Explained: Playbook estimates it can help accelerate Financial Freedom by about 4 years

Last updated: August 27, 2024

Introduction

“Financial Freedom” is defined as the age when someone can retire and live off their assets until the age of 93.

Playbook’s impact on Financial Freedom is the difference in retirement age between two scenarios:  “With Playbook” and “Without Playbook”. We start by calculating someone’s net worth and projected “Financial Freedom” age based on their existing behavior; this is the “Without Playbook” scenario. Clients input the following pieces of information as key inputs:

• Salary
• Tax filing status
• Employer retirement plan information (i.e. if they have a 401(k) through work)
• Employer retirement plan match (does their employer offer a match)
• Monthly savings by account type (cash accounts, brokerage, IRA, employer retirement plan, and “other”
• Date of birth

Using this information, we calculate an estimated net worth curve. The “Financial Freedom” age represents the age at which the client can “retire” and sustain themselves only via their assets until their age of mortality, assumed as 93 years old.

To calculate the “With Playbook” scenario, our software will focus on maximizing clients’ tax advantages first, with any remaining savings put towards investable accounts. We assume clients retire at the same age as the “Without Playbook” scenario. The additional tax savings can significantly compound wealth over time, in many cases leading to a sooner retirement age.

If clients are already maximizing their retirement account contributions, then the Playbook Impact is likely minimal. For clients who only save in depository accounts, it’s likely that they will have a significant difference in their “Financial Freedom” ages as their projected investment growth will heavily outweigh their growth in cash.

Example of Playbook Impact

Here’s a simple example to illustrate this behavior:

Assume a client is 63 years old and spends $60,000 per year (or $5,000 per month). With zero inflation, income, or growth on investments, the client would need $1.8 million to cover all expenses until their mortality age of 93 years old (this is equal to 30 years x $60,000 of annual expenses). If this client has $2.0 million of assets at the age of 63, then we would say they have achieved “Financial Freedom”; if it’s less than $1.8, then we would assume the client would need to keep working.  

Overall, the median years saved off “Financial Freedom” for clients of the Playbook platform is four years (since tracking began in July 2024). A simple example to illustrate how someone might have this type of impact. Let’s assume that Client A:

• Is 32 years old, lives in California and files Single
• Salary of $100,000 with no other income
• Has a 401(k) through work with a 100% match up to 3% of salary
• Contributes just enough to 401(k) to get the employer match, but doesn’t max out. This equates to $250/month
• Saves $750 per month into a savings account and $500 per month into a brokerage account. Does not utilize an IRA
• Based on current spending and assumptions (outlined below), we project the client to “retire” at age 55.
• Between 55 and 93, the client withdraws funds proportionately from their taxable, tax-free and tax-deferred accounts. Withdrawals are grossed up and used to calculate the optimal pre-tax amount needed.

After one year, this client’s net worth is approximately $25,000, split across brokerage, savings, and 401(k) accounts. In this first year, Client A has paid $24,000 in income taxes and another $14 in taxes on dividends and interest payments. In addition, they have contributed about 24% of their income to their savings and investment accounts.

Conversely, if Client A chooses to go with Playbook, then all monthly savings are contributed towards retirement accounts first, with the leftover going to taxable brokerage accounts. After one year, the client’s net worth is $27,642. The client has benefitted by reducing taxable income, since contributions are tax-deductible, thus increasing their savings rate to over 25%. The client has also removed the tax-drag from investment returns. Assuming the client can continue to contribute to retirement accounts, there will be significant, additional compounding of assets.

Assumptions

Market Data

To calculate a client’s “Playbook Impact,” we make several assumptions regarding market data. We assume an annual inflation rate of approximately 2% and approximate annual total market return of 7%, with dividends accounting for 2% and market growth contributing 5%. The return on cash in depository accounts is estimated at 0.5% per annum.

Tax Rates

Our tax rate assumptions include claiming no dependents and filing taxes in the state of residence, while taking the standard deduction. We consider income to be from ordinary wages and salary, with capital gains taxes similarly calculated on the projected current year income. In retirement, the tax rate is a blended tax rate. It’s calculated based on the total income needed from each account type (i.e. tax-free, tax-deferred, and taxable), distributed pro-rata across all account types. For example, if 50% of assets are tax-free and 50% are taxable, then any withdrawal will be sourced equally from each account type. Lastly, the withdrawal is grossed up to account for taxes.

Cash Flow Behavior

We assume that the client’s inputted monthly savings remain consistent and grow with inflation. Expenses are calculated as income minus taxes and savings, and they also grow with inflation. Financial freedom is defined as the age at which a client’s assets can sustain their spending until age 93, which is our assumed mortality age. Upon retirement (aka “Financial Freedom”), expenses are assumed to step down to 75% of pre-retirement levels. We assume that taking money out happens at the midpoint of the year, and putting money in also occurs at the midpoint of the year.

Other Factors

Roth accounts are assumed to grow tax-free indefinitely, but they follow the same market return assumptions as taxable accounts. Tax-deferred accounts also grow tax-free until the age of financial freedom, with the same market return assumptions as taxable accounts. Our model does not assume tax loss harvesting in brokerage accounts. Upon retirement, withdrawals from these accounts are made at the retirement tax rate. We do not factor in social security payments as part of our retirement planning calculations.

Summary

These assumptions form the basis of our calculation of the impact on “Financial Freedom,” which represents the difference between a client’s projected retirement age with and without the use of Playbook’s software. By incorporating advanced tax-minimization strategies, consistent savings growth, and strategic investment withdrawals, we aim to optimize clients’ financial trajectories and help them achieve financial freedom more efficiently.‍

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