How we crunch the numbers
How did we arrive at the numbers you see?
The amount "I have" is, well, what you've told us you've already saved toward your goal. This can be done in one of three ways:
- You manually enter the amounts that you have saved toward your goal. These amounts will not be updated automatically, which means that as balances changes, it will be your responsibility to update that information.
- You can connect your accounts from third-party financial institutions to LINK. The account balances will generally be updated on a daily basis and so will be tracked automatically for you.
- You can connect your Prudential accounts to LINK. This can include your 401(K) or other accounts that you may have at Prudential. The account balances will be updated and tracked automatically for you.
- For additional important information about connecting third-party and Prudential accounts to LINK, click here and here.
How much you'll "need", is "estimated" and your "probable outcome" are a bit more complicated:
For some goals, we gather information from third parties in addition to what you've told us. (Please note that third-party data can change.) Besides your personal information:
- For general investment goals, we use the target dollar amount you provide.
- For education goals, we assume college costs will rise 5% a year, and use either the current reported costs of tuition, room and board for the school you cite or, based on your choices, the average cost for either a public institution in your state, a public institution outside your state or a private institution in or out of your state. (Note that some private schools charge different amounts for students from in and out of their states.)
- For retirement goals, we assume your current annual salary will grow by 2.5% each year until you retire to arrive at your estimated pre-retirement income. We then multiply your estimated pre-retirement income by your selected percentage of pre-retirement income you will need in retirement (80% is selected by default). The resulting figure represents what you may need as income each month during retirement.
- For home goals, we use your expected down payment on a house: We multiply the down payment percentage you provide by the home price you're considering.
- For baby goals, we use the dollar amount you plan to spend; to help guide you, we provide the national average first-year cost of raising a baby for those at your income level and relationship status.
- For car goals, we use the dollar amount you plan to spend.
- For wedding goals, we use the amount you plan to spend and adjust for inflation based upon the amount of time until the event.
- For emergency fund goals, we help guide you by providing a target value based upon your monthly household expenses multiplied by the number of months you specified.
- For life insurance goals, we estimate your projected life insurance needs based on information you provided such as your annual income, household savings and debt, and national-average funeral costs. We also assume 3% general inflation, that college costs will rise by 5% a year, and that your investments will produce average annual gains of 4.5% after taxes.
- For custom goals, we use your specified target amount adjusted for inflation based upon the time horizon.
Note: If you borrow money to buy a home or car, please update your debt balance on your profile; this will update your life insurance goal and needs. If a new baby is your dependent, you should add them to your profile, which will create a new education goal and update your life insurance goal.
How do you derive "Estimated" and "I’ll Probably Have"?
For retirement goal, our calculation for estimated income assumes by default a 6% annual rate of return on investments you have identified for retirement (you can adjust this between 2% and 10%). The same annual rate of return is assumed for all retirement assets, irrespective of how they are held or invested (PMA account, brokerage account, 401(k), savings, etc.). The estimated monthly income calculated includes an estimated monthly Social Security Benefit based on recent Social Security Administration statistics and benefit formulas. It assumes that benefits when you retire will equal the current Primary Insurance Amount (PIA) for a single individual in a similar situation. In addition, this estimate does not take into consideration any changes to Social Security that may occur. This estimate does not include commissions, bonuses or any other incentive compensation (unless included in your current annual pay). Social Security will not be included if your assumed retirement age is less than 62 or you elected to not include this within the estimate.
For investing goals other than retirement, we use "Monte Carlo simulation," a computerized technique that simulates thousands of possible investment outcomes and the probabilities that they will occur in virtually any scenario. We run these simulations when you log in to your account, when you make certain changes to your goal or profile and when you change your initial investment amount or contributions; results vary with each use and over time. "I’ll Probably Have" is an estimate of the assets you may have when you reach the target year you set for your goal.
How does "Monte Carlo" work?
Monte Carlo simulation considers:
- Your "time horizon," based on the year you aim to complete each goal.
- The current savings you have, and contributions you're making, toward each goal.
- An assumed annual rate of return for the Prudential Managed Account (PMA) portfolio we've matched for your goal and our capital market assumptions, which help determine how each portfolio invests over time (but which aren't guaranteed).
- An annual rate of return that we use for any other assets that you’ve told us you have (see below for details)
For investing goals other than retirement, “I’ll Probably Have” estimates how much money (and the corresponding percentage of your goal) our models simulate you’ll have at the end of your goal period with 50% confidence. In other words, each time we run the simulation, the “I’ll Probably Have” figure has been reached or exceeded 5 out of 10 times. This is meant to estimate how your assets will perform in an average market environment. If the market experiences below average performance, your outcome will likely be worse than our estimate, while if the market experiences better than average performance, you may outperform our estimate. Because we use a 50% confidence level in calculating "I’ll Probably Have", these two scenarios (under- and over-performance) are equally likely.
Unlike actual portfolio outcomes, Monte Carlo simulations don't reflect real trading, liquidity constraints, fees, expenses, taxes and other factors that could impact future returns. Markets may perform better or worse than expected, especially when considering the thousands of possible economic and financial scenarios we simulate.
IMPORTANT: The projections and other information regarding likelihood of various investment outcomes are hypothetical, do not reflect actual investment results and do not guarantee future results.
How we use your account information in the Monte Carlo simulation
We do not consider the underlying investments in any third-party or Prudential accounts you have connected to LINK with the exception of Prudential Managed Accounts. Instead, we take the current value of your other accounts, and project that value forward in the Monte Carlo simulation based on certain assumptions. Those assumptions are generally based on the responses to questions we ask while you are creating your LINK profile, including, but not limited to, your risk willingness, age and liquidity needs. For example, if you connect your $200,000 non-Prudential brokerage account and a $25,000 non-Prudential IRA account, we will assume that these accounts are invested consistently with the risk tolerance you have provided for your PMA account and will experience a level of growth commensurate with that level of risk. If, in fact, the accounts you connect are invested differently than your risk profile indicates, then the impact of the different risk profiles on your investment returns will not be considered in our Monte Carlo simulation. As a result, if the accounts you connect to LINK have investments or risk profiles that differ from our assumptions, the result could be that our Monte Carlo simulation significantly over- or under-estimates your probable outcome.