Life Stages (continued) Young adult - age when an individual will either continue their education or begin working. Adult age 26 to 50 - stage of an individual's life most associated with increasing financial responsibilities - raising a family, establishing a home, paying for education, etc. Adult age 51 and over - a period where family responsibilities begin to lessen and plans for retirement should take a more prominent role.
Calculator Uses Constant Dollars Assumes a dollar today is worth the same at any future time Using constant dollars eliminates the effects of price changes allowing comparisons between years without having to factor in the effect of inflation Future estimated balances and resulting withdrawals or annuity payments displayed are represented by their present value in current dollars Accomplished by removing inflationary factors from future inputs to the calculator such as planned contributions, withdrawals, and investment return rates
Asset Balances Displays the asset account balances in constant dollars at various ages Uses ‘true’ investment return assumptions to estimate asset balances at present value ‘True return’ is the annual investment return based on expected after-tax return and after deduction of anticipated inflation rate For example, if annual investment return is 12%, tax rate is 25% and inflation 2.5%, then True return is 12% - (12% x.25 = 3%) - 2.5% = 6.5% If tax deferred account, then True return = 9.5% Three fixed and one user-defined return rates are used to calculate asset balances
Financial Planning Scenarios Easily run multiple scenarios reflecting different asset accounts’ investment returns Accommodates taxable and tax deferred accounts such as IRAs Produces graph of asset balances at various return rates for each scenario Flexible uses, i.e. - College fund calculator
Retirement Planning Features Allows for combination of monthly withdrawals, total withdrawal or purchase of an annuity Calculates asset account balances and/or age when account is out of funds based on planned monthly withdrawal amounts Calculates monthly annuity payments based on account balances and term of annuity for two typical annuity earning rates
Easy to Use – Few Inputs Name that identifies each scenario For each life stage – three entries per input column –Beginning age –Monthly amount –Ending age ‘True’ investment return assumed to be earned on scenario’s assets For annuity – purchase age and term
Example of Using Calculator for Retirement Planning
IDA Design Features Originally designed for Individual Development Account participants Calculator structure includes a column that incorporates matching funds from an asset building program Variables inputted for IDA are the percent match at different life stages and the annual asset match maximum
FAB Housing Calculator 1 Simple calculator for both personal and regional housing affordability assessments Can be used to determine income needed to afford a particular house for sale Can be used by households to determine the price of housing that is affordable Calculates the annual and monthly income needed and equivalent hourly earnings Can be used to assess the relative affordability of housing within a region by using median household income and the median sale price of housing in the region
Mortgage Rates and Affordability Affordability is a function of mortgage rates An affordability calculator should reflect different mortgage rate assumptions Calculator 1 uses three different mortgage rates Historical rate of 8.1% based on past rates Low rate is set at 6% High rate is set at 12% Demonstrates the significant effect of interest rates on current housing affordability
Housing Calculator 1 Assumptions Housing is affordable when no more than 30% of income is spent on housing costs Housing costs include mortgage payments, property taxes, and insurance Mortgage payments based on 80% 30 year mortgage - no mortgage insurance needed Property taxes set at $15 per thousand Insurance based on State Farm Ins. rates
Lender Income Ratios & Affordability Historically lenders have used an income ratio of ~30% to determine affordability Today’s lenders may increase the ratio depending on an applicant’s credit score A housing affordability calculator should have flexibility to reflect this situation The FAB Calculators will handle historical and an individual’s approved higher ratio
Local Housing Affordability Calculator To calculate housing affordability, enter median household income into Annual Gross Income above and local median house sale price into House Price above Homeownership Affordability Index Depending on Mortgage Rates Interest RatesHistoricalLowHigh Affordability Index 1 1.0221.2080.778 1 An Affordability Index of 1.00 or higher indicates that the median priced house sold is affordable to the median income household. An index of 1.15 means that the median income household could afford 115% of the median priced house.
FAB Housing Calculator 2 Calculator 2 produces accurate estimates by using both property and personal data Can be used by households to determine impacts of different financing scenarios Calculates the annual and monthly income needed and equivalent hourly earnings Can use a known credit score to more accurately estimate the cost of mortgage insurance if your mortgage terms require it
FAB Calculator 2 Notes Calculator assumes a credit score of 710 unless a different credit score is entered Calculator uses a debt-to-income ratio of 40% unless a different approved ratio is entered Other monthly debt payments such as auto loans, personal property loans, credit line loans, school loans, minimum credit card payments, alimony, child support payments, etc., are required to be entered
FAB Housing Affordability Calculator 2 House Price Down payment Down payment % Down payment $212,500$30,000 14.12%$30,000 Mortgage amount Term in years Interest Rate FICO Score (Note 1) Lender Approved Debt-to-Income Ratio (Note 2) $182,500306.75%690 Homeowners Insurance - annual premium Property Taxes - annual Other debt monthly payments 3 Monthly housing expenses plus other monthly debt $720.00$2,850.00$425.00$2,015.69 Minimum Income Needed Monthly Income Equivalent Hourly Wage $60,471$5,039$29.07