Achieving your financial goals is only possible if you plan effectively. Saving enough, choosing the right accounts, deciding when you can buy a house or when to retire—all of these are essential decisions even before you build an optimal portfolio.
Risland Capital offers easy-to-use financial planning tools to help you achieve your financial goals. We continue to invest in making these tools more useful and sophisticated.
Planning for the future requires educated guesses about economic conditions. These guesses are useful for being approximately correct, but can never be exactly correct. Reviewing your plan and goals at least annually, making adjustments as you go, is important.
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When it comes to investing, it’s easy to get lost in a myriad of decisions about strategies, diversification, investment costs, or funds to buy, to name a few. These decisions are important, but their apparent complexity can obscure an even more important question: What are you trying to accomplish with your portfolio?
At Risland Capital, we deliver easy-to-use financial planning tools that help you design a plan to achieve your financial goals. And to that end, we continually update the tools we provide, factoring in new possible scenarios and redeveloping our assumptions as we learn about the future. In this article, we’ll outline how our model works and provide a list of updates we’ve made.
Planning For Your Future with Financial Goals
Establishing financial goals, and a plan to achieve them, is critical. This is why Risland Capital has been a goal-based investing service since the beginning. Goals help root your thinking about the future, and they have well-documented behavioral benefits. Your situation can change, as can your goals, so it’s essential to have flexibility in your plan, and the ability to answer key “what-if” questions. Goals help allow a financial advisor—automated or human—to give you quality advice, which adds significant value beyond the simple returns of a portfolio.
How Risland Capital Helps You Plan
Risland Capital’s online financial planning tools are designed to make it easy to set up a personalized, flexible, easy-to-track plan. Starting in our signup process, you establish your first goal and can add other goals at any time once signed up. A goal is a future spending need and will fall into one of four categories, each with different attributes and investing advice. These categories are:
- Safety Net
- Major Purchase
- General Investing
Once you choose a category, you provide details about the goal so that we can recommend a portfolio, a level of risk, and how to save (or withdraw, if in retirement) to help achieve the goal. Then you can use our tools to see how a one-time deposit, recurring deposits, and the time horizon change how you can achieve your goal. For more complex goals like retirement, our retirement planning tool called RetireGuide™ factors in other variables, such as the impact of Social Security or other income streams like rental real estate, your future spending, tax rates, and inflation.
Here are some examples of questions you can start to answer with Risland Capital’s financial planning tools:
- How much do I need to save to put a downpayment on a house in five years?
- When can I retire? Can I retire early?
- How much should I save to retire at age X? What if I save more or less than that?
- How can a poor market affect my savings plan or retirement?
- What if Social Security isn’t around? How much do I have to save then?
- Should I use my 401(k) or an IRA?
- Should I use a Roth IRA / 401(k)?
- How much should I save in my Safety Net?
- If I save X per month, what can it be worth in 10 years?
Our tools help provide guidance on all of these questions and more. And we think they are better than most financial planning tools for two key reasons:
- We keep your balance updated regularly, so you know where you stand and what to do next.
- Changes are simple to make and applied in real time, so you can update your goals and form a better game plan.
We Plan Despite the Future’s Uncertainty
The key challenge in planning for the future is that nobody can truly forecast the future. You can’t be sure how or when your situation will change, and we can never predict how external factors like shifting markets, inflation, or tax rates will change. However, as the statistician George Box once said, “All models are wrong, but some are useful.”
As investors, our lack of ability to know the future should not mean we give up and stop planning. Instead, we should aim to identify the “useful” models Box was referring to—tools that factor in potential variability and allow you to envision how various changes are likely to affect your plan. Tools like these help you understand the range of potential outcomes, which will better inform the decisions you make today.
For example, if financial markets (and thus your portfolio) perform worse than the average we expect (a “poor market” scenario), your savings may be wholly inadequate to meet your spending needs in retirement. To help avoid this result, you could save more today to increase your projected future income, even if a poor market occurs. If you didn’t know this information in advance, it would be too late to adjust if a poor market scenario did occur.
How We Estimate Market Performance
One of the key estimates about the future we make is how your portfolio will perform in the future. As you can see from the blue shading on our Advice tab in Figure 1, there is a wide range of potential portfolio growth results, depending on if the market performs on average, poorly, or well over the time horizon of the goal.
