Monarch’s Forecasting Feature: Play with the Future

When will you be able to take a career break? How do you know if you can afford that dream house in three years? Will you have enough money to last your entire lifetime? It’s time to stop guessing or using tools with arbitrary numbers that don’t reflect your real life to find answers to these important questions.

Introducing Forecasting, the feature that helps you discover a confident plan for your future. This isn’t a tool you’ll need to spend significant time figuring out and setting up. We’ve provided you with the baseline assumptions and pulled your real data, so you can instantly begin drawing insights from a forecast. This is a living plan that you can see, test, and trust — and as your life changes, your forecast will, too.

#Why did we build forecasting?

#Finally, a forward-looking view

We decided to build a forecasting feature at Monarch for a few important reasons. Forecasting is one of the most requested features from our members. It’s critical to understand your financial picture in the present, as well as the past, but we also need to use that information to make forward-looking decisions. We need to know what’s possible. That’s what forecasting is all about.

Our goals feature is designed to help you plan and implement a strategy, but our Forecasting tool takes that a step further. It provides you with insights into how these goals will play out throughout your life, especially when you’re balancing them against each other and your day-to-day spending.

With the new Forecasting feature in Monarch, major life decisions no longer have to be made with just your gut. Forecasts in Monarch are modeled outcomes that reveal what you can accomplish with your money in the decades ahead. The default assumptions we make to create your initial forecast are based on thoroughly-researched data and best practices. They’ve also been informed by our team of financial experts with academic credentials with decades of experience guiding real people through their financial decisions.

Ultimately, this feature was created for you and because of you. Our new tool provides insight into your future in ways no other financial app can match.

#Answers on arrival & as life changes

Monarch’s Forecasting tool incorporates your real life data into long-term projections you can trust.. You won’t spend time guessing what assumptions to make and if they are even close to ballpark accurate (i.e. income, spending, inflation, return rates, life event timing, etc.). This is a tool that you don’t have to figure out before it will show you something meaningful. We’ll dive into the details of how and why we arrived at our default assumptions, but know it’s all from deeply researched facts and based in reality.

You also won’t have to wonder if all the information plugged into the forecast is stale or outdated – Monarch gives you a living forecast that updates in real-time thanks to your linked accounts. This isn’t a static “moment in time” projection. Whenever change happens to anything you’re currently tracking with Monarch, you’ll see that automatically reflected in your forecast.

#Play with your future

No one can predict the future, but Monarch’s Forecasting tool lets you take a peek into what’s possible. With our interactive features baked in, our Forecasts can show you where you might stand financially after a variety of life events.

While we took the liberty of making several default assumptions, this tool is meant to be played with. You are free to tweak any variable and get instant feedback on how it may impact your financial future. Want to see how changing your retirement age from 65 to 55 might affect the rest of your life? Go for it. If you want to buy a home in five years, but aren’t sure what price to pay? Tweak the numbers and see how it plays out. Just click and drag to change any assumption or variable and you’ll instantly see it reflected in the forecast.

Monarch’s Forecasting tool is designed to be explored, not perfected. No matter how precisely you plan your future, life changes quickly and often. This tool is meant to be directionally correct and give you the guidance to make more informed and confident decisions along the way.

#Account and Life Event Assumptions

Most forecasting tools require the user to input a ton of data including all your financial information and assumptions about things like your income, your expenses, how much you think your investments will grow over time, and even what you think inflation will be. Even if you can find and enter all of this info into a tool, it still would only give you a “moment in time” snapshot that could be out of date the next day.

With other forecasting tools, you’ll still be left guessing as to whether your goals are actually feasible if anything at all changes. Monarch knows your life evolves and our tool is built with flexibility and directional correctness in mind.

Still, we wanted to give users a solid foundation on which to try out their financial dreams. In order to show you what could be without requiring hours of setup and data entry, we have to make some default assumptions to get you started quickly. Again, these are baseline suggestions that can help provide directionally correct guidance for most people, but you’ll always be free to tweak them and see how they change your forecast. Let’s review these assumptions together.

