Outline key considerations for both assumptions and variables for retirement forecasts
When reviewing projections for retirement investing, consideration should be given to the underlying assumptions that drive any projection or forecasting tool, for example:
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- Is the projection tool using a deterministic or stochastic methodology?
- Are contributions or withdrawals index-linked?
- What all-in fee estimates are used in the calculations?
- Are projected values expressed in nominal or real terms?
- To what confidence levels are projected values expressed?
- What asset allocation or portfolio returns have been assumed for the investment strategy?
Advisers should consider adopting a clearly defined set of assumptions to ensure analysis is consistent across their client base.
The key variables of portfolio size, investment term, and withdrawal rate that together make up a withdrawal profile will be individual to each investor on a case-by-case basis and should be used as the basis for assessing suitability for clients in decumulation.
Henry Cobbe is head of Copia Capital Management
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