Optimized Retirement Withdrawal Strategy

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JMC2009
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Joined: Sat Apr 14, 2018 7:32 am

Optimized Retirement Withdrawal Strategy

Post by JMC2009 » Sat Apr 14, 2018 7:49 am

Good morning,

I've been a long time silent follower and reader and joined this morning to create this post. I've been doing some research on Asset Withdrawal Strategies to ultimately project the highest NET withdrawal once an individual chooses to Retire. The majority of the posts I do see here are around asset accumulation, but I'm hoping to better optimize the distribution of assets. Is there any packaged software or tools that you can enter your total assets, the tax qualifications of those assets, your SSI projections at early retirement (with calculated increases through age 70), your mortality prediction, any pension income/other taxable income (real estate, etc.) and the ability to log your expenses?

My expected output is at an individual level (or household) an annual withdrawal strategy that optimizes for the highest net payout based on your life expectancy and asset qualification which would incorporate the federal/state tax tables.

In short, I've been searching for this but have yet to find something. If there's nothing out there, what are others doing? In addition im looking for a "side" project where I could build such a tool if it doesnt exist today.

Thanks!

bradpevans
Posts: 330
Joined: Sun Apr 08, 2018 1:09 pm

Re: Optimized Retirement Withdrawal Strategy

Post by bradpevans » Sat Apr 14, 2018 8:19 am

Paid financial planners, often charging 1%

It does get complicated, as steps up in income (market performance, SS, pensions, RMDs) all have impacts in how much you get to keep. Death of spouse often increase tax hit

From a simplicity standpoint it’s easier to run scenarios with Roth, since a dollar is always a dollar AND Roth dollars don’t impact other dollars Not true for 401, taxable, SS, pension etc

livesoft
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Re: Optimized Retirement Withdrawal Strategy

Post by livesoft » Sat Apr 14, 2018 8:22 am

So have you tried any of the calculators at all? Which ones have you tried and found lacking?

Fidelity has a decent tool. www.i-orp.com is decent. VPW is decent. Have you tried ESPlanner? Any others?

Perhaps you are looking for more precision and/or accuracy than is possible or even necessary?

If I was going to build such a tool, then i would become very very familiar with all the existing tools by running them many different ways.
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heyyou
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Re: Optimized Retirement Withdrawal Strategy

Post by heyyou » Sun Apr 15, 2018 1:56 am

Optimal implies some certainty about the future, and there just isn't any. Yes, there is history, but not enough when trying to forecast future average returns for the next thirty years.

Read Michael H. McClung (include the middle initial to avoid the video game author) since he reproduced previous WD strategies in his book to shown their deficiencies. What is safe, often leaves significant assets unspent if the worst cases do not occur during your retirement period. He uses relative stock valuations (CAPE10) to modify the initial spending amount, then considers annual inflation and future longevity for each next annual WD amount, all based on recent portfolio value, spending from bonds first, rebalancing when stocks are higher than on retirement day, and with a slice and dice allocation. You would have to do a lot, to be more thorough than him.

livesoft
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Re: Optimized Retirement Withdrawal Strategy

Post by livesoft » Sun Apr 15, 2018 10:28 am

And somebody did a lot more than McClung:

https://earlyretirementnow.com/2016/12/ ... t-1-intro/
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David Jay
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Re: Optimized Retirement Withdrawal Strategy

Post by David Jay » Sun Apr 15, 2018 11:26 am

I second the ERN series for those who want to dig into the concepts.

If you want a calculator where you just plug in your numbers and it gives you the “best” solution - good luck with that!
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

JMC2009
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Re: Optimized Retirement Withdrawal Strategy

Post by JMC2009 » Sun Apr 15, 2018 12:55 pm

Thanks for the replies. Yes I've read many of the above. I have not looked at Fidelity's tool.

Sandi_k
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Re: Optimized Retirement Withdrawal Strategy

Post by Sandi_k » Sun Apr 15, 2018 1:34 pm

I simply made a spreadsheet that incorporates multiple milestones. Since we don't know what tax rates will be, it's based on current law and practice. And even then, many of the milestones are not expressed arithmetically - but notes on the age lines as a reminder.

