Note: Descriptions are shown in the official language in which they were submitted.
CA 02350039 2001-12-20
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METHOD, SYSTEM AND COMPUTER PROGRAM FOR AUDITING FINANCIAL
PLANS
Field of the Invention.
This invention relates to computer programs and related methods and systems
for
financial planning for individuals.
Background of the Invention.
Financial plans are essential to the plans for retirement, saving for major
expenses, such
as children's education, for most individuals. If too little is saved, or the
wrong investments are
made, individuals will not be able to maintain their lifestyles in retirement,
may not be able to
send their children to desired schools, or may find themselves outliving their
savings. On the
other hand, if more sums than are needed are set aside for future needs,
individuals may find
themselves unnecessarily denying themselves and their families even minor
luxuries, such as
vacations and larger homes. Professional financial planners and individuals
have a variety of
ways of creating financial plans. The financial services industry has adopted
standardized means
of projecting out individual financial plans. There currently exists today no
program or
mechanism that allows an individual to have an accurate perception of what
would have
happened to their financial plan historically. In lieu of actually doing that,
which is also a little
bit insufficient, the financial services industry has adopted The fundamental
flaw with those
standard means is: 1 ) they use either an assumed rate of investment return
over the whole period
of time, and as can be proven mathematically, lacks any relation to what the
values will be in the
future even if those annualized returns are received, or 2) they try to
statistically calculate to
come out with a forecast of statistical probability of the distribution of
outcomes; by the very
nature of the statistical estimation, those do not really relate to actual
historical experience. In
either case, the fundamental problem in any financial plan done with any of
these standardized
CA 02350039 2001-12-20
WO OOn6843 PCT/US99I26I54
tools, either using simple annualized return as a means of estimating future
values or a statistical
estimation of future values, that the plans do not accurately predict the
future wealth of the
individual using the financial plan. For example, existing prior art tools
help the individual
figure out a risk tolerance, and then request the user to furnish a return
expectation is or
determine what the return expectations should be for the risk tolerance. These
prior art tools
then advise the user to expect a certain return, or a certain outcome based on
a certain return,
allowing for projected cash flows.
The lack of accuracy in prediction, as noted above, causes great problems for
the
individual. The individual may fail to meet his financial goals or forego
opportunities in trying
to meet those goals. A financial plan may direct an individual to save more
money then she
needs to, or retire later than he or she needs to. A financial plan may advise
an individual that he
may retire earlier than he should, or withdraw more money than he should from
investments. All
of this advice results from the estimation errors made through either of the
current industry
norms.
Financial plans are generally reviewed and revisited once every few years. The
financial
plan ands forecasting tools are not meant to help the individual client make
decisions on a daily
basis about the implications of making an asset allocation decision or making
purchasing
decisions or retirement decisions. These decisions tend to be very long term
in nature and
updated fairly infi~equentiy. Even if the tools were accurate, predictions may
be made after
investment, spending or retirement decisions have already been made. Their
inherent nature is
such that they are not updated on a regular basis. Such plans provide little
support for investors
to make investment decisions.
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For example, an investor feels wealthy because he has received some great
market
returns. His plan called for saving $20,000 a year, and he intends to continue
to do so. His
current plan said he was supposed to have $2 million at a given time, and
because of great
market return, he now has $2.5 million. He then decides to make a major
purchase using a
portion of the additional $500,000. He fails to rerun his financial plan. He
does not know how
making that purchase decision will affect his likelihood of achieving his long-
term goals.
An object of the invention is to provide a method for evaluating financial
plans to
determine the likelihood that an investor will meet the investor's financial
goals.
An advantage of the present invention is that such a method is provided.
Additional
objects and advantages wil! become evident from the detailed description of a
preferred
embodiment which follows.
Summary of the Invention.
