Ready for Retirement?
How this tool works
- About the “Ready for Retirement” Tool
- User Inputs and Adjustable Assumptions
A. User Inputs
B. User Adjustable Assumptions
- Understanding your Results
- Monte Carlo Simulation
- Material Limitations
A. Retirement Asset Mixes
B. Annual Inflation
C. Effective Income Tax Rate
D. Life Expectancy
1. About the “Ready for Retirement” Tool
The “Ready for Retirement” tool (hereinafter “Tool”) is designed to estimate how much investment growth a current, lump-sum value of retirement savings could
realize from now until retirement and how much income it may be able to provide
during retirement years.The calculations are based on the user’s answers to the questions presented along with various assumptions that are explained below. The inputs and certain assumptions may be changed by the user to help gain a better understanding of how changes in the users situation could alter the estimated results.
2. User Inputs and Adjustable Assumptions
The Tool analyzes the inputs and adjustable assumptions noted below to calculate the estimated results presented. When using this Tool keep in mind that financial projections are not mistake-proof and cannot ensure specific future results. Changes in tax or benefit laws, investment markets, or your own financial situation can cause actual results experienced to deviate significantly. To address this uncertainty you should evaluate a wide range of possible outcomes by creating several scenarios with various sets of assumptions. In addition to the user inputs and user adjustable assumptions described below, to calculate the results presented this Tool uses certain fixed assumptions that cannot be changed.
A. User Inputs
|Inputs||How is it used?|
|Number of Individuals||The number of individuals selected will impact the time horizon this Tool will use to perform calculations. If two individuals are selected, this Tool will begin the retirement income period when the first individual plans to retire and end the income period when the last individual remaining dies.|
Age & Retirement Age
|This Tool uses current age and the age you want to retire to determine the time horizons used in the estimates.|
Available for Retirement
A hypothetical investment return is applied to this value based on the Pre-Retirement Asset Mix to calculate the Projected Value at Retirement. The value entered should be in today’s dollars.
B. User Adjustable Assumptions
|Assumptions||How your assumptions are used.|
|Pre-Retirement Asset Mix||The Tool utilizes the selected Pre-Retirement Asset Mix for the pre-retirement phase of calculations (default is “Income”).
|Annual Inflation||This Tool adjusts the annual withdrawal income for inflation to reflect level purchasing power during the selected retirement period.|
|Effective Income Tax Rate||An estimated blended rate of all taxes that may be due on distributions during the retirement income withdrawal period. This Tool assumes all savings are tax deferred and then reduces the annual withdrawals by the selected Effective Income Tax Rate. The default rate is 25%.|
|Life Expectancy||Life expectancy is used along with the age you want to retire to determine the duration of the retirement period. The default life expectancy is age 90.|
|Desired Probability of Success||The percentage chance that the withdrawals made during the retirement period will not exhaust savings prior to the end of the assumed life expectancy. The default percentage is 95%.|
3. Understanding your Results
Projected Value at Retirement - represents the potential growth from now until retirement of the value entered for current retirement savings. Growth is calculated based on the expected annual rate of return for the Pre-Retirement Asset Mix. This figure is not adjusted for taxes or inflation. For more information about the Retirement Asset Mixes, please refer to Section V – Material Limitations below.
Potential Sustainable Annual Income - represents an annual estimate in present dollars of the amount of money available to spend during the specified retirement period. This Tool uses the Projected Value at Retirement in a probability based “Monte Carlo” simulation to estimate an amount that can be withdrawn on an annual basis without depleting the savings prior to the selected life expectancy. It is derived as a present dollar average of the annual withdrawals displayed on the “Income from Assets Graph.” For more information about Monte Carlo simulations, please refer to Section IV – Monte Carlo Simulation below.
