A common planning scenario involves illustrating the tradeoffs of a lump-sum pension vs an annual pension to help a client determine their preferred financial path. This article will walk through how to create proposals of both options to present to a client.
This article covers several tools in RightCapital and demonstrates how to pull them all together into a compelling presentation. First, we will need to create additional Plans. Each plan will represent one pension option. Below we will detail the process of creating and comparing multiple pension plans.
The first step is to create two additional plans: one for the Annual Pension, and another for the Lump Sum. This can be done in the Retirement > Analysis section, by clicking the pencil & paper icon next to the Current Plan:
To incorporate a pension scenario under the current plan, annual pensions will be modeled under Profile > Income and lump-sum pensions will be modeled under Profile > Savings.
Once the two additional plans are created, go on to the next part of this article.
For the annual pension, make sure the 'Annual Pension' plan is selected on the left-hand drop-down menu above the two graphs. Then, click the Action Items button at the bottom of the page:
Whichever plan is selected on the left-hand side is the plan that will be impacted by changes to the Action Items.
Within the Action Items, click the 'Edit' button in the lower right, and then click 'Add New Items'. Within this menu, hover over Income and then select Pension to add a Pension Income stream to the proposal:
Enter all of the relevant information such as start year, annual amount, annual increase, etc. When finished, click Save in the lower right.
Annual amount - The dollar amount that the client will receive each year from the pension.
Income starts - The start year is the first year the income is included in the plan. For clients who are already receiving their pension income, select the 'Already started' option.
Type - indicates the period for which the pension income will last:
Certain only - reflects payment for a specific duration. If selecting 'Certain only', input the year that income should end in the Guaranteed Period field.
Life only - reflects payment for the life of the owner. If selecting 'Life only', input the percentage of income that the surviving client will receive upon the death of the owner in the Survivor % field.
Certain/Life - reflects payments for the longer of either the client's life or the period indicated. If selecting 'Certain/Life', input the year for the Guaranteed Period to the right, as well as the Survivor % at the bottom of the card.
Annual increase - indicates whether and by how much the pension income will increase each year. You can specify whether this is a simple or compounding increase in the Increase type field.
Simple - increase is calculated based on the original annual income amount, and will be identical each year going forward.
Compound - increase is calculated based on the original annual income amount, plus accumulated interest of previous periods.
Cost Basis - optional parameter for non-qualified pensions, representing the total amount paid into the pension by the client. If the pension is qualified, leave this field at $0.
Exclusion Ratio - optional parameter for non-qualified pensions, representing the percentage of the pension income that is not taxable until the cost basis is depleted. If the pension is qualified, leave this field at 0%.
Non-Covered - for pensions paid by an employer that does not withhold Social Security taxes, the 'Non-covered' box can be checked. In applicable cases, Social Security benefits may be reduced as a result of WEP or GPO.
State Tax Exempt - For pensions that are not subject to state tax, you can check the ‘State tax exempt’ box. If the box is left unchecked, pension income will be subject to state-specific taxes, based on the client's resident state.
To create a one-time deposit reflecting the nature of a Lump-Sum payment, select the Lump Sum Pension plan on the left-hand side of the Retirement > Analysis:
Within the Action Items, click the 'Edit' button in the lower right, and then click 'Add New Items'. Within this menu, hover over Savings, then Other, and select Tax-Deferred option to add a Tax-Deferred Savings card to the proposal:
Input the parameters of the one-time lump-sum payout, including the full amount. Be sure to set the starting and ending points to the same age or year to reflect a one-time contribution. This card will reflect savings coming from outside of the plan, so as not to reduce the client's income. Name the savings card "Lump-Sum Pension" so that it will be easier to find when comparing the two options (as explained below). When finished, click Save in the lower right.
Using the 'Save to' field in the lower right, you can choose whether the lump sum payout will be rolled over into an IRA or 401(k)/403(b).
At this point, there should be two proposed plans created, one with an annual pension and another with a lump sum.
Navigate to Retirement > Analysis to illustrate the different options. In this scenario, the Current Plan reflects neither pension option.
1
Select the Annual Pension plan in the drop-down menu on the left.
2
Open the Action Items to ensure the annual pension amount is input correctly, and the lump-sum option is set to $0. In other words, make sure that the annual pension is turned on, and the lump sum is turned off.
3
Now, select the Lump Sum plan on the left-hand side.
4
Open the Action Items to ensure the lump-sum amount is input accurately, and the annual pension is set to $0.
5
Voila! Now you can select one proposal on the left and the other on the right to see the difference in probability of success and median ending assets. You can even compare the plans across different return scenarios on the Comparisons tab:
