Market Condition Confidence Levels

The calculator graphs results of the analysis based on how an asset allocation similar to an asset allocation you select performed in a certain percentage of the simulated market scenarios. For example, the market performance model considers "average" market performance at the 50% confidence level. This means that in 50% of the historical market scenarios run, an asset allocation similar to your selection performed at least as well as the results shown. Conversely, in 50% or 1/2 of the historical market scenarios run an asset allocation similar to yours failed to reach the results shown. Fidelity uses this 50% figure to provide education on how risk affects the returns of certain portfolios.

While considerations of risk may be made at the 50% level, you should also have an understanding of how your plan supports your charitable goals if markets do not go your way.

Note that the projections do not reflect the impact of any transaction costs or management and servicing fees in the planned giving solution; if these had been included, the projected charitable balances would have been lower. The calculator does assume that there is a 60 bps administrative fee based on annual average charitable assets in the solution.

Understanding the Effect of Market Performance on Assets

The calculator graphs results of the analysis based on how an asset allocation similar to your proposed asset allocation performed in 50% of the simulated market scenarios. Under average market performance simulations, half of the scenarios resulted in equal or higher amounts of charitable assets (or length of time providing grants from the planned giving solution to charity) and half resulted in fewer assets (or a shorter period of time providing grants from the planned giving solution to charity). Basing your plan on 50% market confidence can show favorable results for some, but it comes with the risk that in 1 out of 2 times your plan might fail to reach these results.

Note: The average performance simulation does not mean that the calculator uses a historical market average to model market performance at a steady rate of return each and every year. The market performance model uses a probabilistic modeling approach to simulate market volatility over time.

Limitations of Historical Performance Analysis

Historical performance analysis figures do not represent the actual or hypothetical performance of actual charitable holdings. They are based on the mix of asset classes you selected.

Although past performance does not guarantee future results, it may be useful in comparing alternate investment strategies over the long term. Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical illustrations.

Monte Carlo Simulations

Monte Carlo simulations are mathematical methods used to estimate the likelihood of a particular outcome based on historical analysis. The Monte Carlo approach has been in existence since the turn of the century and is used across many fields, such as physics, chemistry, and biotechnology to solve complex science problems, particularly those that fall into a nonlinear category. The calculator uses the Monte Carlo approach in which markets are assumed to change. Historical performance simulations are conducted to determine the probability that a portfolio may experience a certain minimum level of performance.

Monte Carlo simulations are analogous to rolling several pairs of dice. Each Monte Carlo simulation reproduces a random set of results by generating a random return for the scenario. When analyzed together, these results suggest a probability of occurrence. For example, if you repeatedly roll four dice at the same time, the probability of all sixes coming up in the same roll is very low; however other results may be more probabilistic, such as one six resulting in any given roll. For the purposes of the Monte Carlo simulation utilized in the calculator, a series of hundreds of returns for a given scenario are randomly generated. Together, these scenarios provide a probability that a certain amount (or greater) of return occurs at that level.

Expected Returns

To generate the return assumptions certain constraints are applied on the simulations beginning with expected returns of the asset classes. Note that for the calculator's purposes, an investor is an individual making a charitable contribution to a planned giving solution. However, the same calculations would apply to an individual or institutional investor investing in a taxable account.

The estimated returns for the stock and bond asset classes are based on nearly 200 years of historical data. Each year (or as necessary), the calculator's assumptions will be updated, to reflect any movement in the actual inflation rate.

Assumptions in Monte Carlo

Random variables, representing asset class returns, are drawn from a specific statistical distribution. The time increment used in the Monte Carlo simulations is one year. Annual randomly generated returns are required to simulate the mean, standard deviation, distribution and correlated behavior of observed historical asset class returns of stock, bond and cash (short-term).

Volatility of the stocks (domestic and foreign), bonds, and short-term asset classes is based on the historical annual data from 1928 through the most recent year-end data available from Ibbotson Associates, Inc. Stocks (domestic and foreign), bonds, and short-term are represented by S&P 500®*, U.S. Intermediate Term Government Bonds, and 30-day U.S. Treasury bill, respectively.

