RFI Fundamentals

 

RFI Fundamentals

 

One of the core ideas behind RFI is that a retiree’s monthly spendable funds can be maximized by allocating financial assets between (a) the purchase of a deferred annuity and (b) a portfolio that can be drawn down during the annuity deferment period.

To illustrate this principle we will assume some basic financial information about the retiree as shown in spreadsheet rows 4-12 in the image below:

 

Once the basic retiree information is entered, scroll down to rows 42-50 where up to six RFI scenarios can be defined.  For our simple case we define one scenario where a 10 year deferred annuity is purchased and the remaining financial assets are assumed to generate an annual return of 8%; this is illustrated below.

Once the scenario is defined, hit the “Calculate” button; RFI displays a progress indicator and updates the two RFI charts: the first (illustrated below) displays projected spendable funds, and the second displays projected financial asset balances.

*** Important Note: Whenever you change any input values in a Scenario, the "Calculate" button turns red indicating that you must hit the "Calculate" button to update the chart.

There are a few important things to note about the spendable funds chart:

In the example above we chose an arbitrary "Assumed Rate of Return" and a "Rate that Materializes" that are both 8%. If we change the "Rate that Materializes" to 4% and re-calculate the scenario, we get a chart that looks like this:

RFI assumes that any outstanding financial asset balance grows at the specified "Rate that Materializes" (in this case 4%); since the retiree's "Assumed Rate of Return" (in this case 8%) remains fixed, the outstanding asset balance at the end of each year will not be sufficient to finance the planned spending pattern.  In order to avoid complete depletion of assets before the annuity payments begin, RFI automatically recalculates the "new" monthly spending amount consistent with the lower asset balance.

Important note: Retirees with equity in their homes can use a HECM Reverse Mortgage to offset the financial asset balance shortfall outlined above.

Also note that you can view the second chart (see the example below) at any time to see projected asset balances over time.

 

In the chart above, note that the "Display Details" box (in the lower left) is checked and details of asset balances are displayed.  Note further that if you check the box labelled "Display Value of Estate" the actual line displayed on the chart will show projected estate value rather than financial asset balance.

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