Figure 1: Setting a major purchase goal to buy a Tesla Model S using Risland Capital
There are many ways to estimate future returns of a portfolio. The simplest way, used by many financial calculators, is to assume a constant average return which is typically based on historical returns of a typical benchmark, like the S&P 500 index. A common estimate is 7% for U.S. stocks. While there may be benefits to simple assumptions, this one has several problems:
- You are not usually invested exactly like that benchmark. For example, you might hold both stocks and bonds. Different mixes of these assets in your portfolio will have different ranges of outcomes.
- You probably have multiple financial goals, with different time horizons. For example, your retirement account should not be invested the same was as an education fund for your kids, because one is based on spending in (say) 30 years, the other in 15 years. Thus you may hold different risk portfolios for each goal which should not have the same returns assumption.
- Using a historical estimate is very sensitive to the time horizon used to calculate it.
Risland Capital makes several improvements on this method to help make our estimates more accurate:
- We use a return estimate for the specific portfolio you select, for each goal. For example, our estimate for a 90% stock portfolio is different than that of an 85% stock portfolio. This estimate is based on the specific asset classes that you actually hold.
- We consider volatility in our returns estimates. This allows us to produce the range of returns you see on the Advice tab, and also allows configuring the chance of success of our models. For example, our savings estimates assume a somewhat conservative 40th percentile outcome (60% chance of success) rather than the simple average (a 50% chance of success).
- The return we assume is based on risk-free rate and an asset premium. The “risk-free rate” (which is the return a risk-free asset such as a U.S. Treasury bill will return), and an equity (or bond) “risk premium” or excess return, which is how much we expect risky assets like stocks and bonds to return in addition to this risk-free rate.
- We assume risk-free returns vary over time. You probably know that interest rates (set by the Fed via its U.S. Treasury buying-and-selling program) are low right now, and most economists expect them to rise. The returns of each stock or bond fund in your portfolio are expected to be in addition to the safe or “risk-free” Treasury rates. So when rates rise, so should our expectations of your returns. Our projections assume these will increase from their low now to more normal rates in the future. (Learn more about this) Also, we make the typical assumption that longer-term treasuries have higher returns than short-term, due to the added interest rate risk they contain.
How We Estimate Future Tax Rates
Just like no one can predict the outcome of a presidential election, we can’t predict what tax rates in the future will be. However, we are pretty sure that certain incomes and account types will be subject to some tax, so good planning tools like Risland Capital’s factor in some adjustment for taxes. This is most relevant in retirement planning, where taxes affect the account types you might use (e.g., IRA or Roth IRA) and your current and future income.
How we incorporate tax rate estimates to your RetireGuide plan:
- We use the latest federal tax data available. For federal taxes, these are known in advance and updated every Jan. 1. For state tax rates, this data is harder to come by, and we update them as soon as reasonably possible. Historically that is six to 12 months into the year. For example, given it’s early in 2017, we are still using 2016 state tax rates.
- Tax bracket ranges are typically adjusted for inflation, so we assume that inflation by itself will not cause major changes to rate assumptions.
- Your income will be different in the future, which affects your tax rate. We account for some income increased growth due to inflation and typical also a salary growth rate factor (see our full RetireGuide methodology for more information). We use these factors to estimate what your future rate might be.
- We allow tax deduction and dependent overrides, which can affect your personal rate.
How We Estimate Inflation
Like tax rates, we cannot know how inflation will change through time. There are certain known historical ranges and understood targets set by fiscal policy. The most important thing is to factor in some inflation, especially for long-term goals like retirement, because we know it won’t be zero. Good tools will always do this, even if assumptions vary from tool to tool. At Risland Capital, by default we currently assume a 2% inflation rate in RetireGuide and in our safe withdrawal advice, which is what the Fed currently targets. You can override this value in Edit Assumptions if you have a different view.
