Age Finder: this button, located at the top of the application, activates a window that shows the year in which you and your spouse/partner are specific ages.
Annual Benefit: the annual payments made by defined benefit pension plans
Annuities: a financial security whose payments continue as long as the owners of the asset survive.
Assets: titles of ownership of real properties or financial securities.
Asset Income: refers to the interest, dividends, capital gains, and other capital income earned on investments in real property and financial assets.
Bonds: titles of ownership of loans made to individuals, businesses, or the government
Borrowing Constraint: the maximum amount the household can borrow.
Build Portfolios: to access this screen, select Monte Carlo from the Folder List. If Monte Carlo doesn’t appear on the Folder List, activate on the Family Information screen at the bottom right. The Build Portfolio screen asks you to specify up to 10 different portfolios that you and your spouse/partner may wish to hold either now of in the future, either in Regular Assets or Retirement Accounts. Once you have built your family’s portfolios, click Implement Portfolios to specify the particular portfolios you wants to hold in regular assets and in your and your spouse’s/partner’s retirement accounts in each future year.
Cash Value of Life Insurance: the amount of money saved in the course of paying life insurance premiums on a whole life insurance policy. Whole life policies combine term insurance and a saving account. The cash value of whole life policies refers to the size of the policy’s savings account.
Child-Adult Equivalency: the ratio of the expenditure on a child of a specific age needed to provide the same living standard as that of an adult
Family List: this is a list of all families, which is display to the left of the Family Information screen. If you click the name of the family on family list, you will see a listing of all of the profiles for that family. If you click on a profile, you’ll see Inputs, which you can click to access the input folders, as well as reports that have been already been computed and are available for viewing.
Create Reports: click on this button to get a menu of reports that you can generate. Select the ones you want to generate and then click Compute.
Consumption: refers to all expenditures by the household other than special expenditures, housing expenditures, taxes, and insurance premiums. Recommended annual consumption amounts are calculated by ESPlanner in light of your household’s current and future economic resources, its current and projected future demographic composition, its current and future projected spending on housing, special expenditures, taxes, and life insurance premiums, and your preferences about how you’d like your living standard to change over time and in the event of the death of the household head or spouse/partner.
Consumption Smoothing: refers to the financial planning approach of ESPlanner that determines the amounts of saving and life insurance necessary to smooth the household’s living standards before and after retirement as well as in the event of the death of the household head or spouse/partner. In smoothing the household’s living standard over time and in the event of early death of the head or spouse/partner, ESPlanner takes into account the households’ economic resources, living standard preferences, special expenditures, estate plans, housing plans, demographic composition, and economic assumptions. ESPlanner also takes into account economies in shared living.
Contingent Labor Earnings: the amount of money that one spouse/partner expects to earn in the event of the death of the other spouse/partner.
Contingent Planning: forming plans for the event that the household head’s spouse/partner may die.
Contingent Special Expenditures: are special expenditures that will occur if the household head or spouse/partner passes away. Contingent special expenditures are set equal to regular special expenditures unless their values are changed in the Contingent Plans Folder.
Current Earnings: money earned this year from working.
Current Saving: the amount you intend to save this year according to your responses on the first three pages of the Saving Folder
Custom: this button allows you to enter your professional information.
Defined Benefit Pensions: employer-provided pension benefits. The size of these pensions is defined by a formula that typically depends on age, years of service, age of retirement, and past earnings
Defined Benefit Pension Plan: an employer pension plan that provides a defined benefit.
Defined Contribution Accounts: tax-favored, employer-provided retirement accounts in which the employer defines how much is to be contributed for each employee. Defined contribution accounts generally permit employees to make matching contributions and to choose, within certain limits, how contributions to their accounts are invested
Dollars: refers to valuing dollars received or spent at prevailing prices with no adjustment for inflation; i.e., it refers to the actual number of dollars paid or received.
Downpayment: is the amount of money that one needs to have to add to borrowed funds in order to receive a mortgage (to borrow money to purchase a house). A typical downpayment might be 20 percent of the purchase price of the home.
Economic Assumptions: the set of inputs entered in the Economics Folder
Earnings Growth Rate: the annual rate at which earnings will grow in today’s dollars
Economic Resources: includes the household’s current net worth (including employment-related retirement accounts) and its current and future labor earnings, pension benefits, social security benefits, and inheritances.
Economies in Shared Living: the fact that people living together can jointly consume a variety of goods, like television viewing, heat, lighting, housing space, and thus enjoy a higher standard of living than if they lived separately. This is often referred to as “Two can live more cheaply than one.”
