would be very large, if current cost-inefficiencies are allowed to continue. The higher your costs relative to costs that you think are reasonable, the more VeriPlan's graphics will show large cost-inefficiencies. Moreover, younger users of VeriPlan will see more decades of escalating cost-inefficiencies, because they have more time remaining in their lifetime projections for these cost-inefficiencies to compound.

Investment fees and costs are provided to investors in bits and pieces, which makes it difficult to understand their overall lifetime costs. VeriPlan's various cost-inefficiency graphics pull the entire investment cost story together into just a few graphics based upon your projected financial picture.

The section above entitled "To whom would you like to direct the recurring gift of your excessive investment costs?" summarized how VeriPlan calculates and projects cumulative investment losses due to excessive and unreasonable investment costs over your full lifecycle. It explained how these cumulative lost assets effectively are transferred to someone else and are no longer within your reach. In effect, VeriPlan projects that their lost value would grow in perpetuity and in trust without any asset withdrawals.

Because these cumulative losses become phantom assets, and they no longer exist in any asset account to which you hold title, you cannot make any withdrawals. However, this is not true of the financial assets that you have retained. In any year in which your expenses exceed your current income and you have an expense shortfall, you must withdraw assets from these existing accounts. By removing assets for your personal needs, you will also remove all potential future appreciation on those assets. Obviously, in retirement, the typical family will experience year after year where expenses exceed current income and assets must be withdrawn.

This is a significant reason why the phantom assets lost to excessive investment costs on VeriPlan's cost- inefficiency graphics will continue to accelerate in value, while your tangible, retained assets on these graphs will grow at slower rates, decline, or even become totally depleted. Your retained financial assets are the only assets off which you can live. The phantom assets you gave away through excessive investment costs may help to pay the living expenses of others, but not for you and not for your family.

In relative terms, your retained assets must fall further and further behind your phantom assets, to the extent that you must pay expenses out of your financial assets rather than add to them. This is why VeriPlan's graphs show an increasing divergence between retained assets and lost assets as one moves through retirement. Furthermore, for those VeriPlan users whose projections indicate that their financial assets will be exhausted prior to age 100, their total asset projection graphics will still show that returns will continue to accrue to on these phantom assets -- even after their tangible assets are exhausted! In effect, these graphs project the lost annual pre- tax returns that a person could have lived on had he not paid these higher and excessive investment costs.

Of course, if you did reduce your investment cost significantly and retained more of your investment assets in accounts over which you held title, then you would give yourself more choices. You could fully restrain any additional consumption and let these assets grow and compound without withdrawals, or you could increase your consumption. By choosing to control your investment expenses across your lifecycle, you could increase the latitude that you have to make other choices, since these lost assets would no longer be lost.

The illusion of inflationary returns and how percent of asset fees erode your real dollar assets

Investors tend not to adjust their returns for inflation, which allows investment numbers to seem to grow more, when asset values actually are growing at lower real dollar rates and might not be growing at all in real dollar terms. Furthermore, though the industry's percent of assets charges, your assets actually immunize the industry from inflation, while you pay in real dollars to provide this inflation immunization.

VeriPlan's projections remove the illusion of asset value growth caused by inflation, which has averaged very close to 3% over the past 80 years. All of VeriPlan's asset valuation and investment return graphics and corresponding data worksheets provide constant purchasing power dollar projections. In relative pricing terms, a projected expense for an item in fifty years would be the same as a current expense for the same item now. Similarly, one dollar of your projected assets would have similar purchasing power in fifty years, as now.

While your investment portfolio is not inflation-proof to you, many the financial industry's costs and fees are for them. Any industry fee that is charged as a percent of your assets makes the industry's revenue from you immune to the impact of inflation on your portfolio. Reductions in your real assets pay for this inflation immunity.

For example, if you have some multiple of $1,000 invested in assets that are held in custody by a broker or advisor, and you pay 1% of your assets every year for investment advice, here is what would happen under two different inflation scenarios. (For simplicity of presentation, industry fees in these examples will be assessed on end-of-year assets rather than on average assets. This difference does not affect any of the conclusions below, but it simplifies the math.)

If there is zero inflation and a 5% gross real asset return during one year, then at the end of that year, you would have gross assets of $1,050. You would pay 1% on $1,050 or $10.50 per each $1,000 of initial assets. After this fee, you would net $1,039.50 per $1,000 of initial assets or a 3.95% real annual return. For each $1,000 under advisory custody at the beginning of the year, multiply $10.50 to arrive at your total advisory/custody billing. The industry keeps 1% of your assets.