#General inputs

First, there are general inputs that tell us basic things like how old you are and what your current net worth is. General inputs represent a projection of your current financial trajectory, assuming there are no major changes over time. Included are the following:

• Your age: Taken from your Monarch profile.
• Take home income: This is the average of the last 12 complete months of income actuals from your Monarch budget. If you’re new to Monarch, you can manually add a value.
• Expenses: We have all of your real data and use it to start. The average of the last 12 complete months of actual expenses from your Monarch budget are used as a baseline. If you’re new to Monarch, you can manually add a value.
• Inflation rate: The default inflation rate is 3%. This is based on the historical long-term average of inflation.
• Assets: All of the accounts that are enabled in your Monarch net worth report are included. Based on historical averages and forward projection research, Monarch defaults to the following growth rates, but you can adjust any of them if you wish:
  • Savings: 3%. The savings rate is based on the historical average rate of inflation in the US, which is 3%.
  • Investments: 7%. The investment rate of growth is based on a projection of what experts think will happen to a diversified portfolio of stocks and bonds over the next 10 years, otherwise known as a forward projection.
  • Real estate: 3%. The real estate growth rate is based on the inflation rate.
  • Extra Savings: 3%. If you don’t tell us where you want them to go, extra savings will grow at the rate for Savings accounts.
  • Vehicles: -15%. This represents the average reduction in value of most types of passenger vehicles per year, but you can change it to a positive number if you have a special vehicle that is growing in value instead.
  • Anything else: Default to 3% historical inflation rate.
• Liabilities: All debt accounts that are “enabled” in your Monarch Goals Paydown tab are included. We also bring over any info you’ve given us about the interest rates and planned monthly payments (or minimum monthly payments, if planned is blank) for each of the enabled debt accounts. If you update those values in the Paydown tab, we’ll also apply the changes to your forecast unless you manually override those values in your forecasting options.

#Yearly Inflation and Investment Rates

How did we get to 3% inflation, 7% rate of return for investments, and 3% growth of expenses? It’s all based on research and historical data. According to the Federal Reserve, over the last century, inflation has averaged about 3% - and yes, the past five years have brought the average inflation rate back from 1-2% per year in the 2000s and 2010s to the 3% per year long-term historical average, so they fit with our expectations. The 7% rate of return for investments is based on what experts expect over the next 10 years for returns on a diversified portfolio with a mix of stocks and bonds.

We also assume your income and expenses are growing by the rate of inflation and that real estate prices increase at 3% as well. Again, these are based on historical data.

These assumptions are not set in stone. If you want to see how increased inflation might affect your long term plans, you can change this variable to a higher number. If you want to be a bit more aggressive in your investment strategy and model out what a 9% rate of return will do, you can tweak that as well. All the variables are based on real data, but can be amended to your preferences.

#Anticipated life events

There are several common life events and milestones that you can add to your forecast at any time. We also made default assumptions for these life events as well, but members can change them to fit their needs. A few life events we’ve included are buying a home, taking a career break, having a kid, retiring, end-of-life planning, and other events ranging from vacations to weddings.

Here’s what we’ve assumed for each:

#Buy a Home

Based on historical averages and in-depth research, Monarch has chosen the following default assumptions for buying a home:

• Finance vs. Pay Cash: We default the setting to Finance a home purchase, since that’s what the vast majority of home buyers use, but if you’re planning to buy a property outright, you can choose the Pay Cash option instead.
• Down payment amount: defaults to 20% of purchase price. Monarch uses 20% as the default down payment since it is the amount required to avoid private mortgage insurance (PMI) on most mortgages. PMI is an additional expense that may be required if you put down less than 20% on a home purchase.
  • It may be helpful to know that the average down payment for first time home buyers in the US is more like 5-10%. The more you put towards a down payment, the lower your monthly payments on a loan will be. Just be sure to leave 2-3 months of expenses or more in savings for emergencies, which you have a higher risk of once you purchase a property.
• Mortgage: Standard 30 year conventional loan. This is what most home buyers in the US use to purchase a property. You can change this to a 15 year mortgage if that’s what you’ll be using instead.
• Mortgage interest rate: 7%. This is based on the historical average interest rate of a 30 year conventional loan for a single family home, but you can change it if rates have changed.
• Property taxes: 1% of purchase price. This is roughly based on the national average but varies greatly depending on your location, so be sure to adjust it to the area in which you are buying a home.
• Home insurance: 0.5% of purchase price. This is roughly based on the national average but again can vary greatly depending on location, so be sure to adjust as needed.
• Yearly home ownership costs: 1% of purchase price. Homes require ongoing maintenance and occasional repairs. As a general guideline, we recommend setting aside 1% of the value of your home each year to account for this. If the property will be rented out to others, you may need to set aside more like 2-4% of the home’s value per year.

