In Moneytree Advise, 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 typically displays cash flow surpluses. It is important to note Moneytree Advise ignores pre-retirement cash flow. Pre-retirement, Moneytree Advise focuses on additions the clients explicitly state they make to their assets and how those assets grow with rates of return.
Note: Items going into the Other Income column bypass this rule. The Other Income column accounts for Special Income items, Special Expense items, Life Insurance benefit payouts at death, and Education Costs once existing funds deplete. Every one of these items has options to include or exclude them from the projection. Incomes appear in black, expenses in red.
When the client retires, the cash flow changes gears and to show the withdrawals required to meet the living expenses and taxes number. Post-retirement, the Cash Flow very rarely shows a shortage unless the clients run out of assets to cover their spending needs.
Column 1 – Earned Income:
- Earned income is a source of income, and displayed in black.
- Earned income is the combined pre-tax (gross) value of income as entered on the Income/Pension/SS input for “Current Annual Earned Income” for Individual 1 and Individual 2.
- Taxes due on earned income go into the Living Expense and Taxes column.
- Earned income will be included prior to retirement and stop at the clients retirement age set in the Names/Ages input.
- Earned income will increase from now until retirement according to the increase rate entered for the earned income in the Income/Pension/SS input.
Column 2 – Retire/Roth Accounts:
- Any contributions the client makes into retirement accounts displays as a use of income, showing 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 display as a source of income, showing in black. Distributions represent RMDs and any withdrawal made to meet required income needs.
- Pre-retirement withdrawals are uncommon. They appear if a special expense or education costs force withdrawals from assets and there are no savings and investments available.
- Distributions show the amount taken out to cover living expenses and the amount to cover the taxes caused from the withdrawal itself.
Column 3 – Investment Accounts:
- Any contributions the client is making into non-qualified investment accounts display as a use of income, showing 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 display as a source of income, showing in black. Distributions represent withdrawals to cover excess expenses.
- Typically there NO withdrawals appear until retirement, unless special expenses or education costs force withdrawals 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.
Column 4 – Pension/Soc Sec.:
- Pension and Social Security benefits combine in this column as sources of income, appearing in black. Both pensions and Social Security benefits appear as AFTER TAX (net) values.
- Pension amounts come from the Pension/S.S. input.
- Pension benefits increase 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 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.
- Lump sum pensions appear in the year entered to be received. Lump sum pensions reinvest directly into the tax-deferred retirement account.
- Social Security:
- The report shows the estimated benefit based on earned income, or the value input in the Income/Pension/SS input section.
- Social Security benefits increase both before and after start age based on the increase rate entered.
- Spousal or survivor benefits report if the individual qualifies and the amount exceeds their own benefit.
- The AFTER TAX (net) Social Security benefit appears. Social Security benefits are assumed to be 85% taxable.
Column 5 – Other Income:
- This shows the total value between all Special Incomes, Special Expenses, Education Costs in excess of existing funds, and life insurance death benefit payouts.
- If the total Special Income exceeds the total Special Expense, the reported values is black.
- If the total Special Expense exceeds the total Special Income, the reported values is red.
- Example: If there Special Income of 10,000 occurs the same year as a Special Expense of (15,000), the reported value is (5,000) as an expense in red.
- Special Incomes appear as entered. For taxable incomes, reduce the entered amount in the Special Income input section to account for taxes.
Column 6 – Total Sources:
- This shows the sum of everything to the left of this column (Earned Income, Retire/Roth Accounts, Investment Accounts, Pension/Soc Sec., Other Income).
Column 7 – Less Living Expenses & Taxes:
- Living expenses and taxes are uses of cash and display in red.
- Living expenses include the personal expenses entered in the Expenses input, debt payments when included, and taxes on earned income and asset withdrawals.
- Pre-retirement, the report shows the amount entered in the “Current annual expenses” field.
- As soon as one individual retires, the report switches to the amount in the “Annual expenses during retirement” field.
- After one individual passes away, the report shows the amount in the “Annual expenses for a survivor in retirement” field for the remainder of the projection.
- The living expense amount increases according to the inflation rates entered to the right of the expense amounts on the Income/Expense input.
Column 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.
Prior to retirement, Moneytree Advise 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, Moneytree Advise the cash flow changes gears and it will show the withdrawals required to meet the living expenses and taxes number. It never shows a shortage unless the clients run out of savings and don’t have any asset to pull from to cover their spending needs.
The Cash Flow report provides an alternative view to the Retirement Capital Analysis report. The Cash Flow report does not drive what clients pull from or add 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 Moneytree Advise. This report drives what funds withdraw or invest into assets.