If there is 5% inflation plus a 5% gross real asset return during one year, then at the end of that year, you would have gross assets of $1,100. You would pay 1% on $1,100 or $11.00 per each $1,000 of initial assets. After subtracting 5% inflation, your gross real dollar assets before this industry fee would be $1050. After this higher $11.00 industry fee, you would net $1,039.00 per $1,000 of initial assets or a 3.90% real annual return. The industry keeps 1% of your assets, however your real asset return is actually lower, when there is 5% inflation versus when there is no inflation Your net real dollar return is 3.90% versus 3.95%.

You have immunized the industry from inflation, by paying higher dollar fees through these percent of asset charges assessed against your nominal assets. The industry gets paid higher nominal dollars, while you only have real dollars left to reinvest or to spend. The industry takes these fees from your assets with no guarantee that your results will improve. In fact, across all investors, improvement on the market's return is impossible. Because of these percent of assets costs, lower net returns are inevitable for all investors who pay these fees. Inflation makes the situation worse.

A dozen other reasons why you might be surprised at the size of your total lifecycle investment cost-inefficiencies:

1) Before now, you probably did not have a cost-conscious, automated lifecycle projection facility like VeriPlan that permits to you compare your actual costs with costs that are reasonable to you.

2) The financial industry puts its hands into many of your pockets simultaneously. While you are paying attention to one cost, you may neglect to focus on several others. There are so many fees and costs that it is not possible to understand the total impact without an automated tool, like VeriPlan, which is designed to do so.

3) While some investment costs are disclosed, others such as trading costs, are obscured or hidden. VeriPlan makes hidden costs visible through its projection estimation methods.

4) For investment costs that are disclosed, the type of information provided to you results from regulatory mandates. Industry regulations result from a negotiation process between the industry and the U.S. Securities and Exchange Commission. Obviously, in these negotiations the industry pushes for less rather than more disclosure and greater rather than less obfuscation. The result is highly fragmentary disclosure and greater rather than less obfuscation.

5) At most, your visible disclosed costs will presented over a ten-year period using average return assumptions. Ten-year periods do little to educate the public about the compounded, multi-decade investments returns that are lost to cost-inefficient investment strategies.

6) Recurring investment costs are expressed as a 'small' annual percentage of your assets rather than as the much larger percentage of your annual returns that investment costs really are.

7) Industry representatives are trained to tell you that these costs are not very high and certainly are well worth paying. While overall there is no reason to expect that paying more in costs will improve performance, the industry's subtle and not so subtle marketing messages say that paying more improve performance, when the opposite has been proven to be true on average. When an individual investor understands the magnitude of the investments costs that he pays over their lifecycle and the fact that the average investor is likely to under-perform the gross return of the market to the extent of his investment costs, he may have second thoughts.

8) Non-recurring charges like sales loads take some of your assets off the table at the outset. Only if you remember, will these lost assets and your returns on these lost assets ever be accounted for in your investment performance evaluations.

9) Most individual investors do not benchmark the performance of their investment portfolio. They have no idea whether they are getting what they thought they were paying for.

10) The industry's investment costs are set so that they tend to remain well below nominal market returns. Therefore, on average, investors will usually see net growth in their nominal investment numbers. Few will calculate the opportunity cost compared to a more cost-efficient strategy.

11) Numerous high quality and low-cost investments are available, and historically they have delivered better returns than higher cost investments. However, individual investors must be proactive and look for them. Higher cost investments have higher costs, it part, because these higher costs pay for hundreds of thousands of directly and indirectly commissioned brokers and advisors to find you and to sell to you these higher cost investments. These brokers and advisors have no incentive to sell low-cost investments to you, because that is not what they get paid to do.

12) Brokers and advisors will not have to live off of your personal portfolio in the future, but you will. Industry representatives must live off of your portfolio now, so that they can build their own personal investment portfolios and serve the profit-seeking demands of their financial industry employers. For the average investor, investment costs must be huge, because the financial services industry itself is huge. The industry has to make money off of someone. In spite of the industry's advertising, it is surprising that any individual investor would really think that there could be any genuine partnership with the industry, because the relationship is largely a zero sum game. When you make more, the industry makes less and vice versa.

Many investors are already wary of investment costs, and they work hard to control their costs. After using this investment cost effectiveness tool, there probably will be many more individual investors who will strive much harder to lower their investment costs.

There is no reason to be subtle about this. Most investors are simply naïve about the insidious and corrosive nature of investment costs. While most investors do not focus on investment costs, investment costs are the only substantial investment strategy factor over which they have some control that will affect their net long-term investment returns. Investment costs seem like a relatively minor factor to many people, largely because investment costs are stated as a percentage of overall assets and not gross returns.

