Need Analyser, Savings - About the savings need analysis

About the Savings Need Analyser

A better name for this simulation would probably be the "Investment Need" analyser since savings are deposited into a model taxable investment account. Think of this model account as an unwrapped investment without a dividend yield. 

When run, the savings need analysis creates a special reserve account called "Needs Analysis".  Funds are deposited into this investment account and are held until the specified target event, after which they are released for payment of expenses.

The net assumed growth rate of this taxable investment account can be viewed by clicking any bar of the lower chart shown when running the simulation, prior to the savings target event selected for the simulation - e.g. Retirement. This bottom chart shows the simulation results. Click the Detailed Info link at the bottom of the chart legend. The chart details panel will display. Select the Investments tab. Find the "Needs Analysis" account. A growth rate will be shown for this reserve account, net of any account fees.

This growth rate is set from Preferences > Plan Preferences (on the right side of the screen) > Default Inflation / Growth Rates > Investment Growth %. The default fees, deducted from this default growth rate, are also set in Plan Preferences on the Investment Fees panel, in the Taxable % field.

The default account fees on this taxable account are also taken from Preferences > Plan Preferences > Investment Fees > Taxable %. Again, the growth rate shown on the Let's See chart's Detailed Info panel, Investments tab are net of these account fees (i.e. the realised growth rate).


Using the Savings Need Analyser with the Performance Slider

The performance slider, if activated, could be used to adjust this assumption upwards or downwards. I've never used the two together until now but this is an interesting approach. Again, you can view the performance slider's adjusted growth rate as applied to the"Needs Analysis"; account on the Let's See chart's Detailed Info panel, Investments tab.

If you run the savings need analysis and then adjust the growth rate using the performance slider, the chart results will adjust, showing any surplus or shortfall, but you would need to click the Analyse button again to get an adjusted annual savings figure based on the adjusted growth assumption.


Negative Results - Using the Savings Need Analyser to Spend Down Assets, Calculating Potential Future Gifting or Spending

In cases where there is no projected future shortfall, the savings need analyser will not only show that there is no need for additional investment, it will also show a negative result, which could be taken to indicate what your client could spend or gift, on average, to spend down liquid assets. If you want to know how much could be spent or gifted on average, annually, to spend down all liquid assets over the course of a lifetime, select the final Mortality event as the goal event for the simulation. You might also choose to view the Liquid Assets chart when running the simulation, which should show these assets diminishing over the course of the timeline. 

 

Simulation Errors

Sweeping Funds and Solution Errors when running the Need Analyser

A word of warning. If you have funds set to be swept automatically from default cash into another account, say an unwrapped investment, and have in turn set the account to disallow or restrict withdrawals (by using advanced settings on the Liquidation Limits / Planned Withdrawals) you might create a problem the need analyser will be unable to solve. The result would be a simulation error. When running the simulation, the Amount Needed field would show a result of "solution error". 

The same problem would occur if you were tothat  have a sweeps rule set to move funds automatically into a special type of account that the software does not take ad hoc withdrawals from in order to top up income. These are accounts with special tax treatments. 

Ad hoc withdrawals are never taken from: 
- Drawdown Pensions (except for when drawdown income is set to be taken “as needed”), 
- Trusts (other than Child Trusts and only in certain circumstances), 
-  Enterprise Investment Schemes, 
-  Venture Capital Trusts, 
-  Discounted Gift Trusts. 

Normally you would need to set a drawdown to pull any funds from these accounts, however, having all funds automatically swept from default cash into one of these special account types will likely  cause a solution error when running a needs analysis. 

 

Another Common Cause of Simulation Errors - Restricting Expense Payment Sources

Another common cause of solution errors are expense payment sources. For expenses you have the option to specify whether a preferred source, usually a particular savings or investment account, should be drawn upon to pay a given expense before other possible payment sources such as incomes are taken into account. For example, if your clients are saving into a special fund to pay for their children's future university fees, you would likely set this account as the preferred payment source for these fees on the Expense screen > Advanced Settings > Expense Payment Source panel. There is no harm in doing this if needed. The software will draw first from the specified account when attempting to pay the expense and if the account does not have adequate funds it will draw from other sources. 

There is an additional option on the Expense Payment Source panel to "Only allow preferred source to pay expense". This setting can create problems for the need analysers. By ticking this option you will prevent the software from fulfilling the expense from any source other than the preferred payment source. Use this option only very sparingly and we recommend only using it in what-if plans. It could be useful, for example, in testing a case to discover whether your clients are saving enough into that education fund to fully fund their children's future uni fees. Incomes and other liquid assets are taken out of the mix when paying these future expenses and if the account is being underfunded, shortfalls will be shown in the cash flow chart, usually above the black need line to note that then shortfall is an artificial one. Other income and assets are available but the software is not being allowed to draw upon them. 

If you use the "Only allow preferred source to pay expense" option and the account in question goes underfunded, the software will never be allowed to draw from other sources to pay the given expense. When running a needs analysis, this will result in a "solution error" because the software cannot find a solution to the shortfall. The life insurance and lump sum need analysers deposits funds into default cash accounts. The annual savings need analyser deposits funds into a hypothetical "needs analysis" account, modelled on an unwrapped investment. None of these simulations will place funds into a preferred payment source account, unless of course the preferred payment source is a default cash account. Incidentally, there would normally be no need to set a default cash account as a preferred payfor top-up ment source since these accounts are already the first source of cash withdrawals for top-up income, once the year's inflows are exhausted.