InvestmentTab Documentation
The InvestmentTab is a comprehensive section for managing all investment-related aspects of a financial plan. It allows for the creation and management of up to five distinct investment funds, setting their withdrawal priority, and scheduling one-off investments. This tab is crucial for modeling portfolio growth and drawdown strategies.
This tab controls:
- Investment Funds: Configuration of up to five investment funds, including their initial value, contributions, and return characteristics.
- Withdrawal Priority: The order in which funds are drawn down to cover cashflow shortfalls.
- One-off Investments: Lump-sum investments made at specific ages with flexible allocation options.
- Investment Periods: Advanced settings to change investment strategy over time (e.g., aggressive growth when young, conservative preservation near retirement).
- Contribution Schedules: Flexible contribution periods with varying amounts across different life stages.
Inputs
Investment Funds
For each of the up to five investment funds, the following can be configured:
- Description: A custom name for the fund (e.g., "Growth Portfolio", "Retirement Fund"). This helps identify the fund's purpose.
- Initial Investment: The starting balance of the fund at the beginning of the financial plan.
- Tax Type:
- PIE (Portfolio Investment Entity): Investment returns are taxed at PIE tax rates (10.5%, 17.5%, or 28% depending on total income). PIE funds have a maximum tax rate of 28%.
- MTR (Marginal Tax Rate): Investment returns are added to the individual's taxable income and taxed at their marginal tax rate (which can be up to 39% for high earners).
Investment Periods (Advanced Settings)
Within each fund, you can define different investment strategies for various periods of the client's life. Each period can represent a distinct investment approach with its own risk/return profile.
- Fund Type: The risk profile and investment strategy for that period. Options include:
- Conservative: Lower risk, lower return (typically bonds and cash-heavy)
- Balanced: Moderate risk/return mix
- Growth: Higher equity allocation for capital appreciation
- Aggressive: Highest risk/return profile
- Custom Funds: Pre-configured funds created by the adviser with specific risk/return characteristics
- Custom (Manual Values): Allows manual input of all parameters for complete flexibility
- Start/End Age: The age range for which this strategy applies. Periods must be sequential and cover the entire planning horizon.
- Rate of Return (%): The expected annual return (real or nominal depending on inflation settings).
- Standard Deviation (%): The volatility/risk of returns. Used in Monte Carlo simulations to model variability.
- Income Portion (%): The percentage of the annual return that is considered taxable income (as opposed to capital gains). For example, a 60% income portion means 60% of returns are taxed as income, while 40% are treated as capital gains.
- Fees (%): Annual management fees and expenses as a percentage of assets under management. Can be flat fees or tiered fee structures.
Contribution Schedules
Each fund can have multiple contribution periods with different amounts and age ranges. This allows modeling of realistic contribution patterns throughout life.
- Contribution Amount: The annual amount to contribute during this period.
- Start Age: The age when contributions begin for this period.
- End Age: The age when contributions end for this period.
- Multiple Periods: Each fund can have several contribution periods (e.g., $10,000/year ages 30-45, then $15,000/year ages 45-60).
Withdrawal Priority
This determines the order in which funds are drawn down to cover any cashflow shortfalls. Funds are listed in priority order (Priority 1, Priority 2, etc.), and the model withdraws from them sequentially.
- Priority Order: Funds can be reordered by dragging. The fund at Priority 1 is used first, then Priority 2, and so on.
- Sequential Withdrawal: When there is a negative cashflow, the model draws from the Priority 1 fund until it is completely depleted before moving to the Priority 2 fund.
- Strategic Planning: This allows advisers to model different drawdown strategies (e.g., deplete taxable accounts first, preserve tax-advantaged accounts).
One-off Investments
Lump-sum investments that occur at specific ages (e.g., inheritance, property sale proceeds, bonus payments).
- Amount: The value of the one-off investment.
- Age: The age at which the investment is made.
- Details (Optional): A description of the investment (e.g., "Inheritance", "Property Sale Proceeds").
