Understanding cash flow in goalgamiPro can be confusing, in fact the reason this post is just focused on the Cash Flow tab is so you walk away with a clear picture of your funding sources, cost of goals, household account balances, and how these generated calculations are organized. What is the Cash Flow Planner? The Cash Flow Planner is a powerful diagnostic tool we include to further our goal of helping advisors quickly and effectively assess a client’s ability to fund their goals.
If you would like to log in to goalgamiPro and click on your household plan, and then click the “Cash Flows” tab, you will see the generated cash flows for that household.
This visual may help you understand what I am about to describe below.
At a high level, you should know that the cash flow is completely dependent on what the Balance Sheet says and therefore the two are linked. In other words, the Cash Flow Planner is meant to complement the Household Balance Sheet. The Household Balance Sheet analyzes the household’s goals over a Household’s entire plan horizon and then gives a snapshot of the household’s ability to afford their goals. At a quick glance, the balance sheet helps answer the question: can you afford your goals?
We must also remember there are rules and regulations surrounding when money can be withdrawn. Sometimes money is not available when you need it and the balance sheet does not anticipate that. It can only relay what is available based upon resources; it does not take “time” into consideration. It is very common for clients not to have enough money for periods of time—in other words a cash shortage.
In some cases, the balance sheet and cash flow do not align based on the assumptions made. For example, in the cash flow planner a fixed rate of return is used for taxable and non-taxable resources, whereas in the balance sheet, 3 rates are return are utilized to bring resources to present value. The one fixed rate of return is calculated from the 3 discount rates used for the balance sheet. The calculation takes into consideration the 3 goal discount rates and the weighted cost of each goal level. How are rates of return calculated and applied in the Cash Flow Planner?
The first component of the calculation is the discount rate for each goal priority level, which you entered in Economic Assumptions when setting up the household’s account; in the Cash Flow Planner it is used to calculate rate of return. The second component is the weight of the goal level to the total goals (i.e., Necessary goals are x% of total goals.). Third, we look at the percentage of each goal level that can be funded by the household; this is called the Funding Ratio. For each priority goal level, we multiply these values—the discount rate, the weight of the goals, and the Funding Ratio. Finally, we total the rates for each goal level to determine the final rate of return.
Retirement and brokerage accounts used the derived rate of return, but each account type factors in taxes to determine the resulting cash flow from that account in each year. That account is then tapped to fund goals.
For bank accounts, the Cash Flow Planner uses a fixed rate of return that is reviewed—and, if necessary, revised—periodically.
How do you read the table?
The Cash Flow Planner is an optimization tool – it will pull money from the most tax effective resource to pay for a goal.