State-of-the-art retirement cashflow modelling

(supported here by Moody’s stochastic projections).

All pensions-related advice, and the ability for advisers to earn their living, depends on ever improving advice processes and reliance on tools. MiFID is increasing the proof that is required on suitability, and as part of an 'ex-ante' and 'ex-post' approach is putting a far greater responsibility on advisers if they wish to continue to earn 'on-going' income. We deal with the challenges of risk and suitability in a separate article further on, but here we are interested in exploring the role of cashflow modelling.

It is much more important to get key inputs right, including cost and growth assumptions. Small variations can lead to dramatically different results when the long terms used in these illustrations are taken into account.

A well-known ex-regulator is warning people that this is an area likely to attract regulatory oversight in the near future, given the context that it is almost impossible to provide easy-to-understand retirement advice without some kind of cashflow illustration. He also warns against trying to adopt too complex a modelling tool, as the increasing sophistication presents additional due diligence challenges, especially around more detailed tax treatment, and scope for errors increases. It is much more important to get key inputs right, including cost and growth assumptions. Small variations can lead to dramatically different results when the long terms used in these illustrations are taken into account.

Synaptic Analyser screenshot 1

Synaptic Analyser screenshot 2

Users of Synaptic research tools have an advantage in as much as they have access to the Moody's stochastic engine and the Synaptic Comparator illustration engine, meaning that their inputs and analysis on growth and drawdown trajectories are second-to-none.

Users of Synaptic research tools have an advantage in as much as they have access to the Moody's stochastic engine and the Synaptic Comparator illustration engine, meaning that their inputs and analysis on growth and drawdown trajectories are second-to-none. Synaptic Modeller will allow you to project growth for a holding for up to 70 years (though we wouldn't advise it!). You can also overlay any drawdown profile and return a probability distribution graph indicating the likely success of the strategy, on a real (inflation adjusted) basis, whilst setting your retirement date and longevity assumption.

Let's look at a scenario: a saver (my age!) retiring at 65 in 2034, and living 'til 95, looking to withdraw £2,000 a month (inflation adjusted), invested in a Standard Life SIPP, with inflation and costs factored in. The following graph is the stochastic projection from Modeller, and I can see that I have about 45% chance of lasting the distance using my Balanced strategy (I need to increase my risk budget).

Using the same scenario, I set up a Retirement Income Goal and access Synaptic Analyser, drawing on the holdings data that I used for my Modeller journey above. I can easily model my retirement scenario using the growth rate provided by Modeller and the costs supplied by Comparator (my Retirement SIPP is from Standard Life with a bespoke, Balanced portfolio).

The Synaptic Analyser tool presents all the information back to me, with the option of trying new scenarios 'on the fly'.

The dashboard offers me useful metrics to assist the planning process, including the amount I need to invest to attain the level of income I've indicated. Synaptic Analyser offers two key differentiating features. One is the ability to get accurate drawdown quotes from a range of providers, the second is to obtain accurate (enhanced) annuity quotes.

Synaptic Analyser has been designed to offer simple illustrations relating to a drawdown product (you can set a simple income requirement using a slider if you want), or you can build the full retirement plan with multiple incomings and outgoings. The tool will apply tax and inflation adjustments as required. You can look at multiple scenarios, and access the full range of reports to use with clients or for compliance purposes.

The fund income model and the fund value are displayed on the same page. In my scenario, I have work to do to increase the longevity of my fund value and the benefits to my client, whose retirement is clearly underfunded at this time!

Synaptic Analyser 3

Call 0800 783 4477 to request a demonstration or a free trial.