What is the difference between baseline and other/variable expenses?

Income Lab plans don't require expenses, but a fully built-out plan will typically have expenses in it. There are two types of expenses you can include in a plan:

1. Baseline Expenses: Ongoing monthly expenses that are part of the normal day-to-day costs of living. Examples are food, transportation, utilities, and certain kinds of insurance. In a 'How much can I spend?' plan, these expenses do not affect the plan's Spending Capacity (or 'Retirement Paycheck'). They serve only as a comparison to help show how possible spending compares to planned expenses. In a 'How can I spend $X, net of tax?' plan, total baseline expenses are targeted (along with Other/Variable Expenses) for net-of-tax spending.
2. Other/Variable Expenses: Special, notable, irregular, lumpy, and/or temporary expenses. Examples include mortgage payments, gifts, donations, large vacations, or major purchases. These expenses are specifically targeted and funded in the plan, even when the plan is asking, 'How much can I spend?'. So, these expenses will affect the plan's Spending Capacity/Retirement Paycheck in this kind of plan.

These two types of expenses function very differently in Income Lab plans. Since Income Lab plans do not require expenses, you won't see an "Expenses" section in the plan data entry stepper by default. 

1. To add an Expenses tab, click on the plus ( + ) icon to the right of the other plan sections on the stepper.

2. Click on Expenses.

3. To add an expense in Life Hub, just click + Add New and choose Expenses. You can then choose the expense subcategory (Baseline or Other/Variable).

Baseline Expenses

Baseline expenses are the basic ongoing expenses of a plan. In a "How much can I spend?" plan, these expenses have no influence on the plan's Spending Capacity or Retirement Paycheck. Baseline expenses in this kind of plan serve only as a point of comparison. This can be confusing to those who are used to planning by first defining spending amounts. In this kind of plan, you may see an income surplus or shortfall in any given year because you are comparing how much income the plan is providing to the baseline expenses. What is possible may be higher or lower than what is desired.

In a "How can I spend $X, net of tax?" plan, total baseline expenses are the target net-of-tax spending amount for the plan. In this sort of plan, you should not see income surpluses or shortfalls (except in pre-retirement, or in the year of retirement if retirement is mid-year). In this sort of plan, Other/Variable expenses are also covered.

Baseline expenses, which are basic living expenses, can be entered in a plan in two ways.

1. Enter Totals: Enter a total bottom-line monthly expense for the plan. This is a good approach for those who don't want to do detailed budgeting. This expense (which you will see in the plan as 'Living Expenses') will continue through the whole plan and will not change upon one spouse's death.
2. Itemize: List individual baseline expenses. Itemized baseline expenses can include differences in timing (a. through the whole plan; b. only before the income plan begins; c. only after the income plan begins) and can be specified for changes in amount upon the death of a spouse.

Either way you choose to enter baseline expenses, the expense(s) will be adjusted for inflation and will follow the plan's Income Path. (An Income Path specifies how income and expenses will change through the plan. This can be a simple flat, adjusted for inflation path, an age-based ("retirement smile") path, or a custom path.)

Regardless of which plan type you are using, individual itemized baseline expenses work in the same way: they serve to provide detail within the total block of baseline expenses. They do not introduce "lumps" or changes in the baseline expenses of the plan. If you'd like to enter an expense that does introduce changes to the overall total spending, you need to use other/variable expenses.

Itemized Baseline expenses can also be included in a plan via the Medicare, Liabilities, and Insurance portions of a plan. You can choose to include base Medicare Parts B and/or D premiums as Baseline or Other/Variable expenses. Monthly (but not non-monthly) loan payments and insurance premiums can also be included as Baseline expenses or Other/Variable expenses.

When you include these items, you may see a baseline expense called "Other Living Expenses" in your plan. This expense is added simply to smooth out the picture of baseline expenses when these baseline expenses begin or end, or when they change due to inflation.

Other/Variable Expenses

Unlike Baseline expenses, adding an Other/Variable expense to a plan will change the Spending Capacity or Retirement Paycheck of a plan that is asking "How much can I spend?". (And they are also funded specifically in 'How can I spend $X, net of tax?' plans.)

An example will show why this is so. Imagine you have a very simple plan, with a flat (adjusted-for-inflation) Income Path. The plan provides $10,000/month in Spending Capacity. You add a $1,000/month Other/Variable Expense called 'School Tuition' to it that lasts for the next 4 years. The Spending Capacity, net of this expense, goes down to $9800/month. The Spending Capacity gross of this new expense is $10,800.

The net-of-tuition spending has gone down because of this new, specially-funded expense. But it hasn't gone down dollar-for-dollar by $1,000 because the new expense doesn't last for the entire plan. Essentially, this pair of plans shows that the 4-year tuition expense can be funded by spending $200 less per month throughout the plan.

You'll notice in this example that, in fact, the gross-of-expense spending capacity has gone up! How can adding an expense mean someone can spend more?!? Well, it doesn't, at least not for the full plan. The total plan is now to spend more for now (and fund the tuition expense), but to spend a bit less net of the tuition expense throughout the entire plan.

This last effect can be confusing if you don't pay attention to whether you are viewing Spending Capacity/Retirement Paycheck gross or net of these expenses. You can toggle the view using the tool menu in the upper right of the screen.