0:06
Okay, welcome everyone to our monthly lab talk Tuesday. We'll let everybody
0:11
get in the virtual room here. Got me and
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uh Derek Tharp going over product changes, upcoming product changes and
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questions. So, looking forward to being with you. Um, thank you to Ben Vega for handling
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Lab Talk Tuesday last month. Um, while we're waiting, I always like
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to see where people are coming from. If you want to put it in the uh in the chat, I'm in uh sunny Colorado as usual.
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Had our 6 ines of snow over the weekend, but all that's gone. We're back to spring.
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New
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Hampshire. Do love New Hampshire. Is winter done in
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Chicago? Right. Hey, couple. Grand Rapids, Michigan. I have a sister in Grand
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Rapids or nearby anyway.
1:24
Bay Area. Love it. All right. Um, so just couple of
1:31
housekeeping items. Um, please go ahead and put your uh questions in the in the
1:37
Q&A, the ones that you want to actually have me and Derek address. Feel free to use the chat if you're talking with each
1:43
other and so on, but that's much harder to um to monitor and find questions in and respond to them and so on. So,
1:49
please put them in the uh in the Q&A and then you can upvote them and we will um
1:55
try to take all the the ones that have the most votes. Um we typically can't get to all of them and we'll try to
2:00
answer um the questions that we didn't get to either on a future session or uh by email um from our support team. Um,
2:09
and then next week, uh, same time, same channel, uh, we have our retirement
2:15
income intel webinar that, uh, Derek is going to be hosting, um, on, uh,
2:20
retirement visualization and, um, and, you know, how that can help clients
2:26
understand and believe in and follow their their plan. So, this is based on
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um, a new article that that Derek wrote recently. Um, I think you're gonna really like it and that is available for
2:38
CFPCE, one hour of CE. So, um, please join us for that. Uh, and yeah, Ashley
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just put that in the, uh, in the chat, the link to register for for Derek's webinar next week. Okay, so let's get to
2:53
the agenda, which, uh, you know, usually we do start with features, um, either
2:58
new changes in the software or upcoming features. And there's actually a ton of
3:04
new stuff coming. Nothing to show you today. Um, but I do want to go over some
3:11
of it because a lot of it's very exciting. Um, so there's a bunch of little new
3:18
features surrounding social security that are coming uh that are there partly in support of a big new social security
3:24
feature that we'll that we'll have out um I believe by next lab talk Tuesday is
3:31
the plan. Um so I'll tease that a little bit today, but you you'll hear a lot more about the bigger features coming.
3:37
But for smaller features, we have some things surrounding social security timing coming. Um, so just little tweaks
3:45
and fixes um surrounding when people are actually So social security is very
3:51
weird. Uh, for example, if you're born on the first of the month, Social Security treats you as being born uh in
3:56
the previous months, which affects your full retirement age and and all sorts of other things. uh checks are actually
4:04
received a month after the benefit where uh that you actually are are paid for. So, we'll be handling that. Um we'll
4:11
have a new feature to allow you to automatically and easily um plan for or I guess you could even
4:18
think of it as stress testing benefit reductions. So we've had that request for a long time of I think it's every
4:24
year or relatively frequently the um there are government reports projecting
4:31
how much benefits would be cut in the future and at what point uh you know
4:36
making some assumptions about how inflows come. So, we'll have a feature that allows you to say, "Yeah, stress
4:41
test my social security. Um, project a 23% benefit cut in 2035, right?" And you
4:48
can play around with that. Push it later, earlier, make it bigger. So, it's really just around, you know, helping you kind of stress test that um and see
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how how you would have to plan if you um you know, have clients or if you
5:03
yourself are are wondering, hey, you know, I wonder if maybe benefits won't always be what they're currently projected to be. Um so that'll be a
5:09
really nice feature for having deep conversations about um about social security. Um also on the social security
5:17
side we will have uh a new time value of money um interest rate that would not
5:25
affect the the the benefits that you see in your plan but it would affect break even calculations. So, we'll be
5:30
revamping the break even calculation so that you can um look at, hey, what's the
5:35
when uh would delaying taking social security, you know, quote unquote break even in terms of me receiving um more
5:44
benefits than I would have if I had taken as soon as possible. Uh and we'll will allow allow you to put an interest
5:50
rate in there, a discount rate so that you can acknowledge that a dollar today is worth more than a dollar tomorrow or
5:56
10 years from now. Um so those some of those things are you know not everyone will use but they are it's really going
6:03
to uh increase the amount of um things you can do around social security
6:09
planning. Um and one reason that we're doing all this other than that we're always trying to improve things make
6:14
things better give you more tools is we will have a new social security optimizer uh feature coming out in the
6:22
next uh month. It's in it'll be in May, but um and these new uh features around
6:30
social security and being able to control them are in support of that because you'll have ways to to really
6:35
play with those, play with uh life expectancy, kind of see a heat map of
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where good decisions uh might lie in terms of social security, both in terms of lifetime benefits and in terms of how
6:47
it affects your overall retirement paycheck or spending capacity. So, really excited about that. But you'll
6:54
hear more about that as we get a little closer to that um to that uh to that
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date. Um okay, let
7:07
me my um Here we go. Okay. Uh a couple other features
7:13
I'll go over before we get to the presubmitted questions. Um we will also I just mentioned time
7:20
value of money for social security break even. Um we will also be offering that
7:26
for tax lab. So a lot of people have asked like hey could I I like that I can strip out inflation for tax lab. So for
7:33
example here I'll I'll just go to the uh the app here and show you.
