Key Points

  • Planning and goal setting are critical to helping you reach your financial objectives.
  • Schwab Intelligent Income™ offers a Goal Tracker to help you project hypothetical performance for your portfolio and monitor whether or not your goal is "on target" towards achieving your recurring withdrawal goal.
  • The Goal Tracker uses long-term return estimates and simulations to show a range of outcomes to help you monitor if you're "on target" or diagnose whether you need to consider making adjustments to reach your goal.

Introduction

Schwab Intelligent Portfolios® provides you with a convenient way to invest and save for an investment goal. The goal can be to accumulate savings, or to take distributions for an income need.

In order to reach a goal, a plan with clear, concrete, and trackable steps helps in almost any area of life. Investing is no exception. We believe that financial planning and goal setting are critically important. A good plan should include a clear goal, an understanding of the risks and benefits, and a look at "what if" scenarios.

It's one thing to invest. It's another thing to invest with a goal in mind. If you are using Schwab Intelligent IncomeTM, the Goal Tracker visually highlights your investment goal, utilizing your risk profile, investment amount and recurring withdrawals (based on the withdrawal amount, desired withdrawal timeframe and portfolio features you specify). Based on the information you provide, Goal Tracker will estimate whether your withdrawals could last over your specified time frame.

After you set up a goal, the Goal Tracker will help project hypothetical portfolio performance with your recurring withdrawal and monitor whether your goal is "on target," "off target," or "at risk" so that you can track your progress over time and make any necessary adjustments. It is as simple as going to your Intelligent IncomeTM dashboard and with a few clicks, you can see how to get back on track.

Goal Tracker can help you anticipate how your account could perform, within a range of hypothetical outcomes, to help you work towards your goal. The rest of this whitepaper describes how Goal Tracker projects hypothetical portfolio performance and tracks your account in relation to your recurring withdrawal goal.

What is Goal Tracker?

Goal Tracker can be found within your Schwab Intelligent Income™ dashboard. Goal Tracker helps you set up and track your investments and recurring withdrawals across one or multiple accounts enrolled in Schwab Intelligent Income™. It projects how your portfolio might perform using a range of outcomes to help you see how close you are to reaching your future goal.

Keep in mind, the hypothetical illustrations provide projections, not guarantees, but they can help you consider how your portfolio could perform, if things go as projected over time.

Goal Tracker saves your goal and monitors daily whether your portfolio is "on target," "at risk," or "off target." These graphics are dynamic and you can make adjustments to variables such as your contributions, withdrawals, or time horizon and see how those changes impact your potential to reach your goal.

Goal Tracker Methodology

One relatively straight-forward way to project performance of a portfolio is to estimate an average annual or monthly return for your portfolio, and then use that to calculate your returns, every month, for the rest of your stated investment horizon. This method is called straight-line appreciation.

However, returns are almost never average. Markets are inherently unpredictable and volatile, so we can't assume an average return every month or even every year. Instead, the Goal Tracker uses Monte Carlo simulation to provide probability analysis on the likelihood that your recurring withdrawal will last until a selected end date.

What is Monte Carlo Simulation?

Goal Tracker uses a statistical simulation technique, used widely in finance, engineering and other fields, to simulate a range of paths for portfolio performance, based on long-term return estimates and annual volatility around those estimates. 

For example, a hypothetical portfolio might be estimated to deliver an average 6% annual return per year over time. However, in any single year, it might deliver -10%, 15%, -3%, 8% or a wide range of other possible paths to get there. Each path may be different.

It'd be great if we could assume that a portfolio would receive the average estimated return every month, and every year, like clockwork. Unfortunately, that's not the way markets work. In some months and years, market returns are up, and in some months and years, they are down.

Not every portfolio will end up generating the average estimated annual return over the planning time horizon. Some portfolios may experience a "better" than average series of returns, and some portfolios may receive a "worse" than average series of returns. As noted above, this is part of the inherent uncertainty of investing.

Monte Carlo simulation is a bit like writing down on slips of paper various ranges of projected returns that we think you could receive in a period and putting them into a hat. For each period of your goal, we'd pull out one piece of paper and use that as the projected return for that period, based on a range of projected returns. We do this for every period until the end of your stated time horizon to calculate a hypothetical or projected ending balance. We repeat this series of draws 999 times, to give us a range of possible outcomes. This helps us simulate the uncertainty of markets and ranges of performance.

The exhibit below shows five such trials. Goal Tracker runs many more and then summarizes them in a simpler chart to stress test the likelihood of meeting your goal.


Exhibit 1: Monte Carlo simulates multiple scenarios

A line graph highlighting the hypothetical growth of $10,000 over 10 years in 5 different scenarios and the average result using Monte Carlo analysis. At the end of 10 years the example scenarios range from $13,756 to $32,506 with an average of $17,908.

Source: Schwab Center for Financial Research

Note: Assumes initial portfolio value of $10,000. The average annual return was 6.0% in each scenario and includes reinvestment of interest and dividends and annual standard deviation of 10%. Does not illustrate an actual Schwab Intelligent Portfolios account or the impact of taxes. Investing involves risks, including possible loss of principal. For illustration purposes only.

Long-Term Return Estimates

To create the simulations described above, Goal Tracker uses long-term return estimates provided by Charles Schwab Investment Advisory, Inc. (CSIA) to estimate the performance of your portfolio. In other words, Goal Tracker doesn't just choose a random range of numbers to guess how your portfolio might perform. It bases the simulated returns on long-term return estimates, within a range of possible paths, to show projected performance.

To create these long-term return estimates, CSIA uses a set of factors including interest rates, earnings, dividends and others to estimate future returns and risk on a wide range of asset classes including equities, bonds, and commodities, etc.  The long-term return estimates will vary based on your portfolio. Because the underlying factors used to create long-term estimates change, and because they are updated annually, portfolio estimates will change over time.

Keep in mind, these are estimates, and actual performance will vary and may be less predictable over short time horizons. The performance projections assume your account is automatically rebalanced and remains at its target allocation.  Projections do not include fees or taxes.

The performance and volatility of your portfolio and the ending balance will almost certainly vary, each year, and over time. Past performance or projections are not guarantees of future performance, but we believe that we can give you a range based on how we think the future might unfold.

Conservative, Average, and Extreme Projections

Since no one knows how markets or portfolios will perform in the future with certainty, it helps to project a range of possible outcomes, using our best estimates of how your portfolio might perform over time.

Goal Tracker uses the simulations to chart a range of possible performance, from a "conservative," "average," and "extreme" market. This will help you track your goal over time and the range of possible outcomes. The ranges are described below.

  • The "conservative" market shows your projected ending balance in unfavorable market conditions, based on the many simulations of your portfolio's performance from the Monte Carlo simulation. There's a 75% likelihood that you'll outperform this projection. In other words, it is the 250th best out of 1,000 ending balances. You would fail to achieve this in 25% of the simulations.

  • The "average" market shows the ending balance in the simulated average expected market conditions. There's a 50% likelihood that you'll outperform this projection. In other words, it is the 500th best out of 1,000 ending results. This is the median outcome in the 50th percentile (or median) simulation.

  • You will also see the "extreme" market projections showing the ending balance very unfavorable and very favorable market conditions. There’s an 80% likelihood that your projected balance will be somewhere in between these extremes and a 10% or less likelihood that your money will run out. In other words, they are the 100th worst and 100th best of 1,000 ending results.

  • It's important to know that the calculations assume that your distributions increase each year for the time horizon you choose with inflation, and that you don't change those distributions in the future. In practice, we suggest that you monitor your simulations and make adjustments, if needed, to keep your distributions – and goal – on track.
Exhibit: "Conservative," "average," " unfavorable," and " favorable" markets
Market performance Your projected ending balance would reach this amount...
Conservative market In 75% or more of the simulations
Average market In 50% or more of the simulations
Unfavorable In 10% of the least favorable markets
Favorable Market In 10% of the most favorable markets

Note: The 50th percentile simulation is the median outcome (you succeed in achieving your goal 50% of the time), the 100th percentile simulation is the very best outcome, and the 1st percentile simulation is the very worst outcome.

"On Target," "At Risk," and "Off Target"

Using these projections described for your portfolio, Goal Tracker utilizes the range of projected outcomes to track whether your goal is "on target," "at risk," or "off target," based on the "favorable," "average," "worse," or "unfavorable" markets. In other words, what sort of market or portfolio performance do you need to experience for your goal to succeed?

Understanding the Schwab Intelligent Income™ Illustrations

In using Schwab Intelligent Income™, we assume that your objective is to not draw your account down to $0 before the end date of your goal. Goal Tracker has a higher threshold for "on target" using Schwab Intelligent Income™ because the stakes are likely higher if your account runs out of money. If you use Schwab Intelligent Income™, Goal Tracker will use different illustrations and break points.  For goals using Schwab Intelligent Income™, the Goal Tracker will assume withdrawals will grow with inflation on a yearly basis; however you will need to adjust your withdrawal amount in order to reflect changes in inflation.

The table below shows how Goal Tracker defines whether your recurring withdrawal goal within Schwab Intelligent Income™ is "on target," "at risk," or "off target."

Exhibit: Goal Status within Schwab Intelligent Income™
Goal Status Definition
"On Target" Greater than 75% chance of your money lasting
"At Risk" Less than a 75% chance but better than a 50% chance or your money lasting
"Off Target" Less than a 50% chance of your money lasting

Exhibit 2: Income Goal "On Target"

A chart highlighting the Monte Carlo analysis of making withdrawals from a portfolio enrolled in Intelligent Income between the ages of 65 and 95. The chart shows two lines, the conservative projection line, indicating a 75% likelihood of outperforming the projection, and the average projection, indicating a 50% likelihood of outperforming the projection. The graph shows as On Target with a 75% likelihood of the hypothetical assets lasting through age 95. Both projections have the hypothetical client reaching their target age. The client is also shown as having around $305K remaining at age 95 in an average projection.

