Parameter Changes

A feature is available in Forecaster that allows you to specify a parameter change that is effective starting at a particular year.

Why You Would Use It

Here is one example. If you plan to move from a state with income tax to a state without income tax during your retirement, you can specify a state income tax parameter change to be effective the year of your move. The Forecaster calculation will use the new income tax rate for all years starting with the effective year of the parameter change.

What It Is

A parameter change instruction is another of the instructions available for designing a plan. Parameter change instructions can be defined for each individual asset in your plan. And they can also be defined for the initial plan details that specify the plan's global parameters.

Each instruction specifies its effective year and then one or more parameter changes to be effective from that year onward. By specifying one or more of these instructions, for different years, you can create a plan with varying parameters over the years of the plan's calculations.

How It Works

The initial plan details, as specified in the plan's global parameters, can be considered to be a first parameter change instruction that is effective on the plan's calculation start date. Parameter changes you define for the plan's global parameters then override these initial parameter details in the year your change is effective. The initial plan details, together with your parameter changes, create the plan's global parameters for each year. These are then used in the yearly calculations for each asset.

Also there are certain initial details specified in each individual asset's parameters that can override the global parameters during the yearly calculations. These are asset local parameters such as a specific tax rate or a specific earnings rate. Again, these initial asset details can be considered to be a first parameter change instruction that is effective on the plan's calculation start date. Parameter changes you define for the asset's local parameters then override these initial asset local details in the year the change is effective. Together they create the asset's local parameters for each year.

During the plan's calculation, the plan's global parameters and each individual asset's local parameters for each year are combined so that the local parameters override the global parameters. The resulting set of yearly parameters is used for the yearly calculation of each asset's values.

How To Do It

When you left click the tree view node that represents an asset or the global plan initial details, you will see a new icon on the tool bar in the right hand table view. This icon is the last one to the right, and is for the parameter change instruction. Click this to open the data entry window to add a new parameter change instruction.

You must enter the effective year and at least one parameter change value. After you define at least one parameter change instruction, the tree view node for the collection of parameter change instructions is shown. The tree view node text is taken from the description, if any, or else is made up of tokens representing the parameter value entered. See Figure 1 below.

 

You can define more than one parameter change instruction for the same year if you don't specify conflicting values for the same parameter.

After you have defined at least one parameter change instruction and the tree view node for the collection is visible, you can left click the node to see a summary of the parameter change instructions you defined. If you have multiple parameter change instructions for the same year, they are combined into a single instruction for the summary display. The sequence of the instructions does not matter. See Figure 2 below.

 

If the asset with the parameter change instructions also has initial asset details specified, these initial specifications show up in the summary display as a line for the plan calculation start year.

When you run the plan's calculation, each individual asset's calculation is performed using the combination of the plan's global parameters, including any global parameter change instructions, and the asset's local parameters, including any local parameter change instructions. The local asset parameter values take precedence over the same value from the global parameters. You can see the resulting set of parameters, as used in the calculations for the individual asset, by right clicking the tree view node for the collection. See Figure 3 below.

 

The display shown in Figure 3 shows parameter values for each year in the plan. For each of the yearly calculations for this individual asset ("Living Trust"), all the required parameter values are obtained from this table. Other assets may have different tables of parameter values, depending on their collection of parameter change instructions. Parameter values that are not specifically defined for the individual asset come from the collection of global parameter values.

Only the values in the ROI, Fed Tax, State Tax, and Capital Gains Tax columns can be changed by a parameter change instruction defined for this asset. Values in the COLA column are from the specifications of the global plan details. Changes that you see here are the result of parameter change instructions defined for the global plan details.

Values in the Retirement Living Expense column are increased each year according to the COLA value of the preceding year. Values in the Individual Gift Tax Exclusion column are also increased each year according to the COLA value of the preceding year, except that a minimum of 2% is maintained.

The complete set of parameter values for the global plan details can be seen by right clicking the tree view node for the collection of parameter change instructions under the global plan initial details. If there is no tree view collection node, then the global parameters are defined by the data entry form for the initial details.

These displays are all taken from the sample plan file named "example- parameter changes 1.frc". The values were selected to demonstrate changes only and have no real meaning.

 

Calculation Results Can Be Different Now

If you have run calculations with Forecaster version 3.0.50 or earlier, there are several diferences in the program, made to support parameter changes, that can result is slightly different calculation results.

The yearly individual gift tax exclusion value is calculated differently now. For any year in your plan where gift taxes were due and calculated, the tax amount can be different.

The yearly-inflated value of your retirement expense is calculated differently now. The year-to-year value of this expense can be different.

A different method of determining a year's capital gains tax corrected an error in the prior version. This can cause a different result.

Overall, the different results that have been observed are less than 1%.