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 will receive so that the plan is complete. To enter non-portfolio income (meaning, any income not accounted for via withdrawals from the investment accounts and annuities entered in the Assets part of the plan), go to the “Other Income” tab in the plan stepper, add an Income item in Life Hub, or, if you're building a new household, add “Income” in the Quick Create new household flow.
It's also important that, for each income item, you properly specify that income stream's timing, frequency, amount, tax treatment (or tax type), and inflation treatment.
Tax Treatment
The way that an income stream is treated for tax purposes is very important for both Federal and state tax. At the Federal level, ordinary income is subject to different tax rates and thresholds than long-term capital gains income. (This is also true in a few states.) Keep in mind that Income Lab automatically models relevant Federal and state deductions on income, so you do not have to separately include these.
In an Income Lab plan you have the following options for Tax Treatment for non-portfolio income:
| Tax Treatment | Explanation | Example(s) |
| Investment Income | Treated as investment income for purposes of Federal net investment income tax; Advisor specifies the mix of ordinary, long-term capital gains, tax-free (non-taxable), and tax-exempt income (allocations must add up to 100%). | Rental income; K-1 income from mineral rights |
| Not Taxable | Not counted as taxable income for any purposes | Inheritances, gifts received |
| Ordinary Income | Subject to Federal ordinary income tax | Pensions |
| Self-Employment | Earned income; can affect pre-FRA Social Security benefits; subject to FICA and ordinary income tax; FICA is twice that paid for wages, but ½ of this FICA is automatically deducted for purposes of ordinary income tax | Income earned via self-employment |
| Social Security | Social Security benefits; Subject to Social Security taxability rules; Typically, you'll want to enter benefits on the “Social Security” tab, not in “Other Income”. However, this is an option for special situations and extra types of Social Security benefits. | Customized Social Security flows |
| Tax-Exempt | Tax-exempt is NOT the same as “tax free” or “not taxable”; This income is often included in modified adjusted gross income (MAGI), which is used in some tax calculations. | Municipal bond interest |
| Wages | Subject to FICA and ordinary income tax | Earned income from W-2 employment |
Note that some income types (for example, military, police, firefighter, and other public employee pensions) are not taxed at the state level. For these types of cash flows, be sure to check the “Exempt from state tax” box.
For investment income, you will need to specify a custom allocation between ordinary income, long-term capital gains, tax-exempt income, and tax-free/non-taxable income.
For example, K-1 income from an investment might specify a certain amount of that income as return of basis (non-taxable) and the rest as a mix of ordinary income and long-term capital gains. Or, rental income may be a mix of ordinary income and non-taxable income (due to deductions for expenses).
Annuity income from a single-premium immediate annuity (SPIA) or deferred income annuity (DIA) may be a mix of ordinary income and non-taxable income (due to the “exclusion ratio” of the annuity). For example, a $1,000/month immediate annuity with a 60% exclusion ratio would be entered as 40% ordinary income and 60% non-taxable income.
If you are entering municipal bond income as a separate income item, as when modeling a bond ladder, you would need to specify this income as 100% tax exempt.
The sale of a business might include long-term capital gains and non-taxable return of basis.
Inflation Treatment
The way that an income stream or expense item adjusts (or doesn't) over time is also very important. An income stream that has regular CPI-related inflation adjustments will have a larger positive impact on how much someone can spend than an income stream that does not adjust at all over time. An expense that inflates at a higher rate than overall inflation will have a larger negative effect on the plan. There are three inflation options offered for modeling cashflows in Income Lab.
| Inflation Treatment | Explanation | Example |
| Adjusted for Inflation | Adjustments are tied to actual inflation (modeled by plan inflation assumption(s)) | Social Security, Rental Income |
| Not Adjusted for Inflation | No adjustments over time; Nominal amount is constant through the whole plan | Many pensions |
| Custom | Annual adjustments by a specified rate; A cost of living adjustment (COLA) | Some pensions; Expenses that tend to have unique inflation behavior (e.g., healthcare, higher education) |
Custom inflation adjustments / COLAs
Note that the “Custom” or “COLA” option is based on a nominal/not adjusted for inflation model. Therefore, if a cashflow with a custom inflation rate begins in the future, the initial amount of that cash flow will be whatever you enter in the “Amount” field. For example, if you have a $3,000/month expense for long-term care that begins 20 years from now and you enter a 6% custom inflation rate for this expense, you will see, in nominal terms, that this expense is $3,000 decades from now. In real/today's dollars terms, that might be much less (maybe $1,500).
If you'd like that future expense to inflate between now and when it starts, you will have to enter a higher number. For example, if you think that $3,000 will inflate at 6% for the next 20 years, enter (1.06)^20 * 3000 = $9,621 instead of $3,000.
Income Lab does not offer automatic inflation treatment options to model a custom inflation rate between now and when the cashflow starts; nor is there an option to have normal inflation apply between now and when the cashflow starts and then to apply a custom rate thereafter. These special situations will require changing the value you put in the “Amount” field for the cash flow.