Introduction
We often hear one question: "Why do the Balance and Sustainable Spending charts show different worst-case scenarios?" Let's dive in and clear up the confusion.
Description
Both the Balance and Sustainable Spending charts provide insights into potential financial futures, but their perspectives on the "worst-case scenario" differ in fundamental ways:
Balance Chart: This chart illustrates how a client's funds might fare over time, based on various plan inputs such as spending, contributions, income sources, and more. The "worst-case" scenario in this context represents the historical situation where the client's funds deplete the fastest, considering the simulation inputs.
Sustainable Spending Chart: In contrast, this chart approaches the worst-case scenario differently. Instead of adhering to a fixed spending amount, it determines the maximum annual spending a client can sustain without exhausting their funds. Here, the "worst-case" refers to the historical instance when the client could only afford a very limited annual expenditure while ensuring the longevity of their funds.
To simplify, the Balance chart examines the given set of inputs to observe outcomes, while the Sustainable Spending chart computes the optimal spending amount for a desired financial longevity.
Example
Imagine a client, Mrs. Jones:
In the Balance Chart: Assuming Mrs. Jones plans to spend £60,000 each year, the worst-case scenario illustrates the historical point at which her funds would be depleted. In this scenario, the chart explores how her funds could deplete at different rates based on the assumed spending.
In the Sustainable Spending Chart: To guarantee that Mrs. Jones's funds endure her lifetime, the chart computes the maximum spending each scenario could support. This scenario could be distinct from the worst 'balance' scenario in the other chart. The worst case in this context refers to the time in history when the fixed real amount she can spend throughout her plan duration is the lowest possible.
Conclusion
Each visualization offers a unique view of a client's financial future. With this knowledge, advisors can give well-rounded and clear advice.