This article describes building plans in the non-tax mode of the application.
An income plan is defined by the level of retirement income and the income strategy used to generate that income. The income strategy, as explained in another article, is a mix of the Social Security claim age, a specific individual bond ladder structure, the amount & type of annuities, and the model allocation for the Systematic Withdrawal Portfolio.
You can analyze income plans in a couple of different ways. One flexible method is to use the custom plan functionality, which allows you to specify the income strategy to be analyzed. To use the custom plan functionality, simply click the icon in the Income Strategy Options panel or the icon in Plans panel. Another way of building the plans is through the Optimization function, which will be described in another article.
Before you analyze a plan, you should configure a few alternative strategies for bond ladders and annuities in their respective tabs. The Custom Plan pop-up window will feature only the options that have been configured in those tabs. For example, if you have three bond ladder configurations defined in the Bond Ladders tab, you will be able to choose one from those three while submitting a plan for analysis. Similarly, for each annuity configured in the Annuities tab, you can choose the amount of the annuity.
Inputs for the Custom Plan Run
Plan Name & Remarks: The first input in the plan analysis pop-up window is the Plan Name. This name uniquely identifies the plan and is used in the client illustration report. It is highly recommended to keep the names short, such as Smart Plan, Base Plan, Plan A, and Plan B, so that you can easily refer to them in conversations with your client. Another aesthetic reason of using short names is that the names are also used in labels for bar charts in the client report. Very long names will reduce the length of the bars, thereby decreasing the visual communication effectiveness of the charts. The Remarks field can hold longer comments about the plan that you wish to share with the client – the Remarks are printed ad-verbatim in the client illustration report. Use the Remarks field to explain the plan, the strategy and reasons you included that strategy in the analysis.
Desired Income: In the Enter Plan Variables pop-up window, the desired income configured in the Income Parameters tab can be changed for each plan run to see the effect of increasing and decreasing the retirement income. A variation of income over the retirement phases is done using percentages of the Desired Income.
Model Allocation: Model Allocation represents the model portfolio/allocation used in the Systematic Withdrawal Portfolio component of the income strategy. Values that you see in the drop-down list are the model allocations that have been configured for the chosen Capital Market Assumptions. New model allocations can be added using the Capital Market Assumptions tab.
Social Security Claim Age: If the Social Security benefit and corresponding claim age for the members have been defined in the Members panel, an option for changing the Social Security claim age is offered as a choice. The claim age choice during the plan run can be different from the claim age defined in the Members panel. The benefit amount at the desired claim age is determined first and then the converted benefit amount is used during the simulation based analysis of the plan. The conversion is based on the Social Security Administration's rules. Those rules are described in the Methodology document available in the Income Discovery tool.
Bond Ladder: If you wish to use a bond ladder for the plan, you may select an option from the drop-down list. All of the bond ladder options that you have configured for the client in the Bond Ladders tab are offered within the drop-down list. To compare the benefits of the plan with or without the bond ladder, you should configure at least one bond ladder option with 0% of desired income – that represents not using the ladder.
Income Annuities: The next set of fields is related to the purchase of income annuities. Any income annuities that are configured in the Purchase Now sub-tab are available as an individual field where you can select the percentage of total assets to be used for its purchase. All annuity purchases are made from the total retirement assets and the balance is invested in the Systematic Withdrawal Portfolio.
Variable Annuity: The last field would be the variable annuity, if one has been configured. Similar to income annuities, you must specify the purchase amount as a percentage of the total assets to be used.
By clicking the Compute button in the Enter Plan Variables pop-up window, the Income Discovery tool will analyze the chosen income plan using a Monte Carlo simulation based on the capital market assumptions that were selected in the Parameters tab. The performance of the plan is reported in multiple risk and reward metrics (for further details about the metrics, read this article) with the description of the strategy used in that plan.
Use of the same inflation and asset class returns for a capital market assumption scenario set: A key objective of the Income Discovery application is to help you evaluate different income strategies. If the same set of multi-year sequences (one thousand sequences for forward looking capital market assumptions) of inflation and asset class returns are used to analyze and compare two different income plans, then superiority of one over the other can be established. The Income Discovery tool will generate these sequences once a new scenario set is defined or an assumption is changed and then it reuses the set for analyzing multiple plans for different households. Further details will be provided in a separate article.
Adding more plans and comparing them
The Income Discovery tool allows you to add more than one income plan to the Plans panel and then compare them side-by-side. Each plan may have its own retirement income level and corresponding strategy. You can also reorder the plans so that you can effectively compare them next to each other. See screenshot below for two plans that are compared side-by-side. Read article that explains the risk and reward metrics used in the screenshot below.
Once you have finished the analysis and are ready to generate the client report, you can then delete any unwanted plans and arrange the remaining ones in the desired order of presentation to the client. The plan at the top is shown as the recommended or proposed plan in the report. This top row plan will show more details than the other plans in the report, such as the cash flow chart.
Social Security Claim Age in the Add Custom Plan Pop-Up
If the Social Security benefit claim age in the Members panel is configured as being Receiving Now, then the Social Security claim age option is not offered in the Add Custom Plan pop-up window. Receiving Now selection implies that the benefit is being received and thus can't be changed. If the client has filed for the benefit recently, there is an opportunity to suspend the benefits and return the money received. If you are trying to analyze such a case, you can configure the claim age when benefits started for the client and then show the client implication of suspending and deferring the benefit. In summary, the claim age in the Members panel must be set to a specific age other than Receiving Now to allow the user to choose a claim strategy during the Plan analysis.