For illustrative purposes only. Not representative of any specific investment or account.

In the illustration above, the target shows the age you input saying how long you'd like for your money to last. Your portfolio and withdrawal amounts are "on target" because your money is projected to last in 75% or more of the simulations, if you make no changes or don't reduce spending in a down market. The extreme projections (the light dotted lines) show the extreme projections – how long your money would last in the 10% worst (on the left, just under age 90) and 10% best (on the right, the portfolio keeps growing) markets.

Exhibit 3: Income Goal "At Risk"

A chart highlighting the Monte Carlo analysis of making withdrawals from a portfolio enrolled in Intelligent Income between the ages of 65 and 95. The chart shows two lines, the conservative projection line, indicating a 75% likelihood of outperforming the projection, and the average projection, indicating a 50% likelihood of outperforming the projection. The graph shows as At Risk with a 73% likelihood of the hypothetical assets lasting through age 95. The conservative projection line only reaches a target age of 94, but the average projection line does reach the target age.

For illustrative purposes only. Not representative of any specific investment or account.

In the above example, your income goal is "at risk" if you have money left over only between the "conservative" and "average" market. You may want to change your distributions if you'll only have money left in this scenario. In the case above, the money runs out in a "conservative" market, or 27% of the time.

Exhibit 4: Income Goal "Off Target"

A chart highlighting the Monte Carlo analysis of making withdrawals from a portfolio enrolled in Intelligent Income between the ages of 65 and 95. The chart shows two lines, the conservative projection line, indicating a 75% likelihood of outperforming the projection, and the average projection, indicating a 50% likelihood of outperforming the projection. The graph shows as Off Target with a 46% likelihood of the hypothetical assets lasting through age 95. Neither the conservative projection line nor the average projection line reach the target age. Instead, the conservative projection line highlights the hypothetical client running out of money by age 89.

For illustrative purposes only. Not representative of any specific investment or account.

In this final example, your income goal is "off target" if you have money left over only in the "average" market or better (i.e., success less than 50% of the time). The chance of having money left is a 50/50 coin flip or worse. The example above shows that you need a market better than what's projected on average to have money left over at your end date.

Getting Back "On Target"

Now that you know where you stand with your goal, how do you get back "on target"? The tables and narrative below suggest actions you can consider to get your savings or income goal back "on target."

You can extend—or shorten—your time horizon, decrease your goal amount, decrease your recurring withdrawal, or make a one-time contribution.

Exhibit: Goal Status for Schwab Intelligent Income™
Goal Status Suggested Action
"On Target" Looking good. Continue to monitor your progress
"At Risk" Your Schwab Intelligent Income™ goal is at risk. Consider lowering your recurring withdrawal amount or increasing your enrolled assets
"Off Target" Your Schwab Intelligent Income™ goal has gone off target. Lower your recurring withdrawal amount or increase your enrolled assets.

Don't Over-React to a Down Market

If your goal is "off target" due to a dip in the market, don't think first of upping the risk in your portfolio. Your risk tolerance is what it is and it generally doesn't change based on just a change in your goal's status or market swings.

Down markets are a part of investing, and may occasionally put your goal "off track." Goal Tracker projects a hypothetical range of outcomes so when markets dip and your emotions start to get the best of you, you can come back to the Goals tab and see if you are still "off track" and by how much. This can give you a little better perspective during the ups and downs in all investment markets over time.

Conclusion

Setting goals and tracking progress toward those goals are important parts of success in investing, particularly in retirement. If you set a goal, it increases the likelihood of success. Goal Tracker helps project possible hypothetical outcomes, stress test your plans, and keep you on track towards your financial objectives.

There is no guarantee that the intended goal, or that the amount or duration of future withdrawals associated with those goals, will be reached. In addition, the projections and other information you will see here about the likelihood of various outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The projections are based on estimates intended to be representative of the selected portfolio. The output of this tool may vary with each use and over time. The tool does not consider the specific securities or other assets held by you. This tool provides analysis based upon your inputs but makes additional assumptions detailed in this paper.

Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs.

Schwab Intelligent Income is available in both Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium. Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co. Inc. ("Schwab"), a dually registered investment advisor and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. ("CSIA"). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.

Schwab Intelligent Income™ is an optional feature for clients to receive recurring automated withdrawals from their accounts. Schwab does not guarantee the amount or duration of Schwab Intelligent Income withdrawals nor does it guarantee any specific tax results such as meeting Required Minimum Distributions.

Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are designed to monitor portfolios on a daily basis and will also automatically rebalance as needed to keep the portfolio consistent with the client's selected risk profile. Trading may not take place daily.

Diversification, automatic investing and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

(0220-096W)


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