What are the default values for the Income Setting slider?

Advisors can fine-tune all income settings in any plan by going to a plan's Advanced Settings. However, advisors will often want a quick and easy way to set reasonable income settings. The Income Setting slider offers the following nine preset combinations of income levels and adjustment plans. These presets are available for convenience only and should not be interpreted as financial advice.

All income settings include a target risk level and lower and upper guardrail levels. These are all defined by the two main risks of retirement income: the risk of overspending and the risk of underspending, given the plan's resources and goals.

Income Setting

The overspending risk and underspending risk are complementary: maximizing one leads to minimizing the other. Typically, plans try to balance these risks. 

A perfect balance of risks would have a 50% change of overspending and a 50% chance of underspending. However, application defaults all target a balance that avoids overspending at the expense of underspending. In other words, defaults all lean to the more cautious side. 

For example: The middle (moderate) setting targets a 20% risk of overspending and 80% risk of underspending. Even the most aggressive default setting has 60% chance of underspending.

Guardrail Settings

A plan's income guardrails are the risk levels at which the plan will call for an adjustment in income. The upper ("spend more") guardrail is triggered when the risk of underspending gets too high. The lower ("spend less") guardrail is triggered when the risk of overspending gets too high. All default income and guardrail settings have the same upper and lower guardrail settings.

• Default Upper Guardrail: An increase in spending is triggered when the risk of underspending reaches 100%. The new income after hitting this guardrail is the income that has the target risk of underspending/overspending.
• Default Lower Guardrail: A decrease in income is triggered when the risk of overspending reaches 75%. When this happens, the new income level is 10% of the way back toward the target risk of overspending.

Between these two risk levels, income is allowed to stay the same even though the risk is changing. You can think of guardrails like a thermostat that can turn on the furnace (at, say 65 F) or the air conditioning (at 75 F). If things are too cold, the heat will kick on. If things get too hot, the AC will cool things down. But in between these trigger points, the temperature is allowed to fluctuate.

Please note that although underspending risk and overspending risk are stated on a 0 to 100 scale, it is possible for an income level to be below the "lowest" income level or higher than the "highest" income level on this scale. 

For example: If $10,000/month in income would have survived the worst simulated sequence of returns and inflation and exactly hit the plan's goals, this income level will be said to have 100% risk of underspending and 0% risk of overspending. Income levels less than $10,000/month would have >100% risk of underspending and <0% risk of overspending. 

If you see a risk level like 105% or -5%, that should be interpreted as a percentage adjustment to the income level that has 100% or 0% estimated risk. 

For example: If $10,000/month had 100% risk of overspending, $10,500 would be said to have a "105%" risk of overspending. If $10,000/month had a 100% risk of underspending, then $9500 would have "105%" risk of underspending.

Custom Guardrail Settings

Since all default options use the same guardrail settings, you will see a gradual rise in guardrails as you move toward higher income levels using the income setting slider. However, if you'd like to adjust these guardrail settings for a particular plan, you can do so in the plan's Advanced Settings in the Income Settings section. 

For example: You may find that a more conservative approach would wait longer to make an increase in income, or wait less to take an income decrease. 

Conversely, a more aggressive stance might not wait until the risk of overspending is 100%, but might adjust income upwards at a 10% or 15% risk of underspending.

All such settings are entirely up to the advisor to set to ensure the plan best meets the clients' needs.

A Note on Adjustment Speeds

Adjustment speeds (between 0% and 100%) specify how large of a change the plan will call for when a guardrail is hit. A 100% change will return income to the target risk level. A 50% change will move income halfway back toward the target risk level.

You'll notice that hitting the upper ("spend more") guardrail has a 100% increase in speed for all default settings. This reflects two factors. First, note that the target risk level, by definition, represents a risk level that a household is comfortable accepting.

In contrast, the decrease in speed is 10% for all default settings. This reflects a preference for slower, more measured downward adjustments. Downward adjustments can be somewhat painful, so many will prefer to move slowly into income decreases in the hopes that a small number of small adjustments will be enough. (A slow adjustment speed does open up the possibility that several adjustments may be needed over time.) There is nothing inherently wrong, however, with adopting higher decrease speeds. You can do so in the plan's advanced settings.

• Advantages of slower reactions to hitting the lower guardrail: Can avoid 'whipsaw' effects and larger-than-necessary adjustments.
• Disadvantages to slower reactions to hitting the lower guardrail: One adjustment may not be enough, and multiple spending cuts may be needed if things continue to get worse.

As with all Income Lab settings, users should adopt values that fit the unique needs of the households for which they are planning, whether those are application defaults or custom values.