Disclosure and Assumptions - Future Income Calculator
Golden Analytics Underlying S2I Future Income Calculator
Golden Analytics is a patent-pending analytical tool developed by Golden Retirement, LLC that uses a mathematical process called an algorithm to help you evaluate and compare various alternatives to creating a Plan for Retirement Income (Plan). The underlying economic parameters of the Monte Carlo projections will be reviewed periodically. While the following describes the current version of Golden Analytics, subsequent releases of Golden Analytics will be expanded to include other asset vehicles, and allocation and distribution strategies.
Disclaimers
The information presented is based on the information you have provided to Golden Analytics in the planning process and in large measure on Golden Analytics assumptions involving certain economic parameters. While these assumptions are reasonable and reflect current and historical information, Golden Analytics cannot actually predict the future and cannot guarantee that the prior experience of these economic parameters will continue in the future. The projections establish a range of outcomes distributed by frequency of occurrences and are for illustrative planning and comparative purposes only. Please note that any tax-related information provided by Golden Analytics is not intended as and should not be construed as legal, tax, or investment advice. You should always consult your tax advisor to help answer specific questions regarding how tax laws apply to you. The tax information Golden Analytics provides is necessarily incomplete, and the tax laws and regulations are subject to change. Therefore, Golden Analytics does not guarantee and is not liable for the accuracy or completeness of any tax information provided, or any results or outcome as a result of the use of this information.
IMPORTANT:
The projections and other planning information generated by Golden Analytics regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Actual investment returns, asset allocations, risk profiles, fees, expenses, taxes, and interest rates underlying the Plans illustrated will vary from the projections shown, perhaps significantly.
As time passes, goals, investment objectives and personal circumstances may change, as may the investment markets and the economic and political environments. Such changes can have a significant impact on what Plan options are appropriate. It is important for an investor to recognize these changes and, if appropriate, revise the Plan based on the new personal situation.
Description of Plan in Savings2Income Future Income Calculator
While Golden Analytics can help analyze various alternatives to creating a Plan for Retirement Income, it is uniquely able to analyze those utilizing the Savings2Income (S2I) planning method. Among other aspects, the S2I planning method involves the build-up of Guaranteed Income over time, and the purchase of Guaranteed Income for life.
In the S2I website, there is a Future Income Calculator (Calculator) that develops retirement income and asset value projections for Personal Retirement Savings, i.e., assets invested and held outside of a qualified retirement Plan or Rollover IRA. The S2I planning method is applied to create after tax retirement income that is designed to increase every five years under median market conditions, until lifetime income is purchased at a specified secure income age.
The balance of this document presents the Golden Analytics assumptions and methodology underlying this Calculator.
Description of Managed Account and No-Load Variable Annuity during Accumulation Stage
In the Calculator, Golden Analytics compares a Plan to accumulating Personal Retirement Savings (which are long term savings held outside of a qualified retirement Plan or Rollover IRA) in a Managed Account investing in mutual funds, to a No-Load Variable Annuity (No- Load VA). The Managed Account assumes that these non-qualified savings are invested in model portfolios of equity and bond mutual funds. Depending on the client's risk profile the account value is allocated and rebalanced among: a model portfolio of actively managed equity funds, a model portfolio of passive equity funds, and a model portfolio of bond funds. The No-Load VA has the identical allocation and periodic rebalancing as the Managed Account. Both Plans further assume that a fee-based advisor has developed and is monitoring the allocation and rebalancing.
Description of Managed Account and No-Load Variable Annuity during Distribution Stage
Although many distribution (payout) strategies are possible, the Calculator assumes that the investor's objective is to create a guaranteed stream of retirement income, maintain liquidity generally through the investor's life expectancy and some tax advantages. Thus, both Plans being compared assume the accumulated value is used to purchase one or more fixed annuities (immediate annuities certain and/or immediate installment refund life annuities or/and life only annuities) under the following income strategy.
The S2I planning method permits the investor to consider a full range of conversion options, both as to the timing and amount of the conversions, and the form of annuity. This enables the investor to create a customized retirement income Plan to reflect personal circumstances and resources, in particular other sources of retirement income, such as Social Security and any pension income.
Under S2I, conversions may be assumed as frequently as every 5th year, until a final secure income age. Forms of annuity are annuity certain from ten to twenty years, and life annuities with and without a refund feature. The conversion Plan is based on a specified percentage of the then account value, and is then applied to purchase the form of annuity chosen. The conversion at the secure income age can be set at less than 100% leaving a residual account value; however, in the No-Load VA, all assets need to be distributed by age 90.
