Retirement Plan Modeling Turning finance theory into finance tools ℠ With MCP Suite 2007 Professional Version

The Future is Uncertain! While other software can produce a retirement plan that presents a seemingly certain outcome, because the future is uncertain those plans offer little more than an exercise in futility. Be wary of financial tools creating plans that point to just one result: Success.

So What’s Wrong with Typical Retirement Plans? The plan is created as a “one time” decision.  (Without ongoing plan management, success is in jeopardy) Plan assumptions are flawed, undermining the results.  (Poor analysis of the plan investments can compromise the forecasting value of the plan) A focus on the process of investment selection, which increases the risk of plan failure.  (If the plan’s success is dependent on manager performance, your client’s future is in their hands) The plan is created as a “one time” decision.  (Without ongoing plan management, success is in jeopardy) Plan assumptions are flawed, undermining the results.  (Poor analysis of the plan investments can compromise the forecasting value of the plan) A focus on the process of investment selection, which increases the risk of plan failure.  (If the plan’s success is dependent on manager performance, your client’s future is in their hands)

Assumptions are Everything! The purpose for a retirement plan is to evaluate the future; making a projection. Since projections require assumptions of investment returns, proper analysis techniques are paramount.  Ask yourself, “What did my last retirement plan use for investment projections?” How confident are you that your plan is solid?

Garbage In = Garbage Out Even Nobel Prize winning investment analysis can yield useless results, if the wrong historical data is fed into them.  Is the last 10, 20, 30, or 80 years relevant to your retirement planning forecast?  Should you assume actively managed investments will perform identically in the future as they did in the past? Even Nobel Prize winning investment analysis can yield useless results, if the wrong historical data is fed into them.  Is the last 10, 20, 30, or 80 years relevant to your retirement planning forecast?  Should you assume actively managed investments will perform identically in the future as they did in the past? Do your current planning tools belong in the garbage?

Flawed Analysis, Flawed Results Using just historical performance of actively managed mutual funds is flawed. ▫Example: Fidelity Magellan. Is the same manager running the fund as in the past? NO! Assuming the historical returns earned by a manager who is no longer in charge will create a flawed plan. Part 1 In the 1980’s Peter Lynch managed the Magellan fund and outperformed the S&P 500 Positive Alpha Today Harry Lange is the manager and the fund is underperforming the S&P 500 Negative Alpha

Flawed Analysis, Flawed Results Most retirement planning/ portfolio analysis tools force investment professionals to assume an actively managed mutual fund performs equal to its benchmark. Part 2 Magellan’s best-fit index is Russell Midcap Growth, not the S&P 500! Is it really a Large Cap Fund? The negative Alpha for both indexes means that the manager is underperforming for the relative risk.

What is Retirement Plan Modeling?  Robust: It allows the advisor to select separate historical returns for each asset class to match their market forecast.  Flexible: It will model a managed portfolio with Modern Portfolio Theory statistics applied to a benchmark.  Comprehensive: It is a process of proper assumptions for both investment performance and retirement income goals. The RIGHT assumptions will add to your confidence!

Assess Retirement Goals for Income Assess the Current Investments Model Current Investments using Modern Portfolio Statistics Select Historical Periods that “Best Fit” Market Forecasts Using Monte Carlo Simulations, Determine Probabilities for Success or Failure Retirement Plan Modeling: A Process

Create Each Plan with Confidence With MCP Suite 2007, Professional Version: ▫You can select separate historical returns for each asset class to match your market forecast. ▫You will model managed portfolios with Modern Portfolio Theory statistics applied to a benchmark. ▫You will have a process of choosing proper assumptions for both investment performance and retirement income goals.

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