Income/Assets Graph - After reviewing the results page displaying the Projected Value at Retirement and the Potential Sustainable Annual Income, you will be able to view these details in a graph by clicking the link labeled “Click for Income from Assets Graph.” Based on a Monte Carlo analysis using the assumed Desired Probability of Success, the graph displays estimated maximum annual withdrawals the Projected Value at Retirement (displayed as “Asset values” on the webpage) could sustain without being depleted prior to the end of the retirement period. These annual figures are reduced by the assumed Effective Income Tax Rate and increased each year by the assumed Annual Inflation Rate to represent increases in withdrawals necessary to provide level purchasing power throughout the retirement period.
When two individuals are included in the analysis, the income graph reflects the age of the first to retire. It continues the age that individual would be during each year until retirement has ended for both. Retirement ends when both individuals have attained the assumed life expectancies. If both individuals will retire in the same year then the ages of the oldest individual are represented.
4. Monte Carlo Simulation
The Tool estimates your Projected Value at Retirement and Potential Sustainable Annual Income using the inputs and assumptions outlined above. A Monte Carlo simulation is a technique for simulating real-world situations that involve elements of uncertainty and can provide information on the likelihood that your assets will last through retirement. Assumed values for uncertain variables are generated repeatedly to simulate real-world possibilities. These variables include, among others, interest rates and market performance.
This process is repeated hundreds or thousands of times. Then a tally is made of how many times your assets last through the retirement period and how many times they do not. Through this process, a probability can be assigned to assets lasting through a designated retirement period. This is not a guarantee of performance and your experience may differ.
In the Tool, the Monte Carlo analysis performs 1000 simulations for each of the six Retirement Asset Mixes to calculate the highest annual withdrawal amount that does not exhaust the retirement savings prior to the end of the retirement period based on the assumed Desired Probability of Success. The Tool selects the outcome with the highest withdrawal rate based upon the selected Desired Probability of Success. This number is selected to show the highest potential withdrawal amounts and does not represent an actual or expected rate.
By default, this Tool uses a “Desired Probability of Success” of 95% which means that 950 times out of 1000 the withdrawal rate used by the Tool will not exhaust the retirement assets prior to the selected life expectancy. Therefore, decreasing the “Desired Probability of Success” to 80% in the “Assumptions” page will lead to a more aggressive withdrawal rate and raise the Potential Sustainable Annual Income. However, this amount will reflect a probability that only 800 times out of 1000 the withdrawal rate will not exhaust the retirement assets prior to the selected life expectancy. Likewise, lowering the “Desired Probability of Success” to 65% will lead to a higher withdrawal rate and a corresponding higher Potential Sustainable Annual Income.
5. Material Limitations
Users should keep in mind that this Tool is for illustrative purposes only and is not intended to provide investment, tax, or legal advice. Because factors such as future inflation, future investment returns and the length of your retirement are impossible to accurately predict—and small variations in these data may create dramatically different results over time—you should view the results as an estimate that may vary materially from your actual situation in retirement. The longer the time horizon prior to retirement and during retirement, the greater the deviation the estimated results may have from actual future results. PLEASE NOTE that this Tool does not take into account continuing contributions to retirement savings and other factors that will have a material impact on your financial situation in retirement, such as Social Security retirement benefits and other sources of additional income. While this tool can help users start thinking about their retirement income, it should not be relied on for investment decision making or retirement planning.
A. Retirement Asset Mixes
The Tool uses six hypothetical Retirement Asset Mixes with different rate of return potentials and risk characteristics, ranging from Income (lowest risk and lowest return potential) to Aggressive Growth (highest risk and highest return potential). The performance characteristics of each Retirement Asset Mix, as used by this Tool in performing calculations, is determined by percentage allocations to some or all of five key asset categories: Large Cap Stocks, Mid Cap Stocks, Small Cap Stocks, International Stocks, and Fixed Income Securities. The expected performance projections for each asset category are developed based on research and analysis conducted by a range of professional investment managers and analysts that estimates the long-term prospects for the financial markets. Projections are made not only for future average annual returns, but also for expected levels of risk and correlations between asset categories.
