Invest Yourself For a Better Retirement™

Nestor: Limitations

  • The appropriateness of the results are dependent upon the accuracy of the information provided by the user, including age, gender, existing sources of income, retirement savings, basic spending needs, and risk tolerance.
  • Actual results will be better or worse than what is assumed by Nestor, in which case discretionary spending, basic spending, annuity purchases, and investment strategies may need to change from those assumed by the model to protect against outliving your assets.
  • Actual annuity prices and fees will be different than those assumed by Nestor, which may affect the amount of discretionary and basic spending that should be pursued.
  • Nestor assumes that annuity prices and fees remain unchanged over the period of analysis; however annuity prices are often changed from time to time by life insurance companies.  This may have a positive or negative effect on actual results when compared to the model.
  • Nestor assumes that investments in US Bonds, Large Cap US Stocks, Mid and Small US Cap Stocks, and Foreign Stocks are made through no load, low fee indexed mutual funds or ETFs.  To the extent that these allocations are invested differently, higher fees and expenses may result.
  • TIPs are assumed to be bought and held to maturity, with maturities matching the cash needs each each.  To the extent that actual investments in TIPs do not match cash needs, or portions of the TIP portfolio must be sold prior to maturity, the investor may be exposed to interest rate risk and possibly incur higher transaction fees that what are assumed in this analysis.
  • Nestor only considers a single scenario for investment returns.  While the intent was to use investment returns that are, in the aggregate, more conservative than average historical returns, actual returns may be even worse than those used by Nestor.
  • Nestor only considers 4 different asset allocation strategies for the growth portfolio; it therefore may be possible that a different asset allocation may produce better expected results.
  • The investment return assumptions and associated standard deviations used in determine the “shock drop” scenario are based upon results from broadly diversified portfolios of US large cap stocks, US mid and small cap stocks, US bonds, and foreign stocks; if the actual portfolios used are not well diversified there may be a higher risk of not meeting your basic spending and discretionary spending needs.
  • Nestor assumes that TIPs, basic spending, and discretionary spending are subject to the same inflation rate.  TIPs are linked to the Consumer Price Index, while basic spending and discretionary spending will inflate based upon the change in prices of the “basket of goods and services” that are purchased, which may be a different “basket of goods and services” than those used by the Consumer Price Index.  Therefore, the gains and losses associated with inflation on TIPs will be different than actual inflation of basic and discretionary spending, meaning that inflation risk will not be fully mitigated.
  • While the period of analysis used is intended to be more conservative when compared to life expectancies under the Annuity 2000 mortality table, the actual length of the retirement period will likely be different, which will affect how well the discretionary and basic spending levels can be maintained.
  • The period of analysis was established assuming an average individual in good health an average life expectancy; to the extent that your actual health or other factors result in a shorter than average life expectancy, the results produced by Nestor may not be appropriate.
  • To the extent that the actual investments you make are different than those assumed by Nestor, actual results will be different than those produced by Nestor.  Furthermore, to the extent that these actual investments have greater risk, the “shock drop” assumptions may not be adequately conservative and, as a result, the level of discretionary and basic spending produced and used by Nestor may not be appropriate for actual use.
  • Taxes have not been explicitly considered by Nestor, and there may be important tax considerations that can affect the suitability of these results; this assessment is beyond the scope of the model.  Any provision for paying taxes in the future should be interpreted as being a part of basic spending and/or discretionary spending; therefore, taxes should be deducted from basic spending and/or discretionary spending to determine the amount of spending that can be supported for all needs other than taxes.
  • To simplify the analysis, Nestor converts females into males by deducting 3 years from their current age and using annuity prices and planning periods based upon this adjusted age.  Annuity prices used by Nestor will therefore be different than actual prices to the extent that this approximation is not fully adequate.
  • Nestor converts joint lives (that is, when the model is planning for two individuals rather than one) into a single individual whose age is the average of these two individuals (after deducting 3 years from any female age).  This approximation means that Nestor may not adequately reflect the needs of the users to the extent that the basic and discretionary spending needs of a surviving individual after the death of the other individual is not equal to 50% of their combined basic spending and discretionary spending, and also may not adequately address the risk associated with other sources of income that are contingent upon the survival of one of the two individuals.  For example, if a substantial amount of income came is coming from a pension benefit that stops paying upon the death of the primary life, the model will not fully reflect the risk to the secondary life if he/she is predeceased by the primary life.
  • The income sources provide by the user, including wages, pensions, social security, and other sources of income, are converted into a single and constant dollar amount recognized each year throughout the planning period.  To the extent that actual payments are not received in this way, actual results will be different than Nestor’s results.  In particular, care should be taken when income sources will not be received until a time far into the future, as there may be a risk that the model will produce a level of basic spending, discretionary spending, and annuity purchases that are higher than can be supported by available savings and income in the near term.
  • Only four different types of discretionary spending curves can be used within the model.  To the extent that the shape of your actual discretionary spending is different than these curves, actual results will be different and there is a risk that the recommendations from the model will not be appropriate.
  • Reserve savings defined by you are not adjusted for inflation.
  • Nestor only applies that complete set of logic described above to a representative set of user profiles, as follows:
    • Ages 50, 70, and 80
    • Income that is 0%, 2.24%, 3.36%, and 4.49% of Total Wealth, which is the sum of initial savings (as provided by the user) and the actuarial value of income sources provided by the user (after converting them into a level amount as described above).
    • Basic Spending that is 1.12%, 2.24%, 3.36%, and 4.49%, of Total Wealth
    • Reserve Savings equal to 0%, 20%, and 40% of initial savings
  • Results for users whose age, income, basic spending, and reserve savings that are differed than those listed above were obtained by interpolating the results from the representative profiles that are closest to the user’s age, income, basic spending, and reserve savings.  This interpolation is an approximation of the result that would otherwise be obtained, which means that the results are less accurate and may, for example, result in projected minimum savings that are not equal to the user defined reserve savings requirement.
  • Fixed immediate annuities, variable immediate annuities, and longevity insurance do not provide cash values.  Once these products are purchased, the only cash that can be extracted from these products are future income benefits.  Should your needs change in the future, requiring you to have a need for more cash or liquidity you should reassess the appropriateness of making any subsequent purchases.  In addition, to the extent that this need for additional cash occurs at a time after purchasing the annuities there is a risk that you will not have the cash that you will need at that time.

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Glossary

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