The Retirement Spending Insight is designed to help illustrate how much a client could potentially spend each year in retirement while using their available liquid assets over the course of the plan.
The Insight calculates the maximum annual retirement spending amount that can be supported without creating a shortfall during the planning horizon. Illiquid assets, such as property, and accounts that have been excluded as potential payment sources through withdrawal limits are not assumed to be available to support this spending.
The result can be useful when comparing the client's calculated spending capacity with their planned or actual retirement expenses to help illustrate how much flexibility may exist within the plan.
Choosing When the Analysis Begins
By default, the spending analysis begins at the primary client's Retirement Event. You can change the starting point by selecting a different event within the Insight.
If the primary client is already retired and no Retirement Event is available, the analysis begins at the start of the plan.
For a joint plan, the analysis continues through the end of the planning horizon, generally through the second client's mortality event.
Once the analysis begins, existing user-entered expenses are generally replaced by a calculated Spending Analysis Expense. However, the updated Insight gives you additional control over which goals and mandatory expenses remain in the analysis and whether they are included within or in addition to the calculated spending result.
Including Milestone, Gifting, and Education Goals
The Insight includes separate options for:
- Milestone Goals
- Gifting Goals
- Education Goals
When one of these options is ON, those goals remain in the analysis and the Retirement Spending result is calculated net of those goals.
For example, suppose a client has a $100,000 gifting goal during retirement and the Insight calculates retirement spending capacity of $70,000 per year. The $70,000 represents the client's annual spending capacity in addition to the $100,000 gift.
In the year the gift occurs, the plan could therefore show $170,000 of total spending: the $70,000 Spending Analysis Expense plus the $100,000 gifting goal.
When the option is OFF, that type of goal is removed from the retirement analysis and replaced by the Spending Analysis Expense. This can be useful for exploring questions such as, How much could the client spend each year if they did not make the planned gift?
Note: Milestone, gifting, and education expenses must be entered as Goals to be controlled by these settings.
You can use Year View > Expenses within the Insight to confirm which goals have been retained in the calculation.
Recurring Mandatory Expenses
Recurring mandatory expenses include items such as:
- Recurring debt and mortgage payments, including principal and interest payments
- Ongoing adviser fees
- Insurance premiums
These expenses remain visible within the Insight. The Recurring Mandatory Expenses setting determines whether the Retirement Spending result is shown in addition to these expenses or includes them.
When Recurring Mandatory Expenses is ON, the result is net of these expenses. For example, if the Insight calculates $30,000 of retirement spending capacity, the client could spend $30,000 per year in addition to paying their recurring mortgage, insurance premiums, ongoing adviser fees, or other applicable mandatory expenses.
When Recurring Mandatory Expenses is OFF, those expenses are considered part of the calculated spending amount. For example, if the result is $40,000 per year, some of that $40,000 may be needed to cover mortgage payments, insurance premiums, or other recurring mandatory expenses.
This allows you to choose whether you want to illustrate the client's total spending capacity or the amount available for discretionary retirement spending after recurring mandatory expenses have been met.
One-Time Mandatory Expenses
Certain one-time mandatory expenses are always retained in the analysis and are always excluded from the Retirement Spending result. These include:
- One-time debt or mortgage payments, such as a payoff or overpayment
- Property purchases
- Annuity purchase costs
- Initial adviser fees and exit fees
There is no separate toggle for these expenses.
Because they are excluded from the calculated result, the Retirement Spending amount represents what the client could spend in addition to making these payments.
For example, if the Insight calculates retirement spending capacity of $40,000 per year and the client also pays off their mortgage during retirement, the mortgage payoff remains in the plan without being treated as part of the $40,000 annual spending amount.
Including or Excluding Taxes from the Result
Taxes are always accounted for when the Insight performs its calculation. The Taxes setting controls how they are presented within the Retirement Spending result.
When Taxes is OFF, the result is shown net of taxes. This represents the amount the client could actually spend after accounting for the taxes generated by funding that spending. (Recommended for most cases)
When Taxes is ON, taxes are included within the displayed result. The result therefore represents the total amount that could be withdrawn or used, with a portion going toward taxes and the remainder available for spending.
Suggested Settings for Creating a Retirement Spending Goal
If your goal is to use the Insight result to create a Retirement Spending Goal in the plan, we recommend:
- Turning ON the applicable Milestone, Gifting, and Education Goals
- Turning ON Recurring Mandatory Expenses
- Keeping Taxes OFF
With these settings, the Retirement Spending result represents the amount available for the client's ongoing retirement spending after accounting for taxes, retained goals, and recurring mandatory expenses.
This provides a cleaner spending figure that can be entered as a Retirement Spending Goal without also incorporating expenses that are already modeled separately in the plan.
How the Retirement Spending Calculation Works
To calculate retirement spending capacity, the Insight creates a Spending Analysis Expense beginning at the selected event.
The amount is expressed in today's terms and is increased throughout the plan using the default inflation rate in Plan Settings.
The Insight then uses an iterative calculation to determine the maximum Spending Analysis Expense that can be supported throughout retirement without creating a shortfall.
Depending on the settings selected, this calculated spending may need to be supported alongside retained goals and mandatory expenses.
The calculation attempts to use available liquid assets over the course of retirement. However, the result will not always reduce liquid assets completely to zero. For example, accounts with withdrawal limits are respected and may therefore remain in the plan.
Planned Withdrawals and Withdrawal Limits
Planned Withdrawals are honored within the Retirement Spending Insight.
As a result, Planned Withdrawals can sometimes cause the calculated Retirement Spending amount to be lower than expected.
Withdrawal limits on accounts are also respected. Assets that have effectively been ring-fenced through withdrawal limits may therefore remain at the end of the plan rather than being used to support additional retirement spending.
If you want to explore the client's spending capacity without these restrictions, consider creating a What If and removing Planned Withdrawals or applicable withdrawal limits before running the Insight.
Understanding the Result
The Retirement Spending figure displayed by the Insight is the client's calculated maximum annual retirement spending capacity in today's terms.
The Spending Analysis Expense is then increased from the start of the plan using the default inflation rate in Plan Settings. Because the chart displays future values, the amount shown within an individual year's chart may therefore be higher than the present-value result displayed by the Insight.
The chart may also include retained mandatory expenses or goals in addition to the Spending Analysis Expense, depending on the settings selected.
The spending level is assumed to continue through the end of the plan. For a joint plan, this generally means through the second client's mortality event.
Reviewing the Calculation in Year View
To see how the result is being applied within individual plan years, select Year View in the upper-right corner of the Insight or double-click a bar within the chart.
Within Year View > Expenses, you can review the Spending Analysis Expense alongside any goals or mandatory expenses that remain in the analysis.
This can be particularly helpful when determining whether a goal or expense is being included within the calculated spending result or funded in addition to it and to determine the future value of the expense.
Retirement Spending Insight and Reports
The Retirement Spending result used in reports reflects the event and Insight settings used the last time the Insight was run.
For example, if you run the Insight beginning at one client's Retirement Event with taxes excluded from the displayed result, those settings will be reflected in the report.
If you later rerun the Insight using a different event or include taxes in the result, the next report will reflect those updated settings.
Before generating a report, we recommend running the Retirement Spending Insight using the event and settings you want reflected in the report.