How I use I-ORP, and who shouldn't

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LeeMKE
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How I use I-ORP, and who shouldn't

Post by LeeMKE » Thu May 11, 2017 1:47 am

I fit the parameters to use I-ORP, and it has been a big help:

1) I am principally invested in tax deferred accounts (IRA and 401K) and had done some IRA to ROTH conversions, but wanted to know if more would optimize my taxes during retirement.
2) My estate is not over $5 million, so no estate tax consideration is needed.
3) Optimizing our income is our goal. We are not optimizing to leave an estate.
4) For us, postponing Social Security needs to be balanced against portfolio withdrawals to cover any period we delay Social Security.

If you have 3 or 4 of these same parameters, I-ORP may be very helpful. If you have just two, this tool might help, but might mislead. If you have only one, I-ORP is unlikely to be helpful IMHO.

Social Security — I had tried a few other tools, but was uncertain because the various tools gave different results. For us, the question was whether to take Social Security or dip into savings for early retirement. Most tools ignored the choice between early social security or drawing down from savings while waiting for social security payments. I-ORP shows that we are on the cusp, so that’s why slight variations in the formulas of different tools would show different results.

IRA to ROTH conversions — I discovered “The Hump” 7 years ago when it showed up on my Fidelity Retirement Income Planner. One of my Fidelity reps told me to use these last few years to convert IRA to ROTH because we were destined to be in a higher bracket in retirement. I made conversions I thought would erase that hump. But once I did that, I wanted to confirm I'd done enough, and see whether there was any benefit to converting more.

I-ORP gave me much better specifics as to how much more to convert and the net effect was easy to see because our spendable cash changed, with and without more conversions.

Withdrawal Strategies — I suspected the usual default of most of the planners was not optimum for us. Most planners are static in emptying first taxable accounts, followed by 401K and IRA, and leaving ROTH accounts to the end of plan. This is the best financial planning, but is not the optimum strategy for human beings:
A) If you die before the end of plan, ROTH may not be the best asset to leave behind. And dying before end of plan is the goal.
B) ROTH can be used to smooth out tax peaks, but only if you set things up correctly years in advance and spend just enough from ROTH to float your tax bracket down a notch, but not too much.

The guidance as to how much to take from each type of account is key to lowering our tax bracket throughout retirement. I-ORP did a great job of optimizing which accounts, and how much to take each year.

So, the last 3 years I’ve pulled an I-ORP report to track how I’m doing. Along the way, the author of I-ORP is also improving and enhancing his tool.

Spending Strategies — This year, I discovered a new option: different spending strategies. The results were intriguing, so I read more about each on the Boglehead Wiki, as well as the White Paper on the I-ORP site. In my case, these talk about an issue I am thinking about, spending too little early, when you are younger and able to travel, and ending up with too much money leftover at end of plan. Right now, these strategies are just thinking points for us. I'm finishing up McClung's Living Off Your Money and have more thinking to do about which strategy we will use. But having a ready calculation for a variety of strategies is very helpful for my deliberations.

Here's the link to the long form I used: https://i-orp.com/ORPparms.html
I-ORP does NOT apply:
1) Your estate is likely to be over $5 million, making your case an estate planning case instead of a withdrawal optimization case.
2) You aren't trying to optimize retirement withdrawals.
3) Your retirement will take place after age 70.
4) You will continue adding to savings (more than just replenishing your emergency fund) after retirement.
These are results from a Boglehead who worked with the I-ORP developer to confirm I-ORP does not solve for every circumstance.viewtopic.php?f=10&t=227015
Last edited by LeeMKE on Wed Sep 06, 2017 8:30 am, edited 2 times in total.
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jebmke
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Re: How I use I-ORP, and who shouldn't

Post by jebmke » Thu May 11, 2017 7:00 am

I tried i-Orp a few years ago but found that their tax algorithms were simplistic and flawed. perhaps they have enhanced them since then.
When you discover that you are riding a dead horse, the best strategy is to dismount.

John Z
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Re: How I use I-ORP, and who shouldn't

Post by John Z » Thu May 11, 2017 8:54 am

jebmke wrote:I tried i-Orp a few years ago but found that their tax algorithms were simplistic and flawed. perhaps they have enhanced them since then.
+1 I found also that the suggested approach was way too aggressive (like converting TIRAs to Roths within the first 2 years and a number of other odd directions.

In my continued search for retirement investing and harvesting I found a fantastic book entitled Living Off Your Money by Michael H. McClung. At this site:
http://livingoffyourmoney.com/
you can preview the table of contents, download the first 3 chapters for free, and/or purchase an ebook or hardcover. The first 3 chapters are more than enough to guide you while the following 8 chapters provide more in-depth and detailed information. No high level math knowledge is required.

I am in no way connected to the author or his work.

JohnFiscal
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Re: How I use I-ORP, and who shouldn't

Post by JohnFiscal » Thu May 11, 2017 9:00 am

OP, thank you for the good review of ORP. I had fiddled around with this in the past but really hadn't tried to make full use of it. With your comments I'll head back there and try again.

I have one question about I-ORP (and Firecalc, et al) but I think I will put that in a new thread.

Thank you again for the excellent summary and review.

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ThePrune
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Re: How I use I-ORP, and who shouldn't

Post by ThePrune » Thu May 11, 2017 9:34 am

LeeMKE wrote:Withdrawal Strategies — I suspected the usual default of most of the planners was not optimum for us. Most planners are static in emptying first taxable accounts, followed by 401K and IRA, and leaving ROTH accounts to the end of plan.
This is the "default" only for the uneducated planners (of which, unfortunately, there are an abundance!) The American College for Financial Services tries to teach their students about better withdrawal strategies in the courses leading up to their Retirement Income Certified Professional (RICP) designation.

