How Money calculates items in the lifetime planner (Part 1 of 3)

This is a document that used to be provided on the Microsoft Money 98 site, but can no longer be found. Much of it is still relevant in more recent versions of Money.

Keep in mind that this document focuses primarily on calculations for the Lifetime Forecast (in contrast to the Short-Term Forecast). Also, this document does not cover every calculation or rule that the forecast uses.

Quick Facts about the Lifetime Forecast

• The Forecast begins on the current day and ends when both you and your partner have reached their lifetime expectancy, as indicated in About You.
• Time units are years. The first year always ends on December 31, so the first and last years might not be full years.
• The graph always shows the balance of your Spending, Short-Term Savings, Long-Term Savings, and Retirement account groups.
• Money calculates the balance of account groups at the end of the year based on the balance on January 1, plus inflows and minus outflows for the year.
• The balance at the start of the year is always the same as the balance at the end of the previous year in the Forecast.
• Calculating the amount of inflows and outflows is based mainly on your entries in About You, Budget, and Goals & Events. Modifications are made to the budget over time based on events, inflation, investment gain, and taxes.
• When you look at the Forecast, the starting date is always assumed to be today's date. So, the Forecast always keeps up with real time, and is constantly recalculated based on the current balances in your Money file.
• Incoming money that you do not explicitly save will be allocated for spending.

What about my first year balances?
For the beginning balance of the first year, your Lifetime Forecast uses the sum of the balances of all account groups at the end of the date you create the plan. (For example, if you are looking at your Forecast on a date when you have paid bills, your account balances reflect the balance after the bills have been paid.)

The first year always ends on December 31 (rather than 12 months from the start date), so the first "year" might really be just a few months long. However, your calculations will still be accurate, as Money calculates inflows and outflows based only on the months that your plan is in effect for that year.

How is my INCOME calculated?

Income is calculated from the top-level budget as follows:

• The Income section of the top-level budget lets you specify monthly and any additional yearly income for each partner, as well as any additional income received monthly in the Other Household Income field. There is a line item for each of these income sources in the Forecast.
• The entire monthly income budget is applied for the first (current) month even if today's date is the last day of the month. Likewise, the entire month's portion of the additional household income is included for the current month, regardless of today's date. (1/12th of the full additional household income amount is applied to the first month and every month after that.)
• The entire income of a partner-salary plus additional yearly income-stops when the life expectancy of that person is reached. (Of course, at any time, you can change the life expectancy number in the About You section of the Planner.)

Events
Any of the following events that you specify in the Goals and Events section of the Planner can change the salary of one or both partners:

• Change future income
• Receive raise, pay cut, or career change
• Retire
• Start working
• Stop working

In each of these events, you specify the new salary, the rate of yearly increases, an amount which the salary cannot exceed, and whether or not to include the event in the Forecast. The new salary replaces the entire salary for that person (monthly + additional), but has no effect on the Other Household Income. In calculating the total salary for the year, the Forecast calculates the amount of income earned before the event and after the event.

Also, many events can bring in special income in the future. Here are some examples:

• Pay off a loan
• Receive future income
• Receive future inheritance
• Receive Social Security or pension
• Sell a house
• Sell one house to buy another
• Sell something you own

In each of these events, the Lifetime Forecast takes into account your specifications for the amount of income, what you'll do with it (such as add it to a specific account group or use it to pay off a loan), and the rate at which it will be taxed. You can also decide not to include any income event in the Forecast. To do so, in the Goals & Events area, simply click the event, and then uncheck the "Include this goal in my forecast" box in the lower-left corner of the screen.

In your Forecast, it's easy to see details about a special income event. Just double-click the bar in the Forecast graph for the year you specified for the event. In the box that appears, scroll down to the event you're looking for. To see details for an event that occurred in the past, double-click the first year in the Forecast graph.

Special event income amounts are added to the Spending account group, with two exceptions. The "Sell a House" and "Inheritance" events are added to the Long-Term Investments account group, and are reduced by the amount of tax specified in those events. If you've indicated you'll use special income to pay off a loan, the net amount is applied to that loan if it exists.

Taxes
Taxes are paid on all sources of income from Spending accounts at the average tax rate specified on the Planner tab of the Options dialog box. (To open this box, click Options on the Tools menu.)

The Forecast uses the following rules:

• Contributions to retirement funds come out of pre-tax salary income.
• Contributions to the other saving groups come out of after-tax dollars.
• Tax on special income is computed as: (income received - original cost) * tax rate. (The tax amounts are specified in each special income event.)

Inflation
You have the option of viewing the Forecast in Real Dollars (inflated) or Today's Dollars. To change between Real Dollars to Today's Dollars, click Options in the lower-left corner of the Forecast section of the planner. In the box that appears, click the option you want, and then click View.

The Forecast uses the following rules:

• If Money calculates the forecast in Real Dollars, the salaries will increase each month in the Forecast.
• For events specifying a change of salary, the new salary grows with inflation as does the salary limit. For events specifying special income, the expected income received amount grows with inflation but the original cost amount does not.
• If Money calculates the forecast in Today's Dollars, the salaries are not adjusted for inflation. Instead, the balances of the four account groups are reduced at the end of the year by the inflation rate.
• The formula for the new salary is computed as: old salary * ((1 + inflation rate) ^ (days since last salary calculation / 365.25)) where the inflation rate is the average inflation rate as set in the Options dialog.

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