Scheduling Future Changes in Income - Step Up / Step Down
Aside from annual growth, earnings (as well as bonuses, commissions, dividends and benefits in kind) can be scheduled to increase or decrease at future events. Steps in income scheduled on the Employment screen’s Advanced Settings > Step Up / Step Down panel.
Note: To be used in stepping, the event must fall within the income’s time span. The event must be positioned in a year following the start of the income and prior to the end of employment.
Do not use steps to begin or end an income. That is done on the Time panel, which is used to set the overall time span of an income using either start and end events or by selecting one or more stages. Only changes between the start and end of an income would be scheduled as steps.
For example, our client plans to return to university in two years and work part time while pursing a three year degree. To schedule this change in earnings while working part time through university:
1. Go to the Time screen.
2. Drag and drop two events the timeline: one to step down the income when university begins and another to step earnings up again after graduation.
Note: Events could also be added from the Employment screen. The New Event button, which is located on the Time panel's Event tab, can also be used to conveniently add events to the timeline to schedule future increases or decreases (steps) in income, if needed, without ever leaving the Employment screen.
3. Next, go to the Employment screen. If you are editing an income that hs already been entered into the plan, select the income in the ledger, to the right side of the screen.
4. Expand Advanced Settings and select Step Up / Step Down.
5. Timeline: Select the event at which the step down in earnings will occur - e.g. "Uni work part time".
6. Stepped Income: Enter the full stepped amount in earnings. When entering a future steps in income, be sure to enter the full, edited amount and not merely the difference between the old income and new.
Leave any entries that will not be changed (e.g. bonuses and commission, dividends and benefits in kind) unticked.
Note: Be consistent. If the income is entered as an annual amount in the main fields on screen, be sure that the adjusted amount you enter on the Step Up / Step Down panel is also an annual amount and vice versa for monthly income amounts.
If you were to enter an income initially as a monthly amount and were to switch to an annual amount on the Step Up / Step Down panel, the stepped amount will still be multiplied by twelve, probably yielding some unexpectedly exuberant results in your client’s cash flow.
Notice that an additional set of fields will display. We will use these to enter the next step. Anytime you add a step an additional set of fields will be added to the panel to use should you need to add more steps. If you were only scheduling one step, simply ignore the subsequent set of fields.
7. Timeline: In the second set of fields, select the event at which the step up to regular full time earnings will occur - e.g. "Graduation resume full time".
8. Stepped Income: Enter the full stepped amount in earnings. When entering a future steps in income, be sure to enter the full, edited amount and not merely the difference between the old income and new.
9. Scroll to the bottom of the panel and click OK.
The line graph at the bottom of the screen will show a rough trajectory of the income. It should show the income growing initially, dropping once university begins, and then picking up again with growth factored in, after graduation.
10. Click Add or Update to save your changes.
Present Value / Future Value and Stepping Income
There is one additional consideration when stepping income. Expand the Advanced Settings > Growth panel. Here you can edit the growth rate applied to the income. This rate can also be altered in the future, if necessary, using steps. Moreover, you will find on this panel Present Value / Future Value settings. These two options determine whether growth will be applied to the stepped amount.
Present Value is selected by default. This means that the values entered on the Step Up / Step Down panel are in today's terms. For example, your client plans to work part time in his late career, decreasing his working hours and salary by half at age 60. In terms of present income, this would bring his income to £60,000 per annum. Since the amount is considered to be a present value, in today's terms, inflation will be applied to the £60,000 from the start of the plan until the ”Work Part-Time” event, when the stepped decrease scheduled to occur, and will continue to be applied thereafter. So the increase to £60,000 will be an increase to an inflated £60,000, which will be a greater amount.
Future Value - If you want to take inflation out of these future steps, ensuring that the £60,000 will indeed be £60,000 at age 60, only to be inflated thereafter, select instead the Future Value option.
The system default is Present Value because in most cases we believe it safe to assume that people are thinking of amounts in today's terms and the software works out the inflationary difference for you; however, you have the option to treat these future amounts differently.