The Client Analyser helps you assess your clients’ retirement-funding status, and then maps each outcome to one of several advice profiles. The profiles include recommendations for specific actions you might take to increase the likelihood that your clients will achieve their retirement objectives.
Use it to analyse an individual client — or your entire book of clients. This tool is flexible enough to provide either analysis. It also gives you the option to print a brief report summarizing the analysis of any single client you select.
You'll be able to see which clients have been most affected by market events and need immediate attention. Then, the tool output points you to specific recommendations for each client based on his or her advice profile.
The Client Analyser is based on two related tests. The first assesses the feasibility of achieving an investor’s desired spending goal. The second assesses the viability of establishing a minimum-spending floor based on the cost of a guaranteed immediate lifetime annuity. The two tests are:
The analyser relies on basic client data that you, or your staff, enter into a workbook. All spending amounts are stated in annual terms gross of taxes (any taxes owed are to be paid out of the spending level that you input).
For the Desired Spending Test, the following inputs are required:
The analyser calculates a spending gap by subtracting Income from Other Sources from the Desired Spending Goal. (The resulting Spending Gap is assumed to be adjusted for inflation every year.) The analyser then applies the data to Monte Carlo simulation calculations, using Russell capital markets forecasts and actuarial mortality tables. This produces a sustainable-withdrawal-rate analysis designed to help guide conversations with your clients. Retirement planning is complicated with multiple factors to address. The analyser models three of the major risks — investment, inflation and longevity.
The withdrawal-rate analysis matches the output of each client’s situation to one of these four categories:
Because clients nearing retirement have different options than those already in retirement, each colour zone has two advice profiles (one for each retirement status), resulting in eight different profiles for you to use with your clients.
Investors in any situation (with the possible exception of those in the Green Zone) should consider their choices based on several factors. These include, but are not limited to, future income potential, spending habits, and investment decisions. Each of the eight advice profiles addresses the priority and potential impact of each decision. The information represents general guidelines. Each investor's situation may be different, and the analyser may not take into account all variables which could affect the outcome. Advisors are responsible for making appropriate recommendations.
For clients in the Red Zone, the Orange Zone and perhaps the Yellow Zone, consider conducting further analysis using the analyser’s Minimum Spending Test. This test requires two additional client inputs:
This second analysis evaluates the client's portfolio value based on assets required to meet the stated Minimum Spending Floor if the client needs a guaranteed income level.
The Minimum Spending Test matches the output of each client's situation to one of four Funding Ratio categories. These categories are based on the value of assets in a portfolio relative to the cost of buying an annuity to meet the spending gap. The specific threshold values are defined so that a "favourable" status requires a surplus of assets relative to the cost to annuitise.
The rationale for this is that it’s important to have a cushion of assets in case portfolio losses or changing annuity prices reduce a client’s ability to establish this income floor. The colour-coded labels associated with these percentage ranges (outlined below) are based on Russell’s judgment of what constitutes funding ratios ranging from imprudent to prudent.
Funding Ratio categories:
While the Desired Spending Test always assumes you'll adjust spending for inflation, the results for the Minimum Spending Test depend on the type of annuity price quote you use. The results will only reflect inflation-adjusted future income if you enter the price for an inflation-adjusted annuity.
You'll find detailed instructions for using the Client Analyser on the Instructions tab in the downloadable workbook.
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The projections or other information delivered through the Client Analyser regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.
Limitations of analysis and risks of investment:
Monte Carlo simulation methodology:
The Client Analyser results related to the Desired Spending Test are created with Monte Carlo simulation, a sophisticated mathematical approach used within the financial industry to model possible outcomes of future investment scenarios.The process is designed to reflect the forecasted volatility of investment markets and other economic variables. These scenarios are created using Russell Investment’s proprietary forecasting models incorporating historical data from market and economic indexes. The scenarios model investment performance for a set of asset classes (i.e., stocks, bonds, cash, etc.); the level of interest rates; and the rate of inflation, to estimate how each might affect the portfolio balance over time.
While this method may reflect the uncertainty and randomness of future events, it is important to understand that it is based on assumptions about the future risk and expected returns of each asset class.
Key assumptions:
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