Prof. William Reichenstein (Baylor University) has been publishing for years about better / smarter ways to strategize your retirement withdrawals. Two excellent recent articles comparing various withdrawal strategies are:
Tax-efficient Withdrawal Strategies, K. Cook, W. Meyer and W. Reichenstein
Why the Conventional Wisdom is Never the Optimal Withdrawal Strategy, W. Reichenstein and W. Meyer

I have also used I-ORP to get tax-efficient strategy feedback for my own retirement income. I like it very much.
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JDCarpenter
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Re: How I use I-ORP, and who shouldn't

Post by JDCarpenter » Thu May 11, 2017 9:45 am

John Z wrote:...

In my continued search for retirement investing and harvesting I found a fantastic book entitled Living Off Your Money by Michael H. McClung. At this site:
http://livingoffyourmoney.com/
you can preview the table of contents, download the first 3 chapters for free, and/or purchase an ebook or hardcover. The first 3 chapters are more than enough to guide you while the following 8 chapters provide more in-depth and detailed information. No high level math knowledge is required.

I am in no way connected to the author or his work.
I also have the book and have found it worthwhile. This thread goes into great detail: viewtopic.php?t=192105 I think the fairest way to summarize it is that the reviews, in the end, were mixed.
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KlingKlang
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Re: How I use I-ORP, and who shouldn't

Post by KlingKlang » Thu May 11, 2017 10:31 am

It's been a while since I ran my numbers through I-ORP, although I reviewed the results a few months ago. One thing that struck me was how aggressive it was recommending tIRA to Roth IRA conversions. Is anyone else concerned that after making massive conversions to their Roth IRAs (and paying the taxes on them) that the laws may be changed to penalize "rich" people who have sheltered too much in Roths?

LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE » Thu May 11, 2017 10:41 am

Is anyone else concerned that after making massive conversions to their Roth IRAs (and paying the taxes on them) that the laws may be changed to penalize "rich" people who have sheltered too much in Roths?
Anything can happen, but if like me, you are under $5 million, we are likely to be fine as the impact on retirement for so many would be dangerous to sweep our ROTH accounts into a taxable status. <soapbox>Remember that "dangerous" to the Federal Government is not our fiscal health, but their ability to stay in office. The "Grey Brigade" still has some influence at the polls because we get out and vote. </soapbox>
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curmudgeon
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Re: How I use I-ORP, and who shouldn't

Post by curmudgeon » Thu May 11, 2017 10:42 am

John Z wrote:
jebmke wrote:I tried i-Orp a few years ago but found that their tax algorithms were simplistic and flawed. perhaps they have enhanced them since then.
+1 I found also that the suggested approach was way too aggressive (like converting TIRAs to Roths within the first 2 years and a number of other odd directions.
The challenge I found on i-orp Roth conversions is that the recommendations were heavily based on the assumed rates of return, in addition to tax efficiency. If you guessed a higher rate of return for your Roth, perhaps because of a longer-term investment horizon, i-orp will suggest high rates of conversion. While this may be logical from a linear programming perspective, it probably doesn't reflect the reality of real world asset allocations. The solution is to make sure you use the same expected return for all your account types when investigating Roth conversions.

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whaleknives
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Re: How I use I-ORP, and who shouldn't

Post by whaleknives » Thu May 11, 2017 11:27 am

KlingKlang wrote:. . . One thing that struck me was how aggressive it was recommending tIRA to Roth IRA conversions. . .
curmudgeon wrote:The challenge I found on i-orp Roth conversions is that the recommendations were heavily based on the assumed rates of return, in addition to tax efficiency. If you guessed a higher rate of return for your Roth, perhaps because of a longer-term investment horizon, i-orp will suggest high rates of conversion. While this may be logical from a linear programming perspective, it probably doesn't reflect the reality of real world asset allocations. The solution is to make sure you use the same expected return for all your account types when investigating Roth conversions.
My issue with ORP was the opposite: it would only recommend one year of Roth conversions, even with 6 years available after retirement and before SS, using a constant return of 5-6%. One thing to remember about ORP is that "optimizing" income means maximizing, even if you don't plan to spend that amount. The basic input form now recommends FIRECalc if you know your retirement spending and want to know "When will my savings run out?", and ORP if you know your planning horizon and want to know "What is my maximum disposable income?" You can reduce spending in ORP by specifying a minimum end balance.

As I look at the basic ORP today, it says one assumption is that "IRA to Roth IRA conversions are not included. At least one quantitative study (See page 47) reports that conversions offer little economic advantage but their dramatic increase in taxes paid in early retirement tends to panic the novice." You have to use the "long form" for Roth conversions.
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LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE » Thu May 11, 2017 11:49 am

John Z wrote:
jebmke wrote:
I tried i-Orp a few years ago but found that their tax algorithms were simplistic and flawed. perhaps they have enhanced them since then.


+1 I found also that the suggested approach was way too aggressive (like converting TIRAs to Roths within the first 2 years and a number of other odd directions.


The challenge I found on i-orp Roth conversions is that the recommendations were heavily based on the assumed rates of return, in addition to tax efficiency. If you guessed a higher rate of return for your Roth, perhaps because of a longer-term investment horizon, i-orp will suggest high rates of conversion. While this may be logical from a linear programming perspective, it probably doesn't reflect the reality of real world asset allocations. The solution is to make sure you use the same expected return for all your account types when investigating Roth conversions.
The "flaw" of all models is that you must examine the results for unintended consequences of your entries.
Yup, if you assume a higher return for ROTH, a good model will recommend higher conversions. Good catch!
The tax calculations must be simplified for a model, unless you want tax return software built into your model. And that would be wrong because tax law is variable and unpredictable. No point calculating tax detail too finely because the only certainty is that it will change.
My very aggressive ROTH conversions are showing an increase in cash flow throughout retirement on all models that differentiate between IRA and ROTH. So I'm good with doing these early conversions during the few years I have left in this tax bracket. YMMV

Models are a balancing act. If they have too much detail, it is too difficult to have confidence in them because a small error buried deep can be magnified in the final results. If they have too little detail, they are useless. The trick is to find a happy medium for your use. Some folks revel in messing with their models, but I find that when something on my end changes, I can't be quite sure that my changes to a complex model aren't causing some unintended consequences. That's why I use several models. If they diverge, I have to do some work to understand why. If they move in the same direction, I can rely on the results.

