Why are portfolio withdrawals lower than expected in a joint plan with cash flows that change when a spouse dies?

A joint plan with cash flows that change when one or the other spouse dies contains a special kind of mortality risk: the risk that one spouse will die before the plan ends and the non-portfolio income that the surviving spouse receives will go down - perhaps by a lot.   EXAMPLE 1: Single-Life Pension Imagine that a household has a $1 million portfo...

Why is the Final Portfolio Balance (legacy) so High in Life Hub and the Tax Lab?

Two Ways to View Plan Data Income Lab retirement income plans include plans for adjustment: increasing income, withdrawals, and spending if things are going particularly well, and reducing income, withdrawals, and spending if things are going particularly poorly. These plans are built for a world where investment returns and inflation vary. However,...

Average Historical Returns

Income Lab allows you to choose to use "Historical" analysis method for your plan. Historical analysis uses historical return and inflation sequences as a model of asset class and inflation behavior. It is useful, therefore, to have some idea of the average historical returns and standard deviations of inflation, asset classes, and blended portfolio...

What Asset Classes are used for Returns in the 1800s or early 1900s?

When using historical sequences of returns, the software uses specific asset-class returns when available. However, when going further back in history, more general asset class returns are used when necessary. For example, before mid-cap value returns are available as a separate set of asset-class returns, the system uses mid-cap blend returns. Befo...

How does Income Lab handle longevity planning?

Using Longevity Risk to Produce Plan Length Rather than asking for explicit dates of death or ages at death in the planning process, Income Lab's default approach to longevity planning is to ask for clients' attitudes toward their longevity. Specifically, plans specify a Longevity Setting similar to what some researchers call “longevity risk toleran...

How does Income Lab create its default capital market assumptions?

Firms and advisors specify their own capital market assumptions (CMAs) for use with the Traditional Monte Carlo and Regime-Based Monte Carlo analysis methods. To assist with this process, Income Lab provides default capital market assumptions that reflect historical averages for asset class indices. Default CMAs are updated at monthly at the same ti...

How does the "Age-Based" income path work?

The Income Path setting includes the default Age-Based option. This option implements the concept that is sometimes called the "Retirement Smile" or the "go-go, slow-go, no-go" periods of retirement spending. This pattern helps plan for: Higher (and even rising) income early in retirement Decreasing real spending through the middle of retirement A r...

How is Inflation Handled in Income Lab?

Inflation touches almost every part of Income Lab. This article explains the basic ways that inflation is modeled across the platform and answers questions like: What inflation rate is assumed on the platform? Is inflation static or variable? How can I adjust assumed inflation rates on the platform?   Variable Inflation Rates The core analytics of I...

What indices does Income Lab use to model asset class returns?

Asset Class Indices Income Lab includes the ability to specify allocations to 24 asset classes for any investment account or model portfolio. These asset classes are shown in the table below along with the index we use for current asset class return modeling.  Index returns are used in several places in the Income Lab app, including to produce defau...

How are Portfolio Withdrawals Calculated?

When modeling portfolio withdrawals, we use the following method: If RMDs are required, these are always taken If an account does not allow withdrawals (like IRAs before 59.5), we don’t take withdrawals from this account in the years when the age restriction applies Otherwise, withdrawals are taken proportionally from all accounts. So, for example, ...

How are a Plan's Guardrails and Spending Capacity Calculated?

  At its core, a retirement income plan made and managed in Income Lab answers the following questions: How much can I spend? What change in my account balance would make an adjustment up or down a good idea? What could those adjustments look like, in dollar terms?   You will find the answers to these questions on the main plan dashboard. The  Spend...

How are average returns and standard deviation calculated?

Within the application, users can see the average real (net-of-inflation) annual  net-of-fee  expected return and standard deviation of returns for each investment account and for the overall portfolio.   If you have questions on how these values are calculated, please see below. If you want to check a plan's capital market assumptions, please go to...

How are net-of-fee returns calculated?

The Effect of Monthly Returns and Fees All portfolio return calculations in the Income Lab application are monthly, not annual. Therefore, although you may see a capital market assumption of a 10% average annual return or an account with a 10% expected average return, in fact the software interprets that as a 0.8% monthly return. (1 + 0.8%) ^ 12 - 1...

