Welcome to this tutorial on the Qualified Plan Calculator inside the Truth Concepts Software.  What Todd will be going over below is how to use the calculator to show the whole truth around this arena.  Could be a 401k plan, an IRA, a SEP IRA, simple, the 403b, Profit Sharing Pension Plan, anything that falls under the government’s domain in the Qualified Plans.  This calculator will tell the whole truth about the money inside this plan.  You can view the visual tutorial by clicking on the Tutorials tab on title menu of the home page. 

We’ll look at the 401k and let’s say we have an individual who is 35 as our current age, and we’re going to look out to age 64 which is 30 years.  We’ll have a present value, this is going to be the money currently in the plan and let’s put $100,000 and let’s put an earnings rate of 8%.  So what we see is right off the bat we have account value that is going to grow to $1006,266 and the rate of return is the 8% that we put in there.  Let’s also put in an annual payment.  So I’m going to click on the payment block and I’m going to put in here $10,000 I could increase this if I want to but I’m just going to put in a level $10,000 per year from 35 to 64 and it didn’t change our rate of return but it did move our account value up to $2,229,724. 

Now, I would do this in the order I’m doing this right now and what I want to do is show the benefit of the Qualified Plan, the reason that this individual put it in there which typically is well I get some tax help from the federal government most people look at it as free additional dollars that go into the qualified plan in reality it is a tax deferral.  They also put money in there for the employer match that’s available and we’ll assume that this individual has both of those.  So I’ll click on the tax cost and deferral button and I would like to use the federal income tax so right down here in the I need to put in all of his other income.  The number that should go in here is his net taxable income after all of his deductions except for the deduction for the qualified plan.  So let’s assume that number for this person is $65,000 and what we see is nothing has occurred because I haven’t brought in the tax deferral so now I have to click on tax deferral and when I do it’s going to apply the deferral.  When we do we see the rate of return went to 8.5%.   We see that the value of that tax deferral was $489,290 and what that number represents is the tax deferral plus the growth off that tax deferral off this timeframe so total value of having the government “free” money. 

Now let’s also add the employer match I do that by clicking on employer match.  We could either put a level amount in here or put in a %.  I’m going to put in 50%.  The client typically only hears the 50% number even though most plans don’t match all of the contribution.  In this case, we’re going to assume that the plan documents say the person gets a 50% match but only up to the first $2,500 of their contribution.  So I’m going to put in under maximum match $2,500.  What we see is the ROR went from 8.5% up to 8.78% now we have an additional benefit which is $235,734 worth of net employer match which is the match compounded out over the timeframe.  At this point in this scenario this individual has $2,382,657 dollars in the account.

So now we need to start looking at the costs.  Where I would start is the management fee.  When we look at a management fee, we’re going to put a conservative one in here of 2.5% along the way $439,000 was taken out of the account by management fees bringing our account value down to $1,299,640.  This typically is the number that most people see that the value of account this would be the statement that they would have.  In reality the only way they get to that $1,299,640 is if they pay the tax on that.  So I’m going to add the tax cost in there just by clicking on tax cost. When I do you see if they liquidate the account at age 64 he would have to pay $439,000 in tax which would leave him with $860,000 this is really the number the client needs to have in his head as the value of this account even though the account statement is going to show the gross $1,299,000 he only really has $860,000.  We see that his ROR is 4.94%. 

Something I want to add to this if he makes the decision to contribute to his qualified plan and he doesn’t have money for permanent life insurance then that means in order to protect his family he’s going to have to purchase term insurance.  So I want to add that as a cost in order to make this decision.  Here I’ll click on term insurance which will open up the input box on far right I’ll put in $850 term premium I’ll put in for this 30 year plan.  I could go in and put in a different amount for each year or copy them from an illustration.  Also in this input box we can adjust our payment in any year into the qualified plan, we could have a withdrawal stream we could change in any year what that withdrawal was, we could also change the earnings rate in any year.  We could paste the market history in here, there’s all kinds of things we could do with this input box.  In order to open up or close this box term insurance box or at the top we have a picture of a spreadsheet button which will also open that up. 

What’s happened is since we added a term premium as a cost it dropped our ROR to 4.63%.  We couldn’t take our term premiums out of our qualified plan so term premiums are going to come from income or other assets.  In order to find out what the real impact is to our other assets what we’ll do is add a cost of money.   So I’m going to put in 5% COM.  And all that does is show the cost of carrying this term insurance really is $59,297.  It didn’t change our ROR.  The argument we hear is they would never take this money out in one lump sum they’re going to stretch it out over time and that’s probably true so let’s see how that affects our ROR in this arena.  What I’m going to do is change my projected age to 85.  I want to make sure I stop my payment though at age 64.  We’re going to stop contributions at age 64, we’re just going to look at the scenario out to age 85.  If he didn’t take any withdrawals, which we know he cannot really do, this account would continue to grow and would have $3.8 million dollars in at that point.  By law he would have to start taking money out at age 70 and a half currently and that may change but if we look at this and assume he is going to pull money out at age 65 starting, click on withdrawal button I can put in a flat amount to pull out or I could have the computer calculate how much to pull out.  I click on Auto and it’s going to calculate that $98,283 to come out each year and totally liquidate the account at the end of this timeframe which is 85.  The ROR is 5.15%.  Before it was 4.65%.  There’s not a big difference if he takes it out all at once or if he stretches it out.  The impact from taxes and all other costs are still the same. 

This block on far right column of numbers it keeps track of our money that we’ve actually earned in the account and what percentage.  This breakdown is that 20% of money that we spent was our own money.  That was our contribution and it was only our contribution, we put in $10,000 a year but part of that was a tax deferral so we didn’t really put in the whole $10,000.  It only puts our portion of the contribution into the plan. 55% was the net earnings on our contribution.  16% is both the tax deferral and growth on the tax deferral by the end of the timeframe.  9% is the free and clear match and the growth on that employer match.  So this is the breakdown of dollars we either spent or ended up with in the account.  We see a 5.15 ROR. 

That is really helpful, what we’ve got is a picture of the qualified plan, the whole truth whatever the client has in there already, the ROR, the variables that can be put in place with the market and the term insurance and it graphically presents it and makes it really clear the whole truth about qualified plans.  Thanks Todd!