Employee retirement account contributions: Contributions made by employees and the self employed to tax-favored accounts
Employer retirement account contributions: Contributions by employers to an employee’s tax-favored account
Estate: money left to surviving household members in the event of the death of the household head or spouse/partner. It is calculated as the household’s net worth (at the time of the decedent’s death) plus ESPlanner’s recommended term value of life insurance on the decedent, less the decedent’s special bequest and funeral expenses.
Excess Funerals and Bequests: the excess in the household last year of home equity over its funerals and bequest expenditures
401K Accounts: tax-favored, employer-provided retirement accounts, which are also called defined contribution accounts
Face Value of Life Insurance: the amount of money paid by life insurance policies in the event of the death of the insured.
Fixed Annuity: an annuity whose payments do not vary with the performance of the assets in which the annuity premium is invested.
Folder List: this is a list of the input folders. To access the Folder List for a particular profile, double click on the family’s name in the Family List, select the profile, and then either a) double click Inputs or b) click Edit in the Profiles tool bar.
Funeral Expenses: the amount of money you must pay to be buried or cremated. Typical funeral expenses appear to be around $5000, but to be safe, you should budget for a higher amount.
Future Earnings: money earned in future years from working
Guide: clicking on the Guide button activates instructions for entering data on each screen
Home Equity: The difference between the market value of your primary and vacation homes and mortgages and other housing loans outstanding on these homes
Household Members: the household head and spouse/partner (if the head is married) plus all children age 18 and under.
Housing Expenditures: include all housing-related payments on the household’s principal residence and vacation home. These payments include rent, mortgage payments, property taxes, homeowner’s insurance, maintenance, and condo fees. The release of housing equity through the sale of a home is treated as a negative housing expenditure.
Housing Finances: refers to the financial variables associated with homes. These variables include the value of homes, the size of outstanding mortgages or other loans used to purchase homes, and the amount of monthly mortgage and other housing loan payments.
Implement Portfolios : this screen allows you to tell the application which of your portfolios you wishes to hold in your and your spouse’s/partner’s regular assets and retirement accounts in each future year.
Income: the receipt of money. Income may reflect money earned from working, money received from pension or social security, money earned on past investments, or money received as gifts or inheritances.
Inflation: the general rise in prices between any two periods
Inflation Indexation of Pension Benefits: the degree to which pension benefits are adjusted each year for inflation.
Insurance Load: the administrative and sales charges included in insurance premiums.
IRA: Individual Retirement Account
Joint Estate: the estate that the household head and spouse/partner will leave to surviving household members if they die at the same time.
Joint Estate Report: a report provided for married couples that shows their combined estate if both spouse/partners die in the same year.
Keogh Accounts: tax-favored retirement accounts of the self-employed
Labor Earnings: money earned from working
Labor Income: refers to labor earnings of the household head or spouse/partner.
Large Cap Stocks: stocks of the 500 largest companies in the U.S.
Liabilities: amounts of money that have been borrowed or are otherwise owed.
Life-Cycle Model : the economic theory of saving and insurance that predicts that households will seek to smooth their living standards over time and preserve that living standard in the case of the early death of a spouse/partner or partner.
Life Insurance: an insurance policy that is purchased with insurance premiums and pays money on the death of the insured. Life insurance policies can be term or whole. Whole life policies combine term life insurance and a savings account.
Life Insurance Premiums: payments needed to purchase ESPlanner’s recommended amounts of term insurance for you and your spouse/partner (if you are married).
Living Standard: refers to the household’s consumption of goods and services. ESPlanner’s recommended levels of saving and insurance permit household members to enjoy the same standard of living over time and in the event of the death of the household head or spouse/partner. In making its recommendations, ESPlanner takes into account economies in share living: the fact that two people living together can jointly consume a variety of goods, like television viewing, heat, lighting, housing space, and thus enjoy a higher standard of living than if they lived separately.
Lump Sum Benefit: a one-time payment made by a defined benefit pension plan.