Yet, when investment costs are compared to average gross annual investment returns rather than total assets (which is the proper comparison), then the average investor pays between 1/4 to 1/3 of their gross annual returns in investment costs. When inflation is considered, then the average investor pays investment costs amounting to almost 50% of annual gross real dollar (after inflation) investment returns.

The financial industry is a parasite on the assets of investors and overall it delivers a "negative value-added" with respect to its investment costs. On average, the more an investor pays, the less they keep in the long-term. The academic research literature clearly demonstrates that cost reduction is highly beneficial to investors. The investment research literature also demonstrates that individual investors have no reliable mechanisms to pick investments beforehand that will yield superior investment returns -- except lower costs.

Historical investment returns normalized for investment costs tell investors absolutely nothing of value in choosing one investments over another. On the other hand, choosing low-cost investments has been demonstrated to be a reliable means to achieve superior returns averaged across the investor population. Nevertheless, if you look at search engine statistics about the phrases that people are searching for related to investments, there is roughly a 100 to 1 ratio between search terms that are associated with superior historical returns compared to investment costs. Like sheep to slaughter, this will continue indefinitely unless individuals wake up and start taking steps to cut their investment costs to the bone.

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### Appendix: VeriPlan's design and discounted cash flow modeling

VeriPlan is a lifetime cash flow modeling tool for personal financial decision support. This section compares VeriPlan with discounted cash flow modeling methods taught in business management courses.

Sophisticated, fully integrated, and easy-to-use financial modeling tools

Simply the best home financial planning software available
Introduction

If you have a business management background, you might ask how VeriPlan's cash flow projection methods compare to a discounted cash flow view of a family's financial lifecycle. While there are differences, VeriPlan can be reconciled with discounted cash flow modeling methods. However, because VeriPlan is fully integrated and fully automated, does more. VeriPlan can automatically develop a full range of lifecycle projection scenarios for any combination of assumptions and for any period of years between the initial age of Earner #1 and age 100. In contrast, discounted cash flow models tend to be static and focus on only one period of years for analysis.

When professionally managed businesses evaluate potential projects, investments, and other ventures, a five to ten year discounted cash flow model usually will be developed. Discounted cash flow models project judgmentally estimated future cash flows into the future with an increasing wide band of uncertainty. To estimate the net present value of a planned venture, discounted cash flow valuation methods adjust current and future positive and negative cash flows by a valuation-discounting factor. Financial judgments about the potential success or failure of a project pivot primarily on management's views regarding the likelihood that projected cash flows would materialize as planned.

The values of all future cash flows are discounted to the present by a cost of capital discount rate that should be related to capital market rates of return and that may or may not also include an added project risk factor. Alternatively and preferably, a range of different cash flow scenarios would be developed to calibrate expected risk. Then, each of these scenarios would be discounted using the same cost of capital without any added risk factor.

A flexible, automated, and adaptable financial decision support tool

VeriPlan is a highly automated projection engine that uses constant purchasing power dollars. In effect, VeriPlan begins with historical inflation as its discount rate. Then, VeriPlan adds future annual returns on projected assets net of additions and withdrawals. When projected financial asset holdings are positive, annual asset class returns are projected using long-term non-inflationary risk free rates of return plus historical financial asset class securities market risk premiums. Total gross annual returns are reduced by taxes and investment costs for net returns. If financial assets are depleted, an interest rate is charged on continued consumption. VeriPlan also provides extensive abilities for the user to adjust VeriPlan's rate of return assumptions either systematically or arbitrarily. The user can also adjust the consumption loan interest rate.

While VeriPlan's methods have similarities to discounted cash flow modeling, it uses distinct financial projection methods. At its core, VeriPlan is a fully automated, highly customizable, and quickly changeable cash flow modeling engine. It can instantly develop coherent financial lifecycle scenario projections for individuals and their families. These projections are based on your description of your current financial situation and on your financial planning intentions for your future.

In modeling key factors that affect your personal financial success, VeriPlan's centerline projections:

* use real, constant purchasing power dollars that extract inflation,

* project net annual family profit or savings after expenses, debts, and taxes, and

* grow portfolio values by user-adjustable historical real dollar asset class risk premiums that are net of both capital gains taxes and user-adjustable investment costs.

In effect, VeriPlan's implied annual discount rate reflects inflation plus the rates of return on retained assets that securities markets historically have paid to assume investment risks related to asset classes.

