Nestor: Margin of Safety
There are several ways of incorporating a margin of safety into your retirement income plan, which will have the effect of increasing the likelihood of meeting or exceeding your income needs in the future:
- Use of Conservative Assumptions: Nestor uses conservative assumptions relating to investment returns (using the “shock drop” scenarios) and the planning period (which extend beyond life expectancy).
- Use of Reserve Savings: Reserve savings can be used as a source of additional funds, above and beyond the planned basic spending and discretionary spending. Use them to provide for higher than expected levels of income (for example, from higher than anticipated medical costs) or to support income needs that may extend beyond the planning horizon.
- Use Low Risk Tolerance Strategies: Nestor produces results with low, medium, and high levels of risk. The low risk strategies are based on more conservative assumptions (longer planning periods and lower investment returns in first 2 years), and therefore have a higher margin of safety.
- Timing of Adverse Investment Returns: Nestor assumes that the “shock drops” occur in the first two years of the analysis; losses in the early years of retirement have a much larger, more detrimental effect on the ability to maintain income over the long term, than equivalent losses in the later years of retirement.
- Exclude Certain Savings or Income Sources from the Plan: You may want to exclude certain assets or income sources from the analysis, which could be made available in the future if needed.
- Use of Conservative Products: Nestor uses TIPs, which are backed by the credit of the United States Federal government, and immediate annuity products, which are well-capitalized insurance products subject to regulatory oversight.