7:43
Um, so if I'm in tax lab, um, a lot of it I wouldn't want to have discount
7:49
rates applied to it if I'm showing you, you know, what the plan has for, I don't
7:54
know, wage income or social security, uh, you know, 5 years from now. But for
8:00
things like total net income, total taxes, um break even point, things like
8:05
that, people have asked us to allow you to to specify a uh a discount rate or
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just allow you to um to apply the the plans uh average assumed portfolio
8:19
returns to to do some discounting for this to to get to these totals and so on. So we'll be uh be adding that
8:26
capability. So, if you want a further discount, not just pulling out inflation, but pulling out some additional interest rate uh there,
8:32
you'll be able to do that. Um, a few others, we have a ton of just
8:39
little things coming. Uh so currently if you have a joint plan
8:45
and you go to advanced plan settings, you can go to longevity
8:51
settings and see how income lab um see see how long the plan is and change the
8:58
plan length. And you can either do that using our actuarial model which we use society of actuaries mortality rates for
9:05
this. And you can see right here this plan with with both people planning to
9:13
live uh longer than 60% of people you know their age and sex uh is 31.6 years
9:21
as a joint life expectancy. Um but sometimes people want to state a date uh
9:26
of death just uh you
9:31
know for example just uh for for whatever reason there might be a terminal illness or maybe you just want
9:37
more fine-tuned control of it. Um one thing you'll notice is you know we shifted from joint life expectancy to
9:45
single life expectancy. So I didn't move Mary at all. She's still right here in the middle, but we went down to 29.1
9:52
years from 31.6. Not a huge difference, but that's because joint life expectancy
9:58
is always longer than single. Um, so what we'll be doing is adding the ability to use this calendar version of
10:05
life expectancy for for all clients. So that would include here in a joint plan, I could do it for Mary as well, or if it
10:11
were a single plan, I'd be able to um to do it for just the single client in the plan. So that'll allow you more
10:18
fine-tuned control. You know, typically using the actuarial model is a really
10:23
nice way to go um to make sure that your assumptions are, you know, grounded in
10:28
something grounded in uh in actuarial science. Uh but there's no reason uh you know, not to be able to to to fine-tune
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things. So you'll see uh that ability coming out in the next month. Uh as
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well, um two more small things. Um, we've had
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people ask for within a
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um within a plan. Right now, if you go to your liabilities,
10:57
um you can pay off a loan
11:04
early, but it's a lump sum early payment. So, you're basically saying, "Okay, at some point, we're just going
11:10
to pay off this loan." That's really useful for things like selling a house and and closing the mortgage at that
11:16
time, right? You sell the house and you pay off the mortgage at the same point. Um, but you will soon also have the
11:22
ability to add interest payments. So basically extra interest payments to a
11:28
loan and we will then calculate how much earlier the loan will be paid off. Um,
11:34
so you know it's slightly different use case to uh paying off a loan with a lump sum. more of a like, hey, what if we
11:40
just throw a little extra uh against the against the principal of this loan and
11:45
see how much earlier we pay it off. So, you'll see that also uh coming very soon. And then finally, uh another small
11:53
one is you'll soon be able to uh give IAS basis um and we will handle all
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the basis calculations including the pooling of basis for withdrawals across
12:06
different IRA accounts and so on. So, it's um thankfully not all that common.
12:12
You know, hopefully those of you who have clients with with basis and IAS, you figured out ways long ago to get
12:17
that money into a Roth. But, uh if you do have um you know, post tax money in
12:23
an IRA, you will be able to to um to model that correctly going forward.
12:30
So yeah, just to review all of those, tons of new social security options, including um time value of money on
12:37
break evens and modeling, you know, potential benefit reductions in the
12:42
future, time value of money in in tax lab, um specifying the date of death for
12:48
any client, extra principal payments on loans, basis in IAS. Oh, and I did forget one last one. Um, which I don't
12:56
think I have yet available here, but um, in your settings, you will soon have a new set
13:05
of defaults. Um, and this one will be for income path. So income path for
13:11
those of you who um you know haven't noticed it or haven't used it before is the the shape of the income that you
13:20
expect to need over time. So for example in this plan I have what we call an
13:26
age-based path or you'll hear it called the retirement smile. Um which involves
13:32
them spending a lot more when they're young, healthy, and active and less as they age. This I'm looking at in today's
13:40
dollars. So you actually see it going down. If I add inflation into it by switching over to nominal future
13:45
dollars, you see it doesn't typically actually go down, although it does flatten out quite a bit. Um but what
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we're saying here is your um your spending would not grow at the rate of
13:57
inflation um because you'll be slowing down in terms of you know you'll in your maybe in your 60s and 70s you'll travel
14:04
a lot but by your 80s or 90s you wouldn't as much, right? That kind of thing. Um, so that's an income path. Um,
14:10
I'm using the uh age-based one here. If again I go to advanced plan
14:15
settings and go to income path, I will see my my different options. Agebased is the retirement smile. Flat is same
14:23
amount adjusted for inflation. Um, whatever the inflation you have in the in the plan, your your average
14:29
inflation. Um, and custom is basically defining your own income path. um you'll be able to set a a default for all of
14:37
your plans, your new plans um across your entire instance of Income Lab. So
14:43
for for your plan, so as your in your advisor um login, you'll be able to say,
14:49
"Hey, I like to just start out with age-based." That's great. So any new household you build, it'll have an
14:55
age-based income path. Or you might say, um, you know, I prefer to start with
15:00
flat. assume that I'll spend the same at 90 as I do at 60 uh in inflationadjusted
15:06
terms and then you know you can always go to a plan and change that setting for the plan itself. But soon you will be
15:12
able to to set that um or across your entire
15:17
uh uh entire income lab so that in any new plans you create um you'll have that
15:24
setting. it wouldn't affect any existing plans because, you know, we don't want to just uh uh surprise you with changes
15:31
to those plans. Um so anyway, lots and lots of stuff. Uh there've been sort of a backlog of these uh little things
15:38
people have been asking for that um I think are are going to be really helpful. And then as I said, a big uh
15:44
announcement coming around a new social security optimizer um in something that we're calling
15:50
decision lab. So, it's a a new area where you can focus in on particular
15:55
questions in retirement planning, financial planning, um, and really like
16:02
see visualizations that can help you have great conversations with clients, explore lots of different options
16:07
without having to make lots of plan scenarios. Um, so it should be just a really great way to make your your
16:13
planning more efficient um, in income lab. And like I said, we'll we'll be announcing more about that in uh, a little less than a month, I think.