In comparing results, the S2I planning method assumes the same percentages are applied to the No-Load VA as the Managed Account. The Managed Account assumes that the value of the percentage of the account (after any taxes due) is used to purchase the annuity form selected. The No-Load VA assumes that the percentage of the account value of annuity is exchanged on a tax free basis to the form of the chosen annuity.
Of course, many other distribution options are available, and in practice the fee-based advisor may present several alternatives.
What is a simulation?
In order to compare the Plans under consideration, Golden Analytics simulates certain historical market variables, including the performance of equities, bonds and interest rates, over the projection period. In order to facilitate this, the same sets of market variables are used to determine how each Plan performs, i.e., each Plan uses “the same playing fields” as opposed to a different set for every Plan. Golden Analytics uses Monte Carlo statistical analysis to create these simulations.
Monte Carlo statistical analysis, also known as the Monte Carlo stochastic simulation technique, is a mathematical process used to implement complex statistical methods that chart the probability of meeting specific financial goals at certain times in the future. This charting is accomplished by generating hundreds of possible economic scenarios that could affect the performance of mutual fund investments and the price for purchasing the annuity income benefits at an investor's income start age. Golden Analytics uses at least 500 scenarios to help determine the relative (probable) results of alternative Planes, and analyzes the probability of outcomes resulting from investment models and underlying assumptions regarding certain economic parameters.
The generation of these economic scenarios is designed such that over the entire range of scenarios the long-term return assumptions for each parameter presented in the section is reproduced. The purpose of the Monte Carlo simulation technique is to “stress-test” each Plan to see how each would perform under different economic scenarios.
These scenarios are not representative of any individual security’s performance. Instead, these scenarios represent a range or spectrum of possible performance outcomes of the economic parameters. In order to create these scenarios, sets of financial statistics are combined again and again in new ways – always consistent with what is historically known about financial markets – to approximate different economic conditions. Golden Analytics uses these simulations by combining relevant and changeable economic data along with your personal information. This process generates multiple Plan projections that could occur based upon the risk profile and personal choices you have selected.
The outcomes presented represent only a few of the many possible outcomes. Since past performance and market conditions may not be repeated in the future, your retirement goals may not be fulfilled by adopting any Plan that is based on the projections.
Which are the economic parameters and long-term assumptions underlying the projections?
Golden Analytics simulates the following economic parameters in order to project the performance of each Plan: (1) return on the equity Model Portfolios, (2) return on the bond Model Portfolio, (3) interest rate on any money market fund allocation (future), (4) distributions from the Model Portfolios and money market fund (future), and (5) interest rates underlying the calculation of annuity purchase rates at the income start age and beyond. Note that the current version does not adjust for inflation, and all amounts presented in current dollars and not purchasing power.
In order to create the various scenarios for the equity Model Portfolios, the modeling (algorithm) takes into account the historical average returns and the volatility of the funds assumed for the equity Model Portfolios. For modeling purposes, Golden Analytics also considers the current market environment and the outlook for equity returns in the future. The assumed average annual rate of return (before advisor fees) used in Golden Analytics is 9.0% for the active equity Model Portfolio and 8.0% for the passive equity Model Portfolio.
Interest rate scenarios are generated based on possible developments of current interest rates that are consistent with and correlated to the specific market returns produced by the Monte Carlo method. Historical standard deviation of interest rates (measuring volatility) is incorporated into the model as well. For purposes of modeling annuity purchase rates (used to determine how much income can be purchased), Golden Analytics uses an average benchmark interest rate of 5.0%. Golden Analytics also applies a simulated upward or downward interest rate adjustment. The scenario basis will be reviewed periodically.
The returns for the fixed income Model Portfolio reflect the interest rates simulated above, the average effective duration and the convexity (which is a technical term for characterizing bond investments) of the investments in the bond Model Portfolios. This Plan will be reviewed periodically for consistency with the volatility of funds assumed for the fixed income Model Portfolios.
The impact of the timing of investment returns and interest rates can be significant - the sequence and timing of returns or interest rates can have a material impact on achieving your retirement goals. Some sequences will provide better returns and some worse. There is no guarantee you will receive the investment returns projected and/or receive them smoothly.
The methodology underlying Golden Analytics is based on historical returns and Golden Analytics informed judgment around the outlook for future returns. Over time, Golden Analytics may change the assumptions and/or the weight given to the economic parameters underlying Golden Analytics as analysis of additional historical data is taken into consideration.