No model I tried was incompetent (after all, I got almost all from these forums), but others were too complex or too simple for my goals.
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patrick013
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Re: How I use I-ORP, and who shouldn't

Post by patrick013 » Thu May 11, 2017 12:14 pm

Apart from expecting a trad401k balance, a pension, social security,
and perhaps an annuity my best plan is to withdraw the trad401k
in equal annual withdrawals down to zero balance in the 401k over 20
or perhaps 30 years to stay in the lowest tax bracket while doing so.
Spend what I would need and convert to Roth any remainder annually.
Alternatively withdraw the 401k to zero before the date of SS to begin
to stay in the lowest tax bracket possible.

Not quite as scientific as what I-ORP would do and I haven't had the time
to check side by side a comparison but I'd anticipate the end results would
be similar when the time to start doing that actually comes. It all depends
on what the annual tax bracket is, lower or higher.
age in bonds, buy-and-hold, 10 year business cycle

LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE » Thu May 11, 2017 12:19 pm

As I look at the basic ORP today, it says one assumption is that "IRA to Roth IRA conversions are not included. At least one quantitative study (See page 47) reports that conversions offer little economic advantage but their dramatic increase in taxes paid in early retirement tends to panic the novice." You have to use the "long form" for Roth conversions.
Yes, worth repeating, the long form is what most of us will want to use. The short form is pretty basic in calculating an income stream.

Another thing I like about I-ORP is that help is available. My first attempt gave me odd results, and I couldn't figure out what I was doing wrong. By following the instructions, you can get the inventor? (what exactly do you call a model owner?) to look at your work and give you feedback. Once I got that help, the results have been great for me.

Also worth repeating, if you seek something other than what is being offered, don't be surprised when you don't get a free beer. :sharebeer

I make a donation every year because this model is valuable to me. (I also didn't hesitate to buy a copy of Living Off Your Money when some Bogleheads fixated on the insult of paying for the book.) :wink:
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LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE » Thu May 11, 2017 12:22 pm

I haven't had the time
to check side by side a comparison but I'd anticipate the end results would
be similar when the time to start doing that actually comes. It all depends
on what the annual tax bracket is, lower or higher.
Please come back after you try I-ORP. I'm curious to hear whether you get some surprises. I see one issue with your plan, but I-ORP probably has several to show you.
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Re: How I use I-ORP, and who shouldn't

Post by whaleknives » Thu May 11, 2017 12:37 pm

LeeMKE wrote:. . . Another thing I like about I-ORP is that help is available. My first attempt gave me odd results, and I couldn't figure out what I was doing wrong. By following the instructions, you can get the inventor? (what exactly do you call a model owner?) to look at your work and give you feedback. Once I got that help, the results have been great for me. . . I make a donation every year because this model is valuable to me. (I also didn't hesitate to buy a copy of Living Off Your Money when some Bogleheads fixated on the insult of paying for the book.) :wink:
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FiveK
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Re: How I use I-ORP, and who shouldn't

Post by FiveK » Thu May 11, 2017 1:37 pm

John Z wrote:
jebmke wrote:I tried i-Orp a few years ago but found that their tax algorithms were simplistic and flawed. perhaps they have enhanced them since then.
+1 I found also that the suggested approach was way too aggressive (like converting TIRAs to Roths within the first 2 years and a number of other odd directions.
Concerns here seem similar to ones mentioned in
Wrote a retirement calculator because i-orp.com didn't do what I want
Some quotes from that post:
Perhaps omitting the PEP, AMT, NIIT, and any other acronym tax effect that increases marginal rates is materially incorrect.
Ignoring those effects may be why i-orp and wscott's program don't mind front-loading Roth conversions so much: they may underestimate the tax bite from those high incomes.

The first chart below shows marginal rates when ignoring the PEP, AMT, and NIIT, and assuming all capital gains are taxed at 15%.
The second chart includes the PEP, AMT, and NIIT, and includes the 20% capital gains rate at higher incomes.
Doesn't reassure me that front-loading Roth conversions is correct....

Image

Image

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Re: How I use I-ORP, and who shouldn't

Post by randomguy » Thu May 11, 2017 1:51 pm

curmudgeon wrote:
The challenge I found on i-orp Roth conversions is that the recommendations were heavily based on the assumed rates of return, in addition to tax efficiency. If you guessed a higher rate of return for your Roth, perhaps because of a longer-term investment horizon, i-orp will suggest high rates of conversion. While this may be logical from a linear programming perspective, it probably doesn't reflect the reality of real world asset allocations. The solution is to make sure you use the same expected return for all your account types when investigating Roth conversions.

I agree that the rate of return issue exists. Setting the returns to be equal though is a suboptimal solution. In retirement most people are going to be better off tilting the ROTH (and taxable) towards stocks while holding bonds in the IRA. What you really need to do is to keep the AA (with some tax adjustment) to whatever you want while shifting the assets around to be the most efficient place.

But even if you do that and program in accurate taxes and predications (i.e. does your spouse die at 75 or 90), the range of results due to returns (i.e. making say 15% over the first decade versus 2%) is enough to dramatically change the results. You really need to run a series of assumptions to get a range of possible outcomes and then pick which one matches your fears (running out of money versus paying extra taxes) best but even then the error bars on the estimates are huge.

For most people things like ROTH conversions make a small difference. You either can't convert enough (i.e. you only have say 5 years and can only do 50k/year out of a 2 million ira) or there just isn't much of a savings (you can't avoid SS being fully taxed. You are paying 28% now or later).