16:21
Okay, so I'm out of breath. Um, but let's get to uh get to some questions.
16:28
Um, the first one that I wanted to address, um, and I think you know,
16:34
Derek, it'd be good to have your input on this. It, and I think it has to do with market turmoil, not surprisingly. I
16:39
think we've gotten this from quite a few people. Um, and it's I'll read this version of it. um how would you
16:46
recommend we address a plan midmon when presenting to a client um if the
16:52
portfolio value has significantly changed? So I think this has to do with
16:58
you know things like if you have a plan that's being tracked and monitored. So, for those of you who who are not aware
17:04
of how that works, if I go to this household, for example, um I could I have this any any household
17:13
can have more than one plan, but there's always a primary plan. And I can set that plan to be tracked and monitored.
17:18
Meaning, um every month at the beginning of the month, we pull in new account
17:23
balances. We update the plan completely. We say, "Okay, you're one month older. We everything is redone." But in between
17:30
those updates, you know, obviously your account balances can change and and uh you know, even intraday these days. Um
17:37
so the question is what do we what do we recommend about client communication? If you're presenting a plan and things have
17:44
changed a bunch midmon this person also mentioned like there there obviously there are other things too like deposits
17:49
or withdrawals from accounts. Uh you know those could be big. Um so I don't know Derek if you have some some
17:55
thoughts on that. I mean, I think for me, if there's a
18:00
substantial change like that that might allow for like I could easily go in and change the balance in the plan and then
18:06
recalculate the plan, like that would be something I might do on kind of a one-off basis, but I do think a lot of
18:13
the other, you know, even though they're they feel large, are still going to be relatively insignificant movements and
18:19
like the guard rails and the overall results. So, I don't get too worried just for like my general clients, but if
18:24
somebody has one specific change, it's very relevant to their plan. Maybe they're just trying to decide when to
18:29
retire, things like that. Um, I'm I'm happy to go in that. And that might be the way that I would kind of force a
18:35
change would be to change something like an account balance and then recalculate the plan.
18:40
Yeah, that's a good point. So, in if you're if you are if you have an implemented plan, you can always go I
18:48
don't know if I have one that's implemented here. Um, but I can I can hit track and
18:56
monitor. Do I want to track it? Um, and I'll show you what you'll then see as an option for changing
19:04
um, balances like Derek was mentioning. So, this is be good for kind of a
19:09
offcycle updates if you think it's significant enough. Um, once this is done running, I'll show
19:17
you here. Um, another thing you can do and here while that's running I'll just
19:22
go over here is you you can note the last guardrails for the plan
19:29
um and kind of compare those to where the account balance is today. So uh
19:34
guardrails do change over time. So you know in a month the guardrail for this account won't be exactly 2 million66,000
19:42
but you know it'll be close uh typically. And so you can sort of say,
19:47
all right, well, if we're, you know, maybe we've lost uh, I don't know, 6% or
19:52
10% since I ran this plan last, well, I can be pretty confident that I have not
19:58
hit the lower guard rail. Um, because, you know, I add 25%. Um, I I understand
20:03
a client might like to say, well, yeah, but what is it today? I want to see the the numbers as they are today, and then
20:08
I think Derek's Derek's approach is probably a better one rather than saying, well, you know, it looks like you should be fine.
20:15
Um, okay. So, this one is, uh, oh, Justin, just real quick though on that, I mean, to me, I part of the big
20:21
communication benefits of guard rails is trusting that lower guard rail that's been set and using that as a, okay,
20:27
here's here's when we need to really check in and adjust. And so I also, you
20:33
know, especially if it's more of a long-term, there hasn't been a bigger change, but somebody's just wondering where things are at today. I would
20:40
probably lean more towards that lower guard rail and just instilling trust and yes, we've got a plan. This is when we
20:46
would make a spending adjustment. You're still $500,000 away from that or whatever it is. And I would probably
20:53
communicate around that if it wasn't, you know, I inherited an account and now this is changing my whole plan type of
20:58
situation. Right. Right. No, that's true. And I think uh kind of training clients to understand the guard rails
21:05
and and as you say, kind of trusting them um understanding them, believing in
21:10
them. I think that's stuff that you'll talk about next week, Derek, about visualization. Um that can be a big
21:16
first place to go um if you are looking to do an adjustment. So now that I've uh
21:21
set this plan to be tracked and monitored, I have different options in this little three dot menu in the upper
21:26
right, which whenever you see those three dots, that means okay, you got some you got some options here. Um you
21:32
can hit reconcile plan values and you'll get a quick okay, I'm going to correct
21:38
the values. And when you do that, you know, maybe I say, oh, this one's really uh you know, million. You'll say apply
21:45
changes. In this case, really all I because I just I just set it to be tracked and monitored, you're not really
21:51
going to see a I mean, you you'll see a difference, but it won't be quite the same as if you had been uh had
21:57
implemented the plan, you know, a year ago or something. Um so that's the way to do it.
22:04
Um, and for those of you who, you know, maybe won't make next uh week's webinar,
22:11
um, Derek, to help clients understand the guard rails, what parts
22:17
of the app do you use the most and kind of how do you talk about them? Yeah. So, I I really like going to the stress test
22:24
and particularly looking at, okay, let's throw you some of the worst through some of the worst times in history. What did
22:30
things actually look like? um you know did you need to make large cuts in spending? Were they relatively small?
