The Investment Returns insight calculates the minimum average rate of return, net of 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.
In cases where your client’s needs are already being fulfilled easily by the assets within the plan, the analyzer may return a negative growth rate (e.g. -2%).
Note - 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 analyzer 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, retirement accounts) 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. 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.
Insight Results are Net of Fees
The results yielded by the Investment Returns insight are net of fees, which is to say the analyzer does not apply fees, since investments could have a variety of different fee structures
The simulation tries to find the net of fees 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. 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.
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 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 analyze 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 a near term shortfall that I want the analyzer to ignore, and only want to analyze 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.
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 the Investments and Pensions tabs of this Detailed Info view.