Annual returns assume the reinvestment of interest income and dividends, no transaction costs, no management or servicing fees (except for a variable annuity fee) and the rebalancing of the portfolio every year. The calculation does not include annual returns of individual portfolio securities or any securities you hold, so the calculator's analysis is performed on asset classes, not individual securities. All investments within an asset class are treated the same for historical performance purposes. It is not possible to invest directly in an index. All indices include reinvestment of dividends and interest income.

* The S&P 500® Index, an unmanaged market capitalization-weighted index of common stocks, is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates.

Risk and Return

A Monte Carlo simulation of capital market returns takes into account expected returns from each asset class (i.e., cash, fixed income, equities, etc.), their volatility, correlations between them, and other factors, all based on historical statistics. Random rates of return are generated by sampling values from a probability distribution such as a bell curve (e.g., "lognormal" distribution). Returns from equity asset classes (such as Canadian, US or international equities) are historically higher than returns from lower risk (such as fixed income) or risk-free investments (like cash or GICs). But higher equity returns also have greater risk associated with a wider range of outcomes: from complete loss of capital to appreciation many times over the initial purchase price. And they also experience greater volatility.

Asset classes, when considered within a framework of historical performance conditions, have a clear correlation among each other and are not considered independently. These mathematical relationships can be quantified and fitted in the model.

Varying Results

Market swings can be risky. For example, using an average does not capture the highs of the late "90's" technology boom, or when the bubble burst and markets fell in 2001 and 2002. When deciding on a portfolio asset allocation, it helps to understand the potential impact of risk that comes with more volatile investments. The more equity in a portfolio, the more uncertain future returns might be. Monte Carlo approaches help to demonstrate the risk reward trade-offs that come with investing.

Tax Calculations and Assumptions

Taxes can play an important role in how money grows over time. Given the same investments in the same proportions, assets in tax-advantaged accounts have the potential to grow faster than assets in taxable accounts. In general, investment earnings on assets held by planned giving solutions such as private foundations or by a donor-advised fund sponsored by a public charity are normally not taxed. As such, these assets have the potential to grow tax-advantaged and possibly provide further benefit to charitable causes.

The calculator uses tax rate information that you supply to estimate the potential charitable deductions you may be eligible to take when you file your annual income tax return. The calculator should not be used for purposes of calculating actual tax liabilities or benefits. It is not intended to provide, nor should it be construed as providing, legal or tax advice. It calculates a reasonable approximation of tax liabilities and benefits for any specified year based on information provided by you. The tax calculations performed may not be accurate for tax reporting purposes, so you must rely on the official tax forms mailed to you each year and on your or your tax advisor's calculations for tax reporting purposes.

The calculator does not account for the treatment of any state, local, foreign or alternative minimum taxes, phase-out rules for deductions, and any charitable deduction limitations based on income. In addition, the long-term capital gains tax rates depicted in the calculator do not take into consideration that long-term capital gain income may also be subject to an additional 3.8% Medicare tax for taxpayers with income at or above a certain threshold. These and other differences between your actual circumstances and such inputs and assumptions may lead to materially different results than those produced by the calculator.

Consult your tax advisor regarding questions specific to your tax situation.

Capital Gains Taxes

The calculator assumes that charitable contributions which are composed of appreciated securities have unrealized long-term appreciation and are deductible at fair market value. Long-term holdings are generally assets that have been held for more than 1 year. It is further assumed that there would be no requirement for these assets to be otherwise filed in such a manner as to incur capital gains tax liability

A 15% federal long-term capital gains rate applies if you have 1.) taxable income of $400,000 or less with tax filing status of Single or 2.) taxable income of $450,000 or less with tax filing status of Married Filing Jointly. The 15% long-term capital gains rate applies to taxpayers subject to the 25%, 28%, 33% and 35% federal income tax rates.

A 20% federal long-term capital gains rate applies if you have 1.) taxable income above $400,000 with tax filing status of Single or 2.) taxable income above $450,000 or less with tax filing status of Married Filing Jointly. The 20% long-term capital gains rate applies to taxpayers subject to the 39.6% federal income tax rate.

Please note: The long-term capital gains tax rates depicted in the calculator do not take into consideration that long-term capital gain income may also be subject to an additional 3.8% Medicare tax for taxpayers with income at or above a certain threshold.

The tax information above is based on best available information and may be subject to change. The calculator is to be used for information/educational purposes only and should not be used as the single source to base tax and charitable donation decisions upon. Please consult with your tax advisor when making decisions pertaining to your specific situation.