How does the Preretirement Planner work?

The Preretirement Planner, found in the Income Lab Decision Center, is designed to help you have valuable discussions about some of the most basic and important questions people have when planning for retirement: 

• When can I retire?
• How much should I save?

This tool helps you explore a wide range of possible answers to these questions and find mixes of retirement dates and savings levels that could produce the Retirement Paycheck or Spending Capacity that people in preretirement might want.

Unlike many other “what if” tools in the legacy financial planning software world, Income Lab's Preretirement Planner doesn't focus on deeply flawed concepts like “Probability of Success”. Instead, it focuses on what people really understand - the answer to the question, “How much will I be able to spend?”

Common Questions

Do I have to create a household or plan in order to use the Preretirement Planner?

Yes. As with all parts of Decision Lab, you'll need to make a plan before you use the Preretirement Planner. This tool takes an existing plan and imagines dozens of ways it would be different if you changed some of the plan's assumptions (in this case, the assumption of when the income plan begins and the assumption of how much is to be saved before then).

How is inflation handled in the Preretirement Planner?

The Preretirement Planner assumes that the monthly savings contemplated in each scenario are adjusted for inflation over time. In other words, a $1,000/month savings today is assumed to grow with inflation. So, in a year that amount might be $1,030/month, etc. This assumption matches the idea that wages would typically grow over time, at least based on cost-of-living adjustments, and that savings would grow along with them to keep the savings rate steady.

What sort of investment account are the savings put in?

The new savings shown in the different scenarios in the Preretirement Planner are put in a generic investment account that has the same expected return and volatility as the overall investment portfolio in a plan. The Preretirement Planner does not focus on the long-term tax consequences of these new savings. Therefore, there is no analysis of differences between putting money into IRAs, Roth IRAs, taxable accounts, etc. In order to do that analysis, you'll want to use the Tax Lab.

In what asset allocation are the savings invested? What is the expected return of these savings?

The asset allocation and expected return earned by the savings in each the Preretirement Planner scenario is assumed to be the same as the overall investment portfolio in the plan. That means that different plans, with different overall allocations, will have different results in the Preretirement Planner.

Are the results gross or net of tax?

Projected Retirement Paycheck (or, "Spending Capacity") values are shown gross of tax. The reason is that deciding where the additional savings go is a separate analytical task. The Preretirement Planner is focused on how savings and return rates change the nest egg at retirement and how this could change how much someone could spend. Tax allocation will have an impact on the net-of-tax proceeds at retirement and years into the future and is beyond the scope of what can be shown in a focused tool like the Preretirement Planner.

Are the results real (today's dollars) or nominal (future dollars)?

Values are real (today's dollars). This avoids the "apples-to-oranges" confusion that can arise by showing nominal (future dollars) values: A Retirement Paycheck in 10 years will be (much) higher than a Retirement Paycheck today just based on inflation. In other words, holding all else equal, a nominal comparison would show higher income in the future not because of returns or added savings, but just due to the erosion of purchasing power.

How are the projected Retirement Paycheck/Spending Capacity amounts calculated? Is this just simply time-value-of-money calculations?

Values in the Preretirement Planner reflect all of the sophisticated analytics you get in a normal Income Lab plan. These are not simplistic time-value-of-money calculations. They reflect everything that is special to a plan, including investment risk, inflation risk, mortality risk, the timing of cash flows, etc. Don't let the simple layout of the results fool you: there's a lot that goes into each number in the heatmap!

What determines which values are shown darkest on the heatmap?

Initially, the darkest values will be those that are closest to the retirement income goal stated in the set-up steps to the Preretirement Planner. For example, if the target income is $10,000/month, cells that are closest to this value will be darkest and cells whose values are farther away will be lighter. Note that those lighter cells can be lower or higher than the goal. That's important because it's simple to create a higher retirement paycheck: just wait longer and save more. But at some point that cost (time and money) is too high. So, the heatmap will point out combinations of time and money that most closely produce the target spending - not less and not more.

Is there a way to apply the new savings to the plan?

There is not currently a way to do this, but we plan to add one! (This is not as simple as it might sound since you will have to decide where those new savings are going for tax purposes.)

What does it mean to include or exclude the savings already in the plan?

There are two ways to use the Preretirement Planner: (i) Explore a range of savings levels excluding any savings already specified in the plan, and (ii) Explore a range of additional savings on top of what is already in the plan. The default is option (i), where you will be stripping out all savings already in the plan and exploring a range of savings. This allows you to explore savings levels below the savings currently in the plan (including $0). Option (ii) is also useful, however, if you're fairly sure that additional savings are needed or if there are specific savings events that will definitely happen in the plan.

How does the Preretirement Planner pick the savings and year options to show?

The Preretirement Planner shows a 5x5 heatmap as output, with the possible monthly (real, inflation-adjusted) savings amounts on the vertical (Y) axis and the retirement years on the horizontal (X) axis. Since there are five of each, the system simply cuts the savings and year ranges into five equal parts. So, if the year range is 2030-2034, it will show annual slices (2030, 2031, 2032, 2033, 2034). If the range is 2030 - 2038, it will show 2-year slices (2030, 2032, 3034, 3036, 2038). If the year range doesn't divide evenly into 5, it will still slice it evenly, but because different months in each year would then be chosen you may see the year labels seeming to be uneven.

What is the minimum year range to explore for the Preretirement Planner?

Since the Preretirement Planner shows five different retirement years, the minimum distance in the range is four years. That's because the range is inclusive of the end points. So, from a four-year range we get 5 options (2030-2034 = 2030, 2031, 2032, 2033, 2034).