After you’ve determined how much risk a client is comfortable with, and how much risk they have in their current investments, the next step is to determine how much risk they need in order to meet their long-term goals. Here’s where Retirement Maps step in.
Retirement Maps is a powerful tool to help advisors quickly determine the probability of success for a given retirement strategy. With Retirement Maps, advisors can interactively engineer a retirement strategy for both retirees and pre-retirees. Lightning-fast calculations encourage advisors to show their clients the impact of various retirement plan assumptions in real-time, right before their eyes.
Note: For a deeper dive into Retirement Maps best practices view our 40-minute webinar here.
In This Article
About Retirement Maps
Though Retirement Maps can be used as a stand-alone tool inside of Riskalyze, it was built to help advisors marry the client's Risk Number ® and/or portfolio allocations with retirement goals. With Retirement Maps, advisors can objectively express whether a client's retirement goals, Risk Number and/or existing portfolio have a high probability of success. The map depicts the projected range of potential outcomes for a given portfolio (or hypothetical portfolio) over time, given a set number of configurable inputs.
Retirement Maps provides an opportunity for advisors to address important questions such as:
- Am I saving enough given my portfolio allocation?
- Is retirement at age 55 possible without additional savings?
- What would buying a second home do to my retirement goals?
- Can I be invested this conservatively and still make retirement by age 60?
To begin, navigate to a client profile, and click on the Create Retirement Map:
Retirement Maps needs just a few simple inputs in order to draw the chart and project a probability of success:
- Invested Like determines both the assumed Rate of Return AND Volatility used in calculating the Map. The advisor can select a generic Risk Number OR use the risk/return profile of the client’s Portfolio and/or proposals. If one exists, we'll select the client's Current Portfolio by default. To change the "Invested Like" selection, simply click the More Options menu next the selected item and choose between Custom Risk Target or Select Portfolio
- Selecting a Custom Risk Target, Riskalyze will calculate a projected Rate of Return and Volatility for that Risk Number based on a generic diversified ETF portfolio.
- If the advisor chooses to Select a Portfolio, they'll have the option to choose between a client's Current Portfolio or any Proposals they've created for that client. We'll use the Potential Annual Return and projected volatility for the selected portfolio in the Retirement Map calculations.
- Regardless of which option the advisor chooses, the assumed rate of return will be noted in the Assumptions Section of Retirement Maps.
- Investment Amount is the starting principal amount in today's dollars. By default, if you've selected a portfolio in the "Invested Like" section, we'll start with that portfolio's actual value.
- Monthly Savings is the amount of assumed monthly savings from today until the retirement date selected. If you want Retirement Maps to increase monthly savings going forward, you can edit the "annual savings increase" field under the assumptions section.
- Retirement Year (which can be a date in the past or future) is the date at which the monthly savings stop and monthly withdrawals start. Retirement Maps assumes retirement in the same month as 'today' in the retirement year selected. For example, if it is April 15th, 2014 and you enter 2033 as the retirement year, Retirement Maps will calculate retirement as of April 2033.
- Monthly Withdrawal should be the amount, in today's dollars, needed after retirement, less any other income from Social Security, pensions, annuities, etc. The "Monthly Withdrawal" is the income burden that the portfolio will bear in retirement. For example, if the investor(s) needs a total of $5,000 of monthly income (in today's dollars) at retirement and pensions/social security will be paying him/her $3,000 of monthly income, the "Monthly Withdrawal" will be $2,000. The investor(s) will be withdrawing $2,000 each month in retirement against their portfolio.
- You'll find additional inputs found in the Assumptions section, which you can click to expand:
- Birth Year will work in conjunction with the Life Expectancy input for modeling purposes. The birth year will automatically be included for clients with completed risk questionnaires on file. It may be prudent to adjust the birth year for couples with large age differences.
- Life Expectancy determines the end date of a client's Retirement Map, while also driving the Probability of Success. In this case, success is determined by the likelihood that a client will be able to withdraw the specified monthly amount from their portfolio each month from the date of retirement until through the date defined by their life expectancy.
- Inflation Rate allows you to effectively discount the assumed rate of return by an inputted inflation rate.
- Annual Savings Increase allows you to model an annual increase in monthly savings, raising that value, annually, by the specified percent increase. For example, if a client is saving $100/month and the advisor selects an annual savings increase of 2%, in year two Riskalyze will model monthly savings of $102/month, in year three $104.04/month and so on until the retirement year.
Note: The results are presented in today’s dollars and adjusted for inflation at the rate you select under assumptions. The chart shaded area above and below the solid line on the chart displays a range of possible investment returns based on a 95% probability analysis. Calculations do not include income tax.
Needed by Retirement: The principal amount required at the time of retirement in today's dollars. This is automatically calculated for you, based upon the inputs. Essentially, the Needed by Retirement Date is the amount of money the client will need to have by retirement in order to avoid running out of money given their portfolio, savings, withdrawal rate, and retirement year inputs.
- When a Retirement Map is generated, you'll notice some clickable suggestions along the top of the map.
- The longer the time horizon modeled, the more of an impact the assumption and assumption adjustments tend to have on the map. For a young investor, even small adjustments in assumptions will have a visible impact to the Retirement Maps.
- If the probability of success is high and the client is well-established, you can modify some of the variables to learn the level of flexibility the client has, such as being able to retire earlier, save less, or invest at a lower risk level.
- Conversely, if the probability of success is low, try changing several of the variables, such as investing the client at a higher Risk Number or increasing their savings rate or retirement year. In many cases, Riskalyze will provide suggestions for improvements to the strategy. Advisors can scroll over the suggestions and immediately see the chart change accordingly.
- Want to quickly model social security or the probability of long term success if your client buys that brand new RV or vacation home? Check out how Timeline for Retirement Maps can help.
Creating a Retirement Map will help both you and your client have peace of mind with retiring by lessening the concerns of the unknown.
Pro Tip: Want to learn some creative ways to use Retirement Maps in your practice? Check out our Riskalyze Academy Lesson for best practice tips and advice.
Is Retirement Maps based off of a Monte Carlo simulation?
When we set out to build Retirement Maps, Monte Carlo was our knee-jerk solution. However, we wanted to provide a simpler view for advisors and investors using statistics pulled directly from our portfolio analysis. Thus, we spent considerable time building proprietary technology to solve the problem and answer the question, "how do you calculate the probability of success for a plan or goal when you know the expected return and variance of returns for the underlying portfolio?"
The Riskalyze solution takes the variance expressed in the 6-month range and the expected return (potential annual return) in conjunction with error propagation calculus to give a more robust probability-of-success calculation. Effectively, volatility begets volatility. If variance is the deviation from the expected return, then the more volatile a portfolio is the more you would expect it to deviate from the assumed expected return. Our Retirement Map methodology accounts for volatility into the future where the shaded area accounts for the ongoing variance through time.