The Loss Capacity insight is a simulation which determines how much a plan can lose from investments and pensions at a specific event while still achieving plan objectives.
Choose a Loss Event, click Get Started and the insight will determine the amount of money that could be lost in that year and still leave enough assets to last until the end of the plan.
If possible in the plan, it does this by reducing the amount of money in Investments and Pensions by applying a negative growth rate. It will not reduce money in any Cash/Savings accounts, as in reality these would not incur a negative growth rate.
These accounts are not completely excluded from the simulation though, as the software will still use these Cash/Savings accounts to meet expenses after the loss capacity event.
The simulation does not change other areas, such as Expenses, employment, property, mortgage amounts or protection in the plan.
Once the simulation has been run you can scroll through the different charts, using the left and right arrows, to see the impact. Below is an example of a Net Worth chart after running the Loss Capacity simulation.
The Loss Rate shows the percentage withdrawn from each of the Investment and Pension accounts. For example, if there is sufficient money in cash and secure income to meet expenses from the Loss Capacity event until the end of the plan, then the Loss Rate will be 100%. This means 100% of the Investments and Retirement Accounts can be lost in that loss capacity year and this amount is shown in the loss amount.
If there is insufficient cash/income to meet expenses until the end of the plan, then a lower loss rate will be shown to leave some money in the investments and pension accounts for meeting expenses.
The Loss Amount is the value of money that the plan could lose from Investments and Pensions in that Loss Capacity event year and still meet expenses for the rest of the plan. Note that the loss amount is a future value if a future event is selected.
If there is already a shortfall in the plan, the plan is already expected to run out of money so it can’t afford to lose more, therefore the loss capacity results will return 0% and $0.
Note that the loss capacity insight may leave assets at the end of the plan. For example, if there are plenty of cash reserves after meeting all expenses, money will still be in these accounts at the end of the plan. Also, if the clients expenses are met primarily with secure income such as employment income, state pension and defined benefit pension income, assets may not need to be drawn upon fully.
If any money is left in Investments and Pensions after the Loss Event i.e. if the Loss Rate is less than 100%, these assets will continue to grow thereafter at the Investment growth rates you have set.
Property is not affected by the simulation so you will still see the value of the property at the end of the plan in the Assets chart in the Loss Capacity insight details screen.
Where can I see the detail of what is happening?
You can see what is happening in the simulation by clicking on the Detailed Info button whilst viewing the result of the insight, as shown below.
Looking at the Investments and Retirement tabs in the Loss Capacity year you will see the percentage drop in each account. Scrolling through subsequent years you will see the growth rate return to the original rate and you can see which money is used when.
Looking at the Cash tab in the Loss Capacity year you should see that the growth rate is not affected. Scrolling through subsequent years you will see which money is used when.
Withdrawal limits are honored, so accounts which have ‘Do Not Allow’ selected on the withdrawal limit are not spent in the simulation plan. Note that if you look at Detailed Info, you will still see the growth rate on these accounts change to the Loss Rate in the Loss capacity year, but no withdrawals will be made.