The security ratio and smoothing parameters

The Security Ratio (SR) and Income Smoothing Parameter (a) are the key user-provided preferences within this planner. Together, they determine how much retirement income should be secured and how quickly future investment gains are converted into additional guaranteed income.

Portfolio balance alone does not tell you how much of your lifestyle is locked vs at risk. The Security Ratio makes that distinction explicit by measuring how much of your retirement income has already been secured. It is a key parameter is determing retirement readiness.

The Income Smoothing Parameter determines the trade-off between locking in more income today and pursuing higher income later.

Calculating the Security Ratio

At every step in every simulation path, the model tracks two income concepts:

• Income capacity is what you could generate if you converted all of your portfolio—including stocks, bonds, and (when enabled) any available Social Security benefits—into a lifetime income stream.
• Guaranteed income is the income stream you've already locked in through risk-free investments and any Social Security benefits you've already claimed.

The security ratio is simply the ratio of guaranteed income to income capacity. The Security Ratio is recalculated throughout the planning period and serves as the planner's primary measure of retirement readiness.

A SR value of 0% means all of your retirement income still depends on investment markets. A value of 100% means your entire retirement income has been locked in through risk-free investments and any claimed Social Security.

Note that an SR of 0% begins retirement in the same way as a traditional dynamic withdrawal strategy: none of the retirement income is guaranteed at retirement. From that point forward, the planner still follows its post-retirement policy of converting some future gains into guaranteed income.

Example: Suppose current income capacity is $100,000 annually and $50,000 of that is guaranteed income. The SR is 0.50 at that point in time — half of your income capacity is locked in to guaranteed income, half still depends on market-valued stock wealth. Both values represent annual amounts from today to the end of the planning period.

Before retirement, wealth will be converted into guaranteed income to meet the retirement objective (SR₀). Any claimed social security benifits will also be treated as guaranteed income and help increase the SR.

After retirement, not all investment gains are immediately converted into guaranteed income. Instead, the planner gradually increases the amount of income that should be secured as you age. When markets perform well, it converts enough investment gains into guaranteed income to meet that objective while leaving the remaining wealth invested for future growth.

Why Security Ratio Target matters

Portfolio balance alone does not tell you how much of your income is locked in. Two households with the same $1.2M net worth can have very different SR:

• One has $70K guaranteed and $30K from wealth income potental → SR ≈ 0.70
• One has $20K guaranteed and $80K from wealth income potental→ SR ≈ 0.20

Both households may have hit their "portfolio target" but the second household is able to experience more potential upside and also faces much more downside risk. This is one of the blind spots in traditional retirement planning.

This planner introduces the Security Ratio Target (SR₀) and makes that distinction explicit in the retirement plan. It allows the user the ability to control the type of retirement they are confortable with.

Growing your retirement income

Retirement is not the end of the financial planning story. Post-retirement the wealth portfolio must be managed to generate additional income during retirement. Many retirement plans assume that once you retire, your income remains roughly constant for the rest of your life. This planner takes a different approach.

It first locks in guaranteed income that will never decline. Then it works to add to that guaranteed income over time by continuing to manage the weath portfolio. When markets perform well, part of investment gains are converted into additional guaranteed income. Once that income has been secured, it can never be lost. Each increase raises your lifetime income floor without giving up all future growth opportunities.

We call this the Income Ratchet.

Unlike a traditional withdrawal strategy, the ratchet only moves in one direction: guaranteed income can increase, but it never decreases.

The Income Smoothing Parameter determines how aggressively those gains are converted into guaranteed income.

• Lower smoothing leaves more wealth invested, producing larger income increases later in retirement.
• Higher smoothing locks in gains sooner, producing a smoother and more stable income path.
• Maximum smoothing converts all available wealth into guaranteed income at retirement, eliminating future income growth but also eliminating future income uncertainty.

Setting SR₀ in practice

There is no universally correct value. Higher SR₀ means more guaranteed income at retirement — less exposure if stocks fall right after you stop working — but potentially a later retirement date because you must build more guaranteed income first. Lower SR₀ retires you earlier on average but leaves more income dependent on stock annuitization.

Think of setting a SR₀ to a level that you could live off for a little while if markets declined immediately after retirement.

Use the retirement age distribution and income fan charts to see trade-offs. Adjust SR₀ and re-solve to explore the frontier between earlier retirement and more certainty.

Next: When can you retire? — how the readiness test works path by path.