Income Settings and Guardrail Settings

Income Lab plans are built around balancing the two sides of retirement income risk:

• Risk of Overspending
• Risk of Underspending

These risks are complementary: minimizing one maximizes the other. A 0% risk of overspending is a 100% risk of underspending. While the first of these is well-known and important, the second can often be hidden. But underspending is also a risk. If someone is underspending, they are forgoing the life and experiences with loved ones that they could afford. They are failing to reap the benefits of the work they've done. They are potentially increasing regret later in life when they may look back and wish they had chosen to "live a little".

The first part of an Income Setting is the choice of the balance between these risks. Income Lab defaults all favor a lower risk of overspending at the cost of higher risk of underspending. However, many clients will choose to accept some risk of overspending in exchange for a lower risk of underspending. Still, the higher the risk of overspending, the higher the chance that at some point in the future, the client(s) may need to trim spending.

The second part of an Income Setting is its guardrails. These are the points at which an adjustment in spending would be made to keep the balance between the risks of overspending and underspending in line.

Lower Guardrail

Income and spending will go down if the risk of overspending gets too high. This is called the lower guardrail because it is typically triggered when the investment portfolio balance gets too low.

Upper Guardrail

Income and spending can increase if the risk of underspending gets too high. This is called the upper guardrail because it is typically triggered when the investment portfolio balance gets too high.

These guardrails are contingency plans for how a household will adjust its retirement income in the future if things turn out better or worse than planned. Households will have a variety of attitudes toward the trade-off between current income and the future chance of a pay raise or a pay cut. For example:

1. Some households may prefer to keep their current income quite low to limit the chances that they will have to tighten their belt more than planned in the future. At the same time, such a household would have a higher chance of being able to increase income above the planned level in the future.
2. Other households may prefer to have higher income now, rather than wait for a future income increase. Such households are more willing to accept a higher chance that they may have to reduce their income from this higher level at some point in the future. These households will also have a lower chance of future income increases, since they have already chosen to have higher income.

There is no one right or wrong way to approach this trade-off. The Income Setting slider provides a spectrum of possible approaches, from conservative to aggressive. For more information on the default guardrail levels, please refer to the default Income Settings.

Advisors who wish to fine-tune a plan's income settings may do so in the Income Settings section of Advanced Plan Settings.