Unlike the Pre-Retirement Asset Mix in the user adjustable assumptions, at the selected retirement age, this Tool will adjust to the Retirement Asset Mix which provides the greatest possible estimated sustainable income during the retirement period.
|Retirement Asset Mix||Large Cap||Mid Cap||Small Cap||International||Fixed Income||Expected Average Annual Return*|
*The Expected Average Annual Return is as of analysis conducted 01/01/2017.
Actual investments have fees and expenses that can substantially reduce return results over time. It is important to keep in mind that past performance does not guarantee future results and all investing involves risk. The following risks are typically associated with the asset categories used: Stocks of small-capitalization companies involve substantial risk. These stocks historically have experienced greater price volatility than stocks of larger companies, and they may be expected to do so in the future. Stocks of mid-capitalization companies may be slightly less volatile than those of small-capitalization companies but still involve substantial risk and they may be subject to more abrupt or erratic movements than large capitalization companies. International investing involves risks not typically associated with domestic investing, including risks of adverse currency fluctuations, potential political and economic instability, different accounting standards, limited liquidity and volatile prices. Fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investments in lower-rated and nonrated securities present a greater risk of loss to principal and interest than higher-rated securities.
B. Annual Inflation
Annual inflation reflects the increase in the cost of goods and services and its effect on the purchasing power of money over time. Inflation is an important consideration in calculating the potential income current savings may provide during retirement as this calculation typically encompasses a long time horizon. This Tool adjusts for inflation, sometimes referred to as "cost of living" adjustments, by making annual increases at the assumed Annual Inflation rate to distribution amounts as displayed on the Income from Assets Graph. The assumed Annual Inflation rate is also used to calculate the Potential Sustainable Annual Income figure, which is shown in present dollars. By default this Tool uses an Annual Inflation rate of 3%. This rate may be adjusted on the ‘Assumptions’ page.
C. Effective Income Tax Rate
This Tool does not deduct any taxes when calculating the Projected Value at Retirement. However, the distribution amounts as displayed on the Income from Assets Graph and the Potential Sustainable Annual Income figure are after deduction of taxes at the assumed Effective Income Tax Rate. This is done to represent accounts typically used for retirement savings – such as a 401(k) or Traditional IRA – which offer tax deferred growth with distributions subject to ordinary income tax. This tool does not take into account early withdrawal penalties or required minimum distribution rules that may apply to retirement accounts based on age. Actual taxes will depend on your specific financial situation and the type of account from which distributions are taken.
The Effective Income Tax Rate assumptions available for selection are generalizations intended to represent an estimated blend of all taxes that may be due on withdrawals under current federal and state income tax laws, which are subject to change. This rate is hypothetical in nature and does not represent an estimate or analysis of your current or projected tax situation. By default, this Tool uses an Effective Income Tax Rate during retirement of 25%. This tax rate may be adjusted on the “Assumptions” page. By lowering the Effective Income Tax Rate, the Potential Sustainable Annual Income will increase and the Income from Assets Graph will display higher annual withdrawals through the designated retirement period. However, increasing the Effective Income Tax Rate will lead to a lower Potential Sustainable Annual Income and subsequently lower annual withdrawals as displayed on the Income from Assets Graph.
The COUNTRY Financial® family of companies and their representatives do not provide tax or legal advice and nothing in this Tool should be construed as tax or legal advice. For analysis and review of your personal tax situation you should contact your tax advisor.
D. Life Expectancy
This Tool uses age 90 as the default life expectancy when determining the end of retirement in the analysis. This is considered to be a reasonably conservative assumption since it represents an age that is older than the average life expectancy projected today for U.S. citizens. How long you may live can be one of the most important factors to consider when planning for retirement. Since the assumed life expectancy determines the period of time over which retirement savings must last following the start of retirement, you should make various adjustments to this number to evaluate how it impacts the estimated sustainable income results. Life expectancy age may be adjusted on the ‘Assumptions’ page.