How GuidedSavings Works

Q. How does GuidedSavings show me how to reach my goal?
A. After you have entered all the information about your financial assets and your retirement plan investments, you will be brought to the advice portion of GuidedSavings where you will choose your retirement income goal — how much money you want each month during retirement.

GuidedSavings looks at all your data, including your current assets, how long you have until you retire and your income goal, and calculates an answer.

Q. Can you explain how GuidedSavings calculates my income at retirement?
A. GuidedSavings provides you a range of potential monthly income at retirement. Markets don't' move in a straight line. Rather, they can go up and down, even if in the long run they are going up. GuidedSavings takes this into account. Through a sophisticated approach of running hundreds of market scenarios, GuidedSavings determines what the expected possible outcomes for your retirement savings will be. That outcome is what you see on the screen.

Q. Can you explain the advice process?
A. The process GuidedSavings uses is based on Modern Portfolio Theory. Essentially, Modern Portfolio Theory teaches us that the markets are efficient, and through diversification, you can maximize your return for the amount of risk taken by investing on the Efficient Frontier. These are principals you either know intuitively or have learned. For example, if you invest in a higher risk investment, you expect a higher rate of return. You have probably also heard the saying, "Don't put all your eggs in one basket." These lessons come directly from Modern Portfolio Theory. GuidedSavings is designed to recommend a diversified investment portfolio, meaning a portfolio that is on the Efficient Frontier. These probably sound like good words to you — diversified and Efficient Frontier. Who wouldn't want to invest like that?

So how do you do it? The amount of time you have until you need the money and the amount you currently have saved are two of the most significant variables in determining how much market risk you should take. Therefore, we need to know about all of your retirement savings in order to provide the best possible advice. In general, the process will typically recommend a portfolio of higher market risk the lower your accumulated savings and the longer the time you have until you need the money. And visa versa, the higher your accumulated savings and the shorter the time period, the lower the recommended market risk.

Q. Can you tell me more details about the process?
A. First, GuidedSavings projects, based on the available data for your investments, the future value of your investments. Given that very few segments of the market give a steady return every year, GuidedSavings runs a Monte Carlo simulation to determine a range of possible outcomes. Hundreds of market scenarios are used to calculate the returns over time based on multiple return variations for each of your investments. The end result is hundreds of different summary totals of your retirement investment account balances at your retirement age.

Second, GuidedSavings looks at hundreds of economic and market scenarios to see what could happen to your investments from now until your retirement date. GuidedSavings shows you a range of possible monthly income amounts at retirement projected from your current retirement savings.

Q. What does it mean when GuidedSavings talks about my portfolio?
A. Your retirement portfolio — broadly speaking — is everything that you count among your investments for retirement. Your 401(k) investments including GuidedChoice, other retirement savings accounts, and any other assets you set aside for retirement are included. This section allows you to see the asset allocation and fund detail behind the recommendation.

back to top

GuidedSavings and Risk

Q. What is risk?
A. Every investment involves a certain amount of risk. The returns you're hoping to gain depend on the risks you're willing to take. There are two basic kinds of risk that matter to investing: market risk and inflation risk.

The first type and the one most investors understand best, is market risk. For example, when you invest in a single stock, the value of your investment depends entirely on its performance through the change in its market price and any dividend payments. The price can change because of the company's performance, events that might affect its future performance, or overall changes in the industry or market. Investing in a single stock, therefore, can be risky.

If you try to avoid market risk by choosing conservative investments, however, you very likely may face the other kind of risk: inflation. Inflation, or the rising cost of goods and services, drags down how much your retirement savings will eventually buy. If you invest too conservatively there is inflation risk. That is, your money may not earn enough to outpace inflation.

Q. What are some ways to reduce market risk?
A. Ways to reduce market risk include diversification and time. Mutual funds are designed to help you diversify. They reduce your market risk by purchasing a variety of investments in their defined category. Buying one share of a fund really buys you a small percentage of each investment owned by the fund. Obviously, some funds invest more aggressively than others — and aggressive investing involves more market risk than conservative investing. Buying different types of mutual funds helps to reduce market risk.

Q. How does time help reduce market risk?
A. If you are diversified appropriately, another way to reduce market risk is through time. In fact, market risk is far greater in the short-term, one to ten years. The longer you hold a diversified portfolio, the lower the market risk of the portfolio. This doesn't always hold true for a single investment. If a company stock goes way down in value, all the time in the world may not bring that stock back up in value.

Q. What can you tell me about inflation risk?
A. If you try to avoid market risk by choosing conservative investments, you may face the other kind of risk: inflation. Inflation, or the rising cost of goods and services, drags down how much your retirement savings will eventually buy. This is because investments offering lower, steady returns — for example, money market, stable income, and bond funds — don't fluctuate much in price value. And, they rarely earn much more than the average rate of inflation. The largest problem with inflation risk is that you do not accumulate enough money for your retirement. Keep in mind you need enough retirement income to not only get you to retirement but to get you through retirement. Inflation risk is far greater in the long-term, over ten years.

Q. Does GuidedSavings take into account inflation risk?
A. Yes, that is one of the reasons we give you a range of monthly incomes to expect in retirement. Inflation can be higher or lower in different years and we take that into consideration.

back to top