The Income Parameters panel is used to configure the basic parameters of the income plan, such as assets (in Basic mode), desired income, retirement age, life expectancy, and capital market assumptions.
The Income Discovery tool is intended for clients who are currently retired or will be retiring within a few years. It is not designed to analyze the situation of an investor who is a decade or more away from retirement and in what is referred to as the accumulation phase. Conventional financial planning tools serve the latter case. Most of the articles in the Income Discovery Knowledge Base explain the application usage from the perspective of a person who transitioning to retirement or is already retired.
The Income Discovery tool supports analysis in two modes: Basic mode, which analyzes pre-tax retirement income and ignores tax related details, and Advanced mode, which gets into the details of taxes, including the taxable portion of all cash flows, separate tracking of capital gains that is taxed at a different rate and other taxable income. The use of this panel in both modes is described below, starting with the Basic mode first.
The Total Assets field represents the total investable assets of the retiree that will be used to generate their retirement income. In the non-tax mode of the application, configuration of the total assets, rather than a breakdown of the assets by account, is sufficient for the analysis and reduces the amount of data that the user is required to enter.
Part of the total assets is used to purchase various annuities used in the income plans. The remaining amount is invested in a systematic withdrawal portfolio (SWP), which represents the portion of your client's money in conventional asset classes, such as equities, fixed income, and alternative investments. The allocation model of the SWP can be configured to best suit the retiree's risk preference or under a range of scenarios. The annual return of the SWP can be modeled using Ibbotson historical data or random walk assumption based forward looking expectations.
Desired Annual Pre-Tax Income
Here, you can configure the Desired Pre-Tax Income, which is the total annual pre-tax retirement income from all sources of cash flow. The cumulative retirement income is generated from Social Security, Annuity payments, other incoming cash flows, such as a pension or part-time work, and the systematic withdrawal portfolio. You should configure the total cumulative real income in this field, as opposed to the nominal value. The term "real" signifies that the nominal retirement income is adjusted to inflation in future years. Variation of the real income during retirement, based on changing circumstances and unique situations, is configured in the Income Phases tab. For more details, see the Phases – Inflation Adjusting and Varying Income article.
When using a lifespan based planning horizon, other data inputs must be changed in different sections of the tool. A detailed overview of this can be found in the Lifespan Based Planning article.
Plan Start Year
A primary assumption underlying the tool is that the annual income withdrawal occurs at the end of January, which begins with the first January of the plan start year and each January thereafter. The Plan Start Year is auto-generated by the application to the year of the upcoming January and can't be changed by the user.
If the investor is retiring in the middle of the year, the advisor can remove funds from the total assets to set aside specifically for meeting the expenses until the Plan Start Year.
Capital Market Assumptions
Future inflation and investment returns sequences for analyzing the plan can be built either from historical sequences or by using forward looking capital market expectations. The Income Discovery tool creates historical sequences based on data available in the Ibbotson Classic Yearbook. It also offers three additional default forward looking capital market assumptions. You can choose to analyze plans using any of these assumptions. You can even compare the same retirement income strategy side-by-side, under different capital market assumptions, by changing the assumptions before running the plan.
In switching between the non-tax and tax modes you will notice that the main difference within the Income Parameters tab relates to the Total Assets and Desired Annual Income columns. The Planning Horizon, Plan Start Year, and Capital Market Assumptions columns remain unchanged when switching between the two modes.
Desired Annual Post-Tax Income
In the Advanced mode of the application, the desired post-tax income is configured in the Income Parameters tab. The tool calculates the taxes and adds them, in order to determine the total withdrawals.
Investment assets are not configured in the Income Parameters tab, rather in a separate tab, called Accounts in the Sources tab. Each tax-type account, its basis and model allocation are specified in that tab. These details are described in a separate article titled Tax Mode of Income Discovery.