The Investment Return Rate Need Analyser calculates the baseline minimum rate of return that is needed, across investment/pension accounts, to ensure that no shortfalls occur over the entire planning timeline. Growth rates are blended when performing this calculation. To yield a single figure, this same average growth rate is applied to all of the invested accounts within the client plan (i.e. investment and/or pension accounts), when performing this analysis. Cash accounts, entered via the Savings screen, are - ordinarily - excluded from the simulation, i.e. the assumed rate of interest is taken as 'given'.
In cases where your client’s needs are already being fulfilled easily by the assets within the plan, the analyser may return a negative growth rate (e.g. -2%). Negative returns indicate what your client could afford to lose and still have a successful plan.
To find the average rate of return needed for the entire timeline, simply select the Start event.
The analyser finds the blended minimum annual rate of return, averaged across the entire timeline, that would be needed for all of the accounts in the plan (savings, investments, pensions) to meet your clients expense requirements and thereby prevent any future shortfalls.
The result is the average return needed on all investments atop any regular inflows (e.g. income) or lump sum inflows (e.g. tax free cash from a crystallised money purchase). We don't inflate the rate of return but we do inflate the future expenses that this averaged return must meet, unless you have set inflation rates to zero.
Need is Always Averaged Across the Entire Planning Timeline, Regardless of the Selected Goal Event
The Investment return rate need analysis always tests for minimum rate of return needed (a blended return for all of the accounts within the plan) as averaged over the entire planning timeline. The goal event for shortfall analysis allows you to potentially exclude certain shortfalls from this analysis.
For example, if I simply want to analyse the rate of return needed for the entire planning timeline, including any shortfalls that may occur from the start of the plan its end, I would select the Start event as the goal event.
If I have an immediate term shortfall that I want the analyser to ignore, and only want to analyse the basic return rate needed (for the duration of the plan) to fulfill shortfalls after retirement, I would select the Retirement event or perhaps some event immediately preceding retirement. Any shortfall preceding this goal event would be excluded from the analysis.
So the return is always averaged over the entire timeline but the goal event allows you to potentially exclude some shortfalls from the analysis. If you never want to exclude anything from the analysis, always select the Start event.
Results are Net of Fees
The results yielded by the analyser are net of fees, which is to say the analyser does not apply fees. The simulation tries to find the (net) growth rate which, when applied to all accounts for all the years in the plan, results in a no shortfall after the specified event (e.g. the plan’s Start event). When running this calculation, it does not apply any fees set on the account. The adviser can take the net growth rate and then determine the gross growth rate for a particular account by adding the fees (i.e. “grossing up”) to the computed rate. So for a simulation result of 3.25, if the account has fees of 1%, then 4.25% would be the gross growth rate that account would have garnered in the simulation.
Viewing the Simulation Details in the Let's See Charts
When running an analysis, you can see the results of the analysis by clicking on the lower of the two charts and viewing the application of the resulting return rate to the accounts on the Investments and Pensions tabs of the chart legend in its Detailed Info view.