New Income Planning Tool to Advise Retirees on How Much to Withdraw

To help retirees better understand how much they can safely spend, while taking into account unpredictable factors like investment risk and an unknown lifespan, retirement industry veterans Michael Finke and Tamiko Toland have announced the launch of IncomePath—a retirement-income planning tool. 

In their new white paper, “Freedom to Spend: Building a Better Retirement Income Plan Using Income Paths and Flexible Spending,” Finke and Toland argue that an adaptive withdrawal strategy can allow retirees to take larger withdrawals early in retirement. The trade-off is that retirees would have to commit to more modest spending increases later in retirement. 

While IncomePath will initially only be available to individual financial professionals in the retail environment, Toland says she sees an opportunity for creating customized versions of the tool for different firms and different products in the 401(k) sector. Toland says she is having conversations with 401(k) providers to figure out how the tool can be used as part of the “participant experience.” 

The tool, expected to be available for individual financial professionals in the coming months, includes a “step-by-step” retirement income planning guide and visual aid that allows retail clients to choose their lifestyle path, according to Toland and Finke.  

IncomePath allows a financial adviser to select the right combination of investment risk, portfolio withdrawals and annuity income to help visualize how risk affects possible lifestyle paths and spending in retirement. Toland says the tool is meant to be used alongside other retirement planning software that already exists. 

“One of the things that we want people to really understand is that when you have guaranteed income from an annuity, that allows you to investment more aggressively into equities with the rest of your portfolio,” Toland says. “Because you don’t have to take withdrawals as much out of the rest of the portfolio, then you can allow it to grow and it can work in your favor, giving you more of a potential of increasing income during retirement.” 

Since leaving TIAA in September 2023, where she was the head of lifetime income strategy and market intelligence, Toland started her own consulting firm—Toland Consulting LLC— and is now the CEO of IncomePath. Toland has focused on the issue of lifetime income since she was a trade journalist covering annuities more than 20 years ago.  

Finke is IncomePath’s chief strategist and is also a professor and chair of economic security at the online American College of Financial Services.  

In the defined contribution system, Finke says investors have a greater responsibility for figuring out how to turn their savings into income. He says planning software often focuses on the “lens of failure.” For example, a planning tool may tell a person to take out a certain amount of money every year with a “15% chance of failure.” 

“In many ways, [that’s] really the wrong way to think about it, because it assumes that you’re going to spend the exact same amount of money every year, which is not realistic,” Finke says. “[If] the markets don’t do well, you’re probably going to adjust downward a little bit. So [the failure model] doesn’t allow for spending flexibility, and it also focuses on something that’s very negative.” 

In building IncomePath, Finke says he and Toland wanted to create a process that is “realistic and optimistic” and helps people understand the relationship between investment risk and spending. They also intended to demonstrate how taking a portion of one’s savings and using it to buy an annuity can impact the path of spending over time.  

The methodology behind IncomePath involves a withdrawal strategy that recalculates every year based on the account value and expected lifespan of the individuals. In addition, it allows a withdrawal adjustment that permits spending flexibility up to a stated percentage of the previous year’s withdrawal.  

Finke and Toland argue that the 4% rule—withdrawing up to 4% of one’s savings in the first year of retirement—provides a “reasonable” degree of income flexibility that many retirees would tolerate. However, unlike the 4% rule, the experts believe that spending more when asset returns are higher allows a retiree to enjoy a lifestyle benefit from accepting investment risk.  

“We have a really flexible approach to actually implementing this,” Toland says. “Right now, we don’t really see going directly to consumers as a great way of helping them have a more confident retirement because most people need some kind of guidance. There are lots of financial planning tools out there for financial professionals, and they’re great. They’re often very detailed and include things like taxes and specific asset allocations. What we’re really focusing on is a different way of showing … retirement outcomes that [are] much more high level and directional, and then also integrat[ing] that annuity piece.”