Summary
Target-Map's Expected Net Return on Capital represents the advisor's estimate of the blended net rate of return for the investable assets being used (net of taxes and fees).
All Target-Map templates are coded to 5% out of the box to be able to generate a Target-Map quickly. The default value may be adjusted for all Target-Map templates on the Target-Map Preferences page.
It also serves as the discount rate to bring into present value the values of summed future cash flows providing growth of cash flows and assets at the same rate.
An average expected net rate is not calculated within Asset-Map platform. It must be intentionally modified by the advisor should they wish to do so.
Set the Expected Net Return on Capital
Out of the box Target-Map templates are coded with a default rate of return of 5%. This can be adjusted to the advisor's preference for all Target-Map templates in the Target-Map Preferences:
Or you may customize the blended rate within the specific Target-Map:
Why use a Single Rate?
Some reasons to utilize one amalgamated rate of return to represent the average rate include:
Minimizing the quantity of printed client report pages due to added disclosure statements.
Allowing the advisor to focus on and speak in terms the client generally understands and prefers, namely answering the questions, "Are we alright?" and "What do we need to do if we're not?", instead of getting into uninteresting and complex details.
We find that using multiple rates of historic returns on one Target-Map's individual assets to try to predict the future does not provide the needed insights to answer the questions above. However, if the advisor wishes to display the historic returns on specific assets they may do so by typing it into one of the asset's free-text fields (the Reference Name field or the Location field) on the Asset-Map. Those will not be calculated anywhere. Or, the advisor can type more details into the notes field on the Notes tab of the asset for later review or optional printing.
Examples (not real-life representations):
a) Typing historical rate of growth in Location field of an Asset and using Notes. No calculations are done.
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b) Typing historical rate in Reference name field on an Asset and viewing its appearance within a Target-Map's What you have page. No calculations are done.
Using Target-Map clones provides the opportunity to show the long-term effects on a plan under differing estimated Expected Net Return on Capital rates.
Simply use the clone button to make an exact copy of the baseline Target-Map, and click either the Settings button or Edit button to make the adjustment.
Single Rate is Not Unprecedented
The use of a single rate for a financial discussion is not unprecedented and is in fact, quite common. Examples include a retirement account that invests in a portfolio. A 401(k)/IRA that invests in mutual funds or other allocations is quoted as a blended rate even though multiple investments are distributed among assets that grow at differing rates. Also, COLA (cost of living adjustment) is typically spoken in terms of a blended rate to accommodate for inflation:
The Consumer Price Index examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
The Wholesale Price Index measures and tracks the changes in the price of goods before they reach consumers: goods that are sold in bulk and traded between entities or businesses.
The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services.
Expected Rate of Return on an Asset is a 'Discount Rate' on Future Cash Flows
Target-Maps are a Present Value Calculator. The effect of the rate of return on future cash flows (like a Pension, an annual annuity payment, or Social Security Insurance) is to discount the equivalent future value sum of the cash flow into today's dollars. That way we can illustrate the maturing of that money from today using the same rate used for growing assets.
For example:
Example Cash Flow Source | Future Lump Sum Value (straight line multiplication)
| Discount Rate | Present Value Equivalent (the start value that grows from today at that rate into the future over those years) |
Pension | $660,000 | 5% | $104,681 |
7/2022