A method for evaluating financial plans includes the steps of calculating the
change in a
predetermined initial value of an investment over a time interval based on
changes in value over
a first historical time interval to obtain a changed investment value,
updating the changed
investment value based on the selected amount and time to obtain a further
changed investment
value, calculating the change is the fiuther changed investment value over a
second time interval
based on changes over a second historical time interval to obtain a further
investment value,
repeating the steps of calculating, updating and again calculating with
respect to a third historical
time interval and a fourth historical time interval, respectively, and after
at least one of the
calculations, adjusting the investment value based on at least one of a
contribution amount and a
withdrawal amount. The method may include presenting the result of the
calculations as a report
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to an individual. The method is preferably implemented by suitable computer
software.
Investments may be categorized in more than one asset category, and distinct
historical data
employed in calculations for each asset category. The results of the
calculation may be
compared to a selected wealth goal. After each calculation relative to
historical data, an
adjustment of the investment value to simulate tax effects may be made.
A system for evaluating financial plans includes a computer programmed to
calculate the
change in a predetermined initial value of an investment over a time interval
based on changes in
value over a first historical time interval to obtain a changed investment
value; to update the
changed investment value based on the selected amount and time to obtain a
further changed
investment value; to calculate the change in the further changed investment
value over a second
time interval based on changes over a second historical time interval to
obtain a further
investment value, to further calculate, update and again calculate with
respect to a third historical
time interval and a fourth historical time interval, respectively; and, after
at least one of the
calculations, to adjust the investment value based on at least one of a
contribution amount and a
withdrawal amount.
. A storage rnediuin-has'stclred therein instructions, wherein the
instructions, when
executed by a processor, cause the processor to perform the steps o~
calculating the change in a predetermined initial value of an investment over
a
time interval based on changes in value over a first historical time interval
to obtain a changed
investment value;
updating the changed investment value based on said selected amount and time
to
obtain a further changed investment value; and
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calculating the change in the further changed investment value over a second
time
interval based on changes over a second historical time interval to obtain a
further investment
value, and
repeating said steps of calculating, updating and again calculating with
respect to
a third historical time interval and a fourth historical time interval,
respectively; and
after at least one of the calculations, adjusting the investment value based
on at
least one of a contribution amount and a withdrawal amount.
Brief Description of the Figures.
Figures lA, 1 B and 1 C are a flow chart illustrating the steps in a method
according to
the invention.
Figure 2 is a sample graphic representation of the result of a method of the
invention.
Figure 3A and 3B is a sample chart of a result of a method of the invention.
Figure 4 is a sample chart showing another result of a method of the
invention.
Figure 5 is a block diagram showing features of a system according to the
invention.
Description of the Invention.
Referring to Figures 1 A = '1 C, the method of the invention is illustrated in
block diagram
format. Generally, the initial step is to provide to a program sufficient
information about the
individual, the individual's current investments, plaanod future
contributions, and planned
withdrawals, to permit the method to run. At step 102, the user is prompted to
define personal
information. The personal information preferably includes information
important to financial
planning. The basic information includes the individual's birth date, the
individual's intended
retirement age, and the end age for the plan. The information may also
include, if the individual
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has a spouse, the spouse's birth date, the spouse's intended retirement age,
and the end age of the
spouse for the plan.
The user may then be prompted to define one or more accounts, as shown at
block 104.
Preferably, these accounts are named by the user. The user is prompted to
define the properties
of each account as shown at block 102. The most important properly of the
account is the tax
treatment of the account. For example, the gains on the account may be subject
to current
taxation. Alternatively, the gains on the account may be deferred until
withdrawal. Pull-down
menus may be provided to provide a selection from a variety of different types
of investments,
such as 401{k), 403(b), Individual Retirement Account, savings account,
Education IRA, Roth
IRA, investment real estate, and other investment types.
The user is prompted to provide opening balances of each account at block 108.
For an
effective financial plan, the opening balances preferably represent the actual
present values of
the accounts.
The user is prompted to furnish the planned annual contribution to each
account, as
shown at block 110. The program may provide for changes in planned annual
contributions to
accounts at differtnt time periods-in the future, or selection of the start
and end age of
contributions for various accounts. A default may be a level contribution
starting immediately
and continuing until retirement.