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Re: How I use I-ORP, and who shouldn't

Post by jebmke » Thu May 11, 2017 1:52 pm

The fact that these graphs both omit the famous hidden 30% marginal rate should be a red flag to many.
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Re: How I use I-ORP, and who shouldn't

Post by chuckb84 » Thu May 11, 2017 2:20 pm

LeeMKE wrote:I fit the parameters to use I-ORP, and it has been a big help:

1) I am principally invested in tax deferred accounts (IRA and 401K) and had done some IRA to ROTH conversions, but wanted to know if more would optimize my taxes during retirement.
2) My estate is not over $5 million, so no estate tax consideration is needed.
3) Optimizing our income is our goal. We are not optimizing to leave an estate.
4) For us, postponing Social Security needs to be balanced against portfolio withdrawals to cover any period we delay Social Security.

If you have 3 or 4 of these same parameters, I-ORP may be very helpful. If you have just two, this tool might help, but might mislead. If you have only one, I-ORP is unlikely to be helpful IMHO.

Social Security — I had tried a few other tools, but was uncertain because the various tools gave different results. For us, the question was whether to take Social Security or dip into savings for early retirement. Most tools ignored the choice between early social security or drawing down from savings while waiting for social security payments. I-ORP shows that we are on the cusp, so that’s why slight variations in the formulas of different tools would show different results.

IRA to ROTH conversions — I discovered “The Hump” 7 years ago when it showed up on my Fidelity Retirement Income Planner. One of my Fidelity reps told me to use these last few years to convert IRA to ROTH because we were destined to be in a higher bracket in retirement. I made conversions I thought would erase that hump. But once I did that, I wanted to confirm I'd done enough, and see whether there was any benefit to converting more.

I-ORP gave me much better specifics as to how much more to convert and the net effect was easy to see because our spendable cash changed, with and without more conversions.

Withdrawal Strategies — I suspected the usual default of most of the planners was not optimum for us. Most planners are static in emptying first taxable accounts, followed by 401K and IRA, and leaving ROTH accounts to the end of plan. This is the best financial planning, but is not the optimum strategy for human beings:
A) If you die before the end of plan, ROTH may not be the best asset to leave behind. And dying before end of plan is the goal.
B) ROTH can be used to smooth out tax peaks, but only if you set things up correctly years in advance and spend just enough from ROTH to float your tax bracket down a notch, but not too much.

The guidance as to how much to take from each type of account is key to lowering our tax bracket throughout retirement. I-ORP did a great job of optimizing which accounts, and how much to take each year.

So, the last 3 years I’ve pulled an I-ORP report to track how I’m doing. Along the way, the author of I-ORP is also improving and enhancing his tool.

Spending Strategies — This year, I discovered a new option: different spending strategies. The results were intriguing, so I read more about each on the Boglehead Wiki, as well as the White Paper on the I-ORP site. In my case, these talk about an issue I am thinking about, spending too little early, when you are younger and able to travel, and ending up with too much money leftover at end of plan. Right now, these strategies are just thinking points for us. I'm finishing up McClung's Living Off Your Money and have more thinking to do about which strategy we will use. But having a ready calculation for a variety of strategies is very helpful for my deliberations.

Here's the link to the long form I used: https://i-orp.com/ORPparms.html
" Most tools ignored the choice between early social security or drawing down from savings while waiting for social security payments. I-ORP shows that we are on the cusp, so that’s why slight variations in the formulas of different tools would show different results. "

That's exactly what I used it for.The nice thing about i-orp is that you can set up a fairly detailed scenario and then test variations. Since I retired at 61, if I postponed SS to age 70 to maximize total retirement spending, I'd draw down my 401k by 40% before I got there, OTOH, if I took SS at 62, the drawdown is no more than 10%. Postponing SS to 70 results in about 1% more total spending in retirement (from 61-95), but I didn't like that initial 40% drawdown.

It's a good tool and I think it hits a nice middle ground on sophistication without complication.

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FiveK
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Re: How I use I-ORP, and who shouldn't

Post by FiveK » Thu May 11, 2017 2:22 pm

jebmke wrote:The fact that these graphs both omit the famous hidden 30% marginal rate should be a red flag to many.
Looking at the original thread with those graphs, it appears they are correct. There is no 30% marginal rate in the situation under study:
- $100K capital gains
- $115K other ordinary income
- the chart then shows the marginal rates of tIRA->Roth conversions.

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Re: How I use I-ORP, and who shouldn't

Post by jebmke » Thu May 11, 2017 2:31 pm

FiveK wrote:
jebmke wrote:The fact that these graphs both omit the famous hidden 30% marginal rate should be a red flag to many.
Looking at the original thread with those graphs, it appears they are correct. There is no 30% marginal rate in the situation under study:
- $100K capital gains
- $115K other ordinary income
- the chart then shows the marginal rates of tIRA->Roth conversions.
Then does i-Orp properly reflect that marginal rate pop at lower income? Many people who retire early prior to taking a pension (if they have one) and Social Security keep their other income quite low and manage dividends accordingly. This is true even with very large portfolios. If you start your study above the 30% hump in the marginal rate it is deceptive.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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FiveK
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Re: How I use I-ORP, and who shouldn't

Post by FiveK » Thu May 11, 2017 2:44 pm

jebmke wrote:Then does i-Orp properly reflect that marginal rate pop at lower income? Many people who retire early prior to taking a pension (if they have one) and Social Security keep their other income quite low and manage dividends accordingly. This is true even with very large portfolios. If you start your study above the 30% hump in the marginal rate it is deceptive.
Don't know the answer to your question - and it is a good one.

AFAIK the tool used to generate those charts (see Tools and calculators - Personal_finance_toolbox - Bogleheads) gives accurate marginal rates for the inputs it considers, and the charts show the difference between "simplified" vs. "accurate" calculations. I don't know what i-orp's calculations deliver for marginal rates.