In the face of the fundamental uncertainty of the future, VeriPlan draws strength from being fully integrated and instantly updatable by the user. You can control any values and assumptions related to projecting your annual income, expenses, savings, taxes, and debts. You can adjust projected asset return rates, investment costs, and taxes. Each variable in VeriPlan is integrated with all other variables. Therefore, the plausibility of any value that you set for any individual factor can affect the overall plausibility of your projections.

By using real dollars versus nominal or inflationary dollars, VeriPlan projects a constant purchasing power consumption value for any assets retained for any period during your lifecycle projection. In addition, when it might reasonably be expected that certain input factors would change at a rate different from the core inflation rate, then VeriPlan allows you to make a relative inflationary growth adjustment. Examples include adjusting percentage growth rates relative to inflation for your earned income, your ordinary expenses, and your major planned expenses.

By adopting a constant real dollar model throughout, it becomes unnecessary to use an explicit inflation factor in most of VeriPlan's calculations. However, in a few circumstances an explicit inflation assumption is required. In these situations, VeriPlan uses the compounded or geometric long-term historical U.S. inflation rate for the past eighty years, which has averaged very close to 3%. For example, future repayments on current debts would be made in nominal dollars. Therefore, VeriPlan first converts future debt payments into real dollars using this 3% inflation assumption, and then joins these negative cash flows with other negative and positive cash flows in VeriPlan.

VeriPlan provides a variety of fully integrated real dollar projection methods related to your income, living expenses, debts, and taxes. These user-adjustable parameters model financial factors over which most individuals can exert reasonable control throughout their lives. While still uncertain in many respects, you usually can also exercise substantial control over your future earned income and expenses.

You can make ongoing adjustments to income, expenses, and savings throughout your life, as may be required. While employment can be interrupted involuntarily, tax rates might change, and other risks materialize, most people usually will have significant control over these income and expense levers, which are important to personal financial success and failure. Through intelligent and proactive personal financial planning, people can make ongoing adjustments that can increase the likelihood that they will have a sustainable living standard throughout their lives.

A VeriPlan user can re-evaluate the plausibility of his assumptions and rapidly test the effects of using different assumptions. Evaluating the plausibility of each VeriPlan input parallels the cash flow estimation process that is required to develop a discounted cash flow model for a business project or investment proposal. If businesses evaluate a project with similarities to other projects that they previously managed successfully, then they can develop cash flows that are more detailed. They might reasonably have increased assurance that these modeled cash flows would be controlled as anticipated. Furthermore, upon implementation initial project plans are always adjustable in the light of new positive and negative information.

VeriPlan is very similar in that your projections can be updated easily to reflect new information and new decisions. VeriPlan avoids planned obsolescence and can change, as your personal planning needs change. Because important projection assumptions such as tax rates are user-updatable, VeriPlan can remain a relevant financial decision support tool, over the years as your needs evolve.

Overview of VeriPlan's asset valuation system

Projected annual cash flows are net of your projected income, expenses, debts, taxes, and investment costs. VeriPlan automatically maintains your lifecycle asset allocation strategy using one of five user selectable methods. It automatically rebalances across asset classes at the beginning of each projection year. Taxes are projected automatically based upon the user's current federal, state, and local tax regime, including other taxes, exemptions, deductions, and any tax basis.

In projecting investment portfolio returns, VeriPlan uses the following general model:

At the beginning of each subsequent projection year, VeriPlan automatically rebalances your cash, fixed income, and equity financial assets according to one of five user selectable asset allocation methods provided, including your specific parameter settings. The first rebalancing occurs at the beginning of the second projection year. This permits you to understand clearly how your current portfolio may deviate from your chosen lifecycle asset allocation, and it gives you ample time to rebalance your real-life financial asset portfolio during the first year in a cost- and tax-efficient manner. If you make portfolio changes more quickly, you simply can update your asset entries to reflect these asset purchases and sales.

Driven by your projected net annual savings or dis-savings, your asset additions or withdrawals are applied automatically to your financial assets annually in accordance with your chosen asset allocation method and with your preferences regarding taxable, tax-deferred, and Roth 'tax-now-not-later' investing.

Using beginning annual asset values and net asset additions and withdrawals, your gross investment returns are calculated using long-term asset class risk premiums, which securities markets have paid historically.

Your gross projected returns are reduced automatically by the investment cost structure of your current portfolio or by your alternative settings for maximum reasonable investment costs you are willing to pay.

Federal, state, and local income taxes and other taxes, exemptions, deductions, and asset tax basis are managed automatically. Total taxes are assessed according to your particular projected taxable income and taxable asset situation. Any short- and long-term capital gains taxes that would be payable on withdrawals or fund distributions are assessed automatically. In years when you are projected to have positive (negative) net income or cash flow, these cash flows are reinvested (withdrawn) automatically.

