Step 1: Calculating the Retirement Income Objective
The first calculation performed is to derive the retirement objective. A participant's salary is entered in and an assumed growth rate is applied until the designated retirement age is reached. A replacement ratio is then applied to this pre-retirement final salary to determine the amount of income needed for the first year of retirement. This income need is then grown through retirement based on an inflation factor. The model then factors all known sources of retirement income such as Social Security and additional outside assets.
Step 2: Analyzing the Current Strategy
After determining the participant’s income objective, we evaluate how they are tracking against the goal. The system makes projections by running 1,000 Monte Carlo simulations using forward-looking capital market assumptions to provide a range of future results based on their current portfolio balances by investment, contribution rates by the employee, and any employer contributions. Projections also include multiple plans, Social Security (based on the SSA.gov ANYPIA calculator), pensions, or other assets as appropriate for each individual in both wealth and projected income denominations. The range of future values for the employee’s current strategy is then compared to the retirement income objective to determine the individual’s probability of reaching their goal and converted to a RR Score on a 1-10 scale.
Step 3: Determining your RR Score
Finally, each individual receives a projection of their shortfall (or surplus) in retirement income as compared to their objective. This clearly identifies the gap that needs to be addressed through changes in investment strategy (how they are investing), contribution rate (what they are investing), or retirement objective (when they plan on using what they have invested). Our objective is to show each participant what they need and how they can control the factors affecting their likelihood of getting there. The RR score can be interpreted as a 1 being the lowest likelihood of success and 10 being the highest probability of success. An RR Score of 7.5 or higher is considered in the Target Zone.
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