Main Reports: reports that assume you and your spouse/partner (if married) live to their maximum ages of life
Maximum Age of Life: is the oldest age to which you or your spouse/partner (if you are married) might live. The maximum age of life should not be confused with the expected age of life: the age at which people, on average, die. In choosing the maximum age of life, one should err on the high side. The reason is that ESPlanner will plan for your household’s consumption only up to the latest year that you or your spouse/partner might be alive (although it will take into account the need to maintain the living standards of surviving children through age 18 as well as cover future special expenditures). The lower you set the maximum ages of life for yourself and your spouse/partner, the less ESPlanner will recommend that you save. Note that, if you are married, you are free to set different maximum ages of life for yourself and your spouse/partner. You are also free to change the maximum ages of life as often as you’d like and rerun the program. In this way, you can determine the sensitivity of ESPlanner’s recommendations to the assumed maximum age of life. For example, if you first try age 95, but think that may be a bit high, rerun the program with age 90 and compare results. Remember, running out of money is no fun, so choose a conservative (i.e., high) value for the maximum age of life.
Maximum Indebtedness: the most your household can borrow for purposes other than purchasing a house.
Minimum Distribution Requirements: the requirement that tax-deferred retirement account assets be withdrawn at a minimum rate based on the age of the account holder.
Monte Carlo: when you activate Monte Carlo simulations at the bottom right of the Family Information screen, ESPlanner adds a Monte Carlo input folder to the Folder List. When you click on this folder, you’ll see a screen with two tabs, Build Portfolios and Implement Portfolios.
Monte Carlo Simulations: each Monte Carlo simulation is based on three sequences of rates of return: one for the annual returns on the household’s regular assets, one for the annual returns on your retirement account assets, and one for the annual returns on the your spouse/partner’s retirement account assets. Each sequence consists of a rate of return drawn at random for each year starting from the current year and continuing through the last year to which your or your spouse/partner could live. The random draw of a rate of return on your regular assets in a particular year is based on the probability distributions of the returns on the assets held in that year’s regular asset portfolio. Similarly, the random draw of the return earned on your retirement account assets in a particular year is based on the probability distributions of the rates of returns on the assets held in that year’s retirement account portfolio. And the random draw of the return earned on the spouse/partner’s retirement account assets in a particular year is based on the probability distributions of the rates of returns on the assets held in that year’s spouse/partner’s retirement account portfolio.
In the simulation, the program starts in the current year, determines the household’s spending based on its current regular and retirement account asset positions, and then uses the first-year’s random returns to determine how much regular and retirement account capital income the household will earn over that year. Given this capital income and the household’s labor and other income and given current year spending, the program determines the household’s asset positions at the beginning of the next year.
These asset positions determine, in turn, the next year’s spending. The reason is that the program’s dynamic programming calculates in advance the spending levels the household will have for all possible levels of regular and retirement account assets in each year. (Incidentally, these calculations take into account the higher taxes that come with higher levels of capital income.) Proceeding in this manner generates a time path of spending, net worth, and total income for the particular simulation being run. By running a large number of these simulations, one can determine percentile distributions of spending, total income, and net worth in each future year.
Mortgage Balance: is the outstanding unpaid amount of money borrowed to purchase a home.
Mortgage Payments: are the regular payments made to pay off a mortgage loan on a home.
Mutual Funds: investment vehicles that pool together the money of many contributors and use them to invest in diversified portfolios, typically of financial assets. For example, a bond fund is a mutual fund that invests in an array of bonds, whereas a stock fund is a mutual fund that invests in various stocks.
Net Home Purchases: The amount spent on purchasing primary and vacation homes net proceeds (net of the sales costs) from the sale of your primary and vacation homes
Net Worth: the sum of regular assets, retirement account assets, reserve fund assets, and home equity.
Non-asset Income: is the income exclusive of capital income earned on regular or retirement account assets. It includes labor earnings, defined benefit pension income, special receipts, and social security income.
Pension Income: refers to pension benefits received by the household head or spouse/partner.
Percentage of Capital Income Earned on Regular Assets that is Received as Capital Gains: fraction of the income that you earn on your regular assets that is earned in the form of capital gains.
Percentile Distribution: shows the value of a random variable such that a specified percentage (e.g., 75 percent) of draws of that variable fall below that value.
Portfolio: the allocation of a household’s financial assets among stocks, bonds, and other financial securities
Rate of Return on Regular Assets: the pre-tax nominal rate of return earned on regular assets. If Monte Carlo simulations are activated, this rate of return is calculated automatically for each year and equals the expected return on the regular assets portfolio specified for that year.
Primary Home: is the household’s principal residence.
Rate of Return on Retirement Account Assets : the pre-tax nominal rate of return earned on retirement account assets. If Monte Carlo simulations are activated, this rate of return is calculated automatically for each year for you and your spouse/partner separately and equals the expected return on the retirement account portfolio specified for that year for your and your spouse’s/partner’s respective retirement accounts.