22:36
Just gaining that understanding and something that I think has a little bit more re real world context um and just
22:43
feels like something that okay I I know about the you know the global financial
22:48
crisis. I understand what that was. I understand how I would have actually experienced going through a period like
22:54
that. Um to me those are just so much more meaningful. Uh, and that is where I
23:00
like to go to really talk through that kind of worst case scenario. I might even play around with things like maybe
23:06
showing somebody retiring um, you know, during the uh, global financial crisis
23:12
to see more of an upside. You know, how much you could see that spending increase, but I find with a lot of clients, the conversation is
23:18
disproportionately on that uh, the the negative side of that.
23:24
Yeah. Um, Derrick just mentioned something maybe not everybody's aware of. Uh so we have these five periods in
23:31
the retirement stress test. Great depression, post-war decade, stagflation, dotcom bubble, and
23:37
financial crisis. But each of them gives you an option to do before, during or after. Um not all of these are crises.
23:44
So post-war decade is more of just an interesting time. But the other ones are definitely crises of a sort or extended
23:50
crisis like stagflation. So typically in those, the before is going to be the worst of the three. Um the during is
24:00
probably when it would have felt the worst or close to that time period. So here the during we actually put in
24:06
November of '08. Um so it's not quite the bottom of the market but you know you you've lost a bunch already. So
24:12
probably uh you know September if I remember right was kind of uh when you know there was the most uncertainty.
24:18
People weren't sure if their you know money market accounts would be liquid. Um, and then
24:24
after, you know, here we're in November of09. Um, so you've kind of already seen
24:30
sort of the first bounce back from it. So you don't don't see as much of that, but you're you're definitely past it.
24:36
Um, so those are three options there. Uh, and like Derek was saying, you know,
24:41
if I if I do um before stagflation, I'm starting in, you
24:47
know, 68. I'm during I'm in 75 and if I'm after I'm in
24:55
82. This plan shows you here uh given that it just I mean it's absolutely
25:00
incredible to live through the 80s and 90s, right? But then it actually has kind of overdone it. So uh this would be
25:05
a good plan to put a put a cap on the income and then you would never have uh you'd probably just cap it out here and never get a pay cut after that. So, uh,
25:13
you know, in this case, they're spending, um, what, you know, three more than three
25:19
times their original planned income. Probably, uh, probably not a bad situation to do a to do a
25:25
cap. Um, okay. So I think uh I know on that as well I know Carl's asking how
25:32
the current um conditions have affected
25:37
um the uh the default capital market assumptions in the app. Um we we only
25:46
run those at the beginning of each month. So we use monthly data in making
25:52
those default calculations. And so our current data only goes through the end of of March. Um and all of this started
25:59
in April. So uh TBD unfortunately um but might might actually be worth since it is an interesting time. Um I will try to
26:07
do a little bit more of an analysis of how those change at all. Um some of them won't change much. Right? If we if if
26:13
we're doing uh the last uh you know 30 years or 50 years average returns, one
26:18
month of of average returns won't change anything. Um but the uh what you see in
26:24
I don't know how many of you are aware of this this piece the historical analysis tab has this um this shading
26:32
that shows you periods that were um more and less like today in economic terms.
26:39
And so it'll be interesting to see if any of this shading changes um because that's a little bit more uh that that
26:45
can change uh change more. Um typically you won't see just
26:52
absolutely massive changes unless you saw a giant interest rate change or um
26:57
huge change in cape or or things like that. But small changes can definitely uh make a difference. We've seen that in
27:04
2022 or in uh you know the in COVID we saw brief changes in kind of this
27:10
shading here and that will affect the defaults um for things like regime based
27:15
Monte Carlo. So so that'll be interesting to look at. Um, okay. Let me
27:25
see. Let me hit a few of the other pre-
27:30
sububmitted, but we do have some some new ones here, uh, that we'll try to get to today. So, um, had some questions.
27:38
Um, I think these were probably from uh newer advisors who are newer to income
27:44
lab, but there are lots and lots of those, so I think they're worthwhile um hitting, which one of the one of the
27:49
things that can be a little disorienting about income lab when you first start using it is that the place it starts in
27:56
planning is with someone's resources. So, it starts with the question, what can I spend? And typically that means
28:03
kind of well what do you have like what can we bring to bear on funding your lifestyle? Um and it doesn't start with
28:10
well how much do you want to spend? Um and that's disorienting because often in
28:16
other software that's where you start. You you you you say well this is what I want to spend and then it'll do an
28:22
analysis and tell you whether it thinks that's a good idea or not. And then you can try another number and see if that's a good idea or not.
28:29
Um, so that whole what am I spending inside of it is is kind of a secondary
28:35
piece in income lab. That doesn't mean it's not important. Um, you can do a lot of really powerful uh expense planning.
28:42
Um, but it is kind of the second thing that you would get to in a plan. So, I
28:48
wanted to go over, we had questions about, okay, how do I do this? What's the difference between baseline expenses and variable expenses? What's the
28:54
difference between itemizing and doing a total? So, I wanted to just go over that really quickly for everybody. Um, so I'm
29:02
going here to cash flows and expense details. Um, and in this plan I
29:11
have set a single I think a $10,000 living expense, just a total.
29:19
And then I have a bunch of other little expenses that are itemized elsewhere in the plan. Um, and if I take those out
29:26
here, um, I'm just sort of saying, all right, here's my big chunk of spending. It's my
29:33
quote unquote living expenses. I'm not itemizing. I'm just saying what matters most to my clients
29:40
is just knowing they have some spending money. And there's a bunch of stuff that's going to be within that for them.
