When using any financial planning tool, it is important to make sure that it is capable of considering as many variables as possible (or at least those that apply to your specific situation) so that it can generate the most thorough and accurate results. For the purposes of this post, we will discuss what happens if annual income exceeds what is needed to pay expenses (including taxes).
Some planning tools, believe it or not, do not account for any excess income. The Fidelity planning tool (nothing against Fidelity, but their planning tool is a good example in this case) states that, "If your income in any given year is larger than your expenses, this Tool does not assume that you save the surplus". In fairness, the Fidelity tool does save any excess RMD's, but that still means that any excess income is simply "lost", or not otherwise accounted for. If the amount of excess income for a particular year, or even many years, is a few hundred dollars, or even a thousand dollars, that may not materially affect your total results over several decades. But if you have $150k in income each year and only need $100k for expenses and taxes, are you willing to let $50k per year (for as long as that happens) just disappear from your plan? Especially if it happens consistently? Probably not.
With TCRP, you have a couple of options. To make sure that excess income is accounted for in at least a minimal way, the planner defaults to automatically saving a minimum of 25% of the excess. If you have a relatively small amount of excess income for a year ($1k - $5k?), or even consistently for many years, this may be okay since a small portion is saved, and the remainder, while not accounted for, could be considered as an intentional way to build a margin of error into your plan. Expenses themselves are difficult to forecast with any certainty over long periods of time (decades?) and if they turn out to be more than planned, the few thousand of excess income that was not saved/accounted for (even several thousand per year for many years) provides a bit of a cushion for that possibility. While it is certainly better than nothing, if you have a more significant amount of excess income, you might want to consider other options.
No matter the amount of excess income, you have the option to specify what portion of the excess you would like to save. Being able to specify a particular % of the excess allows you to decide whether you would like to save a generally greater percentage, a specific amount needed to reach a goal and then spend/ignore the rest, (you can see how much is being saved for each year on the Results page), or to just try to save as much as possible (for those super-savers
out there). Whatever your intent, it's good to have options. TCRP currently allows you to save up to 90% of any excess income. For the 2025 version, this maximum will increase to 95%. The planner does not allow 100% to be saved for
two reasons - most importantly, it would not be realistic, reasonable, or financially responsible for anyone to be expected to be able to save every penny of excess income, every year, for decades. Things happen, money gets spent in unpredictable ways, at unpredictable times. It is also wise to always maintain a small margin of error in this regard.
For those fortunate enough to have large amounts of excess income, leaving 10% of the excess unaccounted for can be a significant amount, and that's why we are increasing the maximum allowable auto-save percentage to 95%. Even the remaining 5% can be significant for some, but we maintain that being able to select 100% would not be prudent. Better to underestimate how much may be saved than to overestimate.
While the planner does not allow you to choose the exact amount of excess income to save (only the percentage),
if you want to save a certain amount each year, you can still get close to that goal. Set the auto-save % to a realistic/reasonable amount, for you, based on your savings habits. Review the resulting amount saved each year on the Results page. If the amount is more than you wanted, enter an expense for the difference. For example, if the auto-save amount is $7,000, but you only want to be sure to save $5,000, enter an expense for $2,000/year. You can label the expense as, "extra savings" ("extra spending"?), or whatever you like. That expense will directly lower the amount that is auto-saved. At least then you will know that you are saving what you wanted to, and can still see the additional amount of cushion above that amount (the added expense). While you can't adjust the auto-save % by year, you can adjust the added expense for several different time frames, so monitor the amount saved on the Results page so that you can try to average out to your savings goal.
You can also use the auto-save feature in another way. Start by entering what you feel is a realistic percentage of excess income for you to save (i.e., how much of your income are you saving now?). When all other entries are completed, assuming that your plan turns out in a positive way, reduce the auto-save percentage to the minimum 25%. Are your results (when both spouses have reached age 90, for example) still positive - or as positive as you would like them to be? Adjusting/lowering the auto-save % is another way to stress test your plan. This can be used in conjunction with raising the inflation %, lowering investment return %'s (or at least entering a few negative years for a dose of realism), or lowering income earlier than expected (as you approach retirement?). The more scenarios that you try,
the more you will learn about the strengths and weaknesses of your plan.
One last note related to saving excess income - In order for the auto-save feature to give you the best information
(i.e., how much is auto-saved each year) it is essential that all itemized expenses are entered as thoroughly and accurately as possible. This means that you have entered all specific expenses that you can think of (current and future), as well as more vague expenses such as general spending money, eating out, replacing older appliances, etc.
Yes, they are all a forecast, and will undoubtedly change as time goes on (as will other variables, such as expected investment return %'s), but to calculate how much income may truly be excess, and available to save, expenses need to be as realistic as possible to start with.