Because your property and other assets may lack current and objective fair market values that can be measured from real-time securities markets, and because such assets often are subject to extended lock up periods, VeriPlan treats your property and other assets separately from your more liquid cash, fixed income, and equity financial asset classes. For example, your interests in limited partnerships, hedge funds, and other alternative private capital investments may not have any resale market and may be subject to significant lockup periods and sales disincentives. Similarly, if you have an actively-managed private business, it could take years to prepare to sell and sell.

For your non-publicly traded property and other assets, VeriPlan uses your judgmental estimates about their current fair market values and the growth rate prospects for these assets. VeriPlan automatically projects future values for your property and other assets. Projected appreciation is reduced by the rates of investment costs that you indicate.

All net cash flows related to your earned income, withdrawals, living expenses, debt payments, ordinary taxes, and financial asset capital gains distributions are added to or taken from your cash, fixed income, and equity financial asset classes. Your property and other assets are assumed to be held perpetually. VeriPlan makes no assumptions about projected sales dates or conversion of your property and other assets into financial assets.

VeriPlan automatically provides a series of multi-period projections

VeriPlan's projection methods can be reconciled with discounted cash flow modeling methods. VeriPlan is generally useful to the individual for lifetime financial planning, because:

VeriPlan fully integrates and automates all projection functionality;

In response to any change by the user, VeriPlan instantly provides graphical and data projections for each year up to age 100; and

VeriPlan enables full financial lifecycle comparisons between any combination of user financial data and VeriPlan settings.

VeriPlan's methods of projecting values:

* for your cash, fixed income, and equity asset classes by user-adjustable historical risk premiums and

* for your property and other assets by your personal estimates,

differs from a discounted cash flow analysis model. In the later model, future cash flows are estimated and discounted to the present. However, because discounted cash flow models typically use a single fixed number of modeling years (often five to ten years), a terminal asset valuation method is still needed to estimate the future value of a business or a project at the end of any limited discounted cash flow modeling period.

Various approaches might be used to estimate this terminal value for a project modeled using discounted cash flow methods. One approach, for example, is to:

* treat the net cash flow in the last year modeled as the terminal pre-tax profit,

* multiply this pre-tax terminal profit by an appropriate estimate of the price-to-earnings ratio for a stand-alone business,

* reduce this future profit figure by an estimated tax rate,

* discount this net, after tax terminal value back to the present, and

* add this terminal value to the discounted cash flow values from the fixed five to ten year modeling period of the main cash flow model.

Discounted cash flow modeling methods provide just a single valuation estimate for an arbitrary number of years. In contrast, VeriPlan provides an annual series of values across your potential lifecycle and across the assets that you hold in the five primary asset classes. VeriPlan's lifecycle projections are akin to an annual series of net present value calculations discounted at the inflation rate and growing or declining in real dollar terms based on investment class risk premium returns. For each additional year of age, VeriPlan effectively projects another scenario, which models terminal asset values cumulatively from the present out to that projection age discounted by the rate of inflation. These projection series are conveniently presented by VeriPlan's graphics and corresponding data worksheets.

Cumulative securities market asset class returns are added to the portfolio at each age, based upon long-term historical risk premiums, which can be adjusted by the user for scenario planning. Each of these annual asset class projections are valued net of reinvestments, investment costs, and taxes for the cash, fixed income, and equity asset classes. For the property and other asset classes, each of these values are net of reinvestments and ongoing investment costs, but are gross with respect to capital gains taxes and sales disposition charges.

Furthermore, VeriPlan's capital asset valuation methods and discounted cash flow modeling methods can be reconciled from a theoretical point-of-view. According to the capital asset pricing model, an enterprise appropriate risk- adjusted cost of capital for discounted cash flow modeling would be derived from rates of return in public securities markets. The discount rate used would already include the risk premium embedded in public market returns. Therefore, discounted cash flow models project dollar cash flows into the future and discount them to the present using risk- adjusted securities market rates of return.

In comparison, VeriPlan uses current asset values and then grows their values going forward, by using long-term historical securities market risk premiums for the broad asset classes. Although the methods differ, both discounted cash flow modeling and VeriPlan derive their effective discount rates from the same securities market sources and risk- adjusted market returns. VeriPlan just starts with current asset values and grows them forward into the future, while discounted cash flow models start with future asset values and work backward from there to the present.