29:46
Maybe that for them is going to be, you know, food, transportation, clothing,
29:52
entertainment, right? This is the kind of person who, you know, doesn't want to put their
29:57
uh their Netflix subscription on a on an itemized budget, right? So, the way that you do that is you go to
30:03
expenses, baseline expenses, and you choose enter totals. And this is just kind of for bottom line
30:09
planning. A baseline expense is this kind of just lump of spending that you
30:16
have access to every month. uh it tends to be more of like an average spending than what you actually are definitely
30:22
spending each month, right? I mean, maybe there's a, you know, a sale on chicken this month and so you'd spend a
30:27
little less on groceries, you know? So, it's just kind of a an easy number.
30:33
There are places in the app where you can itemize other baseline expenses. So,
30:39
here I've I've put um John and Mary's base Medicare premium as a baseline
30:46
expense. Um, you can do that, you cannot do that. The way you get to it is, um,
30:52
in the advanced settings under Medicare here is where
30:57
you specify, you know, if people are covered by parts B or D, uh, the base premium for B and D, when they begin um,
31:05
Medicare, um, and whether the base premiums are itemized as an expense item, and if so, do you want them as a
31:11
baseline or or variable expense? So, that's that's where that is. Um, for
31:16
those of you who want more um, detail in baseline expenses, that's
31:25
totally fine. Um, and you do that again in expenses, baseline expenses. But
31:30
here, you just switch it over to itemize. And now, you know, itemized to your heart's content. This can be really
31:37
useful if you are wanting to plan for um you know things like uh expenses
31:44
changing when someone dies. Um so that this is a place that you can do that uh
31:50
that you can't do that if you're just doing um uh you know bottom line totals. Um so
31:57
very very doable. And what you're really doing in this case is um if you think of
32:03
that big pink uh thing that I had in the last one. Um okay, maybe it's like a you
32:08
know a a strawberry cake or something. Now you're you're cutting into that cake and you're seeing well what's inside the
32:15
cake, right? What are the layers? How how am I building up this big chunk of spending? Um but baseline expenses are
32:22
really just this kind of average ongoing, you know, spending money.
32:27
Other invariable expenses on the other hand are are very different. So if if
32:33
you have a baseline expense, you know, maybe you say, "Okay, here entertainment is $2,80 a month." You know, you're sort
32:40
of saying, "Well, maybe I'll spend that. If I don't spend it on entertainment, maybe I'll spend it on something else, right? It's it's ongoing expenses for
32:46
the whole plan." Variable expenses, on the other hand, are are expenses that if they go
32:51
away, you're just going to not spend that money on something else. So, for example, and I may might be easier to to
32:58
look at the the baseline version so we don't get as much uh or sorry, the total version. Okay, so I have these guys all
33:05
listed here, right? I've got this extra surge in vacations and I've got my
33:10
mortgage payment. And you can see by having those in here, I I my my total
33:15
spending is much higher when both of them are around than when they go away. Um that's a variable expense. Um, so if
33:22
if I made my mortgage payment a baseline expense, I would be I would not see this big cliff in my spending. Instead, what
33:30
I'd be saving saying is, okay, you know, I'm going to spend $10,000 a month, and for now, 2,000 of that's going to go to
33:37
my mortgage, so I guess I have 8,000 for everything else. But if you make it a variable expense, you're saying, no, no,
33:43
I'm going to spend 10,000 on everything else, plus I'm going to spend $2,000 on my on my mortgage. Um, another place you
33:50
can see that is on the main dashboard here. I have my retirement paycheck and
33:55
I can decide whether or not to include my variable expenses in that number.
34:02
Either way, the variable expenses are in the plan. But I might want to talk with my client about ongoing expenses. Hey,
34:10
roughly 186. Or I might want to say, "No, our total spending is going to be
34:15
20,700 and that includes your mortgage." Um, so this is just a place you can see
34:20
the uh the expenses going on. Um, you can also see it if you click on
34:26
retirement uh paycheck or spending capacity and go to expenses. There
34:32
you'll see baseline expenses, other expenses or variable expenses and um and
34:38
taxes. So hopefully that helps. Basically the difference between baseline expenses and
34:45
variable expenses is um baseline expenses is just this picture of your
34:51
long-term spending. It's average. It's relatively smooth. And it the way you
34:56
spend it could come and go, but you're kind of planning on spending that much variable. And and as such, by the way,
35:02
the the baseline expenses don't really affect the the plan that in a way that it doesn't affect your retirement
35:07
paycheck. uh you either can afford to do that or not. Whereas, if you do a variable expense like a like a mortgage
35:13
that's going to go away after some time, um you're saying, "I'm definitely spending this. I'm definitely spending
35:19
it on the mortgage and it will actually affect your
35:24
retirement paycheck because it'll say, "Oh, okay. Let's put it all over here, pay off our mortgage, and that'll bring
35:30
down the amount we can spend on everything else uh for the plan." So hopefully that wasn't uh wasn't too
35:36
too much review for those of you been around income lab for a long time, but it's always a good good reminder of how that works because it is a little
35:42
different for um compared to what you might have seen in other other planning. Um okay, I'll do a quick one
35:50
and then we'll get to some of these uh other questions we just got. We got a
35:57
question about how to do qualified charitable distributions um recently. So, um, qualified charitable
36:05
distributions or QCDs are withdrawals from IRA accounts, only IAS, um, but you
36:13
actually can do them from inherited IAS. Um, but not 401ks and things like that.