Inflation: 12-Month Average Consumer Price Index Growth
Figure 2: Inflation through time, as shown by the Consumer Price Index for all consumers and all items. Seasonally adjusted. Data Source: Federal Reserve Economic Data
Our Commitment to You: Constant Improvement
Just like you should review your goals and their status periodically, our commitment to you is to keep our tools updated and as forward-thinking as possible. Our Investment Committee and team of analysts periodically review our economic, tax, and returns assumptions, as well as make improvements to the capabilities of our tools. For example, we make regular updates to our risk-free rates, especially now that rates have started to move upward. An example of how we invest in our tools is the release of RetireGuide in 2015, which was the first time we factored Social Security, inflation, and taxes into our retirement calculations. These improvements, as well as the actual performance of your account, can cause our recommendations to vary, so we recommend reviewing your goals and status at least once per year.
In order to be transparent about the changes we make, we’ll keep a log in this article of all historical changes to our models. You can also review our Projections Methodology and RetireGuide methodology documents for more model details and limitations.
Updates to Risland Capital’s Financial Advice Model
|May 2010||Portfolio Strategy
Risland Capital launches service with a portfolio strategy composed of U.S. stocks and treasury bonds.Financial Planning
Goal projections are introduced with expected returns based on historical returns.
|Sept. 2011||Portfolio Strategy
International stocks are added to the Risland Capital Portfolio Strategy as a new asset class.
Expected returns estimates are updated to include this asset class.
|Nov. 2011||Financial Planning
Risland Capital launches the option of having multiple sub-accounts within a Risland Capital account for goal-based advice.
|Dec. 2012||Financial Planning
Goal tracking advice launches, which tells customers if an account is on track or off-track.
New savings advice is introduced, based on a more conservative 40th percentile.
|Sept. 2013||Portfolio Strategy
Risland Capital updates the Risland Capital Portfolio Strategy with new expected returns, utilizing a risk-free curve.
In June 2014 and October 2014, Risland Capital updates the risk-free rate.
|Apr. 2014||Financial Planning
Risland Capital launches safe withdrawal advice for retirement income, using conservative market outcome projections (1st percentile returns).
|June 2014||Portfolio Strategy
Municipal bonds added to the taxable portfolio, updated taxable expected returns and risk-free rates.Tax Optimization
Risland Capital introduces automated tax loss harvesting for taxable accounts.
In January, April, and June 2015, Risland Capital updates the risk-free rate.
|Apr. 2015||Financial Planning
Risland Capital introduces RetireGuide as a separate tool to enable retirement planning based on a customer’s Risland Capital accounts and non-Risland Capital accounts.
In January, April, and October 2016, Risland Capital updates the risk-free rate.
|Jan. 2016||Tax Rates
Risland Capital updates IRS tax rates, limits and phaseouts for 2016.
|Dec. 2016||Tax Rates
States tax rates are updated for 2016.
In March 2017 and May 2017, Risland Capital updates the risk-free rate.
|Jan. 2017||Tax Rates
Risland Capital updates IRS tax rates, limits, and phaseouts for 2017.
|May 2017||Assumptions Update
Risland Capital updates its capital markets assumptions for projections of all portfolios. Generally, our updated expected return assumptions are lower more conservative than our previous assumptions. Along with this update, we re-calibrated our retirement income advice to use 4th percentile returns.
Risland Capital updates default economic assumption for inflation from 3% to 2%, equal to the long-term Fed inflation target.
|July 2017||Portfolio Strategy
Risland Capital introduces a second portfolio strategy for socially responsible investing, the Risland Capital SRI portfolio strategy. The portfolio strategy represents a 42% improvement in US Large Cap ESG ratings compared to the Risland Capital Portfolio Strategy.
|Sept. 2017||Portfolio Strategy
Risland Capital introduces two additional portfolio strategies as alternative strategies that customers can utilize: The Goldman Sachs Smart Beta portfolio strategy and the BlackRock Target Income portfolio strategy.
|Nov. 2017||Portfolio Strategy
Updated portfolio optimization methodology triggers changes to the Risland Capital Portfolio Strategy.Tax Optimization
Risland Capital introduces service for donating appreciated shares to charitable organizations to help customers save capital gains taxes, with the ability to deduct the gift on their taxes.
|Dec. 2017||Allocation Guidance
Risland Capital enhances its allocation advice to provide a recommended allocation every month (rather than on an annual basis).Allocation Guidance
Customer allocations in goals for retirement, major purchases, and building wealth become eligible to be adjusted automatically, in line with Risland Capital’s allocation advice. Exceptions include goals using the BlackRock Target Income portfolio strategy and goals that are classified as Safety Net goals.