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 help illustrate how much a client could potentially spend each year in retirement while using their available liquid assets over the course of the plan.
The Insight calculates the maximum annual retirement spending amount that can be supported without creating a shortfall during the planning horizon. Illiquid assets, such as property, and accounts that have been excluded as potential payment sources through withdrawal limits are not assumed to be available to support this spending.
The result can be useful when comparing the client's calculated spending capacity with their planned or actual retirement expenses to help illustrate how much flexibility may exist within the plan.
Choosing When the Analysis Begins
By default, the spending analysis begins at the primary client's Retirement Event. You can change the starting point by selecting a different event within the Insight.
If the primary client is already retired and no Retirement Event is available, the analysis begins at the start of the plan. For a joint plan, the analysis continues through the end of the planning horizon, generally through to the second client's mortality event.
All existing expenditure and goals from this point are replaced by the Spending Analysis Expense figure.
However, there are five new toggle options on the left hand side that will give you additional control over which goals and mandatory expenses remain in the analysis and whether they are included within or in addition to the calculated spending result.
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 calculated net of these goals.
For example, if a client had a Gifting Goal of £100,000 in retirement, and a Retirement Spending result of £70,000, the gifting goal will remain in the plan and the retirement spending result will be NET of the £100,000 gifting goal figure.
In other words the £100,000 gifting goal is in addition to the £70,000 Retirement Spend result, so in the year of the gift you may see spending of £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 £72,000 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 see which goals have been included within the calculation.
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 Recurring Mandatory Expenses is toggled ON the result is net of these 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 Recurring Mandatory Expenses is toggled OFF these 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 allows you to choose whether you want to illustrate the client's total spending capacity or the amount available for discretionary retirement spending after recurring mandatory expenses have been met.
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 as a onetime payoff.
Taxes
Taxes includes all tax types and they are always accounted for within the insight. The taxes setting controls how they are presented within the Retirement Spending result for example whether the Retirement Spending result is shown 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 the selected Event. 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.
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: 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 and Withdrawal Limits
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.
Understanding the Result
The Spending Analysis Expense is then increased from the start of the plan using the default inflation rate in Plan Settings. Because the chart displays future values, the amount shown within an individual year's chart may therefore be higher than the present-value result displayed by the Insight.
The chart may also include retained mandatory expenses or goals in addition to the Spending Analysis Expense, depending on the settings selected.
The spending level is assumed to continue through the end of the plan. For a joint plan, this generally means through the second client's mortality event.
Year View
To see how the result is being applied within individual plan years, select Year View in the upper-right corner of the Insight or double-click a bar within the chart.
Within Year View > Expenses you can review the Spending Analysis Expense alongside any goals or mandatory expenses that remain in the analysis.
Exit this detailed view by clicking on the Year View Icon again.
This can be particularly helpful when determining whether a goal or expense is being included within the calculated spending result or funded in addition to it and to determine the future value of the expense.
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.