A: We are aware of a number of programs that set out to capture every last detail about your financial life. You would need to invest a great deal of time and effort to provide all that information (far more than for EvolveMyRetirement®). They then make future projections using equally detailed rules, but these are underpinned by crude assumptions: for example, that investment growth will be identical every year, and will never fall, or that there's no need to project beyond a fixed arbitrary time horizon. This is nothing like the real world, in which investment returns fluctuate from year to year, sometimes dramatically, and in which none of us can predict with confidence how long we will live.
The philosophy of EvolveMyRetirement® is to capture your finances and your attitudes in just enough detail so that the program can fill in the remaining gaps and go on to make future projections. Our program takes into account the uncertainty of investment returns, property prices, inflation and longevity, so that your confidence in the results can be much higher. However we do not aim to take the place of an independent financial advisor, and we strongly recommend that you consult one before putting any generated strategy into practice.
A: The purpose of EvolveMyRetirement® is not to give you specific investment advice, but rather to arrive at a high-level strategy geared towards sustainable spending, consistent with your stated attitudes to risk and leaving a legacy. The program makes assumptions, which you can adjust if you want, about investment returns, in terms of both average returns and volatility. Specific advice on how to achieve such returns is beyond the scope of this website, and should be sought from an independent financial adviser.
A: Even though this could be done in theory, it would involve adjusting the utility value of early retirement compared with having extra discretionary spending. The problem lies in quantifying the benefits of an extra year of free time, compared with having, say, £1000 a year less to spend for the rest of your life. We've taken the view that these sort of judgements are too subjective to automate reliably. We've therefore left retirement dates to be adjusted manually, at least for now.
A: EvolveMyRetirement® is designed to cater for most peoples' needs. There may be some circumstances when the right choice of inputs is not obvious. Please feel free tocontact usif you would like assistance.
A: EvolveMyRetirement® uses mortality tables published by the Office for National Statistics. Based on gender and date of birth, a person's life expectancy is determined based on probabilities found in the mortality tables, and randomised during each Monte Carlo Simulation. In cases where a plan member has either impaired health or unusually good health, you are able to specify a biological age that's more or less than the person's actual chronological age. It should be borne in mind that wrongly assuming impaired health may skew the results towards over-spending, so this feature should only be used with caution based on professional advice.
A: The main factors that impact annuity rates are life expectancy and gilt yields. Annuity rates don't fluctuate as much as some financial markets, but they do tend to vary gradually over time. Rather than second-guess the future movement of annuity rates, EvolveMyRetirement® only uses current annuity rates in its calculations, which will be updated as and when annuity rates vary. If annuity rates change significantly in the future, then your strategy may show different results, and further optimising it may well improve it.
A: You can, if you want, defer the start date of your state pension, in order to increase your annual pension amount. This can sometimes be beneficial provided you're in good health, and have a long life expectancy. Here's information from HMRC about this. You should also talk to your financial advisor about it.
A: When you create your plan, it is given a number of assumptions. You can view these in the Assumptions section on the Plan page, where you can modify them if you wish. We believe that the default values make sense, but we don't assume that we necessarily know best. If you consult a financial advisor, he or she may consider some of these assumptions too optimistic or pessimistic, and advise you to change them.
A: Economists use the word 'utility' to describe the usefulness of something. A utility is expressed as a number, so the bigger the utility value something has, the more useful it is considered to be. A utility can be calculated for every strategy. The higher the value of the utility, the better the strategy is deemed to be in meeting the objectives of the plan's members.
To calculate a strategy's utility, EvolveMyRetirement® runs a Monte Carlo Simulation. This simulates possible scenarios over and over again, randomising where there are uncertainties according to built-in probability distributions. In some scenarios the plan members may run out of money. In others, investment returns may be exceptionally high and the members may leave a huge legacy. The results of all the scenarios are analysed, taking the following factors into account in this analysis:
• The level of spending achieved in each scenario.
• The likelihood of running out of money.
• The likelihood of ending up with negative net worth.
• The size of any legacy.
• The importance to the plan members of leaving a legacy.
• The plan members' risk aversion.
A: Some possible reasons for this could be:
• If the setting is for discretionary spending, then lowering the risk means lowering spending, which you'd like to keep as high as possible. The optimisation will have found a balance between risk and reward, based on your stated attitude to risk.
