Comments From Developing Lifetime Finances and FinanceBase

While developing Lifetime Finances and FinanceBase, I also developed a viewpoint on number of items that may be of interest. In particular, there is a lack of good, non-product retirement planning, finances in Canada and the USA are surprisingly similar, compounding has good and bad effects, “rule of thumb” is not a good way to plan for retirement and software should be easy to use, but also permit access to special features.

There is a Lack of Good, Non-product Retirement Planning

Lifetime Finances was started because the free retirement calculators provided by banks and other financial instituions make too many assumptions, take too many pages to enter data and then suggested products. Even the Canadian government’s calculator is too slow and not nearly complete enough. While there are a few commercial Canadian calculators that are for individual use, I felt I could do better. However, there are a lot of USA calculators, but a preliminary look at them indicates the Lifetime Finances is a worthy competitor. Time and user-feedback will be the judge.

Canada and the USA are Surprising Similar

To change Lifetime Finances from a Canadian application to one that deals with the USA as well, there were more similarities than differences between how the countries handle investments, government pensions and taxes. Investments had different names, but they could still be grouped into 5 classes now that Canada has TFSAs which are similar to Roth IRAs. Even taxes have much the same structure, with Canada having a greater similarity between provinces as they use the same form. However, most states are different from each other in that they use different forms with different deductions and credits. At the federal level, both countries have payroll deductions, personal deductions, government pensions and registered pension plans with specified payouts. It is in the details for each state that requires the greatest effort.

Rule of Thumb is Not a Good Way to Plan for Retirement

There are many estimates of what is needed to retire. For example, some use a multiple of the present income while others use a set amount of assets and then there is the “4% rule” for withdrawing from assets. Working with Lifetime Finances has made it obvious that only comparing expected expenses against income (from all sources, including assets and the selling of assets as needed) provides the confidence needed. In many cases, because expenses drop off once the children are gone and the mortgage is paid, the income needed in later years reduces the need for a large asset base. Adding the government pensions and a company pensions make the situation better. Doing a cash flow over a lifetime makes it obvious what assets and income are required.

Income Taxes are Often Estimates Using Marginal Tax Rate

It is takes a lot of work to include Federal and Provincial or State taxes into a retirement calculator. Consequently, many calculators just use an estimate for the retirement effective or marginal tax rate. This leads to inaccurate results as the effect of exemptions, dividend tax rates, deductions, property and mortgage credits, etc. are not included. With the inclusion of these in Lifetime Finances, planning during the working and retirement years is as accurate as it can be. Whenever there is an obvious difference due to deductions and exemptions that have not been included, Lifetime Finances proves a means on the Taxes page to adjust the taxes. One of the reasons taxes are not normally included is that they must be updated each year. These are done for Lifetime Finances and they can be imported using an encrypted file. It is then easy to change any saved plans to the new year.

The Greatest Risk to a Comfortable Retirement is the Effect of Compounding

Compounding has a good and bad effect. It is good when applied to investments as the investment grows each year because there is interest on interest. It is bad because expenses also grow each year by the cost of living increase so that what cost a dollar a few years ago now costs half again as much. While the objective is to have assets have a growth rate more that the inflation rate, it is not clear that it will always be enough. One of the best ways to stress-test a retirement plan is to use a high inflation rate and a low investment rate. This will expose when money runs out and what should be done to offset it.

Software Should be Easy to Use, but also Permit Access to Special Features

Designing any software that is user-friendly is always a challenge because making it do everthing it should without adding complexity is not easy. The approach used in Lifetime Finances is to put as much as required to get a good result on one page. A user can then work though the page or use the Wizard without having to keep track of what was entered on a previous page. Everything is visible and can be changed at any time. Then, if the user wants to make adjustments, use some of the special features or tweek some of the yearly data, the additional pages can be used. This approach permits casual users to get results with a minimum of work and financial expertise, but gives the more knowledgeable user access to all of the variables and special features.