The equity securities purchased by the mutual funds in your equity Model Portfolios may differ significantly in terms of performance, volatility, covariance and risk from the equity securities that comprise the sub-asset classes used in Golden Analytics. As a result, the composition and characteristics of the mutual funds in a Model Portfolios may differ significantly from certain assumptions used in Golden Analytics. Similarly, the characteristics of the bonds and fixed income securities purchased by the mutual funds in a bond Model Portfolio may differ significantly from the assumptions used in Golden Analytics.
Which elements of the Plans are simulated based on the economic parameters?
Economic parameters are reset periodically. Once they are established on a given date for a particular scenario, each Plan is projected for each year over the projection period.
The simulated elements are the rates of return for the Model Portfolios, interest rates, dividend and capital gains distribution rates. Based on these simulated elements, account values, dividend distributions, capital gains distributions, fees, taxes, reinvestments, rebalancing exchanges, cost basis, annuity purchase rates and income payments are projected.
In essence, Golden Analytics develops at least 500 projections of how each Plan could be expected to perform using these simulated economic parameters.
How are annuity purchase rates reflected in the modeling?
In modeling the annuity purchase rates underlying the annuity certain, Golden Analytics simulates the benchmark interest rates, and adjusts those rates by a simulation of an interest rate adjustment above or below the benchmark interest rates. That simulated interest rate adjustment reflects the variation in the interest rates that insurance companies have historically earned above or below the benchmark interest rates on similar contracts. To the extent that the actual pricing in the future varies from these interest rate assumptions, any of the Plans that involve the purchase of the annuity would be more or less favorable. The current model does not distinguish between the different forms of annuities in setting the interest rate.
What tax treatment was assumed for the two Plans?
Yearly Tax Deducted from Account Value
Personal Retirement Assets invested in a Managed Account are taxed each year on the realized capital gain, dividend, and interest distributions from the mutual funds held in the Managed Account. In Golden Analytics projections, taxes at the applicable rates are deducted from the distributions before reinvestment. The reinvested amount after tax increases the cost basis referred to below. The account is rebalanced each year, and capital gains or losses may be realized.
Personal Retirement Savings invested in a No-Load VA are not taxed on investment returns from the underlying variable annuity mutual funds. The cost basis remains constant at the original invested amount. The variable annuity is rebalanced each year, but capital gains and losses are not currently taxed.
Calculation of Retirement Income before Tax at Each Conversion Age
For the Managed Account, Golden Analytics assumes the portion of the managed account is surrendered and the after tax proceeds (after any capital gains tax) are applied to purchase the form of annuity. The cost basis is further increased to reflect the net amount paid. Amounts in the Managed Account are liquidated on a pro-rated basis.
For the No-Load VA, Golden Analytics assumes under the partial exchange rules recently adopted that the portion of the variable annuity is exchanged income tax free to the form of annuity. Under these new rules, a pro-rata part of the cost basis is applied under the partial conversion to determine the amount excluded from tax.
Yearly Taxes Deducted from Annuity Payout to Determine Spendable Retirement Income
For the Managed Account, under annuity rules, payments under the annuities are taxed at ordinary income rates, although a portion of each payment is received tax free as a return of principal. The higher cost basis of the Managed Account is used to calculate the excluded amount.
For the No-Load VA, the original cost basis is used in determining what portion of annuity payment is received as a tax-free return of principal. Thus, in most cases a higher portion of annuity certain payments are taxable under the No-Load VA.
What level of fees was assumed for the two Plans?
Advisory, Product and Transaction Fees
Fees for a Managed Account are typically made up of advisor and product fees, including fund fees, and transaction fees. The advisor fees are assumed to be 1.25% per year and to be representative of the fee on accounts under $250,000. The assumed fund fees are .85%. No transaction fees are assumed in the Managed Account. Golden Analytics will review these assumed fees periodically.
For the No-Load VA, fees are made up of advisor fees, and product fees, including underlying fund fees and fees for the variable annuity. The advisor fees are assumed to be .85% and to be representative of the advisor fee on a No-Load VA under $250,000. The lower assumed advisor fee for the No-Load VA reflects the higher compounding account balances, and the simpler management of the tax deferred No-Load VA. Product fees are assumed to be .85% for the combined fund fees and No Load VA product fees. No transaction fees are assumed in the No-Load VA. Golden Analytics will review these assumed fees periodically.
What approach to asset allocation was assumed?