36:19
Uh, they're withdrawals that are taken after you turn 70 and a half. Um, and
36:25
it's actually 70 and a half as opposed to the year you turn 70 and a half. Um, that go directly to a charity. Um and as
36:32
such they're treated as taxfree. You don't have to itemize them as a deduction or anything like that. It just
36:38
goes out taxree. Makes your taxes very simple. So you don't have to be someone who itemizes um to get the benefit of
36:43
it. Um and the way you do that is actually really easy. Uh the way you include it in a plan is really easy. You
36:50
simply need to have IAS in the
36:56
plan and then include charitable expenses in the plan. after you turn 70
37:02
and a half. And I don't know why this is uh taking its time here. Okay, so we
37:09
have an IRA here, right? 1.1 million. Um I don't believe I have any charitable
37:16
expenses. Doesn't look like it. Nope. Um and if I add a charitable
37:24
expense to the plan, which I can do in a lot of places. I could go up to edit and do it in that stepper or I can hit add
37:31
new. I'm going to make it a variable expense. Um just out of curiosity I'm going to
37:40
see. Okay. So in uh 2030 John is is 71. So John's IRA
37:47
should be available from then.
37:55
Um, and I don't know, maybe it's um $6,000 a year. I'll I'll make it 500
38:02
a month. And charity's at the top
38:09
here. Very funny to me. It's like this is why the Simpsons don't don't have five fingers because it looks strange
38:14
when you draw them. But that's the the hand with the heart. Um, and we'll go
38:21
to, you know, we'll just start it in 2030. And we can even,
38:28
um, end it, you know, a few years later or something like that.
38:46
And that's that's it. So those um those expense types are actually really important. Uh I know it looks like maybe
38:53
it's just so that you can uh you know show some some pretty uh icons here. Um
39:00
but certain of those expense types matter a lot. So charity um education if
39:06
you have a 529 that's how it will trigger the 529 withdrawals. [Music]
39:12
Um anyway, so now part of this IRA withdrawal is going that $6,000 of it is
39:18
going to be um a tax-free uh QCD. Um I probably could have built this plan
39:25
so you could really see that a little more clearly. Um the other nice thing is that the the software itself will
39:32
actually make sure not to spend all of the IRA if a QCD is going to be possible
39:39
in the future. So, it won't Roth convert the entire IRA, for example, if you had
39:44
a Roth conversion plan here, because it's just more tax efficient to use a QCD to get money out of an IRA than to
39:50
do a Roth conversion uh from it. So, it'll figure out how much to keep back so that it's projected to have enough in
39:56
the future to do the the QCD. Um, so that's it really. You don't have there's nowhere where you sort of say, "Hey, I
40:02
want a QCD. Here's how much." You just do you just put in charitable expenses and it will do the work for you. um
40:09
saving enough if it can't. If you don't have IAS and you have charitable expenses, it'll still do the expense. It just won't be able to do a a QCD for
40:17
it. All right, so let's get to
40:23
um the presubmitted questions. All right, well, I'll hit
40:30
this one since I mentioned it earlier. Uh David,
40:39
looking and more robust one. Um, but I'll show you where it is now. So, if I
40:50
click I just uh I just got a message that my internet was a little uh spotty. So, hopefully I'm not Can someone let me
40:56
know if you can hear me? We can hear you. It was just a little blip there.
41:03
Okay. Just a small blip. Yep. All right. So, anywhere you see social security in the app right now, if you click it open,
41:10
you get all of the uh controls for setting up social security. Um, and
41:17
right now, what you see on the bottom here is u for example, I'm going to look at John
41:23
here. If he waits to full retirement age, that would be November of this year for filing.
41:30
Um, and he'd still be 66. So his his full retirement age is not yet um 67. He
41:36
was born early enough that it's still in the 66s. Um and you see for that to be a
41:41
good choice, he's going to have to live to be 79 and 11 months. Um that's the
41:48
point at which it would break even. It's comparing claiming at that point or if here if I go out to 70 um it's comparing
41:54
claiming at that point to claiming as soon as possible. So that's that's where that's coming in. Um, as I said, there's going
42:00
to be some new features very soon about um time value of money, about um all
42:06
sorts of things. Um, you know, stress testing benefits, being able to play around with, well, okay, that's the
42:12
break even, but what if, you know, I I I assume that he'll only live to 80,
42:17
right? Okay, well, that's a bad decision then. So, where where should I take it then? What's the best place? So, there's going to be a whole bunch of good things
42:25
there. Um, and you can find the same break even calculator in
42:32
um in the stepper in kind of the regular data entry and on income social security
42:40
just scroll down and you'll see see the break even
42:45
um in this case uh Mary we've set her as claiming in January of 24 so there is no
42:52
you that that's in the past like it's already done right so break even is not a a relevant thing for her. Um whereas
42:59
if we pull it out into the future then we'll start seeing a break even
43:06
age. Okay. Um we had a uh a question about putting
43:15
expenses for retirement that are beyond the port portfolio's capacity to maintain and it still puts me between
43:21
two guard rails. Um okay. So, I'm not there there could be a different a few
43:26
different things that you're talking about here. Um, I'll answer them both. It's probably
43:32
only one of them, but I'll answer them both. So, the question is, okay, if I put in a bunch of expenses in the plan,
43:39
um, but then my uh my spending capacity
43:44
here, I'm going to go back to the main dashboard. my spending capacity or retirement paycheck um is set up so that
43:50
I'm still between between the guardrails. Um if that's the question,
43:56
it's because you're doing a plan that's asking how much can I spend and that
44:02
plan is not looking at it's not it's not trying to create the amount of spending
44:07
that you have, the baseline spending for example that's in the plan. Um you would see that in LifeHub.
44:16
Um especially if you go to the top here, you have these uh these couple of ways of using LifeHub. This is the main mind
44:22
map one, but on the left it's the uh the um it's called a sand key diagram, but
44:29
it's a flowchart basically. Um and you'll see here that actually um I my
44:35
expenses are far below what I am actually able to spend. And so, you know, this is a surplus. But if I had
44:41
put in, you know, $500,000 of expenses, I would see a shortfall here. Um, so the
44:48
plan in that case is not planning to spend, you know, 500,000. It's planning to spend, you know, 247. Um, and that's
44:56
why it's between the guardrails. So, it's sort of it's not ignoring the baseline expenses. It's saying, "Hey,
45:02
I'm building a plan that uses the resources. Um, and this is how much I can spend.
