How to use Retirement: Analysis Module

A common question from clients is, “Will our future be okay?”

RightCapital is perfectly poised to give you answers to this question. Effectively using the tools in RightCapital inspires confidence from your clients and lowers stress, worry, and anxiety.

Using the Retirement Analysis is perhaps the most common and effective method to address your client’s concerns head-on.

For a brief overview of the Retirement Analysis tool please watch this short video.


Access the Analysis tab by opening the client and navigating to  Retirement > Analysis. Within the Analysis tab, there are four tabs:  Probability, Confidence, Comparisons, and Income. Each section is covered in this article; let's dive in.

Probability tab

The Probability tab reflects the results of a Monte Carlo simulation of 1,000 trials. The probability of success reflects the percentage of time in the 1,000 trials that the client does not run out of money in any year. Even if the simulation registers assets remaining in the last year of their plan, the overall probability of success will decrease if there are any years in which the simulation registers $0 within their projection. The value in the blue bar reflects the median investment asset value at the end of the plan across the 1,000 trials (the median can also be seen on the Confidence tab).

Action Items dynamically adjust variables to create an on-the-fly Proposed plan. Click Refresh to see the impact on the client's plan. The changes made in Action Items will reflect in the "Proposed plan" area while the data in the client's Profile will reflect in the "Current plan" area:

Action Items

RightCapital keeps you in the driver's seat with a high degree of control and flexibility -- on the fly. Action Items allow you to create ad hoc "proposals". To learn more about each field within Action Items, read our article on Action Items here.

The Future / Today's dollars toggle allows you to change how the values on each of the Retirement / Analysis tabs are displayed.

"Future" dollars illustrates the real projected dollar value in future years, factoring in all growth, inflation, and annual increase rates. This represents the actual dollar value that will be projected given those assumptions.

If "Today's" dollars are selected, RightCapital will discount the values calculated in the Future dollar calculation by the general inflation rate that has been set. This allows you and clients to have better context for the values shown by reflecting them in today's inflation environment.

Confidence Tab

The Confidence tab reflects the range of outcomes of the Monte Carlo analysis through the course of the projection.

Put simply...

A client's assets will most likely fall somewhere in one of the blue shaded areas. The lightest blue covers the widest range of possibilities, which means that there is a high degree of confidence a client will land somewhere in that range (90% of results). But it can be hard to plan a lifestyle around such a large bandwidth! The darker blue area is still likely and easier to plan around (50% of results, clustered around the median, are captured by the darker blue band). The solid blue line is just the median - possible, but likely not exact.

At each age (reflected on the x-axis), the 1,000 Monte Carlo results for that point are ordered by asset value. The simulation providing the lowest asset value would be listed as "result 1" and the simulation providing the highest asset value would be listed as "result 1,000".

For the 5-95% Confidence Level, only the highest and lowest 5% of the values are excluded. So, in order, results 51 - 950 (in asset value order) are reflected within the light blue shaded area in the confidence chart. Which means that 90% of the time a client's assets will turn out to fall somewhere between the upper and lower boundary of the light blue area. The 25-75% confidence range reflects results 251 - 750, and the Median reflects "result 500".

Median

Many clients often latch onto the median value as their expected retirement value at any given point. However, at best, this only has a 1/1,000 chance of being exactly true! Some successful advisors carefully disclose both the reality of a simulation ("we can't know the future until we're there") and the reality of probable range over exact value.

Hover your mouse over the chart to see the actual values at each age:

Toggle the displayed values by clicking on the name of the data range in the legend underneath the chart.

Comparisons Tab

The Comparisons tab compares projections for different plans across various return scenarios.

Some successful advisors use the Comparisons tab to demonstrate the value of shifting assets from one allocation style to another. This can be a powerful tool to elevate your expertise to your clients in a visual format. Build an awesome proposal based on your client's unique needs and goals and compare it to how they are currently holding their assets -- your value will be clear as day and your clients will stick with you over the long haul!

There are four different charts in this Comparison:

  • Invested assets (initial view): only compares the value of invested assets (excludes other assets) through the Plan duration
  • Net Worth: compares the client’s estimated net worth (all assets and liabilities) between plans
  • Taxes: displays a comparison of the client’s estimated tax burden throughout the end of Plan
  • Assets at Retirement: displays a bar graph comparing estimated assets at the beginning of total retirement

Use the drop-down box on the left to switch between different charts.

You can also adjust the Return Scenario used in calculating the above listed values. The  Baseline scenario reflects the straight-line projection based on the client's asset allocation for the plans displayed.

