Project Future Income Calculation
The projected future incomes are estimates generated through a Wealth Forecast Engine, a dynamic investment analysis tool (the “Tool”) developed by Morningstar Investment Management LLC, a leading independent provider of asset allocation, analytical and wealth forecasting software. Guided Portfolio Service (GPS) generates projections based on a given period of time using hundreds of economic and investment performance scenarios. The period of time calculated includes desired retirement age through life expectancy with the assumption that assets are depleted in the final year of life.
The projected future incomes are based on 500 “Monte Carlo” simulations of possible economic and financial market scenarios. GPS displays the difference between a projected future income and your retirement income goal. The results are based on simulations of how the asset allocation defined in your inputs may perform under a wide variety of market conditions. A solid strategy should seek results that demonstrate the probability of achieving one’s goal whether the market produces good returns, poor returns, or something in between. The results illustrated are considered conservative – or representative of “fair” market conditions – because 70% of the simulated market scenarios have outcomes that equal or exceed the displayed result, and the corresponding surplus or shortfall to your retirement income goal is calculated using the outcome that 70% of the simulated market scenarios equal or exceed.
The projected future incomes are subject to a number of limitations. The simulation results include the probability of success or failure over different market environments. Although historical data is used, the simulations may not specifically match what has occurred in the market historically and may factor in more or less economic volatility, such as market extremes. Additionally, GPS uses financial data provided by third-party vendors for use in the Monte Carlo simulations and the accuracy or timeliness of that data cannot be guaranteed.
Personal Data and Assumptions
The projected future incomes may incorporate the following information and assumptions:
- Current age
- Current annual income
- Current retirement assets and corresponding asset allocation
- Desired retirement income
- Desired retirement age
- Number of dependents
- Consistent contribution amount/percentage
- Annual inflation of 2%
- Time horizon
- Social Security and other income benefits (e.g., pensions)
- Annual salary increases by assumed inflation rate
- Mortality assumptions
- All contributions are pre-tax including nonqualified accounts
- All distributions are taxable
Investment return assumptions are updated annually and may have a material impact on the projected future incomes. Investment return assumptions are estimates not guarantees. The investment returns you experience may be materially different than those illustrated.
GPS employs different returns statistics for different asset classes, based on Morningstar's capital market assumptions developed using historical and forward-looking data. The allocation of your current assets is specified across 5 core Morningstar asset class categories. Average investment expenses are incorporated into the simulations. Some asset classes have relatively limited histories so less historical data is available to model. Within each asset class a level of diversity is assumed that is consistent with a market index benchmark.
|Large Cap||Russell 1000 TR|
|Small/Mid Cap||Russell 2500 TR|
|International Equity||MSCI EAFE GR|
|Bonds||Barclays Capital US Agg Bond TR|
|Cash||BofA ML US Treasury Bill 3 Month|
Keep in mind, the benchmark may differ from the diversity of your own portfolio. You cannot invest directly in an index.
Definitions of Indexes imitations
BofA Merrill Lynch US 3-Month Treasury Bill -- Comprised of a single issue purchased at the beginning of the month and held for a full month. At the end of the month that issue is sold and rolled into a newly selected issue. The issue selected at each month-end rebalancing is the outstanding Treasury Bill that matures closest to, but not beyond, three months from the rebalancing date. To qualify for selection, an issue must have settled on or before the month-end rebalancing date. While the index will often hold the Treasury Bill issued at the most recent 3-month auction, it is also possible for a seasoned 6-month Bill to be selected.
Barclays Capital US Aggregate Bond Index -- Broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.
MSCI EAFE Index -- Measures international performance and comprises 21 MSCI country indices, representing the developed markets outside of North America: Europe, Australia and the Far East.
Russell 1000 Index -- Measures the performance of the 1,000 largest companies in the Russell 3000 Index.
Russell 2500 Index -- Measures the performance of the small to mid-cap segment which includes approximately 2500 of the smallest companies in the Russell 3000 Index.