• If you've indicated a desire to leave a legacy, then the optimised setting may offer better chances of doing so than a lower-risk setting. Once again, the optimisation will have balanced risk against reward.
• A small apparent difference in risk may be within the margin of error of the Monte Carlo Simulation.
A: The assumptions (which you can view at the bottom of the Plan page) represent things that you cannot control, but that you can estimate. We've provided a set of default assumptions, which we believe are reasonable and sensibly cautious. No doubt some professional economists and financial advisors may disagree with our settings, and would have chosen different ones. That's why we've made our assumptions configurable.
Whatever set of assumptions you start with, EvolveMyRetirement® will optimise your strategy taking them into account. It's almost inevitable that the resulting strategy will be highly sensitive to one or more of the assumptions. That's why it's so important that they're reasonable and not overly optimistic. If you have concerns about the assumption settings, we recommend that you consult an independent financial advisor.
A: Once is unlikely to be enough. Your circumstances can change in many possible ways. For example:
• You might gain an unexpected promotion with higher pay.
• Markets might rise or fall significantly resulting in a revaluation of your assets.
• Annuity rates might change significantly.
• You might be made redundant.
• You might develop an overwhelming urge to retire early.
• You might decide you wanted to continue work past your originally planned retirement date.
• You might receive an unexpected windfall.
• There might be a significant increase in your expenses.
• You or your partner might develop health problems.
• You might alter your attitude to leaving a legacy if you subsequently have children.
• You might outlive your partner.
The optimal level of discretionary spending is based on the known facts at the time that a strategy is optimised. In the words of the economist John Maynard Keynes: "When the facts change I change my mind. What do you do, sir?" So the answer to the question as to how often to re-optimise your strategy is: Whenever the facts change!
A: Part of the answer could be that in many of the trials in which you ran out of money, this happened very soon before the last member of the plan died, which would have mitigated the negative aspects to some extent. It could also be that running out of money often occurred when you were still asset-rich, implying that lifestyle changes, whilst undesirable, would be possible to avoid total disaster.
In any case, the calculated chance of your running out of money assumes that your discretionary spending will stay the same year in, year out. Although such a regular pattern is the assumption made by the calculations, in reality your circumstances are likely to change in the future, as discussed in the answer to the previous question. Your optimal discretionary spending is likely to change over time, and by gradually adapting it to circumstances, your actual chances of running out of money should be dramatically reduced, if not eliminated.
A: The pension figures you entered for employments and self-employments represent what you're currently paying in. The strategy, on the other hand, is telling you a target amount, which could be more or less than you're currently paying in. If it's more, then when the program projects your plan into the future, it will use the higher amount, subject to sufficient funds being available.
A: Actually, you can view bar charts from the Results page, once you've entered your information and generated a strategy. Many other tools prominently display bar charts, and use them to determine if you're 'on track'. This can be highly misleading. EvolveMyRetirement® uses Monte Carlo Simulation by running thousands of scenarios, and working out the chances of a satisfactory financial outcome. On the Results page, you can see the results of this Monte Carlo Simulation, presented as pie charts. But you can also view randomly generated scenarios as bar charts, as well as a scenario that uses average values. None of these scenarios are meant to be relied upon as accurate in isolation, but to serve as illustrations of how the future might unfold.
A: Absolutely not! EvolveMyRetirement® is not intended to replace professional financial advice. Even though it's able to suggest a strategy, putting it into practice requires significant expertise and discipline. In any case, the output of any computer program is only ever as good as its input. We strongly recommend validating your own assumptions with an independent financial advisor, as well as validating any outputs from EvolveMyRetirement® that appear to suggest that a change is needed in your current approach to financial planning.
A: Each optimisation done by EvolveMyRetirement® uses a Genetic Algorithm, which is based on similar principles to the way in which biological organisms evolve through breeding and mutation. Although the evolutionary trend is towards better and better strategies, the path taken depends on numerous random factors. Indeed, the very nature of the problem of retirement planning involves uncertainty. This means that a strategy generated by an optimisation may not be the theoretically ideal strategy, since that could require unlimited time to generate.
It may also be the case that the program considers two or more strategies equally optimal, even though there may be certain differences. Reasons for this might be:
• Increasing the value of a particular setting beyond a certain amount has no effect on the results. For example, it might make no practical difference whether a 60 year old starts rebalancing investments in 40 years time or in 50 years time.