#Have a Kid

Deciding whether to have a child through childbirth or adoption is not only extremely personal, but often out of our control. Monarch has made the following default assumptions:

• Years of child expenses: defaults to 13 years to reflect that the majority of child expenses are related to childcare, which tend to only apply for the first part of a child’s life. You can and should adjust this.
• Yearly child expenses: defaults to $18,000, which is based on national averages, but you should adjust this number according to your childcare plans and any other ongoing expenses, including education, food, clothing, healthcare, kid activities, etc.
• Upfront child expenses: defaults to $4,500. These are one-time costs related to childbirth, adoption, fertility treatments, family leave, or other set up expenses incurred only in the first year of the child’s life, and are based on national averages. You should update this to reflect your specific situation and include things such as adoption or fertility treatment costs, other costs that aren’t covered by insurance, furnishings, clothing, accessories, etc.

#End of Plan

It’s not something most people like to think about, but planning all the way to the end of your life can help you understand if your money is going to last long enough. Monarch makes the following default assumptions:

• Life expectancy is age 90. This age is based on the upper end of US life expectancy and is purposefully more conservative than average life expectancy to make sure that you don’t run out of money if you live longer. You should adjust this based on your own family history.

#Other Life Events

There may be other life events you are planning for that aren’t included among the ones listed above. We plan to keep expanding our event type library to give you quick ways to add common life events, but in the meantime, you can use the “Expense” event to model out scenarios like buying a car, starting a business, saving for a wedding, or paying for education. Monarch makes the following default assumptions for generic Expense event types:

• One-time vs. Recurring: we default to a one-time expense, but you’re welcome to use the Recurring expense type instead if it’s something that will happen more than once.
  • Use a One-time expense for things like a wedding, replacing a car, a once-in-a-lifetime vacation, a boat or RV, or other big one-off costs.
  • Use a Recurring expense for things like big vacations you take every year (that aren’t already included in your regular expenses), starting a business (which often aren’t profitable until the second or third year), or paying for education

#Income

There are times in life when we will experience dramatic shifts in income. This could be due to a job or career change, a liquidity event, or by windfall. For these circumstances, Monarch makes the following assumptions:

#Social Security

For Social Security income, we’ve made the following assumptions:

• Begin taking Social Security at age 65.
  • The age you can start collecting your full Social Security retirement benefit is 67 years old for most people in the US, depending on your date of birth, but you can start taking retirement benefits as early as age 62 or as late as age 70. On average, most people start taking benefits around age 65 so we’ve set this as the default, but you should adjust to reflect your desired starting age.
• Default benefit amount of $1,600 per month.
  • This amount is based on the current national average, but we link out to the Social Security Administration calculator so you can get a more accurate estimate for your own situation.

#Retirement

Everyone should plan for their retirement or, at a minimum, anticipate they’ll no longer be able to work at some point. This is a personal decision and wide ranging, so Monarch made the following assumptions:

• Defaults to one retirement event only. Folks with more than one household member can add a second retirement event if they wish.
• Default retirement age: 65 years old. This is roughly the average age of retirement in the US, but you should play around with it to see what’s possible for you.
• Living expenses: defaults to assume that expenses at retirement remain the same as current spending, adjusted for inflation. Most people don’t want to have to dramatically reduce their lifestyle upon retirement. You can change your spending in retirement with our simple sliding scale if you anticipate spending more or less after you stop working than you spend now.
• Additional yearly expenses: defaults to $6,500 based on average out-of-pocket healthcare expenses for those age 65 and older. You should update this to include anything else you’d specifically want to spend on during retirement, unless it’s already included by adjusting your spending slider to spend more during retirement.
• Income reduction: 100%. Monarch’s default assumption is that all of your income will go away when you retire. You can change this setting if you plan to work part-time or if your spouse will continue to work.

