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Retirement Goals Calculator & Optimizer Methodology
Retirement Goals Calculator & Optimizer Methodology
Updated over 2 weeks ago

How does the TIFIN Wealth's Retirement Calculator Work?

The Goals 30-input retirement calculator pulls data from a dozen questions that are enriched with calculated values, critical assumptions, and macroeconomic trends. Here is how each of these levers plays a role in the calculation:

  1. The first step is to estimate the total wealth needed if a client were to retire at their desired age; displayed as “Required Wealth”. Applying calculated social security benefits, a total shortfall of spending over income is found for each year in retirement. Calculated state and federal taxes increase these shortfalls under the assumption the client’s retirement account is pre-tax. These shortfalls are indexed to the client’s retirement-day dollar value and aggregated into the total required wealth. This calculation takes the following inputs to estimate income and expenses of a client’s family in retirement.

    Age • Retirement Age • Life Expectancy • Spouse Age • Spouse Retirement Age • Spouse Life Expectancy • Annual Household Expense • Annual Expense Post Retirement • Annual Healthcare Expense • Social Security Start Age • Social Security Income • Spouse Social Security Start Age • Spouse Social Security Income • Inflation • Health Inflation • Annual Income • Spouse’s Annual Income • Retirement State

  2. Income and expense events may be added at any point within a client’s lifespan. The ensuing effect will either increase or decrease the accumulating account balance or the retirement need appropriately.

  3. For the accumulation phase, the goals-based approach combines a client’s stated initial balance, savings rate, and savings growth rate to build contributory cashflows. These cashflows are grown in an account invested according to the portfolio selected in step 4.

  4. Select a client: click Assessments > click Goals to then View Results. This will show the client’s current portfolio intersected with advisor-controlled Capital Market Assumptions to generate an average return and volatility for their retirement portfolio. If a current portfolio is not provided, generic portfolios with different weightings of equity and fixed income are used. These portfolios are filtered according to the client’s risk tolerance to find the best approximation of a generic, risk-appropriate retirement portfolio.

  5. Finally, the selected portfolio, contributory cash flows and Required Wealth are used in a probability calculation to get the Odds of Achieving Required Wealth.

  6. Click "Optimize my portfolio's ability more!" to view a recommended portfolio.

  7. Instead of using the client's current portfolio to see if they are on track to reach their retirement goals, steps 4 and 5 are repeated using the portfolios optimizer which pulls from the advisor’s Active models within the Model Marketplace.

    Here you can see that the recommended model improved the outcome by $140k and increased the Odds of Achieving the Required Wealth during retirement:

    Click Generate Proposal in the top right corner or click on the Proposals tab in the left hand pane to preview an investment proposal for the client.

  8. You can adjust the Proposal Outline using the dropdown menu on the right as well as check on / off any reports you don't want to see in the proposal;

  9. Click Generate Proposal in the bottom right corner to download a .pdf file that outlines all inputs and results from the retirement calculator in an easy to read format.

Risk, Goals, or Unified Portfolio Optimization

There are several variables to consider when understanding how the portfolio optimizer is recommending a model. When completing the Retirement Goals assessment, the Portfolio Optimizer will generate a recommended portfolio based upon the following:

  1. If the client has taken the Risk Assessment AND a Goals Assessment, the optimizer will utilize both drivers when making a portfolio recommendation.

    1. The optimizer will recommend a model that falls within the Risk Band AND has the highest probability of achieving the stated retirement goal.

    If the client has taken both assessments, the Goals driver and the Risk driver will both be active on the Recommendations page, meaning that the optimizer is taking the Risk Band and probability of achieving said retirement goal into account in the model recommendation:

  2. If the investor has not taken the Risk Assessment, their Age will determine a Risk Tolerance level for the optimizer of Conservative, Moderate, or Aggressive (see Risk Categories article).

    1. In this scenario, the portfolio optimizer will limit the model universe to Active models (from the advisor's model marketplace) that fall between the equity allocations outlined in the Risk Categories for each Risk Tolerance Level.

    2. For example, if the client is 47 years old, the optimizer will limit models to only those whose equity allocation is between 21% and 70%, which would include a 60/40 model but exclude a 20/80 model. In the former, the model is 60% equities which fall in between the 21-70% allocation in the Moderate category whereas a 20/80 model only has 20% equity, which is below the 21% equity threshold.

    3. If the client has only taken a Goals assessment and not a Risk assessment, the Goals Driver will be active while the Risk driver will be greyed out on the Recommendations page:

How does the Optimizer Recommend a Model for only the Goals Driver?

For the Goals driver, the primary objective of the Goals Optimizer is to maximize the probability of achieving the goal, given the constraints (risk tolerance or risk band). The probability of achieving a goal is determined by comparing the required rate of return to achieve the goal to the investment portfolio's return and volatility.

There are two important variables to consider:

  1. Required Rate of Return - start age, end age, start balance, target end balance, savings per year, etc.

  2. Model Universe - expected returns and volatility for each portfolio that the advisors has "Activated" within their model marketplace

A portfolio's risk score is not an explicit input into the goal optimizer (only as a constraint on which portfolios can be considered if using the risk band). Two portfolios with very different expected returns and volatilities can have the same risk score. Example:

  • Example 1: 15 years to retirement; $500K starting balance; goal of $1M

    • Required rate of return = 4.73% = (1M / 500K)^(1/15) - 1

    • Portfolio 1 has 46% chance

    • Portfolio 2 has 52% chance <<< Recommended

      • Chance % = CDF of normal distribution (((portfolio return - required return - (½ * portfolio variance)) / portfolio volatility) * sqrt(time))

  • Example 2: 15 years to retirement; $500K starting balance; goal of $800K

    • Required rate of return = 3.18%

    • Portfolio 1 has 70% chance <<< Recommended

    • Portfolio 2 has 64% chance

  • Example 3: 30 years to retirement; $500K starting balance; goal of $1M

    • Required rate of return = 2.34%

    • Portfolio 1 has 88% chance <<< Recommended

    • Portfolio 2 has 77% chance

Keep in Mind:

  • If a goal is practically achievable, the optimizer will select a portfolio with lower volatility (not risk score)

  • If a goal is less likely to be achieved, the optimizer will select a portfolio with higher volatility.

  • The Goals Optimizer is not considering the risk score - even though the risk score might be used as a proxy for risk/volatility.

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