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Question: How does the software show compounding of reinvested income?
The way the software shows compounding of reinvested income is as follows:
At the end of the year, any positive after-tax cash (the last column on the Net After-Tax Cash Flow Spreadsheet) is moved into an account called the "Accumulated Savings" account.
Our goal with this Accumulated Savings account is to mimic the performance of a diversified portfolio of investments, into which the client would invest the positive after-tax cash.
The Accumulated Savings account automatically generates a current return (in different asset classes) and appreciation.
The asset classes are interest, tax-free, dividends, and capital gains.
The software has default rates of return for each of these categories, as well as a default appreciation rate.
You can see the rates by clicking Files & settings >Settings >Assumptions, and scrolling down to the section labeled Rates of Return and Borrowing Costs.
You may change these rates on this screen, as well.
These rates are saved on a case-by-case basis. If you change them for one case, those changes will not affect the next case.
This income appears in the column on the After-Tax Cash Flow Spreadsheet labeled "Income on Accum Svg" (Income on Accumulated Saving).
It will also appear on the Budget Report as investment income, and on the View/Edit Taxes reports, in the appropriate categories (interest, dividends, and capital gains).
For details on growth of and distributions from the Accumulated Savings account, click Forms & Reports > More Reports > For Planners, and view the report labeled Accumulated Savings.