#Extra savings

When your income exceeds your savings, investments, and expenses in a given forecasted year, the surplus is considered to be “extra savings” and needs somewhere to go. We assume as a default that they will go into a savings account earning a little bit of interest. You have the option to split these extra savings into your specific savings accounts or to have them go into investment accounts if you prefer. Some folks may want to increase their ongoing or one-time expenses instead if they know they are unlikely to set aside unspent money in real life. Just remember: the more realistic you are with yourself about your own habits, the more realistic your forecast will be.

#Paycheck contributions

As you earn and save for your future, Monarch has made the following default assumptions regarding contributions to your investment and retirement accounts. If you contribute more or less, you can easily make adjustments to reflect your situation. These are the default settings:

• Yearly paycheck contribution: blank. You should add in any contributions you are doing directly from your paycheck since Monarch doesn’t yet capture those in your transactions. Enter this as a dollar amount. You can play around with the amount of the contributions to see how they affect your forecast.
• Contribution growth rate for accounts: 3%, taken directly from the inflation rate. We assume that your contributions will not be static over time but will grow with inflation. This is not currently adjustable per account.

#Expense Withdrawal Order

The order in which you use your checking, savings, retirement, and investment accounts to cover expenses can be adjusted to your preferences. Monarch draws down accounts in this order by default, based on recommendations from our personal finance experts:

1. Cash accounts
2. Taxable brokerage accounts
3. Tax-deferred accounts (traditional IRA, 401(k), 403(b), 457, etc.)
4. Roth accounts (Roth IRA, Roth 401(k))
5. Other assets
6. Extra uncategorized savings

#Taxes

One very impactful but difficult to estimate part of personal finance is taxes. We don’t know exactly where tax rates will land in a couple of years, much less in 30 or more years, and even small changes in tax rates could have big impacts on your finances in the long term. Also, taxes can be complicated with many layers to consider, especially as your finances get more complex. For our initial release of this tool, we’ve decided to work with high level historical averages and current info, then estimate conservatively, in order to give you results that still help lead you in the right direction without getting too far into the weeds. With that in mind, Monarch made the following default assumptions for tax rates in our Forecasting tool:

• Taxable accounts (such as brokerage and savings accounts):
  • Capital gains rate: 15% tax on profits made from selling an investment. You can adjust this to 0% if you’re in the lowest income tax bracket or 20% if you’re in the highest tax brackets.
  • Taxable portion of withdrawals: 80% of each withdrawal from a taxable account will be considered profits from selling investments and will be taxed at the capital gains tax rate. To get this closer to your actual percentage, add up the amount of profits you’d make on all your investments in taxable accounts if you sold them right now and divide it by the total value of all your taxable account investments.
• Retirement or tax-deferred accounts (such as IRAs, 401(k)s, and 529 plans):
  • Income tax rate during retirement: 20% on any income considered to be taxable, including withdrawals from pre-tax accounts or tax-deferred accounts

We’re taking a somewhat conservative approach as it relates to taxes, because if our default assumptions aren’t applicable to your situation, we’d prefer it to result in you having more money rather than less. We chose a 15% rate for capital gains because that’s what the vast majority of folks in the US pay right now for this kind of tax.

For withdrawals coming out of taxable accounts, we assume that 80% of any amounts you take came from profits made from selling investments. This is a pretty cautious guess, since we don’t know exactly how much profit you started out with in your accounts (yet - that information, called “cost basis” on your investments, will be integrated in the future!). This percentage could be a lot lower for you if you just bought an investment recently and it hasn’t grown much, or it could be a little higher if almost all the value of your investment is from its growth.

Lastly, the 20% tax rate during retirement is the national average. Your own tax rate might be lower or higher. For any of these rates, you can and should adjust them to your specific situation, but the defaults are meant to give a sense of what is likely for the majority of Monarch members.