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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE » Thu May 11, 2017 2:46 pm

For most people things like ROTH conversions make a small difference. You either can't convert enough (i.e. you only have say 5 years and can only do 50k/year out of a 2 million ira) or there just isn't much of a savings (you can't avoid SS being fully taxed. You are paying 28% now or later).
Agree. But for some of us (like me) ROTH conversions moved us from solid 25% bracket to tucked well into the 15% bracket. If it makes little difference, you'll be good either way. Try it or don't. 8-)

But in some cases it makes a significant difference. The only way to know is to try out I-ORP and do it early.
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Re: How I use I-ORP, and who shouldn't

Post by h8(N)++ » Thu May 11, 2017 3:02 pm

I quite like i-ORP. Maybe because it allows the input of many parameters.

Yesterday I discovered another i-ORP feature I like: its model will reduce your SS payout by 23% starting in 2035, since that's when SS is scheduled to be able to pay only 77% of promised benefits. The law may well change before then, but in the meantime, it is what it is, and if I can survive a 23% cut in 2035 and still be OK, I'm sure I'll be OK if my SS benefit ends up being more generous :happy

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Re: How I use I-ORP, and who shouldn't

Post by jebmke » Thu May 11, 2017 3:12 pm

LeeMKE wrote:
For most people things like ROTH conversions make a small difference. You either can't convert enough (i.e. you only have say 5 years and can only do 50k/year out of a 2 million ira) or there just isn't much of a savings (you can't avoid SS being fully taxed. You are paying 28% now or later).
Agree. But for some of us (like me) ROTH conversions moved us from solid 25% bracket to tucked well into the 15% bracket. If it makes little difference, you'll be good either way. Try it or don't. 8-)

But in some cases it makes a significant difference. The only way to know is to try out I-ORP and do it early.
Thanks. This year will be my last year of ROTH conversion. My pension starts next year so I probably won't have any room. I will convert up to but just shy of the bottom of the 30% range in 2017. For that I just do a pro-forma return in December - it is usually accurate to within a couple hundred bucks.

To be fair, there may be too many moving parts for tools like i-Orp to incorporate all the various "hidden" rates. Hard enough for the tax software guys to get it right sometimes.
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patrick013
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Re: How I use I-ORP, and who shouldn't

Post by patrick013 » Thu May 11, 2017 3:26 pm

LeeMKE wrote:
I haven't had the time
to check side by side a comparison but I'd anticipate the end results would
be similar when the time to start doing that actually comes. It all depends
on what the annual tax bracket is, lower or higher.
Please come back after you try I-ORP. I'm curious to hear whether you get some surprises. I see one issue with your plan, but I-ORP probably has several to show you.
Well it won't let me zero the trad401k to zero. It keeps spending taxable and
refuses to move anything to Roth then. It wants somebody to inherit some 401k
and some Roth then. It actually leaves several hundred thousand dollars more
in ending account balance then if some other non-LP plan was feasible somehow,
that assuming I spend everything that isn't tax-advantaged thru the years in the
non-LP plan. How can one beat a linear programming program ? Well not today
anyway. :)
age in bonds, buy-and-hold, 10 year business cycle

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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE » Thu May 11, 2017 3:29 pm

Thanks. This year will be my last year of ROTH conversion. My pension starts next year so I probably won't have any room. I will convert up to but just shy of the bottom of the 30% range in 2017. For that I just do a pro-forma return in December - it is usually accurate to within a couple hundred bucks.
You've got more skill/time than I do. We have a small business, so I can't call the yearend numbers until after the books close. No problem. I just convert a great big hunk every January, and then the February after year end, I do the tax returns, scoot my conversion to the last nickel I can justify, and then re characterize (return to IRA) the remainder. I used to convert late in the year, but couldn't stomach paying taxes on a balance that had disappeared in a market dip. So now I do the initial conversion at the beginning of the year, so odds are good I'll have some profit and avoid the psychological barrier of paying taxes on a "phantom" profit.
Last edited by LeeMKE on Thu May 11, 2017 3:45 pm, edited 1 time in total.
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE » Thu May 11, 2017 3:35 pm

Well it won't let me zero the trad401k to zero. It keeps spending taxable and
refuses to move anything to Roth then. It wants somebody to inherit some 401k
and some Roth then. It actually leaves several hundred thousand dollars more
in ending account balance then if some other non-LP plan was feasible somehow,
that assuming I spend everything that isn't tax-advantaged thru the years in the
non-LP plan. How can one beat a linear programming program ? Well not today
anyway. :)
That doesn't sound right to me, but I'm no expert. One guess is that there are rules about draining a 401K to zero before a certain age. Ask James Walsh the model owner, assuming you kept the model number from your work so he can look at it.

If my guess is correct, a Boglehead would simply roll over the 401K to an IRA to regain control of the funds.
The mightiest Oak is just a nut who stayed the course.

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Re: How I use I-ORP, and who shouldn't

Post by jebmke » Thu May 11, 2017 3:44 pm

LeeMKE wrote:
Thanks. This year will be my last year of ROTH conversion. My pension starts next year so I probably won't have any room. I will convert up to but just shy of the bottom of the 30% range in 2017. For that I just do a pro-forma return in December - it is usually accurate to within a couple hundred bucks.
You've got more skill/time than I do. We have a small business, so I can't call the yearend numbers until after the books close. No problem. I just convert a great big hunk every January, and then the following February, I do the tax returns, scoot my conversion to the last nickel I can justify, and then re characterize (return to IRA) the remainder. I used to convert late in the year, but couldn't stomach paying taxes on a balance that had disappeared in a market dip. So now I do the initial conversion at the beginning of the year, so odds are good I'll have some profit and avoid the psychological barrier of paying taxes on a "phantom" profit.
My income is simple right now - retired, no pension, no SS. With biz, even sometimes W2, for sure with K-1s it would be a tougher project to call the ball in December. With recharacterization, it is easier just to jam it high some time before the end December and then adjust the next year.
When you discover that you are riding a dead horse, the best strategy is to dismount.

