Is it a problem that we are taking some forward looking numbers (goals) and combining them with today’s numbers (investment accounts)?

The Household Balance Sheet is a diagnostic that provides a single point in time comparison of a household’s resources versus cash flows funded by those resources – it’s an affordability check. The very nature of a “present value” calculation is to determine a value today of a set of numbers in the future. The various discount rates described above imply a certain rate of return on portfolio assets to fund those costs over time. For comparison purposes, each item on the Household Balance Sheet is assigned a value. The values represent the current liquidation value of resources and the estimated cost of funding goals. For resources, the basic valuation methodology is:

1. Liquidation Value
2. Actuarial Net Present Value (ANPV)

The liquidation value is simply the dollar value entered for marketable resources, such as an investment account.  Actuarial net present value is the method applied to non-marketable resources. Each method results in a gross value of the item. This gross value is then adjusted for the various costs that would be incurred in the event of liquidation, for example sales charges and capital gains on securities. In the case of income producing assets, the system subtracts the ANPV of the income taxes that are forecast to be levied on the income stream. For expenditures the valuation methodology is:

1. Net Present Value (NPV)
2. Actuarial Net Present Value (ANPV)

NPV is employed for education, one-time, and recurring goals where we presume the goal would survive the death of the household. ANPV is employed for retirement expense goals as we assume those goals terminate with the household’s death. For goals, which are explicitly valued on a discounted cash flow basis, the rate used to discount goals is chosen based on the priority level of the goal. The rate used to discount Necessary goal amounts reflects government bond rates. The rate used to discount Target goal amounts reflects expected returns on a balanced portfolio. The rate used to discount Aspirational goal amounts reflects the expected return on an aggressive portfolio. These discount rates represent a translation into values of the financial flexibility captured in the priority level. As capital market assumptions change, the discount rates based on those assumptions should change as well.