Why is the Final Portfolio Balance (legacy) so High in Life Hub and the Tax Lab?

Two Ways to View Plan Data

Income Lab retirement income plans include plans for adjustment: increasing income, withdrawals, and spending if things are going particularly well, and reducing income, withdrawals, and spending if things are going particularly poorly. These plans are built for a world where investment returns and inflation vary. However, there are parts of the Income Lab application that show varying investment returns and inflation, and showing adjustments to income, withdrawals, and spending, could be confusing and even misleading. Therefore, you will find two types of data and visualizations in the application:

1. Those that include income adjustments and varying investment returns, and inflation
2. Those that show no adjustments to income and assume straight-line investment appreciation and inflation

If you see places where the end-of-plan portfolio balance or legacy is (a lot) higher than you'd expect, you are most likely dealing with a part of the application that follows approach 2.

Portfolio Legacy Balances with Income Adjustments and Varying Returns and Inflation

The spending capacity and guardrails for a retirement income plan are built on the assumption that returns and inflation will vary and that investment and inflation risk do exist. The best place to see varying returns/inflation and income adjustments in action is in the Retirement Stress Test and Test Plan sections of the software. These will typically show how, because of adjustments to withdrawals over the life of the plan, the portfolio balance at plan end is reasonably close to the plan's portfolio legacy goal. Income adjustments keep the plan from either running out of money or letting the portfolio balance reach 10x or 100x the legacy goal.

Example Legacy Scenarios from Test Plan

Example from Retirement Stress Test (Scenario beginning before the Great Depression)

These final portfolio balances reflect varying/volatile investment returns and adjustments to income, withdrawals, and spending according to the particular retirement income plan guardrails being tested.

Portfolio Legacy Balances with Steady Returns and Inflation and without Income Adjustments

When the application shows a single scenario, projecting the plan into the future, the app uses constant, straight-line appreciation (based on the plan portfolio's asset allocation and fees), constant inflation, and the core income plan excluding adjustments. This approach applies in Life Hub and the Tax Lab. This is the same core income plan you'll find in the Cash Flows > Income Sourcing graph and table.

Core Income Plan (No Adjustments)

Because these projections exclude adjustments and don't include varying returns and inflation (they include steady, positive returns for all years), the final portfolio balance (legacy) in Life Hub and the Tax Lab will tend to be quite high - higher than would be realistic in a real income experience that does include adjustments.

So why don't Life Hub and the Tax Lab include adjustments and varying returns, and inflation? In order to show detailed values for all plan components in each year of the plan, we have to choose a single scenario to analyze. The no-adjustment constant growth scenario is the "least bad" option for this job. If the app instead showed a scenario with varying returns and inflation, along with income increases and decreases based on guardrails, it would be very easy for a client to conclude that these are exactly the returns and income adjustments they should expect. By sticking with the simpler version, it is easier to explain that the values in Life Hub and the Tax Lab are based on average expectations (which are, by definition, the "best guess") but that actual experiences will very likely be different.

Because of this treatment, values toward the end of the plan-especially toward the end of a long plan - in Life Hub and the Tax Lab are expected to differ significantly from the more realistic plan-end values you'll see in Test Plan and Retire Me When (Retirement Stress Test). When setting legacy expectations, therefore, it's best to focus on Test Plan and Retire Me When. But, when you're looking for detailed pictures of tax categories and brackets, or account-by-account withdrawals, the Tax Lab and Life Hub are the tools for you.