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Re: How I use I-ORP, and who shouldn't

Post by patrick013 » Thu May 11, 2017 4:25 pm

LeeMKE wrote:
Well it won't let me zero the trad401k to zero. It keeps spending taxable and
refuses to move anything to Roth then. It wants somebody to inherit some 401k
and some Roth then. It actually leaves several hundred thousand dollars more
in ending account balance then if some other non-LP plan was feasible somehow,
that assuming I spend everything that isn't tax-advantaged thru the years in the
non-LP plan. How can one beat a linear programming program ? Well not today
anyway. :)
That doesn't sound right to me, but I'm no expert. One guess is that there are rules about draining a 401K to zero before a certain age. Ask James Walsh the model owner, assuming you kept the model number from your work so he can look at it.

If my guess is correct, a Boglehead would simply roll over the 401K to an IRA to regain control of the funds.
Well from speed reading some docs I think it is trying to minimize taxes and
maximize compounded asset returns and like all good LP programs has to
minimize or maximize something, in this case ending account balance at the
plan's end. Does some comparative work evaluating conversions but won't
let conversions become manual, otherwise it wouldn't be a linear program I
guess. So be it. :)
age in bonds, buy-and-hold, 10 year business cycle

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Re: How I use I-ORP, and who shouldn't

Post by randomguy » Thu May 11, 2017 4:37 pm

LeeMKE wrote:
For most people things like ROTH conversions make a small difference. You either can't convert enough (i.e. you only have say 5 years and can only do 50k/year out of a 2 million ira) or there just isn't much of a savings (you can't avoid SS being fully taxed. You are paying 28% now or later).
Agree. But for some of us (like me) ROTH conversions moved us from solid 25% bracket to tucked well into the 15% bracket. If it makes little difference, you'll be good either way. Try it or don't. 8-)

But in some cases it makes a significant difference. The only way to know is to try out I-ORP and do it early.
I think more people misuse i-orp (there have been at least a half dozen threads where people put ROTH returns at 8% and IRAs at 3% and wonder why i-orp is very aggressive with ROTH conversions) and draw the wrong conclusion. It is a useful tool but you really need to understand what it is doing and then think about if the results make sense.

For a person retiring at 65, it is hard to move 400k+ (i.e. about what you would need to convert 20k of RMDs over time) is hard. You just don't have enough space in the 15% bracket and time for compounding to help out. There are some advantages to having money end up in a ROTH instead of taxable but they mainly depend on you not needing to spend the money. It is pretty safe to say if you expect to be in the 25% bracket in the future but are in the 15% now, move income forward. It is a lot harder to say if you expect to be in the 25% bracket in either case, move money forward. And if you are in the 15% case either way, it gets extra complicated in that there are likely to be more interactions with SS taxation.

And finally: Fire any planner who suggests taxable first, followed by tira and then by a ROTH unless they have some pages of math to back it up. The odds of that strategy being optimal in terms of maximizing spendable money is very, very low. It does a great job though of keeping the balances as high as possible for as long as possible which is great if the planner if collecting a 1% AUM fee. Not so great for you. Blended strategies are just always better. They aren't as easy to express though.

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Re: How I use I-ORP, and who shouldn't

Post by gneeby » Thu May 11, 2017 6:44 pm

LeeMKE wrote:]

That doesn't sound right to me, but I'm no expert. One guess is that there are rules about draining a 401K to zero before a certain age. Ask James Walsh the model owner, assuming you kept the model number from your work so he can look at it.

If my guess is correct, a Boglehead would simply roll over the 401K to an IRA to regain control of the funds.
There are no restrictions on withdrawals from tax-deferred retirement savings accounts (IRA, 401k, SEP 403b etc.) after the age of 59 1/2. Same age restriction applies to Roth IRAs.

Transferring 401k investments to an IRA after retirement reduces fees and provides a wider range of stocks and mutual funds.

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Re: How I use I-ORP, and who shouldn't

Post by JDCarpenter » Thu May 11, 2017 10:36 pm

gneeby wrote:
....

Transferring 401k investments to an IRA after retirement [often] reduces fees ....
For me and DW, yes, cheaper to transfer to IRA. I am not certain that my D.I.L. would find this to be the case--but google's plan is pretty darn good. So too, another son who is a baby-Fed employee at IRS legal .... (And if you quit after age 55 is attained, there is another reason to keep with employer.)
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Re: How I use I-ORP, and who shouldn't

Post by patrick013 » Fri May 12, 2017 3:18 pm

gneeby wrote:
LeeMKE wrote:]

That doesn't sound right to me, but I'm no expert. One guess is that there are rules about draining a 401K to zero before a certain age. Ask James Walsh the model owner, assuming you kept the model number from your work so he can look at it.

If my guess is correct, a Boglehead would simply roll over the 401K to an IRA to regain control of the funds.
There are no restrictions on withdrawals from tax-deferred retirement savings accounts (IRA, 401k, SEP 403b etc.) after the age of 59 1/2. Same age restriction applies to Roth IRAs.
Right, but the I-ORP program appears to limit conversions by itself
when it calc's that additional compounding will max the final total
account balance with or without the possible conversions.

from the I-ORP info :
ORP makes conversions so long as the marginal benefit of
increasing the Roth balance exceeds the marginal cost of
slipping into the next higher income tax bracket.


So the end result is a little different from if one put the 401k in a bucket and
converted it anyway, assuming other accounts would provide needed living
expenses.
age in bonds, buy-and-hold, 10 year business cycle

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Re: How I use I-ORP, and who shouldn't

Post by freebeer » Fri May 12, 2017 5:52 pm

chuckb84 wrote:...Since I retired at 61, if I postponed SS to age 70 to maximize total retirement spending, I'd draw down my 401k by 40% before I got there, OTOH, if I took SS at 62, the drawdown is no more than 10%. Postponing SS to 70 results in about 1% more total spending in retirement (from 61-95), but I didn't like that initial 40% drawdown...
Interesting that the difference in total spending between taking at 62 and 70 was only 1%. I would have thought that due to tax savings from minimizing RMDs later it would be a significantly better strategy to draw down the 401k rather than take SS earlier...

