How do I explain "retirement paycheck" to clients?

A core concept in Income Lab is the “Retirement Paycheck” (or “Spending Capacity”). This appears prominently on the main retirement plan dashboard and is a key deliverable concept in a retirement plan.

The Retirement Paycheck is the answer to the question “How much can I spend?” It is the amount that the plan says the client can have in retirement income each month (or year, if viewing on the annual setting). This number can be viewed in monthly or annual terms, gross or net of first-year tax, and including or excluding special other/variable expenses named in the plan.

The software arrives at this number by analyzing the resources available to the household (investment accounts, annuities, pensions, Social Security, and all other incoming cash flows) along with the advisor's assumptions about capital markets and inflation behavior (CMAs), longevity and plan length, mortality risk, etc. The analysis simulates a wide range of possible futures: good returns, bad returns, good inflation, bad inflation, mortality adjustments, etc. 

Each of these possible futures has a maximum amount that someone could spend in that scenario and hit all of their goals. Some scenarios would be rough times to retire (poor returns, high inflation) with lower possible spending; some would be great (high returns, low inflation) and have high spending, and many will be something in between, with fairly good times or a mixture of bad and great and a more in-between spending level. 

The default retirement paycheck you will see in a plan is chosen from this range of possible spending levels. It is a fairly conservative value from within this cloud of possible spending. By default, the income setting is set to a level that has an estimated 20% risk of overspending and an 80% risk of underspending. 

Different plans will have different retirement paychecks:

• Those with more resources will have a higher paycheck than those with less. 
• Shorter plans will have higher paychecks than longer plans. 
• Plans with more inflation or mortality risk will have lower paychecks than those with lower risk.

Of course, there's no one perfect retirement paycheck for a given set of resources. The clients' desires, goals, and attitude toward spending and risk have to be taken into account. Some clients will be more comfortable with risk and will want to spend more. Some will be happy to be more frugal initially and will be happy that this lowers their risk of a future pay cut. Because of this, the advisor can easily change this to any of 9 preset values between 1%/99% and 40%/60%. In the plan's advanced settings, an advisor can set any risk level for the retirement paycheck.