Question:
In RRON and Financial GPS, we are asked to enter a client's gross pay, income tax rate, and qualified account information and the rest is lifestyle money. What is typically the process people use to account for all of the other things that come out of someone's paycheck, additional items when working like:
* State Tax, %
* Local Tax. %
* FICA, %
* Medicare, %
* SDI, %
* DPO/UCE fixed
* BX PPO, Fixed Health Insurance
* Vision Insurance, Fixed
* AD&D, Fixed
* EMP Fund, Fixed
* CR Union, Fixed
Do you adjust "Tax Rate to include Federal, State, Local, Medicare and SDI" and then add an itemized item for everything else and then modify the tax rate at retirement to remove FICA and Medicate (and maybe state and local depending on how qualified plans and SS is tax at that state and local level)
Just looking for a good rule of thumb, because if I don't do it, it appears they have a lot more "lifestyle" money than they really have.
Coaches response:
When discussing tax rate, I include ALL income and payroll taxes in there (fed, state, local, FICA, medicare, etc). If someone is in a 22%/16% marginal/effective federal tax rate, I will typically add another 10-12% for state and other payroll type taxes.
As for the other deductions from someone's paycheck....I consider those as part of "lifestyle". Why? Because those are voluntary expenses...or at least the amount is voluntary. For example, health insurance has plenty of variables that a person has to choose...a high deductible/low premium plan vs a low deductible/high premium plan? Vision insurance is voluntary, group AD&D, etc...a person gets to choose those benefits and the correlated cost. That's why I put all of that in Lifestyle or Standard of Living.
As money flows through the PEM, it first hits the Tax Filter, then Lifestyle Regulator, and then any money not set aside into the Future Lifestyle Tanks flows through as Current Lifestyle. Note that the Current Lifestyle actually has two distinct components...Standard of Living (house, car, education, dining out, clothes, entertainment, and technology/communication.) This is what we tend to think of when thinking of "lifestyle"...but it's really only half of it. Clicking on the words Standard of Living will toggle the icons to "Protection" (homeowners, auto, umbrella, medical, disability, LTC, life, and wills/trusts), which PROTECTS the standard of living AND the money in the tanks. However...none of those protection products is required...let alone a certain protection level. A person has a choice regarding how much protection he/she wants and the cost of such protection. So in that sense, it is a lifestyle decision.
We need to coach our clients in a similar manner...buying "stuff" is a lifestyle decision and so is the protection level. Most folks WANT a good lifestyle and if cost is no problem the vast majority of folks also WANT maximum protection (just ask them....if the price was not a factor, how much life insurance would you own? Disability insurance? Long-term care? Medical?) But in the real world cost has to be considered and therefore people prioritize their levels of protection by what's most important to them. But in short, it's all under the canopy of "Lifestyle". There is much less, if any, the choice regarding how much they have to pay in taxes and that's why it's a bit easier to name a certain tax rate because the decision is basically forced upon them to pay taxes.
Also, remember this...RRON and Financial GPS aren't necessarily designed to get into the nitty-gritty detail - they're designed to "tell the time, not build the clock." You go to Spending Game to build the clock.
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