Income Projection Model

How it works

The Income Projection Model forecasts year-by-year income from all sources through life expectancy, accounting for lifecycle transitions (retirement, death), inflation indexing, and Social Security optimization. In retirement, portfolio withdrawals are calculated from account balances using the withdrawal rate assumption — the model shows what income the plan produces, not what is needed to hit a spending target. The system also distinguishes between "income items" (tax-reportable income on Form 1040) and "cash-flow items" (money received), enabling accurate tax calculations alongside income planning.

1. 1. Income Classification

   Income sources are categorized by type and lifecycle behavior

   Total Income = Pre-Retirement Income + Retirement Income + Investment Income + Asset Withdrawals

   Example: Year 2025: $150k wages + $20k dividends = $170k | Year 2045: $60k Social Security + $40k IRA withdrawals + $15k dividends = $115k

2. 2. Pre-Retirement Income (Ends Before Retirement)

   Wages, business income, K-1 income indexed for growth and ending year before retirement

   Year N Amount = Initial Amount × (1 + Index Rate)^(Years Since Start)

   Example: $100k salary with 3% growth → Year 5: $100k × (1.03)^5 = $115,927

3. 3. Social Security Calculation

   Benefits calculated from PIA, adjusted for claiming age (62-70), indexed for COLA, with survivor benefits

   Monthly Benefit = PIA × Age Adjustment × (1 + COLA)^Years

   Example: $3,000 PIA claimed at 67 (FRA) = $3,000/month. Claimed at 70 = $3,720/month (+24% DRC)

4. 4. Partial First Year (Mid-Year Starts)

   An income stream that begins mid-year pays only part of its annual amount in its start year. Each income item carries an optional "Months in First Year" setting (1–12, blank = full 12 months) that scales the start year only. The amount entered on the item is always the ANNUALIZED run rate — never a pre-reduced partial-year figure — so the second year and every year after pay the full amount grown by the index rate. Indexing is measured from the start year regardless, so the partial year never compounds forward. Social Security handles this automatically for estimated and optimized benefits by deriving the months from the claimant's birth month; an advisor-entered benefit uses the months stated on the item, because an entered amount is just as likely to be a benefit already in payment as one about to begin.

   Start Year Amount = Annual Amount × (Months in First Year ÷ 12)
   Later Years = Annual Amount × (1 + Index Rate)^(Year − Start Year)

   Example: $36,000 pension beginning in September 2025 → Months in First Year = 4 → 2025 pays $36,000 × 4/12 = $12,000; 2026 pays the full $36,000 (plus indexing). Leaving the field blank pays the full $36,000 in 2025 — correct for income already being received.

5. 5. Investment Income (Continuous)

   Dividends, rental income (Sch E), and interest continue through the projection, optionally indexed. Important distinction: dividend and rental income is treated as both taxable income AND spendable cash flow. Interest income is treated as income-only (taxable but reinvested, not a cash inflow) — cash from the account comes through the withdrawal model instead.

   Year N Amount = Initial Amount × (1 + Index Rate)^Years (if indexed)

   Example: $15k annual dividends with 2% growth → Year 10: $15k × (1.02)^10 = $18,285 (taxable + spendable). $5k interest = $5k taxable income, $0 cash flow.

6. 6. Asset Withdrawals (Portfolio-Rate-Based)

   Beginning at retirement, each portfolio account distributes withdrawals calculated from the account balance at retirement and the withdrawal rate assumption (default 4%). Withdrawals increase annually with the inflation rate so real purchasing power stays approximately constant. Required Minimum Distributions from tax-deferred accounts (starting at age 73) are calculated separately using IRS life expectancy factors and honored first — when the RMD exceeds the formula-based withdrawal, the RMD takes precedence.

   Annual Withdrawal = Retirement Balance × Withdrawal Rate × (1 + Inflation)^Years Since Retirement
   RMD (age 73+) = Account Balance ÷ IRS Life Expectancy Factor
   Actual Withdrawal = Max(Formula Withdrawal, RMD)

   Example: $500k IRA at retirement, 4% rate, 2.5% inflation → Year 1: $20,000 | Year 10: $20k × (1.025)^10 = $25,601

7. 7. Taxable vs Cash-Flow Distinction

   Capital gains from asset churn are taxable income but NOT cash flow. IRA withdrawals are both taxable income AND cash flow.

   Taxable Income ≠ Cash Flow. Use appropriate filter for tax calculations vs retirement planning.

   Example: $50k IRA withdrawal = $50k income + $50k cash flow. $10k capital gains (asset churn) = $10k income + $0 cash flow

8. 8. Survivor Scenario

   Survivor benefits replace deceased's Social Security. Other income continues if owned by survivor or joint.

   Survivor SS = Max(Own Benefit, 100% of Deceased Benefit)

   Example: Client: $3,000/mo, Co-Client: $2,000/mo → Client dies → Co-Client receives $3,000/mo (higher benefit)

Real-world context

What drives the result

Assumptions

• Social Security system remains solvent through life expectancy (no future benefit reductions modeled)
• Withdrawal amounts grow annually at the inflation rate assumption so real purchasing power stays approximately constant over retirement
• The withdrawal rate is applied to the account balance at retirement, not recalculated dynamically as balances change
• Asset withdrawals can always be made regardless of current portfolio balance (no depletion guard)
• All dividend income is qualified and spendable as cash flow; interest income is reinvested (income-only, not treated as cash)
• Life expectancy assumptions are deterministic — no mortality probability modeling
• All Roth IRA distributions are tax-free (5-year rule and age requirements assumed satisfied)
• K-1 income is assumed to be from an S-Corp structure (no self-employment tax); see K-1 limitation below

Limitations

• K-1 income is modeled without self-employment tax regardless of entity type — partnership or multi-member LLC income that should be subject to SE tax should be entered as Schedule C instead
• Social Security estimate uses current-year wages for all 35 benefit years — no age-60 wage indexing per SSA methodology; benefits may be understated for peak earners with rising wages
• Social Security COLA uses the global inflation rate assumption rather than an independently configurable COLA rate
• Spousal Social Security strategy is limited to claiming-age adjustment, spousal excess benefit (50% of PIA), and survivor benefit — no deemed filing rules, voluntary suspension, or divorced-spouse benefits
• Income growth is modeled as a smooth annual compound rate — step changes (e.g., a promotion in a specific year) must be approximated by entering separate income items with different start/end years
• Rental income stays flat or grows at the index rate — rental property sales, vacancy periods, or rent escalation clauses are not modeled
• Social Security system solvency assumed — no modeling of potential future benefit reductions or trust fund depletion scenarios

Related

• Social Security Benefit Calculation
• Required Minimum Distributions (RMDs)
• Structured Withdrawal Strategy