Basic spending and discretionary spending are both subjected to a 3% inflation assumption.
Investment Returns, before “Shock Drop”
Cash generates a return of 0.11%.
TIPs generate a return of 3.00%, which is equal to the inflation assumption; it is therefore assumed that TIPs just cover inflation and do not provide any additional yield.
Growth portfolio returns are as follows:
- Portfolio 1: 5.50%
- Portfolio 2: 6.50%
- Portfolio 3: 7.50%
- Portfolio 4: 8.50%
Investment Returns, after “Shock Drop”
Cash and TIP returns are unaffected by the shock drop.
The returns on the growth portfolios are reduced in each of the first two years by a specified number of standard deviations of the returns of each portfolio. The number of standard deviations is based upon risk tolerance, which can be low, medium, or high, as follows:
The resulting investment returns are as follows:
The model assumes that the asset allocation within the Growth Portfolio is rebalanced annually to its target allocation.
Period of Analysis
The period of analysis, which is expressed as the last age at which spending and savings are estimated by the model and included in the analysis, vary by risk tolerance and are as follows:
- Low Risk Tolerance: Age 95
- Medium Risk Tolerance: Age 100
- High Risk Tolerance: Age 105
Note that, in general, a longer period of analysis means that income must be generated over a longer period of time to meet basic and discretionary spending needs, resulting in a more conservative outcome.
The assumed annuity purchase rates for fixed immediate annuities (“FIA”), variable immediate annuities (“VIA”), and longevity insurance (“LI”), expressed as the amount of annual income purchased per $100,000 of premium, vary by attained age and are as follows (for males; females subject to a 3 year age set back):
Note that the income benefits shown above for longevity insurance do not start until age 85.
Note that variable immediate annuities have an assumed investment return of 3.50% and annual fees of 1.50% of benefits, which means that returns on underlying funds must be greater than 5.00% in order for the income benefit to increase.