Assumptions and Methodologies
LINK by Prudential uses proprietary and third-party tools to generate illustrative goals based on each user's inputs. Goals help users plan for future expenditures in their lives. Each goal is an estimate of what an expense will be at some time in the future but may be customized to a user’s specific situation for a more accurate cost forecast. To generate each goal, we consider a user’s inputs such as age, savings, household size, income, etc. Nine standard goals—Emergency Fund, Retirement, Education, Family Protection, General Investment, Home, Wedding, Car and Baby—are available to users, along with a “Custom” goal that users can tailor to their specific objectives.
This information is not intended to be comprehensive. An investor’s needs may be influenced by a variety of factors not included in this analysis, including taxes. You should consult with your advisor to help evaluate your needs and consider the information provided by LINK.
Emergency Fund Goal
The Emergency Fund goal intends for customers to set aside funds for unplanned needs, for example, in the event of loss of income or large, unexpected expenses. The need is a function of the number of months of after-tax income the user wishes to have saved.
• Federal Tax Rate = 25%
The Retirement goal intends to estimate the future cost of a user’s retirement. The goal amount is a function of the user’s desired U.S. city for retirement and the expected average cost of essential items in the city; i.e., entertainment, healthcare, food, travel, housing, inflation and choice of lifestyle.
• Overall Consumer Inflation = 3%
• Housing = 2 people
• The “What I Need” number is the user’s estimated annual expenses multiplied by their time “in” retirement, or actuarial mortality age minus planned retirement age.
This Education goal intends to estimate the cost of a college fund. The expected cost of education can be based on the published cost of tuition for a specific U.S. college or university over four years or a general average cost for a four-year program. In the latter case, users can select between in- and out-of-state institutions, and private and public institutions.
• Education Cost Inflation = 5%
Family Protection Goal
The Family Protection goal intends to cover a family’s living expenses in case of an untimely death by the user. The goal will be created for users who are married or have children under the age of 21. Users can also add this goal manually.
• Overall Consumer Inflation = 3%
• The annualized rate of return on investments is assumed to be 4.5% after tax.
Note: College education costs are not factored into the Family Protection needs calculation.
The Home goal intends to fund the down payment to cover a user’s home purchase. Users can enter the city they plan to buy a house, and we use a third-party source to give users the average home value in that location. Users can use that provided average cost (when available) or enter their own value.
After users purchase the house, they should update their debt balance, if applicable, within their profile, which will update their Family Protection goal.
The Baby goal intends to estimate the first-year cost of a new baby. Based upon a user’s income level and relationship status, we provide the national average first-year cost of raising a baby.
If the new baby is the user’s dependent, users should update their dependents on their Profile, which will create a new College Education goal and update their Family Protection goal.
The Wedding Goal intends to estimate the cost of a wedding. Based upon a user’s desired wedding location and anticipated number of guests, we use a third-party resource to provide the average cost within those parameters. Users can use that provided average cost or enter their own value.
The Car goal intends to fund the purchase of a car. Users can enter how much they plan to spend on this purchase.
If users borrow money to purchase a car, they should update their debt balance within their profile, which will update their Family Protection goal.
General Investment Goal
The General Investment goal intends to assist users in building wealth. Users can enter a target savings amount; we will track their progress toward that goal over the specified time horizon.
Custom goals intend to fund financial objectives that are unique to the user. The goal amount is adjusted for inflation.
• Overall Consumer Inflation = 3%
Note: Third-party information may be subject to technical limitations.
Monte Carlo Simulation
IMPORTANT: The projections and other information generated by this financial analysis tool regarding likelihood of various investment outcomes are hypothetical, do not reflect actual investment results and do not guarantee future results.
The main goal of Prudential’s financial analysis is to educate users regarding the likelihood of how their current savings and financial contributions could potentially perform given various assumptions based on Prudential’s understanding of the global macro economy, financial markets and certain laws and regulations.
The numbers represented in the “My probable outcome” section are generated using Monte Carlo simulation. Monte Carlo Simulation is a computerized mathematical technique that furnishes the decision-maker with a range of possible outcomes and the probabilities they will occur for any choice of action. Results vary with each use and over time. The simulations are based on the expected returns and standard deviations of each Prudential Investment Management Account (PIMA) portfolio. Asset classes not in the portfolios may have characteristics similar or superior, and possibly simulate greater returns, than those used for the simulation. Simulations do not guarantee investment performance. Expected returns and standard deviations do not guarantee future performance and, hence, these numbers should not be treated as investment, tax or legal recommendations or advice.
How does Monte Carlo simulation work?
Monte Carlo simulation considers:
• Time horizon defined by the completion year of each goal on the user’s timeline.
• Savings and contributions the user indicated on the My Finances page
• Rate of Return derived from various factors including, but not limited to, the user’s risk willingness, age, liquidity needs and portfolio asset allocation, our Capital Market Assumptions and historical market performance.
The simulation cannot account for the impact that economic, market and other factors may have on the implementation of ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the simulations do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact future returns. The returns are inclusive of inflation rates. The calculations depend on data from our Capital Market Assumptions, which are not guaranteed. Markets may perform better or worse than expected when considering the thousands of possible economic and financial scenarios simulated. Outcomes are based on a certain level of confidence that the user may be able to achieve his or her goal. The confidence level is assumed to be 70% (that is, 30% likelihood of not achieving the expected return).