by Carolyn Rothwell on August 6, 2013

Silver 101 - Understanding the Cash Flow Illustration


Money Tree's big-picture financial planning software, Silver, includes a year-by-year cash flow illustration.  The Cash Flow Illustration helps client's visualize projected shortages/surpluses prior to retirement.  Upon retirement, the report displays asset distributions to cover spending requirements rather than shortfalls until assets are depleted. 

This post breaks down each column of the Cash Flow Illustration.  

Prior to retirement, the cash flow will display cash flow surpluses, but it is important to note Silver ignores pre-retirement cash flow.  Pre-retirement, Silver is focused on additions the clients are making to their assets and how those assets are growing with rates of return.  Note:  The Special Income/Expense Planners provide an exception to this rule – allowing items entered under the Special Income Planner to be reinvested or items entered under the Special Expense Planner to be pulled from assets prior to retirement.  Education costs included prior to retirement will also be pulled from assets.

When the client retires, the cash flow changes gears and it will show the withdrawals required to meet the living expenses and taxes number.  Post-retirement, the Cash Flow will never show a shortage unless they are out of savings and don’t have any asset to pull from to cover their spending needs.

CashFlow

[1] Earned Income:

  • Earned income is a source of income, and displayed in black.
  • Earned income is the PRE-TAX (gross) value of income as entered on the Pension/S.S. input for “Current Annual Earned Income” for Ind. 1 and Ind. 2.  Taxes due on earned income are included in the Living Expense and Taxes column.
  • Earned income will be included prior to retirement and stop at the clients retirement age set on the Names/Ages input. 
  • Earned income will increase from now until retirement according to the increase rate entered below the earned income amount on the Pension/S.S. input.

[2] Retire/Roth Accounts:

  • Any contributions the client is making into retirement accounts will display a as a use of income, and be displayed in red. 
  • The contribution amount represents personal contributions only.  Company contributions to retirement accounts are not a use of the clients’ income.
  • Any distributions taken from a retirement account will display as a source of income, and be displayed in black.  Distributions represent RMDs and any withdrawal required income needs.  Typically there would be NO withdrawals until retirement, unless special expenses or education costs are included and require a withdrawal from assets and investment accounts were fully depleted.  The PRE-TAX (gross) amount of distributions are displayed.  The taxes due on qualified plan distributions are included in the Living Expenses and Taxes column.

[3] Investment Accounts:

  • Any contributions the client is making into non-qualified investment accounts will are displayed as a use of income, and will display in red.
  • After-tax earnings on non-qualified investment accounts will display as an income source and displayed in black.
  • Any distributions taken from a non-qualified investment account will display as a source of income, and be displayed in black.  Distributions represent withdrawals required income needs.  Typically there would be NO withdrawals until retirement, unless special expenses or education costs are included and require a withdrawal from assets.
  • NOTE: The program will net the total uses (contributions) and sources (after-tax earnings, or distributions required for income needs).  The net result will display in red or black depending on the resulting value.


[4] Pension/Soc Sec.:

  • Pension and Social Security benefits are combined in this column as sources of income, displayed in black.  Both pensions and Social Security benefits will be displays as AFTER TAX (net) values. 
  • Pensions:
    • Pension amount is from the Pension/S.S. input. 
    • The pension benefit will be inflated prior to the start age if you have set “annual increase rate before starting age” and after start age if you have “annual increase rate after starting age” entered. 
    • The program will account for survivor benefits after the death of the pension recipient, when entered under “Percent of this benefit available to surviving spouse” on the Pension/S.S. input.
    • The AFTER TAX (net) pension benefit is displayed.  Pensions are assumed to be 100% taxable.
  • Social Security:
    • The program will estimate a benefit based on the clients earned income, or if the actual benefit is entered on the Pension/S.S. input, the actual benefit will be used. 
    • The program will inflate the S.S. benefit prior to the start age (as well as after the start age), by the increase rate entered. 
    • The program will account for survivor benefits after the death of a Social Security recipient, allowing the spouse to receive the higher of his or her own benefit or the widows benefit (100% of deceased spouse’s benefit).
    • The AFTER TAX (net) Social Security benefit is displayed.  Social Security benefits are assumed to be 85% taxable.

[5] Other Income:

  • This is the total value of everything entered in the Special Income Planner, Special Expense Planner or Education Costs.  Special Income items are a source of income and displayed in black.  Special Expenses and Education Costs are a use of income and displayed in red.
  • If you had a Special Income of 10,000, and a Special Expense for the same year of (15,000), the net result of (5,000) would display in this column. 
  • Special Income items are not reduced for taxes.  If the income entered in the Special Income Planner is taxable, enter the after tax value.

[6] Total Sources:

  • This is the sum of everything to the left of this column (Earned Income, Retire/Roth Accounts, Investment Accounts, Pension/Soc Sec., Other Income).

[7] Less Living Expenses & Taxes:

  • Living expenses and taxes are uses of cash and display in red.
  • The living expense amount is the value entered under the Income/Expense input for living expenses.  The living expense amount can be changed based for pre and post retirement periods.  The cash flow will display the current annual expense amount until a client reaches his or her retirement age, then change to the annual expense amount during retirement.  The amount will also change for survivor situations.  If a client reaches his or her life expectancy, the expense will change to reflect the survivor expense value.
  • The living expense amount will increase according to the inflation rate entered to the right of the expense amount on the Income/Expense input.
  • In addition to the living expenses, taxes on earned income and qualified plan distributions are included in this column.  The expense amount will also included debt payments when elected (see blog post:  Including Debt Payments with Expenses in Silver - new feature in 2017.)  All other income sources (pensions, Social Security, non-qualified investment account earnings) are displayed as after tax values.

 [8] Net Surplus or (Shortage):

  • This is the sum of everything to the left of this column.  Total sources less living expenses and taxes equals the cash flow surplus or shortage.  A surplus indicates income sources exceeds expenses.  A shortage indicates expenses exceeds income sources. 

Remember:

Prior to retirement, Silver ignores cash flow shortages and surpluses.  The program is focused on the additions a client is making to assets prior to retirement.  A surplus is assumed to be spent, as it is not specifically contributed towards savings.

Post retirement, Silver the cash flow changes gears and it will show the withdrawals required to meet the living expenses and taxes number.  The Cash Flow will never show a shortage unless they are out of savings and don’t have any asset to pull from to cover their spending needs. 

The Cash Flow report is an alternative view to the Retirement Capital Analysis report.  The Cash Flow report does not drive what is pulled from or added to their assets, but provides a view of all income sources and expenses.  The Retirement Capital Analysis is the key report for the retirement projection in Silver.  This is the report that drives how much is taken from or added to assets. 

Keep planning SIMPLE with Silver.

Spend less time creating plans and focus on what really matters.

Silver30DayTrialImage.png

Subscribe to Email Updates

Recent Posts

Planner Guides

Check out our free informational guides for advisors including:
  • Fundamental Financial Planning Interview Guide 
  • Making the Most out of Planning Engagements
  • Social Security: Choices Opportunities, and Decisions
  • Understanding Medicare Fundamentals

Popular Posts

Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.