Future asset returns and uncertainty

Because VeriPlan and discounted cash flow projection methods are not predictive, users of either must cope with uncertainty and risk. Future securities market values for any individual's accumulated assets are entirely beyond his personal control. Future securities markets will deliver whatever the then-current consensus on asset values may be. The markets will care absolutely nothing about what you may have hoped would happen.

Discounted cash flow models suffer from the same inability to peer into the future and to model what actually will happen. Neither VeriPlan's centerline projection methods nor discounted cash flow modeling methods can reliably anticipate uncertainties. Just as the securities markets have minds of their own, business management competence may not matter much, when new technologies, new competitors, governmental actions, and other factors invalidate the assumptions that were made to develop a discounted cash flow model.

Therefore, both VeriPlan's method and the discounted cash flow method must find other ways to cope with uncertainty. Some business organizations increase their discount rates to discount more heavily future cash flows for unknown risks. However, it is much preferred that business planners instead develop a range of scenarios to model risks through alternate cash flow outcomes. Instead of systematically underestimating the potential value of all projects with an excessively heavy discount rate, business managers should instead evaluate a range of scenarios with the same risk- adjusted discount rate derived from the securities markets.

VeriPlan provides a fully automated financial decision analysis tool for personal financial planning

Because VeriPlan instantaneously develops a revised projection, after each user change, VeriPlan can be a highly productive personal decision support tool. By automating the lifetime projection process, VeriPlan allows users to focus on analyzing their financial strategies.

VeriPlan's capabilities parallel the methods that should be used to develop a range of scenarios for discounted cash flow evaluations. Because the future is fundamentally uncertain, VeriPlan allows you to create quickly a very wide range of future scenarios. To model uncertainty separately and in combination, VeriPlan allows you to:

* change earnings, expense, debt, tax, and savings assumptions,

* adjust major planned expenses,

* change retirement related assumptions,

* vary asset class returns both systematically and arbitrarily,

* change asset allocation methods and asset risk exposures,

* assess portfolio safety margins supplied by cash and fixed income assets,

* adjust taxable, traditional tax-deferred, and Roth 'tax-now-not-later' investment strategies,

* alter the costs of investing, and

* estimate the present value of your gross and net human capital

Every VeriPlan input or control can be adjusted to produce a new scenario instantly. You can use VeriPlan's graphics and data tables to decide how you might manage, if a particular projection scenario were to materialize. Furthermore, you can produce and evaluate any number and range of projection scenarios, until you are satisfied with your plans.

In effect, VeriPlan is an engine that puts you in full control, when you generate scenario projections for your personal financial and investment planning. VeriPlan can rapidly develop coherent lifecycle projections to help you assess how your current financial and investment practices could play out across your lifecycle. VeriPlan helps you to understand what decisions may be required now for your family "venture" to be solvent and profitable across your full lifecycle under varying circumstances. Furthermore, VeriPlan can help you to test for and anticipate shortfalls, while it also helps you to understand the extent to which your goals might be exceeded.

VeriPlan's approach can generally be reconciled with a long-range scenario planning approach to discounted cash flow modeling. However, VeriPlan delivers far more automated, sophisticated, customizable, rapid, and flexible projection scenario generation capabilities.

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### Appendix: Who is behind the curtain? Biography of VeriPlan's designer

The chief designer and developer of VeriPlan is Larry Russell, an experienced financial planner, investment adviser, business executive, and software manager. Through studies at MIT (BS-1975), Brandeis (MA-1979), and Stanford (MBA-1982), I developed an understanding of economics, accounting, financial management, and investments.

For most of my 20+ year business career, prior to becoming a financial planner and registered investment adviser, I lead strategic initiatives at Hewlett-Packard and Sun Microsystems. Subsequently, I provided executive leadership to early stage Internet software companies focused on securities information and telecommunications.

After graduating from MIT in 1975, I conducted statistical research on employee benefit programs at the National Manpower Institute in Washington, D.C. In 1978, I moved to beautiful California and joined the Institute for the Future, a think tank in Menlo Park, California.

Using sophisticated computer projection methods for Fortune 100 clients, we developed long-range planning scenarios incorporating demographic, econometric, financial, and technological factors. My experience at the Institute for the Future was helpful in the design of VeriPlan, since VeriPlan functions as a fully integrated and automated lifetime scenario projection engine and financial planning decision support tool.

Completing his MBA at Stanford in 1982, I joined Hewlett-Packard's computer systems division and led business development and marketing initiatives. At Sun Microsystems from 1991, I acquired product lines from technology companies via negotiated licensing arrangements. As Director of Corporate Development, during my last four years at Sun Microsystems, I directed mergers and acquisitions projects, evaluated investment proposals made to Sun's senior executives, and managed the corporation's external investments in private firms.

