Whether you ultimately decide to use MMPs or not, the application's ability to illustrate a portfolio composed partially of MMPs is appealing. Even more appealing is the ability to illustrate the "cost," in annual cash-flow terms, of extending the MMP period on the fly. An alternative scenario that extends the MMP period from five to seven years, for example, can be run with a mouse click. Almost instantaneously, the client will see the impact on the asset mix and the cash flow.
Although clients may not be aware of the risks of a bad sequence of returns unless an advisor brings it to their attention, most are acutely aware of the risk at the other end of the spectrum: the risk that the portfolio will expire before the client does. Income Discovery allows the advisor to easily add longevity insurance to the mix in the form of a longevity annuity, that is, an annuity that does not begin paying benefits until some specified time in the future. If you leave the software unconstrained, it will solve for what it calculates to be the optimal percentage of assets, if any, that should be devoted to a longevity annuity. Of course, many clients will resist putting too much into such a product, so if they are not comfortable with the recommendation, you can constrain the permissible amount devoted to this product.
Speaking of annuities, Income Discovery allows for more traditional annuities as well. Currently, the advisor has to price the products and enter them manually, but Income Discovery plans to add feeds from two annuity clearinghouses so that advisors can select individual annuities and get pricing in real time.
Now that we've discussed a few of the things that Income Discovery can do, let's take a step back and briefly summarize how it works. First, you create a household. Only minimal information is required to get started. This includes names, Social Security benefits and start dates, plus total assets and any pension benefits. Next, you go to the inputs screen (it is unclear to me why this is a separate page). Here, you choose the scenarios for the simulation (historical returns or generated returns; Income Discovery provides these numbers, as well as model asset allocations, the standard deviation of returns and the cross correlations, but you are free to change them). You then enter the desired income, the time horizon in years, a maximum amount to be annuitized, if any, and the details of up to three annuity policies to be analyzed. Or, if you prefer, you can run the software without entering the desired income amount and let the program calculate what the client can safely withdraw.
You then push the "perform analysis" button. The program generates three initial "plans." Each plan includes the annual income amount, the median terminal value of the portfolio, the failure rate, the number of years the portfolio will last in a "bad case" (defined as the worst 2nd percentile of portfolio life across all scenario paths). It then displays the amount to be invested in the systematic withdrawal portfolio, the MMP and each annuity being considered.
Let's say that all of the resulting three plans show a portfolio failure rate of at least 15%, but the client insists on a computed failure rate of no more than 10%. With the click of a mouse, the advisor can constrain the failure rate to 10% using the provided drop-down menu. The program will then recalculate based on the constraint. Either the monthly income will be less, the mix will change, or both, but the client can immediately see the trade-off between the two factors. Perhaps the recommended mix for this portfolio is 20% in the diversified portfolio and 80% in an immediate annuity linked to the CPI. The client may object to allocating such a large portion of total assets to an annuity, so you constrain the model to a maximum of 40% annuities. This diverts more money to the diversified portfolio of equities and fixed income, but it lowers the monthly payment by about 10%. This demonstrates the cost of limiting annuities to the client. Armed with this vital information, they can then decide which plan they prefer.
The inputs page includes a few additional options. One allows you to illustrate a phased retirement, so if a client wants $7,000 the first ten years of retirement followed by $6,000 the next five years and $5,900 for the remainder of the plan, you can illustrate that. It also allows you to plan by income category: basic, desired and extra. The point here is to set a baseline amount of income that is absolutely necessary and then add layers of income.
I tried out a beta version, but the production version should be available by the time you read this. Since I used a beta version, it would be premature to rate the program; features are still being added. Overall though, I liked the clean, simple interface. I liked the fact that it is built on the Google framework; this ensures that it will work with both PCs and Macs. It is also browser-neutral. I had no problem running it on Chrome, Firefox or Safari. I also tried running it on a Samsung Galaxy tablet (with the Android OS) and the iPad using their default browsers. It was usable in both cases, but since there are no native apps for the tablets, and since the site is not yet optimized for tablets, the pages were not always centered on the screen.
Since Income Discovery will often be used collaboratively with clients, the layout of the pages could be made more pleasing. The ability to output to PDF so you can save whatever you've provided to the client would be nice. Context-sensitive help and a user guide are also needed. I assume that Income Discovery is working on some of these issues.
Malhotra has indicated that the initial release is only the beginning. The firm is in negotiations with one or more firms to provide MMP execution for advisors who want it. Soon, advisors will be able to include MMP in the plan without having to worry about implementation. They can outsource it to a third party that specializes in building them.