Retirement Planning Fintech Start-Up Income Lab Completes $1.7 Million Seed Financing Round

Retirement Planning Fintech Start-Up Income Lab Completes $1.7 Million Seed Financing Round

We are excited to announce that we have completed a seed financing round, raising $1.7 million from industry executives and investors, including Dave Agostine, a former managing director for BlackRock and former CEO of Cachematrix; Tom Florence, a managing director at Hamilton Lane and former CEO of 361 Capital; and Robert Pinkerton, CFO at Conga and an Income Lab board member.

 

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Beyond Monte Carlo

Beyond Monte Carlo

We’re excited to have Income Lab featured on Inside Information by Bob Veres. Take 5-7 minutes to read about our story and what makes our software truly special.

Synopsis: A new software program offers the opportunity to create much better, more informed conversations about client income in retirement.

Takeaways: Instead of showing the chances of ‘success’ or ‘failure,’ you show the chances that clients will have to tighten their belts if certain downside scenarios manifest—and the degree of tightening. The retirement conversation incorporates risk tolerance issues, and creates a guardrail methodology where the essential lifestyle is minimally impacted.

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Reducing Retirement Risk By Managing Communication Outrage

Reducing Retirement Risk By Managing Communication Outrage

Excited to have our co-founder and Chief Innovation Officer Justin Fitzpatrick featured as a guest author on the Michael Kitces blog.

“Financial advisors often seek to help clients understand the range of outcomes they might experience when following a given financial plan, and frequently rely on statistical probability outcomes derived from Monte Carlo simulations to report on what outcomes the future may hold. In turn, some researchers and practitioners have suggested extending the analysis even further, by accounting for related statistics, such as Magnitude of Failure and Expected Failure, to shore up the weaknesses of Probability of Failure and further enrich the breadth of information that prospective retirees have when considering the best plan to pursue. However, a focus on ever-deepening statistics alone ignores other important aspects of how retirees perceive risk.”

Read the full article here.

 

 

 

 

 

What’s Cooking at ‘Income Lab’?

What’s Cooking at ‘Income Lab’?

Our Co-Founders Johnny Poulsen and Justin Fitzpatrick were recently featured by the Retirement IncomeJournal!

In the interview they talked about their background as former Jackson National Life executives, and how through that experience they saw an opportunity to help advisers help clients optimize retirement income.
They expand on the three goals they had when launching Income Lab: “To make the software dynamic, so that a retiree’s income would adapt to market conditions; to help retirees avoid unnecessary worry (an affliction common even among the well-off); and to help retirees avoid under-spending.”

You can learn more about our founders and what makes Income Lab unique by checking out the full article here.

 

 

 

 

 

How Do Black Swan Events Affect Retirement Income?

How Do Black Swan Events Affect Retirement Income?

The term “Black Swan” has become a shorthand in finance for a large, sudden market drop.1 The dramatic stock market drawdown and economic events of the last month (like the 17 million new claims for unemployment in the last three weeks) have led many to apply the term to the COVID-19 pandemic. Many retirees are worried about whether this Black Swan will require massive lifestyle changes. For businesses that operate with a high amount of leverage and large short-term liabilities, these events can be an existential threat. But evidence from previous Black Swans shows that, historically, they have never had a catastrophic effect on retirement income.

Notable Black Swan Events in History

For present purposes, we’ll define a “Black Swan” market event as a US stock market decline of 30% more in a month or less.2 Since 1928, there have been five such events.3

  • Great Depression: -42% (Oct-Nov 1929) and -32% (Sep-Oct 1931)
  • Crash of 1987: -31% (Oct 1987)
  • Great Recession: -30% (Sep-Oct 2008)
  • COVID-19 pandemic: -33% (Feb-Mar 2020)

Retirement is Not Like Running a Hedge Fund

Many people are understandably worried about Black Swan events’ impact on their investments. But the immediate financial impact of a Black Swan depends very much on the nature of an investor’s liabilities. Fast, unexpected events with massive market impact have an immediate impact on those with large short-term liabilities. For example, many hedge funds are highly leveraged: they borrow money in order to invest it or use financial instruments with built-in leverage, like futures and derivatives. As a result, a hedge fund’s immediate liabilities can balloon in a Black Swan. Because investment banks reconcile (or “mark to market”) many positions daily, a Black Swan event can have a significant impact on a hedge fund’s ability to stay in business. In fact, events with much smaller drawdowns than those highlighted above, like the Asian Financial Crisis of 1997, have caused hedge funds to fold.

