GPS Methodology Disclosure
Guided Portfolio Services® (GPS) is powered by a Wealth Forecast Engine; a dynamic investment analysis tool developed by Morningstar Investment Management LLC, a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. Morningstar is a leading provider of asset allocation, analytical, and wealth forecasting software. The methodology of the Wealth Forecast Engine (WFE) as it relates to GPS is detailed below.
Wealth Forecasting and Advice
The WFE uses investor defined and/or engine defined asset allocations, capital markets forecasts, and other inputs from the investor and the human capital algorithm built into the software to calculate the probabilities that the investor will reach certain income or wealth levels over time.
The WFE uses information that is collected from the investor and/or from recordkeeping systems. The information gathered and how it is used by the WFE falls into the following categories: investor profile, spouse profile, child profile, event planning, planned savings, Social Security estimation, tax rates, inflation rate, and additional questions (see below). An investor may elect to input all of the information into the system, but is not required to do so. The minimum information required is the current balance in the retirement plan account, current income, age, gender, state of residence, and current savings rate. The more information that is included, the more personalized the forecast.
Investor, Spouse, and Child Profile
The majority of information is collected on the investor and the investor’s current financial plan. The spouse’s information is used to complete the investor’s overall plan, along with additional college costs for the investor’s children.
- Social Security Estimation
The WFE estimates the amount the investor and spouse will receive from Social Security. Investors can override the Social Security benefit estimate if they have obtained an estimate from another source (e.g., Social Security Administration) or wish to eliminate it entirely.
- Tax Rates
The WFE estimates for each investor the marginal and actual tax rates based on income level, filing status, state of residence, and number of dependents. After-tax income is calculated based on these rates. A portfolio realization rate that applies to the percentage of capital gain realized each year through managed turnover of the account also is used.
- Current Retirement Assets and Asset Allocation
All of the investor’s current retirement assets must be entered into the WFE. Retirement assets can be entered for the investor’s taxable portfolio, IRAs, participant and spouse bank accounts. For assets on Corebridge Retirement Services' record keeping system, the current allocation will be automatically determined by looking up each investment’s asset class attribution in a table provided by Morningstar. The investor must then input the asset allocation that applies to their other retirement assets in aggregate. Asset class categories are large cap, small/mid cap, international, bonds, and cash.
Simulation of Current Portfolio
In a simulation-based forecast, an investor’s spending, savings, and asset-allocation are run through hundreds of possible scenarios. Each scenario can be thought of as a possible “investing life.” The process of generating hundreds of possible “investing lives” allows the investor to gain valuable insight into the implications of their current investing and saving behavior.
For each simulated run or lifetime, the WFE starts with the investor’s asset-class portfolio for all of the retirement assets they disclosed in GPS and forecasts these portfolios until life expectancy. In creating these forecasts, the WFE considers all the input items provided by the investor. The assets are assumed to be rebalanced annually to the current portfolio allocation, and any taxes are calculated and deducted.
Recommended Portfolio and Savings Rate
For each simulated run or lifetime, the WFE starts with the investor’s asset-class portfolio for all of the retirement assets they disclosed in GPS and forecasts these portfolios until life expectancy. In creating these forecasts, the WFE considers all the input items provided by the investor but increases the savings rate, as needed (to maximum 25% of salary) for the investor’s retirement income forecast to meet or exceed their retirement income goal in 70% of the simulations. The assets not on Corebridge’s record keeping system are assumed to be rebalanced annually to their current portfolio allocation while the assets on Corebridge's record keeping system are assumed to be rebalanced annually to one of seven model portfolio allocations that moves the investor’s allocation on aggregate as close to the Market Portfolio as possible. Any taxes are also calculated and deducted annually.
Calculate Probability Distribution
Once the achievable income is estimated for each of the simulated futures, the WFE will compute and display a probability distribution of these incomes, using this process:
- Sort the achievable incomes in ascending order;
- Find the number of runs where the achievable income meets or exceeds the desired retirement income replacement level (which is input). The percentage of runs above this income level can then be calculated.
- The desired income percentiles are also calculated. The achievable incomes for each of these percentile levels are displayed to the investor (then other levels can be determined, if desired).
This information has been adapted from Advice by Ibbotson.