How can changing the date when the income plan begins change the retirement paycheck (spending capacity)?

In Income Lab, you will see two related by independent concepts:

1. Retirement Date: When will a person stop working?
2. Beginning of the Income Plan: When should the income plan itself begin planning for how much to take from or add to the retirement investment portfolio?

What is a Retirement Date?

Each person in a plan has their own retirement date. This is the date when that person will stop working. The retirement date specified for each person is useful for defining the timing of cash flows. For example, for a plan that has not yet begun (a plan that is still in the “preretirement phase”), you will typically include wages earned between now and retirement. The best practice for this would be to set those wages to end at the wage earner's retirement date. In the example below John is retiring in January of 2027. His wages have the “End Date Option” set to “John's Retirement”. The actual end date for the wages is 12/2026, one month before the specified retirement date. (Begin dates and end dates are inclusive in Income Lab, so this wage flow will occur in December 2026, but not in January 2027.)

The reason it is better to use the “At John's Retirement” end date option, and not to simply specify a custom date (12/2026) is that if you later want to change John's retirement date, you can do that in just one place and the timing of all cash flows the hinge on John's retirement date will change as well. So in this example if we changed John's retirement date to 1/2026, his wages would automatically end in 12/2025. If we have specified 12/2026 as a date, his wages would still go through 12/2026 even if we change his retirement date.

(You'll also note in this example that the begin date is 1/2025. That's because we're doing our planning in 2025. Setting the “Begin Date Option” to “Specified Date” and setting that date to 1/2025 ensures that the wages are received throughout the first year of the plan. The plan won't contain information for 2024, 2023, etc., so even though likely John did have wages in those years, you don't need to worry about changing the begin date - though you could if you wanted to.)

What is the beginning of the Income Plan?

For a plan with only one person, the retirement date and the beginning of the income plan are the same thing. However, for a joint plan, they can be different. One person might retire one date A and the other on date B, and these could be months or years apart. In the situation where two people are retiring on different dates, the software need to know when to begin the income plan.

The point when the income plan begins is the point when the software asks the question, given the resource they'll have from this point on, how much can this household spend? And, in each month and year of the plan, how much will this household take from their investment accounts or, if there is excess income in that month or year, how much would they save to their investment accounts instead? Before the income plan begins, the system only adds to the investment portfolio if there are explicit savings specified. Once the income plan begins, the system figures out how much will be saved to or spent from the portfolio. (Any savings specified during the income plan period will only affect the amounts in different kinds of accounts, which can matter for taxation. But these savings will only actually happen if there is non-portfolio income that can be saved. During the income plan you cannot override the spending plan and force savings instead of spending.)

Let's look at an example with two different retirement dates. In the plan shown below, John is retiring in January of 2027 and Mary is retiring in January of 2030. The income plan itself is set to begin at John's retirement (currently 1/2027), which is the earlier of the two.

What happens when you change the start of the Income Plan?

Typically, if we push the income plan to start later, the retirement paycheck (or “spending capacity”) available at that point will be higher. Reasons for this are:

1. The income plan is shorter (it begins later, but longevity/total plan length hasn't changed)
2. The investment portfolio will likely be higher (more time to grow, more time for savings)

If you move the Income Plan start date earlier, you'd see the reverse: possible retirement spending would typically go down.

However, you won't always see that pattern. In some cases moving the beginning of the income plan earlier could mean a higher retirement paycheck. That's unexpected! If we're funding a longer retirement, shouldn't we have to spend less? 

This unexpected behavior is often due to a mistake in how the plan is entered. It is typically related to the other spouse's retirement date not having been changed. 

For example, let's assume John's wages in this plan at $5,000/month and Mary's are $20,000/month. If we move the beginning of the income plan back from 1/2027 to 1/2026 by changing John's retirement date, John's wages will end earlier. However, we didn't change Mary's retirement date at all, so her wages will still continue to 12/2029. Now the income plan contains not 3 years of Mary's wages (2027-2029), but 4 (2026-2029)! Let's imagine the resources in the plan can produce about $15,000/month in retirement paycheck/spending capacity. All else being equal, adding a year to the plan by moving the income plan start date one year earlier would have a slight negative effect on this number (maybe $14,800 instead of $15,000). However, in this case for that extra year (2026) this couple would not have to draw anything from the portfolio. In fact, they'd be adding about $5,000/month from Mary's wages to the portfolio ($20,000 - $15,000). When the income plan start date is moved to 1/2026, we're just adding an extra year of those $5,000/month savings. That means that the retirement paycheck for 2026 is likely higher than for 2027!

The reason this would be confusing and unexpected is that:

1. When moving retirement one year earlier we may have intended to move Mary's retirement earlier as well. By not doing so we're adding savings/resources to the plan.
2. We might have specified savings plans that are keyed to John or Mary's retirement date. But remember that once we hit the income plan start date, the income plan isn't considering those (except for round-trip or “wash” moves between accounts). Instead, the income plan figures out how much to save or spend. So, in this case, those $5,000/month savings could be quite a bit higher than the preretirement savings we had originally specified for Mary. By moving the income plan start date we effectively changed how much Mary is saving vs spending from her wages.

So, if you move the income plan start date earlier and see this strange behavior (where possible retirement spending goes up), you may want to check both people's retirement dates and the savings/spending that is happening in the two plans.

How do pre-income-plan specified account withdrawals and variable expenses affect this?

Another way that moving the income plan start date could have unexpected results is related to the balance at retirement. If you see the projected balance at retirement is lower at a later income plan start date than at an earlier date, this may be because you have specified account-level distributions in the plan that are assumed to be spent.

Account-level distributions from inherited accounts and non-qualified deferred compensation are assumed to be reinvested into the portfolio. That's because these account types typically require these withdrawals. So, if they are specified, we assume that they are not necessarily being spent, but are simply having to move from one account to another (a taxable account). However, if you specify a distribution plan before the income plan begins from a more typical account type, such as a taxable account or a traditional IRA, the software will assume these are being spent. After all, why else would you specify that distribution! If these sorts of distributions are large enough, they may result in a lower balance at retirement as you push the income plan start date out. To over come this, you can always add offsetting savings back into the portfolio.

Variable expenses that are marked to be funded from the portfolio in preretirement can also affect the balance at retirement. However, since variable expenses during the income plan are also funded from the portfolio, these will not typically have as big of an effect on retirement paycheck/spending capacity.

Before vs During the Income Plan

To summarize some important differences between the before-income-plan and during-income-plan periods:

• Before the income plan begins, the software does not determine how much the household saves or spends. Instead, anything that is not explicitly saved (by a specified savings plan) is assumed to be spent or at least not to be added to the portfolio. In other words, before the income plan begins, specified savings matter a lot.
• Once the income plan begins, the software determines, based on all resources and other plan items, how much can be spent. Using this number, it also determines how much would be saved to the portfolio from any excess non-portfolio income. In other words, once the income plan starts, specified savings matter very little.

During the income plan, specified savings plans are only followed if there is non-portfolio income as a source for these savings. For example, if there is some part-time work leading to $5,000/month in self-employment income during the first few years of income plan, you might want to specify that this is going into an IRA. That's fine. However, if the plan at that point also requires portfolio withdrawals, the plan will simply put those $5,000 into the IRA and then take an extra $5,000 out of another account. In other words, during the income plan you may see savings being “round-tripped” in this way. That means these savings plans will potentially affect taxes in that year or future years (in this case for example we might see higher RMDs in future years), but it wouldn't affect overall spending capacity or retirement paycheck.