Based on the risk profile of the individual, Golden Analytics sets the allocation among Model Portfolios of passive equity, active equity and fixed income portfolios. The account is rebalanced annually among the Model Portfolios to the original allocation.
The allocation and rebalancing among the equity and fixed income Model Portfolios are the same for the Managed Account and No-Load VA.
How does Golden Analytics project taxable distributions from the underlying mutual funds?
Golden Analytics has looked at the history of the funds assumed in the equity Model Portfolios, and aggregated their distribution of dividends, interest and realized capital gains. From that experience Golden Analytics has developed a simulation model that reflects the experience and volatility. Golden Analytics has also reflected the assumed realized capital gains incurred upon rebalancing.
Golden Analytics has looked at the historical experience separately for the active and passive portfolios, and developed separate parameters for each. Golden Analytics will review these parameters on at least an annual basis.
What tax rates were assumed in Golden Analytics?
Federal Rates. Golden Analytics assumes that current federal tax law applies, which represents a reversion to pre-2001 rates starting in 2013. Golden Analytics does not, however, reflect the effects of the Medicare taxes on both earned and unearned income starting in 2013. Further, the model reflects the federal tax rate that you select, and also assumes that your taxable income remains within your original tax bracket. The model assumes you stay in the same tax rate after retirement.
State Tax Rates. Golden Analytics reflects the effects of state income taxes in only those states that follow the federal definition of taxable income. Golden Analytics applies the average tax rate in those states through a mapping to the federal tax bracket. Any local taxes are ignored.
While Golden Analytics goal is to create a reasonable comparison between the Managed Account and No-Load VA there are a number of other factors that might impact the comparison:
- 1. Alternative Minimum Tax which could increase the investor’s effective rate.
- 2. Other income sources or deductions might move the investor into a lower or higher tax bracket.
- 3. Other transactions that the investor might initiate impacting the investor’s tax rate.
What are the starting values in the accounts being compared?
The two accounts are compared on the assumption that the initial investment is comprised of new money and the entire amount is the starting cost basis. An investment of, say, $100,000 is made in a Managed Account, while the same $100,000 is invested in a No Load VA.
In practice, the source of funds for these Plans could be existing securities, managed account, annuities, CDs, etc. Each may have its own tax consequences under the two Plans, and may be more or less appropriate for transfer.
Which projected results are displayed in the Calculator?
While there are many results simulated under Golden Analytics, this Calculator displays the following:
1. Projected Spendable Retirement Income. This represents the after tax income the investor could spend. Year by year results are shown in addition to cumulative retirement income. The latter is the sum total of retirement income not dependent on the survival of the investor.
2. Projected Total Asset Value. These results are made up of the Investment Portfolio Value in either the Managed Account or No Load VA, plus the present value of any Guaranteed Income payable under the payout annuity contracts that are not dependent on the investor's survival. The present value will likely not equal the commuted value the investor might receive under the payout annuity, but rather represents the economic value to the investor.
How does Golden Analytics present probabilities of success?
The Projection Basis is determined from a Monte Carlo Simulation. A probability of success represents the percentage of hundreds of projected scenarios in which a specific value is exceeded. For example, if in 50 out of 500 scenarios the Spendable Retirement Income at age 65 exceeds $500 per month, Golden Analytics states that you have a 10% (50/500) or low probability to equal or exceed $500 of monthly income at age 65. The 10% probability represents the "UPSIDE" projection. Correspondingly, there is a 90% failure rate, in that Spendable Retirement Income would fall somewhere below (perhaps significantly below) $500 of monthly income at age 65 in 90% of the scenarios. On the other hand, the high probability is that in 90% of the scenarios the result is exceeded, and there is only a 10% failure rate. The 90% probability represents the "DOWNSIDE" projection. And the 50% probability represents the "Median" projection.
There is no right answer to which probabilities are selected. It depends on many factors, including your willingness to accept risk, your age and health, and the nature of your retirement goals. Focusing on only one probability, however, may result in missing either the risks or rewards of a particular Plan.
What are the limitations of Golden Analytics?
The purpose of Golden Analytics is to enable you to compare alternative Plans. In order to compare alternative Plans, Golden Analytics assumes that historical correlations between certain economic parameters will continue in the future. However, market variables in the future may not perform as they have in the past.
Since the activity in your simulation has not actually occurred, the results of the simulation may under- or over- compensated for the impact, if any, of certain market factors and may underestimate the impact of market extremes and the related risk of loss. The simulations projected may vary with each use and over time. Other investment categories not considered may have characteristics similar or superior to those being analyzed.