45:08
And I'm just going to point out to you that uh you can't afford all of those uh of those baseline expenses. Um, Derek, I
45:15
know you typically actually have the opposite situation where someone can spend more than their um baseline expenses, but how do you deal with that
45:22
with a client? Do you ever, you know, get a kind of a puzzled look like, well, why is that number not what I'm
45:27
spending? Yeah, I mean it um definitely comes up in terms of just understanding even what
45:35
the plan is saying when we say that it's going to you know they could spend more. I usually try to spin those situations
45:41
just into like this is how secure your overall retirement is like you're so below even what you could potentially
45:48
spend. um you know, we want to keep this in mind and maybe it means you want to give more. Maybe like I do a little bit
45:54
of that dive with zero kind of nudging people towards maybe we should be spending more, maybe we should be doing
46:01
things that you're putting off that you could be doing because you have the resources to do it. But um that to me is
46:08
where the conversation usually goes is just this is how good of shape you're in. you could spend double or whatever
46:14
the number is that you want to spend, but um you know it's up to you how we do
46:19
that. You're going to leave more assets behind if you don't start spending more than that. But that's kind of where I
46:24
personally have that conversation, right? So if you ran into somebody where
46:30
they, you know, you did build a budget for them or or they said, "Oh, I'm spending, you know, $50,000 a month,"
46:35
you would just have a situation where their spending capacity is lower than that. So you have a you have a tough
46:40
conversation coming. The other thing this question could be asking is um they it might have built a plan that is not
46:48
asking how much can I spend but is asking I want to spend this much build a plan that does that. So if I change this
46:56
to you know $40,000. Um and then up here you see
47:01
this plan's primary question is how much can I spend? I want to hit change this.
47:07
gonna change it to how can I spend this
47:15
much. And now instead of asking how much can I spend, it's going to say, "Hey, I'm going to spend this much. Build me a
47:21
plan that does that." Um, if that is above what can actually be done, um, you
47:28
will get a warning about it, but the plan will still have guardrails. It's just that you are almost certainly going
47:34
to hit the guardrails. So, here I've done it, but I've got this uh little
47:39
warning here that says planned spending. By the way, you'll see it now says budgeted spending instead of spending
47:44
capacity, right? Because it's you don't actually have that spending capacity. Uh but it's what you've budgeted for um is
47:51
in the overspending zone, right? So, it's estimated risk of overspending is greater than 50%. Right? So, that's
47:56
that's your first clue. Um but the person's question did say,
48:02
well, hey, you know, I'm still between the guardrails. Yeah. I mean, the the software will just by hook or by crook
48:07
do it. Um, but you'll notice you are, you know, very close to hitting the lower guard rail. You are almost
48:13
certainly going to hit it at some point. You're very far away from getting a pay raise. Uh, you know, I need to more than
48:18
double my money to get a pay raise. Um, so that's that's kind of another another
48:24
hint. Um, you know, in the stress test, you're probably going to see some
48:29
problems. like in the uh global financial crisis, this is what you would have done. Um so you would have taken
48:36
pay cut after pay cut after pay cut to the point where today you'd be spending $6,400 a month instead of your hoped for
48:44
26,700. So it's not that you can't do it in in income lab. You can force a plan to do this. It just will give you lots
48:51
of uh you know flashing red lights that uh this is not a good idea. Um, so those are a few places you would you would see
48:57
that and and this, you know, sounds like Derek, you have a lot of very uh, you know, frugal or or prudent uh, clients,
49:04
but if you have a client where, you know, there's a there's a tough conversation coming, these are some tools that could be actually pretty
49:10
useful for showing them like if we start out doing this, like maybe there's a small chance you could pull this off if
49:16
we enter just an amazing period of of economic boom, but most likely you're going to have some pain. And let me give
49:22
you an example of that pain. All right, good question. Thank you for
49:30
that one. Let's go to see what else we've got
49:41
here. Oh, yeah. And I think it was that second version that this uh person was asking about. now that I read the
49:47
question a little more
49:53
carefully. Okay, just a couple other um questions here. Then we've got does
49:58
Income Lab use actual existing allocations from connected accounts or does it do projections based on
50:04
portfolio allocation settings? It does it based on the portfolio allocation settings. Um now there are integrations
50:11
where we can pull in data about your allocation. Um, off the top of my head, I don't
50:18
remember which ones they are. I think they might be maybe Riskalyze.