Use the drop-down box on the right to show different Return Scenarios.

Return scenarios

There are four pre-built return scenarios:

  1. Bad decade followed by slow growth
  2. Fed adverse scenario followed by modest growth
  3. Strong growth scenario
  4. Flat 0% return

To see the specific values for each scenario, and to create your own scenarios to use in this Comparison, navigate to Advisor Portal > Models > Scenarios.

 

Savings Tab

The savings tab illustrates the benefits of proposed savings strategies during the client's accumulation phase. This area includes four graphs that reinforce the importance of growing a client's portfolio to sustain cash flow needs in retirement. The savings tab will analyze details from the variable plan listed on the left side of the Retirement > Analysis > Probability Tab. Select each graph using the dropdown menu on the right side:

  1. Current year savings
  2. Savings over time
  3. Savings rate
  4. Total savings and returns

Note:

If either client or co-client has retired, only the Current year savings chart will be available.

Current year savings

This chart illustrates the investment contributions included in year one of the financial plan. The first year of each client plan can be customized using the "Cash Flow in simulation starts" methodology setting. Current year's savings are grouped into four buckets:

  • Taxable account savings
  • Retirement account savings (including 401(k)s, IRAs, Roth IRAs, etc.)
  • Education account (529) savings
  • HSA account savings

Retirement savings and HSA savings will include both employer and employee contributions.

This tab will also include the total annual savings as well as the percentage of total income saved. These values are listed to the right of the graph.

Savings over time

This chart illustrates investment contributions included in each year until the first client retires. This differentiates savings by "bucket of assets" identified in the current year savings chart and provides clarity on the benefits of saving over time. The "total savings" and "average savings rate" will be listed on the right side of the graph. Total savings will represent additional contributions made on top of the net worth values listed in the profile tab.

Use the "today's dollars" toggle on the bottom right to remove the general inflation rate from the values.

Savings rate

This chart illustrates the percentage of income saved each year until the first client retires. The savings rate percentage for each year is calculated as the total savings divided by the total income. The "total savings" and "average savings rate" will be listed on the right side of the graph. Total savings will represent additional contributions made on top of the net worth values listed in the profile tab.

Use the "today's dollars" toggle on the bottom right to remove the general inflation rate from the values.

Total savings & proposed returns

This graph demonstrates how the client is projected to reach their accumulated assets at retirement. It shows the current portfolio value, cumulative portfolio return, and total employer/employee savings for each year until the first client retires. If any pre-retirement withdrawals from invested assets are needed to fund cash flow needs, it will be shown as a reduction in the current portfolio value, potentially dipping beneath the "x-axis". The total invested assets when the first client retires is listed to the right of the graph. Additionally, this graph illustrates total savings and portfolio returns associated with a baseline growth assumption.

Use the "today's dollars" toggle on the bottom right to remove the general inflation rate from the values.

Retirement Details

The retirement details tab offers three graphs that allow advisors to demonstrate retirement income, withdrawals from invested assets during retirement, and total retirement spending. Use the dropdown menu on the upper right corner of the Retirement Details tab to select the appropriate view.

You can also adjust the Return Scenario used in calculating the listed values. The Baseline scenario reflects the straight-line projection based on the client's asset allocation for the plans displayed. For more information on return sequences and options to customize them, click here.

Retirement Spending

The retirement spending graph displays a breakdown of the household’s expenses in retirement based on the following categories:

  • Retirement expense
  • Tax expense
  • Housing expense
  • Health care
  • Other.

Use the Retirement > Analysis > Action Items > "Retirement Spending" dropdown menu to model different dynamic spending scenarios that impact the retirement spending graph above.

Learn more about the retirement spending strategies and customization options by clicking this link.

Income Sources

The Income tab allows you to illustrate the breakdown of the client's retirement income sources across the same return scenarios mentioned above. The Income sources chart shows those different sources. As a default, the income tab will illustrate a proposed plan's retirement income projected into the future using a straight-line growth assumption, not Monte Carlo.

Tips

  • Mouse over the chart to see the specific income amounts.
  • The % of stable income reflects the percentage of income coming from Social Security, Pensions, and Annuities.
  • In the Confidence, Comparison, and Retirement Details chart, you can click on each of the items in the legend to remove or show them in the chart

Withdrawal Rate

The Withdrawal rate chart illustrates the percentage of investment assets that are being withdrawn each year to fund retirement expenses.  This number will include any required minimum distributions plus other withdrawals needed to fund their net expenses.