Profit Sharing Accounts: employer-provided retirement accounts in which the amount contributed by employers for each employee is a percent of the company’s profits.
Rate of Inflation: the percentage increase in the economy’s overall level of prices between one year and the next.
Regular Earnings: the labor earnings of the household head or spouse/partner when both the household head and spouse/partner are alive.
Regular Assets: these are assets other than those in retirement accounts. These assets are not tax-favored.
Regular Asset Income : the interest, dividends, capital gains, and other forms of capital income earned on regular assets.
Regular Estate: the sum of regular assets, life insurance, and the reserve fund.
Rent: is the amount paid on a regular basis to occupy a dwelling, which one doesn’t own.
Reserve Fund: these are assets your family either currently has or wants to accumulate, but doesn’t want to spend. The program assumes that the reserve fund is converted to regular assets and spent by survivors once you or your spouse/partner passes away.
Retirement Accounts: these are assets held in 401(k), IRA, Roth IRA, SEP, Keogh, and similar saving accounts.
Retirement Account Contributions: annual contributions to retirement accounts.
Retirement Age: is the age at which you (or your spouse/partner) will stop earning money from working. This may be an older age than the age at which you formally retire from your current job, since you may decide to work in another job thereafter. You are free to enter different retirement ages for yourself and, if you are married, your spouse/partner. If you are married, you can also specify different retirement ages in the case that your spouse/partner dies before his or her maximum age of life.
Roth IRA: an individual retirement account contributions to which are not deductible and withdrawals from which are not taxable.
Saving: the increase over time in a household’s net worth. ESPlanner defines saving to be the household’s total income minus its expenditures on consumption, special expenditures, housing expenditures, and life insurance premiums.
Social Security Benefits: include Social Security retirement benefits, survivor benefits, divorcee benefits, children’s benefits, mother and father benefits, and spousal benefits.
Social Security Children Benefits: Social Security benefits available to the child survivors and dependents of Social Security covered workers.
Social Security Covered Earnings: labor earnings subject to Social Security taxation.
Social Security Divorcee Benefits: Social Security benefits available to the divorcee of a Social Security covered worker when the marriage in question lasted for 10 or more years.
Social Security’s Earnings Test —The reduction in Social Security benefits arising from having labor earnings above the exempt amount of such earnings
Social Security Income: refers to the amount of social security benefits received by the household head or spouse/partner.
Social Security Retirement Benefits: Social Security benefits received by workers in retirement
Social Security Spousal Benefits: Social Security benefits that one spouse/partner can receive in retirement based on the Social Security earnings record of the other spouse/partner
Social Security Survivor Benefits: Social Security benefits available to widows or widowers and their children based on the Social Security earnings records of their deceased former spouse/partner
Special Bequest: the amount of money that the household head or spouse/partner wish to leave upon their death. Special bequests may reflect the desire to bequeath to children and other relatives, friends, charities, foundations, etc. Note that ESPlanner automatically recommends amounts of life insurance and saving that will provide surviving household members with the same living standard in the event of the death of the head or spouse/partner as they enjoyed prior to the death. It also takes into account the need of surviving household members to pay for survivors’ special expenditures.
Special Expenditures: are unusual payments that need to be made in a particular year. Examples of special expenditures are college tuition payments, nursing home care for parents, weddings for children, and computers. Special expenditures do not include downpayments for the purchase of a primary or vacation home. These downpayments should be specified in the Primary and Vacation Home Folders. The also do not include mortgage and other housing loan payments. Special expenditures do include all non-housing loan repayments.
Special Receipts: are unusual receipts of income expected to be received in a particular year. Examples of special expenditures are college tuition payments, nursing home care for parents, weddings for children, and computers.
Spending: the sum of money spent on consumption, special expenditures, housing expenditures, and life insurance premiums.
Standard of Living Index: this index lets you tell ESPlanner that you’d like your families to have a lower or higher living standard in old age. Living standard refers to the consumption of goods and services of household members adjusted for the number of household members. The program automatically recommends more consumption spending when there are more mouths to feed, so don’t use this index for that purpose. Use this index only if you want to have the program generate a higher or lower living standard, per equivalent adult, in the future. The current year’s value of the index is always 100. Setting a value, for example, of 110 (90) in a future year will tell the program to attempt to achieve a 10 percent living standard increase (decrease) in that year. The program will do so to the extent doing so does not require violating the assumed borrowing constraint.
