What is Goals-Based Financial Planning?

Goals-based financial planning serves as the foundation for all recommendations that ComposedPro makes for you.    In fact, defining a financial goal is the first step in our Investment Methodology.   

This first step of defining a goal determines how your accounts will be invested.  Any accounts you attach to the financial plan are then consistently monitored to ensure you are on track to reach your goal.  Our third party financial planning software uses Monte Carlo Analysis to determine your financial plan's Success Rate and the Median Fail Age.  These two easy to understand metrics are designed to tell you where you stand.

What is the Success Rate? 

Ideally, a success rate between 70-90% helps us understand whether the financial plan is on track.  Too low of a success rate could mean you need to contribute more to your accounts, lower the amount of your after-tax goal, or delay the start date of your after-tax goal.  Too high of a success rate means you may end the plan with too much money left.

What is the Median Fail Age?

This metric is the median year of failure for those plans that are unsuccessful. It may give you some additional comfort.  For example, let us suppose that your financial plan is for retirement and your after-tax goal lasts from the time you are 65 until 95.  If your plan's Success Rate is 75% and fails 25% of the time, it means that the failed iterations ran out of money before the age of 95.  This could be concerning.  However, if those failed plans ran out of money at a median age of 94, you may be somewhat comforted.

How are the Success Rate and Median Fail Age calculated?

ComposedPro's third party financial planning software goes through a number of steps to generate a projection of your financial plan from which the Success Rate and Median Fail Age are calculated.

1. Gather information about your goal - this step includes asking you questions about the following:
   • Your after-tax goal (ie. the amount, starting age, and years needed)
   • Accounts used to satisfy the goal (ie. which accounts will be used to invest for the goal)
   • Income that may be used to satisfy the goal (ie. Social Security or pension income)
2. Determine your Investment Strategy - we recommend you invest along one of five glide paths that get more conservative over time.  You have the ability to adjust this recommendation.  Your selection determines your Investment Strategy.  Read more about our recommended glide paths in our Investment Methodology.
3. Start the financial plan projection by holding some factors constant across all trials - Now for the fun part!  It is time to do some calculations.  We start by holding the following factors in your plan constant:
   • Account beginning balances - the started point for the plan.  The sum of your account balances are the total portfolio.  Your total portfolio will change each year in the plan because of contributions, random investment returns (discussed later), RMDs, withdrawals necessary to satisfy the after-tax goal amount, and excess RMDs or income that is not needed to satisfy the goal.
   • Contributions - we generally inflate all contributions by 3% and stop contributions when your goal starts.
   • After-tax goal - we generally inflate the after-tax goal amount by 3% each year.
   • Income that may be used to satisfy the goal - if you wish Social Security income to be included in a retirement plan, we generally inflate Social Security income by 2% each year.  Other pension income you may have received from prior employment is not generally inflated, but we will input specific details we receive from you when inputting any pension income.
   • Investment strategy - we adjust your selected Investment Strategy to get more conservative each year.   We use the same Investment Strategy across all simulations, but random returns are generated each year using step 4 below.
4. Use Monte Carlos Analysis to generate random investment returns - now that we have our constants set, the financial planning software introduces some randomness to the financial plan.  Since investment returns are highly volatile, it makes sense to randomly select a return for each year and see its effect on the plan.  Our third party financial planning software runs 1,000 trials of your financial plan, starting from the current year until your goal ends.  The 500th or median plan is the one that you see graphed within your financial plan.
5. Calculate Success Rate and Average Fail age - now that 1,000 iterations have been run on your plan, the third-party financial planning software can perform some calculations to determine these two important metrics.
   • Success Rate - this is calculated by taking the number of simulations that satisfied your goal without having the portfolio run out of money divided by the total number of trials.
   • Median Fail Age = for those trials that failed by running out of money before the goal ends, this is the median year in which they failed.

What if your goal turns out to be unrealistic?

If your financial plan's Success Rate falls below 70%, there are various actions you might consider, including but not limited to:

• Contribute more to your accounts
• Lower the amount of your after-tax goal
• Delay the start date of your after-tax goal

Each of these actions would have a positive effect on your financial plan's success rate.

Disclosures:

ComposedPro makes no warranties, expressed or implied, as to the accuracy, completeness, or results of any of the financial plan calculations performed by its third-party software.  Please read disclosures provided by our third-party financial planning software on the financial plan generated for more information.  Adjusting investment return distributions shapes to more accurately represent historical investment returns may not be an accurate representation of future investment returns.  Furthermore, historical investment returns are a simplifying assumption used to model future investment returns for illustrative purposes only.  In reality, investment returns are highly volatile and past returns are not indicative of future results.   Any historical returns discussed in this article or used in the financial plan models created by its third-party financial planning software will not necessarily be accurate going forward.  Nothing contained within this email transmission should be relied upon for making any investment decision. Any information provided is for information purposes only and does not constitute a recommendation.  Any data in this article or in financial plans generated by ComposedPro's third party financial planning software that simulate future scenarios are not guaranteed.  The inputs provided by clients used to generate financial plan models are key inputs in each financial plan.  Such information provided by the user should be periodically reviews and updated when circumstances may require.