- Allocation Method: How the lump sum is distributed across active investment funds:
- Equal Distribution: The amount is split equally among all active investment funds. For example, $100,000 across 4 funds = $25,000 per fund.
- Specific Fund: The entire amount is allocated to a single, chosen fund. Useful when you want to target a specific investment strategy or goal.
- Custom Percentages: Specify the exact percentage to allocate to each active fund. The total must equal 100%. For example, 50% to Fund 1, 30% to Fund 2, 20% to Fund 3.
Calculations
Investment Returns
The value of each investment fund grows based on its expected return and is then adjusted for tax and fees. The calculation differs depending on whether it's a PIE fund or taxed at the Marginal Tax Rate (MTR).
Step 1: Add Annual Contributions At the beginning of each year, any scheduled contributions are added to the fund balance.
Formula:
Contribution Amount = Annual Contribution for Current Period (if age is within contribution period)
Balance After Contribution = Start of Year Balance + Contribution Amount
Step 2: Calculate Gross Return The model simulates a return for the year based on the fund's expected return and volatility. This uses Monte Carlo simulation with a normal distribution.
Formula:
Gross Annual Return = Balance × normalRandom(Mean Annual Return %, Standard Deviation %)
The normalRandom function generates returns that vary around the mean return, with the standard deviation controlling the volatility. This models real-world investment return variability.
Step 3: Calculate Fees Management fees and expenses are deducted from the gross return.
Formula:
Fee Amount = Balance After Contribution × (Fees % / 100)
Return After Fees = Gross Annual Return - Fee Amount
Note: For tiered fee structures, fees are calculated based on the balance tier thresholds (e.g., 0.8% on first $100k, 0.6% on next $400k, 0.4% on balance above $500k).
Step 4: Calculate Taxable Portion A portion of the net return (after fees) is considered taxable income based on the Income Portion percentage. The remainder is treated as capital gains.
Formula:
Taxable Return = Return After Fees × (Income Portion % / 100)
Example: If Income Portion is 60%, then 60% of the return is taxed as income, and 40% is treated as capital gains (typically tax-free in NZ).
Step 5: Calculate Tax Tax is calculated based on the Tax Type:
For PIE Funds:
*(PIE Rate is 10.5%, 17.5% or 28% depending on memebrs taxable income)
PIE Tax = Taxable Return × PIE Tax Rate
For MTR Funds: The taxable return is added to the person's other taxable income, and the incremental tax is calculated using NZ progressive tax brackets.
MTR Tax = Tax on (Total Income + Taxable Return) - Tax on (Total Income)
This ensures only the incremental tax from the investment income is applied.
Step 6: Calculate Net Return
Net Annual Return = Return After Fees - Tax
Step 7: Calculate End of Year Balance
End of Year Balance = Balance After Contribution + Net Annual Return
Complete Example (PIE Fund)
Scenario:
- Start of Year Balance: $200,000
- Annual Contribution: $10,000
- Expected Return: 7% (mean)
- Standard Deviation: 10%
- Simulated Return for this year: 7.5%
- Income Portion: 40%
- Fees: 0.75%
- Total Annual Income: $80,000 → PIE Rate: 28%
Calculations:
Step 1: Add Contribution
Balance After Contribution = $200,000 + $10,000 = $210,000
Step 2: Calculate Gross Return
Gross Annual Return = $210,000 × 7.5% = $15,750
Step 3: Calculate Fees
Fee Amount = $210,000 × 0.75% = $1,575
Return After Fees = $15,750 - $1,575 = $14,175
Step 4: Calculate Taxable Portion
Taxable Return = $14,175 × 40% = $5,670
Step 5: Calculate Tax
PIE Tax = $5,670 × 28% = $1,587.60
Step 6: Calculate Net Return
Net Annual Return = $14,175 - $1,587.60 = $12,587.40
Step 7: End of Year Balance
End of Year Balance = $210,000 + $12,587.40 = $222,587.40
Summary:
- Started with $200,000
- Added $10,000 contribution
- Gross return of $15,750 (7.5%)
- After fees and tax: $12,587.40 net return
- Final balance: $222,587.40
- Effective net return: 6.0% (on the $210,000 balance after contribution)
Withdrawal Logic
When annual expenses exceed income, the model follows a strict sequential withdrawal order:
Standard Withdrawal Sequence:
- Savings Fund (above Cash Reserve): First, draw from any excess cash in the Savings Fund down to the specified Cash Reserve amount.