In 1999, I co-founded Codexa Corporation in Altadena, California with an MIT undergraduate roommate, Dr. David J. Leinweber, an expert on computationally driven institutional investing. As Codexa's EVP and CFO, I directly managed the finance, accounting, business development, human resources, and legal functions. I developed Codexa's information service provider business plan, hired the executive team, and helped to raise an $8M Series A venture round.

Codexa developed an advanced and automated systems service that provided Internet information filtering services to Wall Street securities industry professionals. Our service architecture is described in detail Chapter 6 of " _J2EE Technology in Practice: Building Business Applications with the Java 2 Platform, Enterprise Edition_ " by Rick Catell and Jim Inscore.

Our company's early stage clients included numerous major Wall Street firms. Despite having developed working technology, Codexa was still a development stage company with an unsustainable negative cash burn rate. In 2001 the securities, technology, and telecommunications industries fell off the cliff and needed Series B financing was not available, as the dot bomb bubble imploded.

In 2001, I established Lawrence Russell and Company, initially as a consulting firm. As a consultant during its formation in 2001, I served as Interim President of VRVS Global Corporation, a Caltech rich media telecommunications startup. I developed the company's business plan and helped the board to recruit a permanent and experienced CEO. I also developed a financial model to help the new CEO secure a $1M strategic partner investment and a $3M Series A venture capital round.

With the technology and securities industries on their backs in 2001 with all four legs in the air, there were few long-term career opportunities for a person with my background. I decided I was not going to hunt for nonexistent positions along with the haystack of other unemployed professionals in the wake of the dot com crash. Soon, I reached the conclusion that, however unwillingly, I must be retired at the ripe old age of 50. As a self-directed investor during my corporate career, I saved my pennies and invested them according to the principles that I had learned at the Stanford Business School, Therefore, retiring at 50 was feasible, while not desirable to me. Since I was too old for basketball and did not care for golf, I began to catch up on the investment and personal finance research literature to see what was new, since I had been at Stanford in the early 1980s.

In 2002, I began an in-depth and systematic reading of the scientific finance literature. I read finance and investment journals, visited finance professors' websites, and searched the Internet for publications and working papers. As I searched the web, university libraries, and on-line scholarly paper repositories, I was impressed by how much useful, but obscurely written, financial information was scattered around the academic world. It seemed to me that many individuals and families were starved for such useful and objective financial planning and investment information, while they were drowning in a sea of self-interested financial industry sales pitches.

After a year of almost full-time reading, clarity began to emerge. Then, and in the decade following, I have read thousands of research papers in their excruciating economic and statistical details. These scientific finance papers hold information that is directly useful to individuals for financial planning and investing. Yet, academic papers are written for an audience of other academics and highly trained industry research professionals and not for individuals.

This useful academic information is obscured by the vocabulary of economics, mathematics, and statistical research. To make some of this information more accessible, in 2002, I began to write summary articles and publish them on the web. In the past decade I have published well over a thousand financial and investment articles on the web. The easiest way to find them is to go to my _The Skilled Investor_ website: http://www.theskilledinvestor.com/ On the front page of The Skilled Investor you will find a hierarchical listing of many of these articles. In addition, the red colored links in the left-hand sidebar of _The Skilled Investor_ website will take you to my other personal finance, financial planning, and investing websites.

I became convinced that I understood more efficient and scientifically verifiable pathways for individuals to optimize their financial planning and investment strategies. I also realized that the computational details and complexity of the subjects involved prevented individuals from focusing on financial decision-making. Simple spreadsheets, free online financial tools, and back of the envelop calculations were generally useless when hundreds of personal income, expense, debt, tax, investment, and other factors at play, which were unique to each family.

In 2002, I had begun to design and develop a financial and investment planning spreadsheet for my family. I got a bit carried away with this project. In 2003, designed the architecture for a fully automated, completely integrated, and highly customizable lifetime planning software tool build upon the Microsoft Excel spreadsheet engine, which eventually became VeriPlan.

I designed VeriPlan to be a decision support tool set for a financial planning advisory business that I intended to set up. I also designed VeriPlan to be self-learning and self-updatable, so that do-it-yourself users could purchase personal use copies and licenses through the Internet. I realized that the mass of Americans would never have access to a personalized lifecycle planning application, unless an inexpensive software product was developed. I decided that VeriPlan must be priced very low, so that everyone could afford it.

