The Investment Returns insight calculates the minimum average rate of return, inclusive of product and ongoing fees, needed to ensure that no shortfalls occur during the planning timeline.
Growth rates are blended when performing this calculation. To yield a single figure, this single average growth rate is applied to all present and future cash savings, investments and defined contribution pensions within the plan when performing this analysis.
Tip: the return rate on a particular account will not be altered when this insight is run if 'Growth is Fixed' has been selected for that account.
Here is a short video to illustrate how the Insight works: Investment Returns Insight Video
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. -50%). Negative returns indicate what your client’s investments could afford to lose annually and still have a successful plan.
To find the average rate of return needed for the entire timeline, simply navigate to Insights > Investment Return Insight > Get Started .
The analyser finds the blended minimum annual rate of return, averaged across the entire timeline, that would be needed for all 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 savings, investments, pensions atop any regular inflows (e.g. income) or lump sum inflows. 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.
Viewing the Simulation Details in the Let's See Charts
When running an analysis, you can see the result details of the analysis by selecting Year View or double clicking on any bar in the chart.
The resulting return rate for the accounts is shown in Year View > Investments and Year View > Pensions.
Tip: The result from the Investment Return Simulation is inclusive of Product and Ongoing fees. See how fees are applied by clicking on Year View > Investments or Year View > Pensions.
Year View shows the Net Growth needed. You would add the Product Fees back onto the Net Growth which would total the Investment Return Simulation result.
By clicking on the particular Investment/Pension to expand the information further you can view the Gross Return, the different types of fees that are applied to include % and monetary form and the Net Return needed.
Investment Returns are Always Averaged Across the Entire Planning Timeline
The Investment return rate need analysis always tests for minimum rate of return needed (a blended return for all the savings and investment accounts within the plan) as averaged over the entire planning timeline. The Start 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.
However, I have an near 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 fulfil 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.
The return is always averaged over the entire timeline, but the Start 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.
FAQ
Q: Is the Investment Return Insight a real return (after inflation)?
A: No. The Investment Return Insight shows a nominal return, gross of fees. However, since future expenses are inflated in the analysis (unless you’ve set inflation to 0), inflation is indirectly accounted for in the calculation.