Income Ceilings and 'Test Plan' Results

here I have two plans one with a ceiling

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on the income and one without we're

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looking at the plan that doesn't have a

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ceiling and we can see the test plan

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results are 73% of the time above 27

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below average above almost 50% best case

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almost double but if I put a ceiling in

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uh and the ceiling here is 10% above

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plan um I can see best case I'm 10%

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above plan as expected um average

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you know not 50% but 9% um but

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interestingly fewer just slightly fewer

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but fewer scenarios are above plan um

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than when I didn't have a ceiling so

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what's going on

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here well this plan is really simple it

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just has a taxable account I think it's

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$5

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million

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um and here I'll switch it to the one

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with no

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ceiling and it's flat so just inflation

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adjustments throughout nothing fancy

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going on here at all there's no social

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security there's no

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anything so let's look at the global

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financial crisis um both plans

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experience the exact same thing a

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reduction from about 2009 to 2017 then

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they go up but the one without a

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cap goes up in 21 the other one doesn't

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um and it it caps out here so what's

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going on when we look at test plan and

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the overall results

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those overall results are

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saying what is the total income in each

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of these scenarios over the life of the

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plan the way that we get to total income

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is we say how much income did you get at

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different times we mortality adjust

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those so that income early on matters

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more than income later on because you're

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more likely to be alive early on and

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people simply they don't like delayed

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gratification right but higher income

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later on can do a little bit to

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counteract lower come early on so this a

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perfect example the total income for the

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blue line is higher than the total

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income for the yellow line uh so having

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no ceiling on the income results in a

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higher kind of total lifetime income

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score for this particular scenario now

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test plan runs lots of these scenarios

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um and that's going to mean that in some

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cases it looks like about 3% of the

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tests um not having a ceiling is enough

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to flip a below plan to an above plan so

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even though that higher income might

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come a little bit later in the plan um

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but in some cases it could be quite

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early in the plan that because you don't

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have a ceiling you get higher income and

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that can counteract lower income later

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in the plan so having a ceiling on a

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plan um won't necessarily uh improve the

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above

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below um results here in fact you you

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would almost expect them almost always

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to to to uh to decrease the number of

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scenarios above plan because that uh

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that that ceiling is not allowing you to

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kind of counteract those low income

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periods that doesn't mean putting a

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ceiling doesn't have any value but the

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value you would typically see would be

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in the Legacy side um so here for

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example no cap and my we're looking at

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this in uh in today's dollars so

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inflation adjusted best case uh seven

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6.7 worst case

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350,000 if I go to the income ceiling

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and go to Legacy now best case 33

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million worst case is still pretty

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similar so that's where you would see

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the impact of the the ceiling basically

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by by putting in a ceiling you're

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shifting uh the the value of the plan

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into Legacy from

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income so I hope this helps if you're

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seeing this kind of thing in your plan

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uh let us know if you have any other

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questions