The user is prompted to provide planned retirement distributions, as shown at
block 112.
This may be a desired rctimanent income level. The user may further refine by
providing
specific distributions from specific sources. For example, such sources might
include a defined
benefit retirement plan.
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PCTNS99I26254
In a preferred embodiment, the user is then prompted to provide information on
Social
Secwity and other sources of retirement income, as shown in step 114. The user
may select a
desired retirement age. The program may then display annual social security
benefits based on
formulas or tables acces.~ed by the program. Such formulas or tables have been
constructed from
publicly-available Social Security benefit information.
The user is prompted to enter additional withdrawal information at block 116.
For
example, a form may be provided to input the age of each child what levels of
education will be
paid by the individual, and the expected cost per year. The amount and time of
the expected
withdrawals from investments may then r~ea~dily be calculated. Other
anticipated large expenses
may optionally be included.
The user is then prompted to enter allocations of assets by asset categories,
as
shown at block 120. The asset categories are preferably large categories, such
as large
capitalization stocks, small capitalization stocks and foreign investments,
bonds, and Treasury
bills and cash. The selection of particular categories may be altered. The
desired categories
should be those as to which considerable historical data is available. It is
prefezred to assume
~senti~lly a passive investment; rather than ~lookin$ at historic3al returns
of particular managed .
investments. Depending on the features desired, asset allocations may be
selected separately for
both ctmently taxable and tax deferred investments. A further feature that
could be added would
be changes in asset allocations at different times in the future. The user may
also be prompted to
input expected, optimistic, and pessimistic returns on investments.
The user may also be prompted to enter a number for investment expenses. If
investment
expenses are given a positive percentage, this would indicate investments that
underperform the
CA 02350039 2001-12-20
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market historically. If investment expenses are given a positive percentage,
this would indicate
investments that outperform the market historically. .
The user is then prompted to enter tax information, as shown at block 122.
This
information preferably includes Federal income tax filing status, State of
residence, and any
local tax rates. The program may access tables to Iook up applicable Federal
ordinary and
capital gains income tax rates and state tax rates. Local tax rates may also
optionally be entered.
Tax rates may be entered from a look-up table separately for pre-retirement
and retirement rates.
It will be understood that the order that the foregoing information is
furnished may be
changed without affecting the method. The information preferably includes as
much information
as possible relevant to the individual's projected cash flow into and out of
investments and other
retirement income.
The option of selecting an assumed inflation rate may be provided. Different
inflation
rates may be used with respect to different investment categories. The option
may be provided
of furnishing results in inflation-adjusted dollars or actual dollars.
When all the desired information has been entered, the user is prompted to run
the
.;. . ~culation. The program has stored a series of changes in values for ~h
~p~ate category of
assets for a selected number of time periods. The time periods may be, for
example, years,
months, or shorter or longer periods as desired. The performance of the plan,
will then be
determined assuming a large number of different starting points. Based on the
input asset
allocations and the current holdings values, starting values for each asset
allocation and each tax
status are calculated, as shown by block 124. The program selects a time
period, as shown by
block 125. The performance for the first selected time period is then
calculated based on the
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CA 02350039 2001-12-20
CVO OOIZ6843 PCT/US99/26Z54
historical data, separately for each asset allocation and tax status, as shown
by block 126. The
performance may be adjusted either before the calculation or after the
calculation by the
investment assumptions. For currently-taxable investments, any gain is
adjusted by deducting
appropriate amounts based on assumed tax rates, as shown by block 128. The
gain is added to
the value in each category, as shown by block 130. The contribution at the end
of the time
period is then added to each category, based on asset allocations and
previously defined
contribution amounts. Alternatively, if the year of the plan calls for a
withdrawal, for retirement
needs, education or otherwise, the appropriate adjustment is made to the
values. This is shown
by block 132. This value is stored as an ending value. The method then checks
to see if the final
year for the plan has been reached, as shown by decision block 136. If not,
the method returns to
block 125, a new time period is selected, and the calculations are repeated,
using historical data
from the next year in the applicable table, and the contribution, withdrawal,
distribution and tax
information from the next year in the plan. The method repeats until the last
year of the plan is
reached. When the final year of the plan is reached, the method checks to see
if the total
number of starting points is the final number of starting points, as shown by
decision block 138.