Stocks: titles of ownership to corporations
Surviving Household Members: the surviving spouse/partner and surviving children age 18 and under
Survivor’s Living Standard: the consumption of goods and services of surviving household members. ESPlanner’s recommended levels of saving and insurance permit surviving household members to enjoy the same standard of living as they enjoyed prior to the death of the household head or spouse/partner. In determining the size of the estate that surviving household members must inherit in order to maintain their former living standard, ESPlanner takes into account economies in share living: the fact that two people living together can jointly consume a variety of goods, like television viewing, heat, lighting, housing space, and thus enjoy a higher standard of living than if they lived separately.
Survivor Reports: Reports for a surviving wife (husband) of a married couple conditional on a hypothetical age of death of the husband (wife) specified by clicking the Show Reports button. The first time this button is clicked, the hypothetical ages of death for each spouse/partner are taken to be their current ages. After reports based on these hypothetical ages are shown, one can change these ages by returning to the Folder Menu and clicking the Show Reports button. You will now have the option to change these hypothetical ages of death.
Survivors’ Special Expenditures: special expenditures of the household that will be made in the contingency that either the household head or spouse/partner or both are deceased. Examples of special expenditures are college tuition payments, nursing home care for parents, weddings for children, and computers. Survivors’ special expenditures do not include downpayments for the purchase of a primary or vacation home. These downpayments should be specified in the Housing Folder.
Targeted Liability Approach: refers to the traditional method of financial planning in which households are asked to specify the amounts of income or expenditure they seek to have or to make in retirement and in the event of the death of the household head or spouse/partner. In asking households to set such income targets (which then represent a so-called liability for which one needs to save), the traditional approach to financial planning asks households, in effect, to plan for themselves. Why? Because choosing the correct target is a highly complicated decision for which the traditional targeted liability approach provides no real guidance beyond some arbitrary rules of thumb. For example, households that are asked how much money they’d like to have to spend in retirement might respond with too high a figure that would require drastic cuts in the household’s current living standard to achieve. Other households might specify too low a figure leaving them planning to have a much higher living standard in the present than the future. If, as economic science suggests, households seek to smooth (equalize) their living standard at all ages or have their living standards change gradually through time, then ESPlanner is the correct tool to use because it determines directly how much each household needs to save and spend on life insurance policies to guarantee (subject to its assumed income and other data) either a constant or gradually changing living standard through time and in the event of the death of a spouse/partner.
Taxes: the sum of federal income taxes, state income taxes, and FICA taxes
Tax-Deferred Retirement Accounts: 401(k), 403(b), traditional IRA, and other retirement accounts in which contributions are tax deductible and withdrawals are taxable.
Term Life Insurance: the amount of pure life insurance purchased either through a term life insurance policy or as part of a whole life insurance policy.
Term Insurance Policy: a pure life insurance policy that does not combine elements of saving.
Term Value of Life Insurance: the amount of pure life insurance purchased either through a term insurance policy or as part of a whole life insurance policy.
Terminal Year: the last year in which either the household head or spouse/partner is alive.
Today’s Dollars: expressing a future receipt or payment in today’s dollars means abstracting from future increases in the price level (inflation) in specifying the amount in question. Also refers to the adjustment of future expenditures or income for the general increase in the price level that will occur between the current year and the year the expenditures are made or the income is received. For example, if the household head expects to earn $11,000 next year, but the price level next year is projected to be 10 percent higher than it is now, we say that, measured in today’s dollars, the head’s earnings next year are $10,000 ($11,000 divided by 1.1). Another expression for today’s dollars is “today’s dollars;” i.e., expressing $11,000 earned next year in today’s dollars yields $10,000.
Total Income: non-asset income plus special receipts plus regular asset income
Transactions Cost in Selling Your Homes: brokerage and other selling costs measured as a percent of the sale value of your home.
Tutorial: the tutorial can be accessed by clicking on the Tutorial button at the top right of the application. The tutorial is displayed in your browser. It starts with a simple example and then adds to the example. The free Acrobat Reader 8.0 or higher is required.
Whole Life Insurance Policy: a life insurance policy that combines the purchase of pure term insurance with the act of saving. Indeed, whole life policies can be viewed as the combination of a term insurance policy and a saving account. Whole life policies have a face value, indicating the amount to be paid in the event of the death of the insured. They also have a cash value, which is the amount of the policy’s saving account. The difference between the face value and cash value of a whole life policy is the policy’s pure term insurance.
Vacation Home: is the household holiday or vacation residence and occupied by the household only part of a year.
Variable Annuity: an annuity whose return varies based on the assets in which the premium used to purchase the annuity is invested.