Understanding the Economic Assumptions in goalgamiPro

We know understanding Economic Assumptions can be tricky for first time users of goalgamiPro, but we also know even you experts may not understand our economic assumptions used in goalgamiPro.Be sure to also check out our video on this topic. Here is a helpful guide:

Essentially, the economic assumptions are the default assumptions used for the creating the household plan in goalgamiPro. These default assumptions may be modified and drive all of the calculations in the household plan.

Inflation

You have the option in goalgamiPro to “Edit” Economic Assumptions in order to set a rate.

Inflation is the expected annual rate of growth for a goal or resource. Inflation has a significant compounding effect when used over several years. Checking the inflation rate allows you to apply unique inflation assumptions to each goal. The current default Inflation assumption is 2.5%. It is only applied to a goal or resource if you check the box for Inflation.

Anticipated Income Discount Rate

Anticipated Income discount rate is the rate used in the Present Value calculation of Anticipated Benefits and Anticipated Savings.  This includes Social Security, Annuities, Pensions, Retirement Contributions, Educational Contributions, and Other Savings. Simply put, future money on the positive side of the Balance Sheet is discounted at this rate. Why is it used in the balance sheet? –Because the balance sheet brings everything back today’s dollars as the capitalized value of that income stream. On the Household Balance Sheet, Anticipated Benefits and Anticipated Savings are presented as their current worth.  After applying the future income discount rate, you can then look at the future sum of money or future periodic contributions. We provide two options for selecting the rate. You can use the Treasury Yield Curve, or you can use the value pegged to the necessary goals in the goal discount rate.

 

Goal discount rates:

Next you will see the three goal tiers, each with their default values for their discount rates.  You can choose to accept these values or enter your own values for the discount rate. For more information on the three tier goals, please watching our video “Understanding the Household Balance Sheet.”  Just a reminder though that when we do the analysis, all necessary goals get funding first, then target, and then aspirational goals.  Necessary, Target and Aspirational goals can each have a unique goal discount rate.   

 

Transaction Cost

Transaction costs are not AUM (asset under management) charges.  Rather transaction costs are one-time fees used when liquidating accounts for the balance sheet.  To turn them off, set the cost to 0%. Otherwise, transaction cost is always defaulted to 1%.  Transaction cost is applied to security values in accounts, not cash values.

Apply Early Withdrawal Penalty of 10% for Retirement Accounts

Apply Early Withdrawal Penalty pertains to liquidating retirement accounts starting at 56 ½. Like transaction costs, they indicate the overhead of liquidating or using retirement accounts prior to age 59 ½.

If this box is checked, retirement accounts are penalized by 10% on the balance sheet because it is assumed that the accounts are being liquidated. Do not assume that this would only happen on the balance sheet if your client is younger than 59 ½. When the box is checked, the penalty is applied.  When the box is unchecked, the penalty is not applied.