• There's a trade-off between risk and reward. Changing one setting may increase reward just enough to compensate for the increased risk in changing another setting. For example, increasing discretionary spending beyond a certain amount will naturally increase risk. In some cases, the program may consider that the benefit of the increased spending exactly balances the increased risk, based on the user's stated risk tolerance.
A: The settings in your strategy are used in conjunction with built-in rules, using which the program decides each year of your life what to do next, during a Monte Carlo simulation. The underlying rules are:
• After essential and discretionary spending are taken into account, any cash left over is reinvested in a tax-efficient way according to the level of risk indicated in the strategy. Allowances for pension and ISA contributions are utilised as far as possible.
• Where income is insufficient to cover spending, liquid assets are sold to meet the shortfall, priority being given to the least tax-efficient assets.
• Investments are gradually rebalanced from the starting level of risk towards the terminal level of risk, as specified in the strategy.
• A target proportion of total spending is specified by the strategy to control the purchase of new annuities, once any member has retired. Each year, new annuities are bought only if the resultant total annuity income (including existing annuities and pension income) fully covers the target proportion of spending.
• The growth rate of any new annuities is determined by the setting in your strategy, which can be either Level, Fixed or Indexed.
• If there are two members, new annuities are allocated between the members as specified by the strategy.
• Any cash flow shortfall after using all sources of income is made up by drawing down on investments, subject to any restrictions on withdrawals (e.g. from pension funds).
• For retired members in pension drawdown, the level of drawdown is normally determined by the strategy, but may be exceeded should other sources of cash be insufficient.
• If there is still a cash flow shortfall, any extensible and repayable debts are drawn upon, including an assumed overdraft facility based on a combination of the current net worth and gross income.
• If this is still insufficient, equity is released, if possible, based on the value of any main or (to a lesser extent) second homes.
• If all of the above steps fail to raise sufficient cash, then the program continues projecting until the death of the last member, but without any discretionary spending. Any cash shortfall is filled by borrowing at an assumed punitive interest rate. In some cases, this may lead to having a negative net worth; unsurprisingly the program treats this as a highly undesirable outcome.
A: Yes. EvolveMyRetirement® incorporates current rates and bands for income tax, national insurance, capital gains tax and inheritance tax, and makes corresponding deductions in its projections. Regional tax differences (currently only in Scotland) are taken into account, based on the UK postcode entered for the plan. Tax relief on ISAs and pension plans are also taken into account.
Please bear in mind that the program only takes into account what you have entered into the program, so the calculated tax may only be an approximation, though close enough for most planning purposes.
A: Projections made by tools on a straight-line basis are highly questionable. As a simple example, let's assume that certain investments are expected to grow on average by 7% each year. Then an investment of £10,000 would be projected to double to £20,000 in 10 years, on average. However, to make a financial plan that depended on this doubling would be highly risky: there's a 50-50 chance that returns after 10 years will turn out to be less than double, perhaps much less, in which case our plan would fail. How badly it might fail depends on the type of assets we've invested in.
This is not to say that higher risk investments such as shares are to be avoided, but merely that planning based on straight-line projections is far too simplistic. The effects of volatility and uncertainty are felt even more acutely when drawing down investments during retirement. It is far harder to recover from a stockmarket dip that occurs early on in retirement than from one that occurs during one's working life. Sound planning must take into account such risks.
A: Your lifetime contingency represents expenditure that it's impossible to foresee now with accuracy. Because it's unforeseen, it's a matter of judgement as to how much you should estimate. We recommend consulting an independent financial advisor to assist in making this kind of judgement. It may be possible and beneficial to take out insurance policies against certain contingencies, to help reduce the necessary size of your lifetime contingency.
A: Not at all! All calculations and optimisations take place on our powerful computers, not on your own computer.
A: No! The only thing that may be slower is getting the optimised strategy back to your browser, once the optimisation has completed running. However, since the amount of information to be uploaded is quite small, this should not be a problem. This is no different from accessing other pages or other websites.
A: Yes. If you don't want to use EvolveMyRetirement® anymore and would like everything that you've entered to be deleted, you canrequest thisand we'll delete your account. Please bear in mind that if you later decide to sign up again, you'll have to re-enter everything from scratch.
A: EvolveMyRetirement® is created and owned by Okinawa Zest Limited, a company that is wholly independent of financial institutions, and which provides financial planning software that is not biased towards any specific types of investment. Please feel free tocontact usfor further company information.