How does asset allocation modeling work in Income Lab?

The way that an investment portfolio is allocated among asset classes has a significant effect on a plan. However, there is art as well as science in specifying target asset allocations in retirement income planning and management. Below we discuss several issues to keep in mind when developing your approach to asset allocation in Income Lab. Asset ...

What is the difference between real and nominal?

In most parts of the Income Lab application, you can choose to view information in 'real' or 'nominal' terms. This information is not the result of different core calculations and analysis, but rather only the difference in how the effects of inflation are included in the visualization. Both 'real' and 'nominal' views account for inflation, but in d...

Why are growth and inflation different than expected in the first year of a plan?

All calculations in Income Lab are based on monthly values, whenever possible. That includes inflation. This use of monthly values means that, unless it is currently January, the software will not assume 12 months of returns and inflation are yet to apply in the current year. Therefore, from February through December, for the first year of a plan (t...

Why does my plan switch from Historical to Monte Carlo?

Income Lab uses historical sequences or returns and inflation back to 1871. While this over 150+ years of data is ample for most needs, there are situations where a plan is so long that even this amount of data is not enough to produce a retirement income plan and all of the other analytical data available in the Income Lab app (e.g., Plan Test, Ret...

Tax Lab methodology

What Methodology is Used to Produce Tax Lab Analysis? Once you have a retirement income and distribution plan designed, the Income Lab Tax Lab allows you to explore the following questions: How should the client source and sequence portfolio withdrawals? Should the client consider Roth conversions? To do this, the software simultaneously runs 20 way...

How do Income Lab's Monte Carlo simulations model the distribution of returns and inflation?

The Monte Carlo analysis methods in the Income Lab app produce monthly returns and inflation rates that are independent and identically lognormally distributed (i.i.d). In other words, we don’t inject any assumptions about non-normal skewness or kurtosis ("fat tails"). Similarly, we do not model any autocorrelation in returns or inflation. (Negative...

Guardrails in Retirement Stress Test and Tracked & Monitored Plans

The guardrails you see in Retirement Stress Test and in Tracked & Monitored plans are refigured every month of the plan to reflect all changes as the plan progresses and new data becomes available. That includes: As time goes on, clients age and plan length changes Purchasing power changes due to accumulated inflation or deflation (for example, ...

Navigating Mortality Risk in Retirement Planning

When analyzing retirement income scenarios, understanding mortality risk is crucial for comprehensive financial planning. Mortality risk represents the potential financial impact when one spouse dies, potentially leaving the surviving partner with reduced income. Understanding Mortality Risk in Retirement Planning Several key income sources can cont...

Explain the Tax Treatment and Inflation Treatment types for a plan's Non-Portfolio Income Streams and Expenses

Planning for retirement (and life in general!) involves a lot more than just investment planning. That's why Income Lab takes non-portfolio income —such as pensions, rental income, wages, Social Security, and other income — so seriously. It is very important that the plan contain all of the important non-portfolio income that a household receives or...

Are Income Lab guardrails based on Guyton-Klinger guardrails?

Income Lab Risk-Based Guardrail are not Guyton-Klinger Guardrails (and that's a good thing!) The first type of “guardrails” for retirement income that many people encounter are Withdrawal Rate Guardrails, such as those proposed by Jonathan Guyton and William Klinger in a series of articles in the early 2000s (the so-called “Guyton-Klinger Guardrails...

Modeling Cash Inheritances in an Income Lab plan

Sometimes an expected inheritance is an important resource in a financial plan. To enter this resource in an Income Lab plan, simply add it as an “Other Income” item. You can do this a few different ways. You can enter the inheritance via the plan data stepper (accessed from the pencil icon anywhere in the application) as shown here.     You can als...

Account Types

Account Types The portfolios that you model in Income Lab plans can be made up of a number of investment accounts. Each investment account has an account type that differs in how tax and distribution rules apply. Income Lab supports the following account types: Taxable Qualified Tax-Deferred Account Types Traditional IRA SEP IRA SIMPLE IRA Tradition...