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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE » Fri May 12, 2017 6:13 pm

chuckb84 wrote:
...Since I retired at 61, if I postponed SS to age 70 to maximize total retirement spending, I'd draw down my 401k by 40% before I got there, OTOH, if I took SS at 62, the drawdown is no more than 10%. Postponing SS to 70 results in about 1% more total spending in retirement (from 61-95), but I didn't like that initial 40% drawdown...


Interesting that the difference in total spending between taking at 62 and 70 was only 1%. I would have thought that due to tax savings from minimizing RMDs later it would be a significantly better strategy to draw down the 401k rather than take SS earlier...
:sharebeer This is the free beer offered by I-ORP.

Same for me, taking Social Security later did not beat out staying out of the portfolio and taking social security early for one of us, the other will start at FRA. I was surprised by the result, but when I put these cash flows into the Fidelity Retirement Income Planner, sure enough the results for us were better. Test, confirm, do.
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Re: How I use I-ORP, and who shouldn't

Post by smitcat » Sat May 27, 2017 7:01 am

If you set IORP to a 'set' spending number that adjusts for inflation then it will cover more of the parameters in the original post.
I have run it for max spendable income and for a flat spending number and it teaches me more with the set income.
You can also use the various withdrawal options that vary income to non-linear spending patterns that have been authored by some popular 'experts' on actual retirement withdrawal patterns.

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Re: How I use I-ORP, and who shouldn't

Post by JaneyLH » Tue Jul 18, 2017 6:58 pm

I couple of years ago I decided to use the Variable Percentage Withdrawal (VPW) method to calculate how much we could afford to spend in retirement. I just found the Optimal Retirement Planner model (i-ORP) today and input our current data. In terms of who should or shouldn't use i-ORP, my husband and I fit the profile pretty well -- want to spend down our portfolio and leave no estate, plan to take SS at age 70, interested in doing Roth conversions to reduce future taxes.

I haven't had enough time to understand all the implications of i-ORP, but it is interesting that the annual spending target compared to VPW is within 1.6%. That does give me some comfort as a cross-check. :happy

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Re: How I use I-ORP, and who shouldn't

Post by munemaker » Mon Aug 14, 2017 8:46 am

LeeMKE wrote:
Thu May 11, 2017 12:19 pm
I also didn't hesitate to buy a copy of Living Off Your Money when some Bogleheads fixated on the insult of paying for the book.
I just ordered the book in paperback. I did not feel insulted, but was disappointed it is not available at a public library and is not available in the Kindle format. I much prefer borrowing books to buying them, and if I do buy them, I prefer them to be in the Kindle format so I don't have to store the physical copy.

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Re: How I use I-ORP, and who shouldn't

Post by Diogenes » Mon Aug 14, 2017 10:58 am

LeeMKE wrote:
Fri May 12, 2017 6:13 pm
chuckb84 wrote:
...Since I retired at 61, if I postponed SS to age 70 to maximize total retirement spending, I'd draw down my 401k by 40% before I got there, OTOH, if I took SS at 62, the drawdown is no more than 10%. Postponing SS to 70 results in about 1% more total spending in retirement (from 61-95), but I didn't like that initial 40% drawdown...


Interesting that the difference in total spending between taking at 62 and 70 was only 1%. I would have thought that due to tax savings from minimizing RMDs later it would be a significantly better strategy to draw down the 401k rather than take SS earlier...

Same for me, taking Social Security later did not beat out staying out of the portfolio and taking social security early for one of us, the other will start at FRA. I was surprised by the result, but when I put these cash flows into the Fidelity Retirement Income Planner, sure enough the results for us were better. Test, confirm, do.
In my case, having a pension that starts pre-60 will keep me in the 25 percent bracket anyway. This seems to negate the utility of Roth conversions. I also haven't been able to see the value in my spouse postponing her own SS past 62, doing so would require a withdrawal from tax deferred and a drawdown of the tax deferred balances from age 60-66 due to high travel spending.
Running I-ORP appears to confirm this. At RMD age our taxable income will double. The only solution I can see is to shift charitable donations over to be a part of the RMD, saving a little in taxes then I suppose.

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Re: How I use I-ORP, and who shouldn't

Post by FiveK » Mon Aug 14, 2017 11:06 am

Diogenes wrote:
Mon Aug 14, 2017 10:58 am
In my case, having a pension that starts pre-60 will keep me in the 25 percent bracket anyway. This seems to negate the utility of Roth conversions. I also haven't been able to see the value in my spouse postponing her own SS past 62, doing so would require a withdrawal from tax deferred and a drawdown of the tax deferred balances from age 60-66 due to high travel spending.
Running I-ORP appears to confirm this. At RMD age our taxable income will double. The only solution I can see is to shift charitable donations over to be a part of the RMD, saving a little in taxes then I suppose.
If you can defer the pension start date in return for a higher monthly payment, that might be worthwhile. Otherwise it is indeed a "problem". ;)

If the doubled taxable income causes you to pay a higher marginal rate, doing Roth conversions at a lower marginal rate may still be useful.

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Re: How I use I-ORP, and who shouldn't

Post by munemaker » Thu Aug 17, 2017 11:28 am

JDCarpenter wrote:
Thu May 11, 2017 9:45 am
John Z wrote:...

In my continued search for retirement investing and harvesting I found a fantastic book entitled Living Off Your Money by Michael H. McClung. At this site:
http://livingoffyourmoney.com/
you can preview the table of contents, download the first 3 chapters for free, and/or purchase an ebook or hardcover. The first 3 chapters are more than enough to guide you while the following 8 chapters provide more in-depth and detailed information. No high level math knowledge is required.

