Coming soon - changes to the Retirement Spending Insight to allow you to keep Milestone and gifting goals in the plan and run the spending capacity result net of these amounts. This has been a highly requested feature change.
The Retirement Spending Insight is designed to show clients the maximum they could spend, once in retirement, to spend down their available liquid assets to near zero by the end of the plan. This is exclusive of illiquid assets, (usually properties) and accounts that have been ring-fenced – those excluded from being a potential payment source, due to withdrawal limits.
As with all insights this is a conversation starter and is based on assumptions. It works well when comparing to planned or actual expenditure in the plan to assess spending 'wiggle room'.
The spending analysis expense starts from the Retirement Event, which is by default the Retirement Event, however you can change this to any event you like:
All existing expenditure and goals from this point are replaced by the Spending Analysis Expense figure.
There are 5 new toggle options on the left hand side once you're in the insight. Let's walk through each one:
Milestone Goals, Gifting Goals & Education Goals
If toggled ON, milestone, gifting and education goals are included in the analysis (and on the chart) and the spending analysis result is always net of them.
So if toggled on and you have a £100,000 gifting goal in retirement, the gifting goal will remain in the plan and the retirement spending result will be NET of the gifting goal figure. In other words what could they spend in retirement (the retirement spending insight result) whilst also gifting £100,000 in retirement (the retirement spending insight result is in addition to this gift).
If the retirement spending figure is indicated to be £70,000 per year, this means they are projected they could spend £70,000 per year and also make the £100,000 gift, so on one year spending with be £170,000.
This is really useful where the client has planned a series of Milestone Goals or Gifting Goals. You have the option of keeping these goals in the plan and running the insight to see the change in the retirement spending capacity.
If the toggles are OFF then no milestone, gifting or education goals will be in the plan, they will all be replaced by the Spending Analysis Expense figure. This will then assume that none of these goal types remain in the plan. For example, if you didn't make any gifts what would the annual retirement spending figure be? Based on this example they are projected to be able to spend £80,000 a year but make no gifts in addition to this.
NOTE: These have to be entered as Goals, rather than expenses to be available as an option in this toggle.
Use Year View - Expenses tab within the insight to check if they are included or not.
Reoccurring mandatory expenses
Reoccurring mandatory expenses includes the following:
Reoccurring Debt/ Mortgage Payments (repayments and interest only payment)
Ongoing adviser fees
Insurance Premiums
Reoccurring mandatory expenses are always shown in the expenses tab in Year View of the insight, but may or may not be included in the result figure depending on the toggle.
If toggled ON the result is net of the reoccurring mandatory expenses above. This means they could spend, for example, £30,000 per year in addition to paying their reoccurring mandatory expenses. So total spending each year could be more than this if there are any of the above items in the plan.
This is useful if the client would like to explore what their retirement spending capacity could look like in addition to their reoccurring mandatory expenses.
If toggled OFF reoccurring mandatory expenses are assumed to be part of the retirement spending figure. For example, mortgage payments would be part of the result, so for example, some of a £40,000 per year result would be to cover mortgage payments.
This is useful if the client would like to see the total retirement spending figure, of which, some of that will go on mortgage payments, insurance premiums etc.
One off mandatory expenses
One off mandatory expenses are now always excluded from the retirement spending calculation. One off mandatory expenses include:
One Time Debt/Mortgage Payments e.g. overpayment/Payoff
Property Purchase
Pension annuity Purchase costs
Non-Pension annuity purchase costs
Initial advice fees and Exit fees
As they are always excluded there is no toggle option for one off mandatory expenses. This means the retirement spending result will be in addition to making these payments above. So you can spend £40,000 per year and pay off the mortgage.
Taxes
Taxes includes all tax types and they are always accounted for the insight. You can choose with the toggle whether the result should be gross or net of taxes.
Toggled OFF and the result will display net of taxes. This means the result is what the client can spend, rather than the total they need to withdraw to cover spending and taxes.
Toggled ON and the result will display including taxes in the figure. This means the result indicates the total that the client could withdraw, some of which will go on taxes and some on spending.
All other “user entered” expenses are modified, to end at the retirement event.
How it works
To find this annual expenditure, the Retirement Spending Insight creates a “Spending Analysis Expense”. Think of this as any other expense where the value is a present amount, which is inflated using the default inflation rate in Plan Settings.
This Spending Analysis Expense is applicable after retirement. The analyser will attempt to fulfil this maximum Spending Analysis, in addition to any of the items mentioned above depending on their setting.
Note - All non-mandatory expenses are dropped from the simulation in the years after the retirement event. This includes one-off Milestone, Gifting and Education goals unless toggled ON on the left hand side.
The system then does a binary solve to determine the maximum Spending Analysis Expense value (in today’s terms) that can be fulfilled, so that available liquid assets are spent down over the course of retirement, and there is no resulting shortfall in the plan. This is not necessarily a “spend to zero” solution, as some accounts may have withdrawal limits set, and the simulation will honour these restrictions.
NOTE: the Spending Analysis Expense figure returned is in today's terms. This figure is escalated from the start of the plan, using the default inflation rate in plan settings.
Planned Withdrawals
Tip: Planned Withdrawals are also honoured within the Retirement Spending Insight results. This could mean that the Retirement Spending results are lower than expected, due to the Planned Withdrawals.
Setting up a What-if and removing any exclusions, such as Withdrawal Limits and Planned Withdrawals, will provide you with a much clearer picture of the Retirement Spending expense.
Year View to see the details
See Expense details by clicking on Year View top right, shown below, or double clicking on a bar of the chart. Exit this detailed view by clicking on the Year View Icon again.
Additional Details
By default, the Insight currently uses the Principal client's retirement event, or it uses the start of the plan if the primary client is already in retirement and no retirement event is found.
If the second client has already retired, the simulation will still calculate from the primary client’s retirement event.
The value calculated and shown as the result is the maximum retirement spending capacity (present value). The bar in the chart is the future value of the spending capacity result and the sum of the mandatory expenses in the year (debt, etc.) as shown above.
The spending level is assumed to continue until the end of the plan, with inflation. If the plan is for a couple, it continues until second death.
The maximum retirement spending amount is a value determined by examining the entire period of retirement until mortality. The figure is in today’s terms, and can be inclusive of taxes or net of taxes.
The simulation uses a binary solve algorithm, to find the maximum value of the spending goal expense such that there will be no shortfalls throughout the entire planning horizon, after the retirement event (or start event if no retirement event).
Essentially, the calculation is working out how much can be taken out of the plan per year, to end up with zero liquid assets (excluding any that have withdrawal limits set) at the end of the plan (minus any mandatory expenses that must be fulfilled). In most plans, this will correspond to the spending amount that results in zero liquid assets at the end of the plan. However, the simulation doesn’t actually inspect the account values, but instead looks at the shortfall during each iteration of the solution algorithm.
Note for Reports
The Report value will use the Event and settings (i.e. Including/Excluding Taxes) used in the Insight when last run in the software - or defaults to the Retirement event, as explained below.
For example, run the Insight from Mr's Retirement Event, Excluding Taxes and that will be the value shown in the report. Run from Mrs' Retirement Event, Including Taxes in the software and that is the value it will show in the next report.
This means you can produce a report for the Event and settings used in the software.