What is "Economic Context" and how does it affect retirement income plans?

The amount that most households can spend at any given point in retirement is influenced by economic and market factors such as inflation, interest rates, and equity valuations. Advisors can use economic context to inform their retirement income planning and management either as part of client communication, as part of plan analysis, or both. (For more on this topic, please see How To Use Economic Context In Retirement Income Decision-Making from Kitces.com.)

Income Lab displays economic context in the Historical Analysis graph by shading in blue those periods that are most like the present in economic terms (based on these economic factors). You can move the "Economic Context" slider below the graph to change the amount of the graph that is "filtered out" in grey. (The "High Context" setting to the left filters out 2/3 of history.)

Advisors can use this view to talk with clients about economic conditions and how they affect retirement income.

For plans that use the Historical Analysis Method, the economic setting, Economic Context, also helps produce the plan's spending capacity and guardrails by affecting the range of scenarios that the plan considers likely or possible.

Economic Context tilts proposed spending capacity up or down depending on whether current economic indicators suggest that retirement income risk is currently low or high. If an advisor includes economic context in a plan, proposed income at any given point could be higher or lower than it would be if economic context were not included.

For example, in the historical analysis graph above, the economic context removes (marks in grey) many high-income scenarios from consideration (1915-1925, 1945-1955, 1976 to the early 1990s). Focusing the analysis on lower-spending scenarios depresses the plan's spending compared to a plan that doesn't use economic context.

When this more-conservative plan is tested in the Test Plan section or in the Retirement Stress Test, it has fewer downward adjustments. For example, the overall income experience results for a plan with a high economic context applied show 90/10 above/below plan results.

You can remove economic context from a plan by moving the Economic Context slider below the Historical Analysis graph all the way to the left and clicking the blue "Apply new Economic Context to plan" option. When the economic context is removed from the plan above, it results in higher spending and an 81/19 above/below plan split in the Test Plan section.

Each month, Income Lab’s Economic Context engine takes in a wide array of new economic and market data, incorporates it into the Income Lab engine, and monitors implemented plans using this up-to-date picture of retirement-relevant economic factors. This ensures that advisors who include economic factors in their advice are never using stale data.