How to use “How can I spend $X net of tax?" Income Settings

The Income Lab app can be used in two different ways to produce a retirement income plan:

“How much can I spend?”

The default way to use the app. Shows how much a household can afford to spend gross-of-tax and allows exploration of a range of spending levels and adjustment plans/guardrails.

“How can I spend $X net of tax?”

Solves for income risk and guardrail levels that are estimated to produce the desired net-of-tax income and grosses up income to cover the estimated taxes. This option does not allow exploration of a range of income levels but rather focuses on a single income level.

The first of these options is the default and often the first mode used when exploring possible retirement income plans. The second (which used to be called "Solve for this income" in previous versions of the software) is very useful when producing plans outside the normal risk range (that is, when someone is spending far below or above their spending capacity) and when taxes are "lumpy" in a plan, such as when using large Roth conversions.

Typically, when the second option is needed, you will first use the "How Much can I spend?" option to find the range of possible spending levels and see if there is a surplus or shortfall compared to what clients might actually spend. Then, enter an appropriate net-of-tax desired income and switch to "How can I spend $X?" mode.

"How much can I spend?"

This mode is usually your first step if you're beginning to work on a household plan. Given a household's retirement resources (investment accounts, Social Security, pensions, and other income sources, etc.) and its specific legacy and other/variable spending goals, this option answers the question "What (else) can I spend?". This option does not require any budgeting: you don't have to enter any baseline expenses or a desired monthly income level in the plan.

This approach gives its answer gross of tax. Think of this more like someone in their working years answering the questions "what's your salary?", which is almost always answered with a gross-of-tax number. If taxes decrease, this person's net income will increase, but they haven't received a raise from their employer. 

Similarly, the amount someone can withdraw from investment accounts (especially tax-deferred accounts like IRAs) is tax-agnostic: An IRA will support a given withdrawal plan with a certain level of risk, but the IRA itself doesn't care about the tax rate. If taxes go down, the individual's net-of-tax spending can go up without an increase in withdrawals. 

This approach to the "How much can I spend?" question allows easy exploration of a range of income and guardrail options, but it isn't always the last step or the "final answer" when doing retirement income planning. For that, you may need to use the "How can I spend $X net of tax?" option...

"How can I spend $X net of tax?"

This option requires knowing the desired baseline net-of-tax monthly income for the household. Instead of asking how much a household can afford to spend, this option will find income risk and guardrail settings that are estimated to produce the desired net-of-tax baseline income and spending level (while also hitting the specified legacy and other/variable spending goals). This mode will gross up income and withdrawals in higher tax years.

This is particularly helpful when dealing with a plan that has "lumpy" taxable income, such as plans with Roth conversions or large taxable income in a specific year.

Switching the Primary Question

There are two ways to switch between 'How much can I spend?' and 'How can I spend $X net of tax?'. First, on the Expenses tab of the main plan stepper, click the Change this link inside the grey box.

This will bring up a box where you can change the primary question.

You can also make this change in the plan's Advanced Settings, located in the three-dot menu at the top right of the dashboard.
 

Under Income Settings select the “How can I spend $X net of tax?” (where $X will show the desired net-of-tax monthly income you have already entered in the plan), click Save, and return to the plan dashboard. 

If you would prefer to see the income risk and guardrail settings immediately, without returning to the plan dashboard, click Find Income & Guardrail Settings instead of Save.
 

Please note that in "How can I spend $X net of tax?" mode, you will see the following differences in the app:

1. The "Income Sourcing" graph will be "lumpier" since it shows gross income
2. The Tax Lab "Compare" section will show no differences in net-of-tax income across withdrawal strategies.