How to use the Investment Strategy explorer in Decision Lab

The target asset allocation of a plan has large effects on all part of a plan, including:

• Portfolio balance at retirement (nest egg)
• Spending capacity / Retirement paycheck
• Retirement income guardrails
• Portfolio volatility
• Income volatility

The Investment Strategy exploration tool in Decision Lab gives advisors a focused way to explore the core question many clients have: “How should I invest, and how will this choice affect my plan?”

How to use the tool

When you choose “Investment Strategy” from the Decision Lab screen, you'll be given the option to Get Started or Skip to Results. If you choose “Get Started”, you'll be given the opportunity to select which investment accounts you want to include in the question and which asset allocation models you want to explore (with a maximum of 10). For example, if you include all of the plan's investment accounts and all 5 of the “risk-based default” asset allocation models, you will see five results, each showing how allocating the entire portfolio toward each of the risk-based defaults would affect the plan.

These results show how the retirement paycheck/spending capacity of the plan changes based on asset allocation. Typically, we see that spending capacity goes up with a more aggressive allocation. But, of course, there's no free lunch. So, the rest of the tool helps show the potential costs and risks of a more aggressive allocation.

The Bubble Chart option shows the expected return and standard deviation (net of inflation) of the selected target allocations, shown on a traditional risk/return graph. The size of the bubbles (circles) is scaled to the retirement paycheck/spending capacity.

This helps demonstrate that there is a greater risk associated with the larger bubbles. Finally, and perhaps most helpfully, you can explore the portfolio and income volatility of the different strategies in the “Stress Test”. This section is similar to our standard Retirement Stress Test tool, but it allows you to compare different allocation strategies with each other in one place. (The usual Retirement Stress Test comparison tool only allows head-to-head comparison of two strategies/plans.)

In the Stress Test section, you'll have the option to view the plan, with different asset allocation approaches, running through 15 different historical scenarios, and see how income changed due to guardrails, and how portfolio balances changed due to investment performance and withdrawals.

This is very helpful in showing the trade-offs between higher initial retirement paychecks and the volatility of income and portfolio balances. In the example above, we see that the conservative risk-based allocation led to a lower retirement paycheck in 2007, but that the portfolio suffered very little during the Global Financial Crisis. As a result, income did not have to be cut, and could even be increased fairly early in the plan. On the other hand, the aggressive portfolio allocation led to two spending cuts and very high portfolio volatility (with a $3 million portfolio going well below $2 million). However, later in the plan, the aggressive portfolio did recover and, by the 2020s, was higher than the conservative portfolio. This led to income recovery as well.

These are the types of realistic comparisons and conversations that the Investment Strategy tool can facilitate between advisors and clients.

Skip to Results Defaults

If you “Skip to Results” instead of going through the process of choosing strategies and investment accounts, the tool will automatically explore varying all of the plan's investment accounts (excluding variable annuities, since these often do not allow full flexibility in allocation, and fixed-index annuities, which do not typically offer index options across all asset classes). By default, the software will explore all custom allocation models you have (with a maximum of 10). If there are not 10 asset allocation models, the system will choose from the risk-based defaults. If you have no custom allocation models, “Skip to Results” will explore the 5 risk-based default allocations from the allocation slider.