. ,; .If riot, then the entiit~ ~ri~thod tepe~ts, using the same opening
balances asallocated; commencing
from a different starting point. This is repeated until the desired number has
been completed. A
possible minimum number is 32 different starting points. The calculation need
not be performed
for consecutive years. For example, the number of years of the plan may exceed
the number of
years of historical data. In one embodiment, each test is run from the start
point consecutively
untii one-half of the time period of the plan is reached, and then the
calculation returns to the
start point. Other methods may be used if the number of plan years exceeds the
historical data.
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To determine the appropriate amount to be withdrawn, Social Security and other
sources
may be deducted from the desired annual retirement income amount.
For purposes of comparison to a standard calculation, the program that
implements the
method can also calculate the returns based on a flat annual rate of return,
without reference to
historical data.
The method then provides the results in a display for the user. Preferably,
only certain
results are selected for display. For example, the tests may be ranked by
ending value. A middle
ending value, ranked at 50% probability, may be selected. An ending value
representing a result
better than all but one percent of the results may be selected and labeled as
having a 99%
probability of success. The results may be displayed in tables or graphically
in a variety of
formats. For example, the results may be displayed in a graph showing age
against value of
investments. Sample results for fictional assumptions are shown graphically at
Figure 2. Line
202 represents a standard result based on a steady annual increase in value.
Line 204 represents
values based on a result worse than 99% of the starting points. Line 206
represents a result that
is at the midpoint of the analyses that were run.
' As shown in Figure 3A and 3B, the results may also-be displayed-as a table.:
The table
may show the plan year, from the date the plan is run, as shown at 302, the
age of the individual
at the time of the plan, as shown at 304, and the ending value, as shown at
306. Additional
information, such as the cash flow into or out of investments, the yield on
investments in the
year, the appreciation or depreciation in value of investments, and the taxes,
may also be shown
for each plan year.
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The report may also include a detailed analysis listing the ending value and
market
periods for each test that was run. A sample is shown as Figure 4. The tests
are ranked in order
from highest ending value to lowest. Column 402 displays probability of
obtaining at least the
ending value listed. Column 404 displays the ending value of each test, Column
406 displays
ranking each test from most assets to least assets.
Other displays may include a display of cash flows into and out of
investments, showing
contributions to investments, withdrawals, and retirement distributions, on a
year-by-year basis.
The program and system may also provide the user, together with the results of
the plan,
the opportunity to adjust various variables to ascertain the change in
historical results. For
example, an input may be provided to permit the user to change asset
allocations, retirement age,
contribution amounts, distribution amounts, and amounts of other withdrawals.
The program may be made accessible to users at client computers connected on
the
World Wide Web to a server running the program. Web-based forms may pmmpt the
user to
provide rcquired and optional information. The results of the analysis may be
displayed on the
page. The results may also be presented as a report in a convenient format,
such as portable
document format° (pdt) for downloading to the client computer; or=may
be e-mailed from the
server to an address identified by the user at the client computer. This
format is advantageous in
that the tables containing historical data can readily be supplemented, and
tables containing tax
rate information can readily be updated. Also, a financial planner and a
client can share a report
an a web server with suitable security.
Figure 5 illustrates a system according to the invention. Processor 505 is
running in a
server computer. Processor 505 is connected to client computer system S 10 via
Internet S 15. As
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noted, the world wide web may be used for interchange of data. Processor SOS
accesses program
files 520 for instructions. Program files 520 are stored on a suitable storage
medium, such as a
hard drive, CD-ROM or other storage medium. Processor 505 accesses general
files 525, which
contain, non-exclusively, as shown by block 530, historical performance data,
by time period, for
dii~erent categories of investments, tax data, and Social Security data.