The math is done based on multiple inputs: estimated monthly pension income; estimated payout of lump sum amounts (such as PTO upon retirement); Roth conversion dates (before the resumption of the old Federal tax rates) which will add to our taxable income; SocSec upon FRA for my husband, and at age 70 for me; when we adjust spending again because of RMDs, etc.

So I also have listed "triggers" - the age in which DH reaches 63 and IRMAA gets assessed (want to do the Roth conversions before that year); the date on which the house is paid off; the years in which we may be eligible to contribute to Roths before retirement...

The portfolio income estimates are based on withdrawals of 3.75% from my age 60-65; 3.5% from 65-70, and then RMDs. That's as close as we need to get.

Our only other options for optimization are based on moving to a non-income tax state, but we're unsure when that would occur, based on parents - still around? - at that time.

YMMV.

02nz
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Re: Optimized Retirement Withdrawal Strategy

Post by 02nz » Sun Apr 15, 2018 2:12 pm

If considering retiring early (or even just retiring well before taking SS benefits at 70), the best course for many will be:

- Take advantage of years of low or no income between retirement and begin of SS and pension benefits, by 1) withdrawing from 401k's/traditional IRAs, at low income tax rates; this can be done penalty-free from age 59.5, or 55 under some circumstances; and/or 2) doing conversions from those accounts into Roth IRA, again taking advantage of low tax rates.

- For the second strategy you'll need to wait five years for the money to "season," so you'll need to live off of other funds in the meantime, such as taxable accounts or Roth contributions (which can be withdrawn penalty- and tax-free at any time).

- Whittling down your tax-deferred accounts during this time not only takes advantage of low tax rates but also decrease the amount subject to RMDs from age 70.5, which can increase both the tax rate on your distributions and the amount of your SS benefits subject to taxation.

- Between taxable accounts and Roth IRA, you should generally liquidate taxable accounts first, because of their tax drag (e.g., mutual funds' capital gains distributions and dividends being taxable). Liquidating taxable accounts early in retirement could also allow you to pay no (or lower) LTCG taxes than if you did it later (when RMDs from tax-deferred accounts, SS benefits, and possibly other pensions come into play).

- Drawing from Roth IRA last makes sense not only because of its flexibility (e.g., no RMDs), but also because it is the best instrument for inheritance purposes - you can read up on the specifics elsewhere on this forum.

So, generally the strategy would be 1) tax-deferred, 2) taxable, and 3) Roth. The finer points will vary by individual but for the majority of those with all three types of accounts this is probably the best general course.

heyyou
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Re: Optimized Retirement Withdrawal Strategy

Post by heyyou » Sun Apr 15, 2018 2:23 pm

Seconding what 02nz stated above:
Retirement accounts that are only tax sheltered have a large exposure to higher taxes late in retirement after one of you passes. The survivor has only half as many tax deductions as the couple, while the % withdrawal for each annual RMD is rapidly escalating.

blevine
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Re: Optimized Retirement Withdrawal Strategy

Post by blevine » Sun Apr 15, 2018 3:42 pm

Nobody ever seems to consider asset protection in these discussions.
From an asset protection standpoint, keeping $ in retirement accounts is protected from bankruptcy
and in some states there is some liability protection.

I would hope in retirement nobody is going bankrupt, but liability is something one should always be concerned with.
Someone slips in your home, you hit someone with your car etc. I would sleep better at night keeping $ in the retirement
funds as long as possible for this reason.

02nz
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Re: Optimized Retirement Withdrawal Strategy

Post by 02nz » Sun Apr 15, 2018 3:46 pm

Good point heyyou - the death of a spouse, SS taxation (which is not indexed for inflation), pensions, and 401k/IRA RMDs can all really add up to the perfect storm to drive up tax rates.

I'd add here that the conventional wisdom seems to favor drawing from taxable first (a few examples below), after satisfying any RMDs. The logic seems to be to allow the tax-advantaged accounts to keep those advantages for as long as possible. But I think that overlooks the huge tax savings possible from "filling in" the standard deduction and low tax brackets (up to at least the 12% bracket), which overwhelm the tax drag from holding onto taxable accounts a little bit longer.

https://www.kiplinger.com/article/retir ... aires.html
http://news.morningstar.com/articlenet/ ... ?id=844815

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