But retirees are nothing like hedge funds. The average retiree does not invest heavily in using margin (leverage). Additionally, basic retirement liabilities – namely, monthly living expenses – are each relatively small and are due over a long timeframe.

Additionally, though retirement investment accounts will almost certainly suffer during a Black Swan event, many retirees derive a significant amount of their income from sources like Social Security or similar pension, which is not directly affected by Black Swan markets. That means that a portion of the retirement income that covers core living costs is immune to these market disruptions.

Furthermore, living costs are unlikely to increase significantly for retirees during a Black Swan event. If anything, economic shocks can cause short-term liabilities to go down temporarily as people instinctively pull back on discretionary spending. (This is particularly clear in the COVID-19 pandemic, where stay-at-home orders and social distancing have reduced expenses related to travel, eating out, etc.) As a result, the short-term, extreme impact of a Black Swan event is simply not as large for retirees as it is for some other investors.

Long-Term Effects of Short-Term Swans

Given the large and sudden nature of Black Swans, it is tempting to think that the worst timing for retirement would be immediately before such an event. Imagine this: you begin retirement near the top of a bull market. You’ve planned your spending based on a nest egg that has grown with that bull market. A few months later, the bottom falls out of the market. Sounds catastrophic, right?

To see how a hypothetical retiree in this position would have fared historically, let’s imagine households with $1 million (in 2020 dollars) in retirement savings, invested 60% in stocks and 40% in bonds, who began retirement six months before each of the Black Swan markets above. Though in real-life retirees’ income should probably change over time based on longevity, economic conditions, and so on, we’ll simplify here and have each hypothetical household spend according to the well-known (though very flawed) “4% rule”. They’ll spend 4% of their initial retirement balance each year, adjusted for inflation.

Below we see how this nest egg fared over time. In the first three historical Black Swan markets, our households would have made it 30+ years into retirement without running out of money. In only one case (1929) would the household have lived through most of this lengthy retirement with less than they had started with. The 1929 case was particularly bad since this household would have had the one-two punch of 1929 and 1931.

We haven’t yet lived through 30 years since the 2008 financial crisis, but so far, this hypothetical household is doing okay. Because the 2008 Black Swan was followed by a longer, deeper market drawdown, it took a while for this household’s balance to recover. But it’s back at a healthy inflation-adjusted level 12 years later. (It’s worth noting that one thing that can cause Black Swan markets to have a lasting impact on retirement is panic selling.)

I wouldn’t wish the returns from these scenarios on anyone, but it’s clear that past Black Swans did not have what it took to destroy retirements. That’s because retirements play out over many years or many decades: plenty of time for fast-moving, brief Black Swans to look small in the rearview mirror.

1 In his books Fooled by Randomness (2001) and The Black Swan: The impact of the highly improbable (2007), Nassim Taleb defines a “Black Swan” as an event that lies outside the realm of regular expectations (like seeing a black swan if all you’ve ever seen were white swans) and carries extreme impact, but that we concoct explanations for after the fact, making it seem explainable and predictable in retrospect.

2 Based on the daily closing price of the S&P 500 Index. Past performance does not guarantee future results.

3 Many events that do not meet this (admittedly arbitrary and restrictive) definition have been called “Black Swans” elsewhere. I have no issues with the broader application of this term. I’ve chosen a narrower definition here in order to focus on the largest, quickest market drawdowns.