I am in no way connected to the author or his work.
I also have the book and have found it worthwhile. This thread goes into great detail: viewtopic.php?t=192105 I think the fairest way to summarize it is that the reviews, in the end, were mixed.
I bought the book and am working through it. A lot of good ideas and glad I bought it. The book is not a substitute for i-ORP though. Taxes are outside the scope of the book, while i-ORP is all about taxes.

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Re: How I use I-ORP, and who shouldn't

Post by WhiteMaxima » Thu Aug 17, 2017 12:24 pm

That's why in your early age (career), you should contribute aft-tax 401k to the pt that you have 15% marginal rate and use aft-tax saving to cover your daily expense. If your company offers aft-tax 401k, that' even great, do mega Roth. You would have 30 to 40 years doing this until you reach 65 when SS and pension kick in. Remember, 1.5m Roth is worth more than 2.0m 401k.
Last edited by WhiteMaxima on Thu Aug 17, 2017 1:51 pm, edited 1 time in total.

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Re: How I use I-ORP, and who shouldn't

Post by FiveK » Thu Aug 17, 2017 1:48 pm

WhiteMaxima wrote:
Thu Aug 17, 2017 12:24 pm
Remember, 1.5m Roth is worth more than 2.0m 401k.
True, if it costs more than 25% to get the money out of the 401k. Not true if it costs less.

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Re: How I use I-ORP, and who shouldn't

Post by munemaker » Thu Aug 17, 2017 11:23 pm

randomguy wrote:
Thu May 11, 2017 1:51 pm

For most people things like ROTH conversions make a small difference. You either can't convert enough (i.e. you only have say 5 years and can only do 50k/year out of a 2 million ira) or there just isn't much of a savings (you can't avoid SS being fully taxed. You are paying 28% now or later).
I am curious why you say that? Under certain scenario (filling the 28% tax bracket), i-ORP suggests I should convert about $150K/year for a 13 year period, going well past the start of RMDs. For most years, I am already far over the 15% bracket so i-ORP would not run that scenario.

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Re: How I use I-ORP, and who shouldn't

Post by munemaker » Thu Aug 17, 2017 11:25 pm

LeeMKE wrote:
Thu May 11, 2017 1:47 am

2) My estate is not over $5 million, so no estate tax consideration is needed.
What if someone's estate is under $5M now, but i-ORP projects it will be over $5M at the end of life?

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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE » Fri Aug 18, 2017 12:12 am

What if someone's estate is under $5M now, but i-ORP projects it will be over $5M at the end of life?
My guess is that I-ORP isn't set up to do estate planning of this type. Trusts, charitable gifts and life insurance aren't part of this analysis, so you might need to look elsewhere for estate planning advice. But if you are projecting just a small amount over $5 million at end of plan, I wouldn't bother now to get too excited and leap into some of the options estate attorneys use. Things change over time, and IMHO, messing around with trusts, etc. just ain't worth it for less than $500k, especially at end of plan. Unless I had a dependent who would need every dime, I wouldn't sweat the small stuff for the heirs.
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Re: How I use I-ORP, and who shouldn't

Post by smitcat » Fri Aug 18, 2017 6:27 am

munemaker wrote:
Thu Aug 17, 2017 11:25 pm
LeeMKE wrote:
Thu May 11, 2017 1:47 am

2) My estate is not over $5 million, so no estate tax consideration is needed.
What if someone's estate is under $5M now, but i-ORP projects it will be over $5M at the end of life?
On the first page of the full IORP output is a small chart that shows the estate totals. It will indicate the amount of the estate that is left at plan end and what amount is above the current taxable limits.
If you spend the time to read each area and input your own data and desired simulation IORP will give you some good output that can then be compared to future IORP or other spreadsheet runs - leaving items on default will likely leave you with results that do not apply to your case. These are just a few things that can be varied:
- how much you take out each year (not just plan max)
- amount of roth conversions
- predicted gains by account type as well as predicted inflation
- ages of SS election and amount awarded
- ages of retirement
- age of plan end for each

If you vary any of these as well as others the output can and will change dramatically......

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Re: How I use I-ORP, and who shouldn't

Post by munemaker » Fri Aug 18, 2017 7:09 am

LeeMKE wrote:
Fri Aug 18, 2017 12:12 am
What if someone's estate is under $5M now, but i-ORP projects it will be over $5M at the end of life?
My guess is that I-ORP isn't set up to do estate planning of this type. Trusts, charitable gifts and life insurance aren't part of this analysis, so you might need to look elsewhere for estate planning advice. But if you are projecting just a small amount over $5 million at end of plan, I wouldn't bother now to get too excited and leap into some of the options estate attorneys use. Things change over time, and IMHO, messing around with trusts, etc. just ain't worth it for less than $500k, especially at end of plan. Unless I had a dependent who would need every dime, I wouldn't sweat the small stuff for the heirs.
Makes sense.

Thanks

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Re: How I use I-ORP, and who shouldn't

Post by munemaker » Fri Aug 18, 2017 7:12 am

smitcat wrote:
Fri Aug 18, 2017 6:27 am
munemaker wrote:
Thu Aug 17, 2017 11:25 pm
LeeMKE wrote:
Thu May 11, 2017 1:47 am

2) My estate is not over $5 million, so no estate tax consideration is needed.
What if someone's estate is under $5M now, but i-ORP projects it will be over $5M at the end of life?
On the first page of the full IORP output is a small chart that shows the estate totals. It will indicate the amount of the estate that is left at plan end and what amount is above the current taxable limits.
If you spend the time to read each area and input your own data and desired simulation IORP will give you some good output that can then be compared to future IORP or other spreadsheet runs - leaving items on default will likely leave you with results that do not apply to your case. These are just a few things that can be varied:
- how much you take out each year (not just plan max)
- amount of roth conversions
- predicted gains by account type as well as predicted inflation
- ages of SS election and amount awarded
- ages of retirement
- age of plan end for each

If you vary any of these as well as others the output can and will change dramatically......
I have been playing with i-ORP for hours and I know all that.

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