50:23
Um, Red Red Tail, I'm pretty sure, has it. Uh, there are a few others. And we're working on some other things to
50:29
give you a portfolio allocation based on your holdings that you can at least start with. Um, I I would say this is
50:37
often an area where um there's a little confusion. So, in retirement planning software that's forward-looking,
50:45
um, you're pretty much always translating holdings into, uh, asset
50:51
class allocations. Um, so even in software that has that and and we are
50:56
actually building that those capabilities. Um, you're always translating it into an asset allocation,
51:03
asset classes, and then using assumptions within those asset classes. So, there is no, you know, long-term
51:08
retirement planning software that is, you know, using the fact that you own, I don't know, Google as opposed to GE or
51:15
something. Well, that's maybe a bad example. Google as opposed to Apple might be better, uh, as some important
51:21
factor. No, they're just mapping them to the same asset class. Um, Derek, I know you've thought a little bit about this
51:26
and I don't know if you use like the default asset allocations or if you build portfolio uh uh models that you
51:34
then use throughout, but how do you think about asset allocation um when
51:40
you're doing planning? Yeah, I lean very heavily on the default allocations. To
51:45
me, there's always going to be so much noise and, you know, things like that that are going to come up that I'm okay
51:50
with. Even if my 60/40 portfolio is maybe slightly different than the 6040 I
51:55
might get from the default, um, I'm okay with that. And I, uh, personally don't
52:01
get too worried, especially when you get into some of the other asset classes, you know, alternatives, things like that. I just look at that as something
52:08
where as we go through time and as the we get closer to guard rails, things like that, we'll see those effects
52:15
actually come out. Um, but I'm just not too worried on the projection side of things. Yeah. So, I'd say there's two
52:22
things that are important to get in the ballpark. One is, is the average in this
52:28
case, real return roughly what you're comfortable with, right? So, the real return for this portfolio is 5.8%, 8%
52:35
standard deviation 9.7. Um, and so if you're in that range, you're usually
52:40
good. There are people who like to build um I don't know that in this example
52:45
account I have that I could show you this, but there's model allocations. And so if you want to build, you know, five
52:51
model allocations and drop those in, um, then you can always choose, okay, model
52:56
allocations. And then, all right, I've built these models in the past. I don't remember what's in them but um you know
53:04
then you can just choose the model and then you never have to go in and do any kind of customization uh but even in the risk
53:09
risk based defaults you can you can see what's in them here. Um so if you do want to fine-tune you can you can do
53:16
that and not not take out a lot of extra work. Um the other place where it matters is in tax uh estimates. So if
53:23
this and this one is a taxable account. So holding money in um you know mun
53:30
bonds is different than holding it in uh you know government is different than corporate right in terms of taxation. So
53:37
this is also a place where you you might care about that and want to uh show the
53:42
you know at least slightly more accurate tax estimates. Um, same thing with in
53:48
stocks. You might have different assumptions about dividends, qualified dividends, uh, non-qualified dividends
53:53
and things like that. So, those are the two places where it matters the most. But, um, yeah, I'm not aware of any
53:59
planning software that would, um, actually, you know, have an assumption about how Apple would do versus Google.
54:06
Um, that's it's just too too fine grained and I'm not going to not going to make a big distinction. However, I
54:12
can definitely see people wanting to save themselves some time and at least start out if you have an integration if
54:18
you pull in an account from an integration to have our software say hey
54:26
uh you know large cap value like uh and so we are that is on our road map um and
54:31
right now you can get that but only through a few of our integrations and I think red tail is one of
54:38
them. All
54:49
right. Somebody's asking a question on buckets. So, do you have any intel or
54:55
research about the selection of buckets, i.e. which accounts? So, um, if you're
55:00
talking about which accounts to take withdrawals from, um,
55:07
there is a lot of research on that and we we're we're very deep into that and and that is one reason that we have, um,
55:14
tax lab, which is asking the question, okay, I get it. I'm going to take this much in
55:20
withdrawals, but where should I be taking them from? Uh, which accounts should I be doing Roth conversions? Uh,
55:25
and so on. So Tax Lab and LifeHub are great tools to show you exactly where
55:31
you'd be taking money from in each year and so on. So Tax Lab more around should I be doing Roth conversions? Lifehub
55:38
because it goes down to the account level and shows it. If you're talking more about buckets like the the concept
55:43
like the more of the mental accounting helping people understand um their their
55:49
buckets that is something we're looking into. I mean, there's a lot of research on it, but we're looking into features
55:54
that can help you do that because I do think it has a it can have a big impact on people's understanding of their plan.
56:00
And I know Derek, you you sometimes talk with clients um using that language and I don't know if you want to share how
56:06
you how you think about buckets in in that way. Yeah, I I personally align
56:11
pretty strongly with Michael Kisses has a nice article where he talks about, you know, are these really a psychological
56:17
tool or are they more something you actually want to use to plan distributions? And so I fall in the camp
56:23
of it's a useful psychological to tool. I don't personally use it so much for actually planning distributions, but I
56:30
will look at things like okay, how much does somebody hold in cash and fixed income, you know, maybe we call that
56:35
like a protection bucket, you know, how much do they have? If we translate that um into years of expenses and the um
56:44
even going into the cash flows view an income lab can really be helpful if somebody has kind of a
56:51
satchet shape spending pattern or something like that to really get a a better number. But I can say okay here's
56:57
how many years of expenses you would have if in theory we wanted to pull just from these and give the stocks time to
57:03
recover. That's not really how I typically would plan, but I think
57:08
communication wise, that's how I will use that. Yeah. And I think it just is a
57:13
it's a really nice way for people to understand the value of diversification, right? If you can say to somebody, you
57:19
know, in times like today, right? Well, look, um, you know, you actually have 5 years worth of your planned withdrawals
57:25
in, I don't know, uh, bonds or something. That doesn't mean that's actually what you'll you will only spend
57:30
the bonds for the next 5 years, but it does make it puts it in in um, in perspective in a way that saying,
57:38
well, hang on, you're in a 60/40 portfolio, doesn't maybe it's a little too abstract, whereas saying, hey, this
57:44
is, you know, if we needed to, we could let your stocks recover. Um I think that psychologically there's a lot to that. I
57:50
don't know if there is a lot of psychological research on it. I'd be interested in someone doing
57:56
that research if they haven't. Um because I do that is my intuition is that just a normal person might
58:01
understand that better than you know asset allocation talk. Um I don't know
58:07
Derek are you aware of any uh psychological research? I know there's the like numbers research on hey does
58:13
you know does actually using buckets in the way described work? Um but on the psychological side is there any not that
58:20
I'm really aware of. I agree it'd be interesting to see some but uh I think it's a lot more just anecdotal people
58:26
working with clients and having that experience. Yeah. Yep. Okay.
58:32
Um couple questions left over that we'll get back to you on. Um but otherwise
58:37
thank you very much Derek and thanks everybody for joining us today. Please join us next week for um an hour of
58:43
CFPCE and some really good discussion from Derek on his on his new um article
58:48
on visualization. So thank you everyone and have a great week.