How Much of Your Retirement Income Should Be Secured?
Two people may have enough savings to retire but face very different levels of financial risk. One might have most of their future retirement income secured through Social Security and inflation-protected bonds, while the other depends heavily on future stock market performance.
LadderUp makes this distinction explicit using the Security Ratio, which measures how much of your potential retirement income has already been secured and is not subject to market risk.
By choosing a target Security Ratio, you can determine how much income security you require before retiring.
Understanding the Security Ratio
LadderUp distinguishes between two measures of retirement income:
Income Capacity: The total annual inflation-adjusted retirement income your investments and Social Security could support. This includes income already secured, plus the additional income you could secure by converting investments exposed to market risk into income-securing assets at current market rates.
Secured Income: The annual income already supported by your TIPS ladder and Social Security benefits that have been claimed.
The Security Ratio measures the relationship between these two values:
Security Ratio = Secured Income ÷ Income Capacity
For example, suppose your investments and Social Security could support $100,000 in annual retirement income.
If $50,000 is already secured through TIPS and Social Security, your Security Ratio is 50%.
You have the capacity to support $100,000 in annual income, but only half of that amount has been secured against future stock market declines.
The remaining income capacity depends on investments that are still exposed to market risk.
A Security Ratio of 100% means your entire current income capacity has been secured. A lower Security Ratio indicates that more of your potential retirement income remains dependent on investment performance.
Choosing Your Target Security Ratio
LadderUp allows you to choose a target Security Ratio, representing the minimum proportion of your income capacity that you want secured before retiring.
This is an important distinction. Your current Security Ratio measures your financial position, while your target Security Ratio reflects your preferences for income security.
A higher target means more income must be secured before retirement. This provides greater protection against future market declines but may require additional time to accumulate sufficient retirement savings.
A lower target allows more assets to remain invested in stocks, preserving opportunities for future growth and potentially allowing an earlier retirement.
Consider two individuals with the same $100,000 annual income capacity:
- Individual A has secured $80,000 annually, producing a Security Ratio of 80%.
- Individual B has secured $30,000 annually, producing a Security Ratio of 30%.
Both individuals have the same current income capacity, but their exposure to future market performance is substantially different.
Individual A has greater income security, while Individual B retains more opportunities for future growth.
Neither position is inherently better. The appropriate level of income security depends on individual risk preferences and retirement objectives.
Your target Security Ratio is one of the key inputs LadderUp uses to determine when you can retire. Learn more about how LadderUp determines when you can retire.
Increasing Income Security During Retirement
The Security Ratio also plays an important role after retirement.
Retiring with a Security Ratio below 100% means that some assets remain invested for future growth.
As markets perform well, LadderUp can convert part of those investments into additional TIPS, increasing secured retirement income.
This creates the Income Ratchet, allowing investment gains to raise secured income without exposing previously secured payments to subsequent stock market declines.
Over time, LadderUp generally increases the proportion of retirement income that is secured as the remaining retirement horizon shortens.
This creates a personalized income-security glide path rather than following a fixed stock/bond allocation rule.
Controlling Income Smoothing
LadderUp also includes an Income Smoothing Parameter, which influences how aggressively future investment gains are converted into additional secured income.
Lower income smoothing preserves more investment exposure, creating opportunities for larger future income increases but greater uncertainty.
Higher income smoothing converts gains into secured income more quickly, favoring a steadier and more predictable income path.
At the maximum setting, the model converts available investment wealth into secured income at retirement, sacrificing future stock-driven income growth in exchange for greater income stability.
Together, your target Security Ratio and Income Smoothing Parameter allow you to express your preferences for income security at retirement and retirement income growth.
Finding the Right Balance
There is no universally optimal Security Ratio or Income Smoothing Parameter. The appropriate settings depend on your desired retirement income, financial resources, and willingness to accept uncertainty in exchange for future growth opportunities.
Someone who prioritizes retiring earlier may prefer a lower Security Ratio, accepting greater exposure to potential income declines. Someone who values income stability may prefer a higher target, potentially delaying retirement in exchange for greater security.
Similarly, someone who wants to lock in investment gains early in retirement may prefer higher income smoothing, creating a steadier income stream. Someone who wants to preserve opportunities for larger income increases later in retirement may prefer lower smoothing, keeping more assets invested for growth.
LadderUp allows you to explore these tradeoffs directly. By adjusting your target Security Ratio and Income Smoothing Parameter, you can see how different preferences affect your retirement timing and projected income stream.
The objective isn't to eliminate investment risk. It's to find the balance between income security and future growth that best supports your retirement goals.
Next: When can you retire? — how the readiness test works path by path.