- Investment Funds (by Priority): Draw from Investment Funds according to the Withdrawal Priority List:
- Start with Priority 1 fund
- Withdraw all available funds from Priority 1 until completely depleted
- Move to Priority 2 fund
- Continue sequentially until shortfall is covered or all investment funds are exhausted
- KiwiSaver Funds: Only accessible if the member is aged 65 or over. Cannot be accessed earlier regardless of financial situation.
- Cash Reserve (Last Resort): Draw from the Cash Reserve in the Savings Fund as a final option. The model flags this scenario as it indicates the plan may need adjustment.
Example Withdrawal Sequence:
Year 1 - Age 70:
- Income: $40,000
- Expenses: $65,000
- Shortfall: $25,000
Withdrawal Order:
1. Savings Fund (above $10,000 reserve): $5,000 available → withdraw $5,000
2. Remaining shortfall: $20,000
3. Priority 1 - Conservative Fund: $15,000 balance → withdraw $15,000 (fund depleted)
4. Remaining shortfall: $5,000
5. Priority 2 - Balanced Fund: $80,000 balance → withdraw $5,000
6. Shortfall covered. Priority 2 fund now has $75,000 remaining.
Investment Periods Strategy
Investment periods allow you to model different investment strategies at different life stages. This is particularly useful for lifecycle investing approaches.
Common Strategy Pattern:
Ages 30-50 (Accumulation Phase):
- Fund Type: Aggressive or Growth
- Higher expected returns (7-8%)
- Higher volatility (12-15% std dev)
- Focus on capital growth
Ages 50-60 (Pre-Retirement Transition):
- Fund Type: Balanced
- Moderate returns (5-6%)
- Moderate volatility (8-10% std dev)
- Begin reducing risk
Ages 60-95 (Retirement/Drawdown):
- Fund Type: Conservative
- Lower returns (3-4%)
- Lower volatility (5-7% std dev)
- Focus on capital preservation and income
Period Requirements:
- Periods must be sequential (no gaps or overlaps)
- First period must start at or before the starting age
- Last period must end at or after the ending age
- Each period can have different fund types, returns, risk levels, income portions, and fees
Why Use Multiple Periods?
- Risk Management: Reduce portfolio risk as retirement approaches
- Goal Alignment: Match investment strategy to life stage
- Tax Efficiency: Adjust income portion as tax situation changes
- Fee Optimization: Lower fees as portfolio becomes more conservative
- Realistic Modeling: Better reflects how advisers actually manage portfolios over time
One-off Investment Allocation Examples
Example 1: Equal Distribution
One-off Investment: $100,000 at age 55
Active Funds: 3 (Growth, Balanced, Conservative)
Allocation: Equal Distribution
Result:
- Growth Fund: $33,333.33
- Balanced Fund: $33,333.33
- Conservative Fund: $33,333.34
Example 2: Specific Fund
One-off Investment: $150,000 at age 60 (Inheritance)
Active Funds: 3
Allocation: Specific Fund → Conservative Fund
Result:
- Growth Fund: $0
- Balanced Fund: $0
- Conservative Fund: $150,000
Example 3: Custom Percentages
One-off Investment: $200,000 at age 45 (Property Sale)
Active Funds: 4
Allocation: Custom
- Fund 1 (Aggressive): 40%
- Fund 2 (Growth): 30%
- Fund 3 (Balanced): 20%
- Fund 4 (Conservative): 10%
Result:
- Aggressive Fund: $80,000
- Growth Fund: $60,000
- Balanced Fund: $40,000
- Conservative Fund: $20,000