Transcript
In today's training, I will walk you through how to demonstrate periods of major loss and high inflation, and how to compare that to plans showing how fixed income can help offset shortfalls.
We’ll start by creating a what-if plan based on the base plan of my test case. I’ll call this one “Major Loss and High Inflation Test.” After creating the plan, I’ll go into Plan Settings and use the Major Loss section to create a period of three years with custom major loss settings.
You’ll notice that the system has both fixed growth and allocation percentile settings. If your investment products use fixed growth versus a portfolio, the plan will automatically apply the correct figures. For example, if a product grows by fixed growth, it will use the fixed growth settings; if it grows by a portfolio, it will use the allocation percentiles.
For this example, I’ll enter -25% in the first year, -15% in the second year, and -5% in the third year. The system automatically calculates the corresponding allocation percentiles, so you don’t have to manually determine them. I’ll click Done to save and drop this into the plan.
Next, I want to model a period of high inflation in the first few years of retirement. I’ll open the retirement goal and change the beginning inflation rate to 4% for the first three years. Then, I’ll add a step to reduce it to 2.5% after three years, normalizing inflation for the rest of the plan. You can add multiple steps to model periods of rising or falling inflation throughout the lifetime of the plan. I’ll click Done to save. You’ll notice the total need line shows a bump during these high-inflation years.
Now, I’ll drop in the period of major loss. I’ll go to the plus button, select Events, choose the Major Loss event, and set it to occur at age 65. This aligns the three-year major loss period with the three-year high-inflation period. You can also add multiple periods of major loss if desired. In this example, we’ll just use one.
With this setup, the retirement goal now shows that we only meet it 13 out of 25 years. Looking at the chart, we can see shortfalls starting around age 78.
To test how fixed income can offset these shortfalls, I’ll create a new what-if scenario called “Major Loss High Inflation with Fixed Income.” In the plus button, under Retirement, I’ll create a future annuity. This will be a pension-type, capital-protected annuity of $800,000, 30-year certain, starting in the same year. Payment sources will come from Marian’s 401(k). I’ll click Done to save.
With details turned on, you’ll see the annuity appear in the plan at age 65 in green. Now we have more fixed income: for example, $142,000 from Social Security and $45,000 from the annuity this year.
To compare, go to Compare Plans in Chart View. Comparing Major Loss High Inflation versus Major Loss High Inflation with Fixed Income, we can see the difference in shortfalls. In one year, near the end of the plan, the shortfall without the annuity is $102,000. With the annuity, the shortfall drops to $66,000. This clearly demonstrates how the annuity helps cover shortfalls during periods of major loss and high inflation.
I hope this was helpful. If you have questions or need help running a scenario, click the client’s name in the top right, select Request Support, enter your question, and share client access. You can also reach out to us at support@planwithvoyant.com