How is Goal Achievability Calculated?
On the Goal Projector screens, you can help your clients determine how achievable their financial goals are, whether that be for Retirement Income or Wealth Accumulation.
Within each of the Goal Projector screens, you will input some information about the client's desired annual retirement income or wealth accumulation goal, along with the client's annual investment contribution, time horizon, and for the retirement goal, pension and income from other sources in retirement.
From here, each portfolio option is run through 10,000 Monte Carlo simulations, which project how the client's wealth is expected to change over time. For each simulation we generate a sequence of returns. We assume returns are normally distributed and occur on an annual basis, where:
- Wealth Accumulation Goal:
Within the Wealth Accumulation goal, the simulations project how much money the client is likely to have at their expected withdrawal date, given the client's investment amount, annual contributions, and time horizon. The projections are inflation adjusted, so the projected amount is the real value in today’s dollars and contributions are assumed to grow with inflation.
- Retirement Income Goal:
Within the Retirement Income goal, we project the wealth at the retirement date as per the wealth accumulation goal. Then when you retire, we assume that you continue to stay invested in the same investment option and withdraw a constant amount in real terms each year (i.e. adjusting upwards for inflation).
For each simulation, we calculate the highest possible withdrawal rate such that you don’t run out of money before your planning horizon. For a household, the contributions stop and the withdrawal phase begins at the earlier of the two retirement dates. Withdrawals continue until the younger of the two clients reaches the planning horizon.
The projections are again inflation adjusted, i.e. contributions are assumed to grow with inflation and the projected retirement income is the real value in today’s dollars. This makes it easier for clients to understand their potential retirement income compared with their spending today.
You can see the 15th-85th percentiles of the simulations either by selecting the dropdown to the top left of the chart or by switching to the table view (click the three horizontal bars on the top-right corner of the chart).
It is important to note that the projections are designed for illustrative purposes only, and do not represent a full financial plan.
Did this answer your question?
If not, please feel free to reach out to us at customer-support@capitalpreferences.com