I estimate that I put between 3,000 and 4,000 personal hours into the development of VeriPlan between 2003 and 2006. When you are "retired" and self-employed you do not have to keep a time card. By 2006, the functionality of VeriPlan was complete and robust. Since 2007, I estimate that I have spent between 300 and 500 more hours annually working on VeriPlan.

With the scientific planning and investing knowledge that I gained from my reading and publication of financial articles on the web and from the development of VeriPlan, I also planned to become a financial and investment planning adviser. In 2004, I passed the Series 65 "Uniform Investment Adviser Law Examination" administered for the North American Securities Administrators Association (NASAA) by the Financial Industry Regulatory Authority (FINRA). In 2005, my firm, Lawrence Russell and Company, became a Registered Investment Adviser in the state of California (Certificate #133101).

Using VeriPlan as an integral part of my financial services offering, in 2008 I began to deliver comprehensive financial planning services to clients residing primarily in the Pasadena, California area. To avoid all conflicts-of-interest, I set up a purely fee-only advisory practice. I charge hourly or fixed fees for customized planning services. To avoid conflicts-of-interest, I do not sell any investment or insurance product of any kind. I do not charge any percent of asset fees. I do not accept or pay third party fees of any kind.

Before starting my development of VeriPlan in 2003, I had searched for a sophisticated and customizable lifetime financial planning tool to use myself. I was unimpressed with what I found. Instead of providing an interactive and personalized modeling environment that a client could use interactively with an advisor, many professional financial modeling tools had significant functional and analytic limitations. They also required extensive training to be used properly. Worse, all of these professional tools just cost too darn much.

Furthermore, many of these computerized professional planning tools are designed to channel clients toward the selection of more costly financial, securities, and insurance products. Through my research, certain scientifically verifiable selection criteria for financial and investment products had become very clear to me. The cost of any financial or investment product is at the top of this list of criteria.

Financial product selection should be separated entirely from the lifecycle planning process. The sale of financial products should never be embedded into any true financial lifecycle planning application. Lifetime financial planning software should provide interactive tools to understand personal needs and to evaluate financial tradeoffs between one alternative and another. Integrating financial product sales will necessarily distort objective financial planning, because what is best for the client, the advisor, and the industry most often are just not the same.
Mature and robust do-it-yourself financial planning software

http://www.theskilledinvestor.com/VeriPlan/financial-planning/

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### Table of Image Credits

(All projection graphics herein were automatically developed by VeriPlan)

Front

Manage your own personal finance and investment affairs; photo from freedigitalphotos.net

Chapter 1

Path to success; image from FreeDigitalPhotos.net

Tools; image from FreeDigitalPhotos.net

Chapter 2

Cost of living; image from FreeDigitalPhotos.net

Chapter 3

Right and wrong decision signs; image from FreeDigitalPhotos.net

Drawing of woman's head; image from FreeStockPhotos.biz

Baskets; photo by Nicholas Babaian from flickr.com

Chapter 4

How to become an expert; photo by Alan Cleaver from Flickr.com

Plan A B C signpost; image from FreeDigitalPhotos.net

Past present and future dice; image from FreeDigitalPhotos.net

Gold savings key; photo from FreeDigitalPhotos.net

Chapter 5

Cube puzzle; image from FreeDigitalPhotos.net

Chapter 6

Make money keyboard key; image from FreeDigitalPhotos.net

Chapter 7

Finger choosing purchases; image from FreeDigitalPhotos.net

Education savings piggy banks; image from FreeDigitalPhotos.net

Job education signpost; image from FreeDigitalPhotos.net

Chapter 8

Gold nest eggs; image from FreeDigitalPhotos.net

Chapter 9

Home dollar sign scale; image from FreeDigitalPhotos.net

Chapter 10

Debt on back; image from FreeDigitalPhotos.net

House in hand; photo by Alan Cleaver from Flickr.com

Ladder in hole; image from FreeDigitalPhotos.net

Chapter 11

Signing tax return; image from FreeDigitalPhotos.net

Chapter 12

Wooden chairs and porch; photo from FreeDigitalPhotos.net

Sailboats in moonlight; photo by Alan_Cleaver from flickr.com

Chapter 13

Hammock over pool; photo by exfordy from flickr.com

Chapter 14

On the money road; image from FreeDigitalPhotos.net

Chapter 15

Risk blocks; image from FreeDigitalPhotos.net

Humpty prior to the financial crisis; photo by ilovemypit from flickr.com

Humpty after the financial crisis; photo by derekskey from flickr.com
Chapter 16

Expensive cheap signpost; image from FreeDigitalPhotos.net

Donkey; photo by Hamed Saber from flickr.com

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>>> Non finito <<<