Processor SOS may also
access client files 535, which contain, as shown by block 540, non-
exclusively, investment
values, asset allocations, contributions, age and retirement age. Processor
505 causes the data in
block 540 to be updated and changed based on data received from client system
510 in
accordance with instructions contained in program files 520.
The use of the method, system and program of the invention is not limited to
running on
a web server. Copies of the program may be distributed on physical media or by
electronic
transmission.
In testing this method, the inventor has observed tremendous differences
between the
present invention and prior art tools, depending on the individual's pattern
of contributions and
withdrawals and the resulting periodic balances of their investments.
. s. . . . . .I.he tesulf may be ~~pressed as the percentage of outcomes for
which the desired
financial goal is actually achieved. That financial goal can be, for example,
a certain amount of
wealth by a certain date, or a desired stream of withdrawals. The probability
of success may be
expressed a percentage. The inventor believes that the analysis of a financial
plan using the
mettrod of the invention will, notwithstanding the annualized rate of return,
advise the individual
investor as to the likelihood of achieving his objectives.
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The method of the invention gives the investor the distribution the results of
any financial
plan based on historical market outcomes. Probabilities of obtaining certain
outcomes can be
derived from the distribution. Some financial plans, subjected to this
analysis, will show that the
investor would have run out of money before the plan indicated that. This
permits the investor to
know, for example, that the investor has a one-in-ten chance of failing to
meet his objective.
Based on this information, an investor may choose to adjust the financial plan
to provide for less
risk.
Unlike prior art analyses, the results of the method of the invention are is
unique to the
asset allocation, planned contributions and withdrawals, beginning wealth, and
risk tolerances of
each user. For example, for one investor, lowering the small capital
stock/foreign allocation
may increase the likelihood of running out of money. For another investor,
increasing the small
capital stock/foreign allocation may increase the likelihood of running out of
money.
The software may be enhanced to include a mechanism for the investor to
prioritize their
financial outcomes. For example, an investor may have a goal of having a
certain probability of
having $10 million at age 85. The investor may prefer to retire at 65, but
would be willing to
.~ ate as~70~ The same investor may be able to save ug to $40,000 per year,
but maay
strongly prefer not to save more than $20,000 per year. By weighting the
variables, the investor
can then have the program run a series of scenarios. This will then provide
the investor with a
number of different options that meet the criteria.
The method of the invention may be used dynamically by investors for guidance
in
making investment and purchase decisions. For example, an investor may fmd
that, by
foregoing a purchase, he may retire earlier, or increase his likelihood of
achieving his savings
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goal at retirement, by not making the contemplated purchase. An investor
contemplating an
investment may find that, depending on tlse category of investment, she may
either increase or
decrease her likelihood of achieving her financial goals.
The planning software of the invention, including the historical data on which
the
calculations are based, can be made available to the investor to update based
on the actual
current data on the value of investments. Data could be transferred
automatically from financial
services providers to cfient files on a server so that the updates could be
accomplished without
requiring the data to be input by the investor.
The processor may be an Intel Pentium or similar microprocessor. The method
can be
implemented in custom software, or in spreadsheet software such as Excel. The
computer
profram with commands that cause a computer to execute the method can be
stored on any
storage medium that now exists or may be developed in the future, including
fixed disk drive,
floppy discs, and CD-ROM. The computer program may also be transmitted as a
digital signal
over telephone lines, other traa~nission lines, or via radio waves. The signal
may be transmitted
in packets over a packet-switched network, such as the Internet.
.. , , . . . .. , ~ ~e computer program in accordance with the invention may
be stored and distributed in
any suitable storage medium, such as fixed disk, portable diskettes, and CD-
ROM or other read-
only memories. Also, methods described as being carried out in software
running on general-
Purpose computer hardware may be implemented in hardware.
It will be understood that various changes in the details, materials and
arrangements of
the methods and systems which have been described and illustrated above in
order to explain the
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nature of this invention may be made by those skilled in the art without
departing from the
principle and spirit of the invention.
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