Since we are working with net (after tax and paycheck deductions) information in your transaction history and aren’t making specific recommendations for investments, Roth conversions, or Roth vs. traditional (pre-tax) account contributions, we don’t yet calculate your current income tax rate in this tool.

#How to Think About Assumptions

The forecasting tool is built on defaults, but your life isn’t average. The defaults are grounded in well-researched historical data, future projections, and best practices, which are a reasonable starting point but may not be exactly true for you. If you live in a higher cost of living area, know what your exact Social Security benefit will be, plan to retire at 62 instead of 65, or something else different from where we start you, be sure to update your inputs. After all, the more your assumptions match your actual situation, the more useful your results will be.

On the other hand, if you’re unsure of when you’d like to retire, start a family, or buy a home, the forecasting tool is an easy way to play around with these scenarios. Change a variable and you’ll see instantly how your hypothetical choices will impact your long-term finances, before you make a real life decision.

There’s no way to know how your life will play out over several decades, even if you’re mostly certain about what you want, and small input changes can create big swings. Changing the rate of return on investments from 7% to 8% or 6% can dramatically change your net worth when you have many years left in your plan. The same goes for inflation or tax rates. This is why Monarch doesn’t currently provide statistical probabilities or speak in absolutes. Because we work with your real time data, it’s best to take the results of a forecast from this tool and use them to determine if you are generally on the right track or if you need to make some broader changes in your strategy. The goal isn’t a precise prediction, it’s a clear direction to head in.

Monarch’s Forecasting was built for ease of use, but under the hood, it’s sophisticated in its methodology. Our team of engineers, designers, product managers, and financial experts are proud of their collaboration to make Forecasting a trusted tool you can use to play with your future.

#What Monarch Features are Next?

This is just the first version of Forecasting. Expect more and frequent updates soon. In the short term, we'll be focusing on scenarios, additional event types, and more. Stay tuned!

#FAQs

How can I use Monarch’s Forecasting tool?

Monarch’s Forecasting tool is a Plus feature that was created to help you see what’s possible in your financial future. It is designed to evolve and change along with your life. Major life decisions such as buying a home or retiring have massive financial implications. You can use Forecasting to see how those decisions affect your long-term net worth and cash flow depending on timing and inputs. The Forecasting feature isn’t a crystal ball, but instead should be used as a guide to make more informed financial decisions.

What is false precision vs directionally correct?

We’d rather be generally right than precisely wrong in forecasting your future finances. False precision refers to the idea that statistical likelihoods, exact cash flows, complex taxation rules, and net worth assumptions are only relevant and accurate in forecasts if your life remains exactly the same. We cannot predict what life will look like next week, much less in a decade. What we can do is send you in the right direction. By forecasting using well-researched assumptions and financial best practices, we can help you get closer to your overall goals. Nothing is for certain in life, so we won’t pretend that it’s possible to determine exact outcomes. Instead, being directionally correct allows for flexibility and pivots as new information comes into play.

Why are goals and forecasting separated?

Financial goals are fixed targets with deadlines. Forecasting is an estimation of what will happen to your finances based on data inputs. Forecasting is meant to be more flexible and change as new information and data becomes available. Goals, like saving for a down payment or retiring by a certain date, are aspirational and have a prescribed strategy in order to achieve them. Forecasting shows you the impact of those decisions. In many ways, they work in tandem and inform one another. For example, you may see your current retirement goal negatively impacts your long-term forecast and you’ll run out of money early. By adjusting your goal, your forecast will also change.

Why did we choose to present it this way visually and make it easy vs. using advanced statistical modeling and presenting a success rate?

There are a couple main reasons for why we chose to build Forecasting in this manner. First, we believe in being directionally correct over precisely wrong. We can take as much data into our calculations as possible, but we can’t account for the inevitable unknowns and surprises of life. Statistical probabilities are only as good as their inputs. For this reason, it’s best to know you’re heading in the right direction and have flexibility to pivot when needed.

Secondly, making features easier to use will encourage you to actually use them! By offering tools that are easy to manipulate, you don’t have to be a seasoned financial planner to understand how your choices will impact your money over the long-term.