Last update on November 6, 2013
Use the Income Phases tab to configure variations of annual real retirement income for your clients. In the tax mode of the application, the tab is called Income & Tax Phases. This allows you to set-up different tax rates over the course of your client's retirement, which is entered into the tool as an effective tax rate.
The variation of retirement income is modeled in real terms, meaning it is measured in the purchasing power of today's dollars. It remains difficult to create a 10-30 year budget using nominal dollars compounded with inflation. However, building a future budget with the purchasing power of today's dollars is much simpler.
After you have determined the retiree's budget for the length of the planning horizon, the cumulative income needed in each phase can be entered by either clicking the or double clicking the row of data. You may create up to twenty phases by clicking on the , which will create a popup window for you to name the new phase, determine the length of the phase, and configure the % of Desired Income for the phase.
The phases are configured in chronological order, starting with the earliest phase as the first (top) row in the tab. The variation of income is specified as a percentage of the desired pre-tax income, which is configured in the Income Parameters tab.
The income in each phase can be increased, decreased, or even defined as zero, as may be necessary for modeling pre-retiree income requirements. View the Pre-Retiree – Defining Income and Wages article for a more detailed discussion of this topic.
The nominal retirement income is adjusted incrementally for inflation each year during the Monte Carlo simulation based analysis. The amount of inflation depends on the capital market assumptions being used. These assumptions can be easily configured; please see the Creating Capital Market Assumptions article for more details. Unlike most financial planning tools that keep inflation constant, this application models inflation as varying per a defined distribution with a certain correlation to asset class returns.
Typically, discretionary expenses decrease as people get older, but non-discretionary expenses, like medical care, increase with age. Currently, the tool doesn't allow modeling for each expense individually, however, this functionality will be offered soon in a future release of the application.
Lifespan Based Planning Adjustment
When using lifespan based planning, which determines the planning horizon based on percentile lifespans, the phase length must be configured using each member's life. You may have more phases than family members, but the end of each family member's life must correspond to an income phase, with the last phase length being determined by the end of the remaining family member's life. The graphic below, taken from the Brady Case Study, illustrates this scenario.