iORP Retirement Spending Models

[Fired Up]

Here is 100% equity in Tax Deferred. 100% Bond in After Tax, income 38K/year

-terms- Values -text-
CurrAge 55 Current Age of Retiree
Spouse 0 Current Age of Spouse
TaxDef 500 Beginning Tax-Deferred Account Balance
TaxDef2 0 Spouse Initial Tax-Deferred Account Bala
TDNoTaxr 0 Retiree tax-deferred, after tax balance.
TDNoTaxs 0 Spouse tax-deferred, after tax balance.
ContDef 0 Contribution to Tax-Deferred Account
ContDef2 0 Spouses Contribution to Tax-Deferred Acc
RothIRA 0 Roth IRA account Balance
RothIRA2 0 Spouses Roth IRA account Balance
ContRoth 0 Contribution to Roth IRA Account
CntRoth2 0 Spouses Contribution to Roth IRA Account
MinRoth 0 Minimum Roth Balance
AfterTax 500 After-Tax Investment Balance
aftxCost 1000 Cost Basis of Initial After-tax Balance
ContSave 0 Contribution to Savings Account
MinTaxbl 0 Minimum After-tax Account Balance
Estate 0 Minimum Estate Size
Illiquid 0 Illiquid Asset Value.
Illiqudh 0 Illiquid Asset Value (home).
TaxBasis 0 Illiquid Asset Tax Basis.
TaxBassh 0 Illiquid Asset (Home) Tax Basis.
Uprinbal 0 Unpaid Principle Balance
Uprinblh 0 Unpaid Principle Balance (home).
SellYear 0 Year to sell illiquid asset.
SellYerh 0 Year to sell illiquid asset (home).
MortYear 0 Age to Begin Reverse Mortgage
LifeTime 0 Reverse Mortgage: Life time income plan
LumpMort 0 Reverse Mortgage: Lump Sum Distribution
SocSec 0 Social Security. 0 for Null, -1 for 0
SocSec2 0 Spouses Soc Sec. 0 for Null, -1 for 0.
SocSecA 0 Age to Begin Social Security.
SocSecA2 0 Spouses Age to begin Social Security.
DisableR 0 Retiree receiving disability benefits
DisableS 0 Spouse receiving disability benefits
ssFullFn 0 1 if Soc Sec fully funded after 2035
PensionI 0 Pension, Adjusted For Inflation.
PensinI2 0 Spouses Pension, Adjusted For Inflation.
Pension 0 Pension, NOT Adjusted For Inflation.
Pension2 0 Spouses Pension - NO Inflation.
PensionA 0 Age to start Pension.
PensinA2 0 Spouses Age to start Pension.
PensionS 0 Pension Survivors Benefit %.
PensinS2 0 Spouses Survivor Benefit %.
EarnInc 0 Earned Income.
EarnInc2 0 Spouses Earned Income.
EarnIage 0 Age to end Earned Income.
EarnIag2 0 Spouses Age to end Earned Income.
annudr 0 Retiree Initial Annuity Dividend.
annuds 0 Spouse Initial Annuity Dividend.
annufr 0 Annuity Premium Transfered for IRA.
annufs 0 Spouse Premium Transfered for IRA.
annuar 0 Retiree age to begin dividends.
annuas 0 Spouse age to begin dividends.

-terms- Values -text-
tontindr 0 Retiree, Initial Tontine Dividend
tontinds 0 Spouse, Initial Tontine Dividend
tontinfr 0 Retiree: Premium transfered from IRA
tontinfs 0 Premium transfered from IRA
obamaC 0 Affordable Care Act, PTC
ACAlid 0 MACGI upper limit for ACA,
HSAcont 0 Health Savings Acc Contribution,
RetAge 65 Age to Begin Retirement Plan.
RetAgeS 65 Age at which spouse retires.
Termr 92 Retiree Planning Horizon
Terms 92 Spouse Planning Horizon
earlyr 0 Retiree early withdrawal (-1 none)
earlys 0 Spouse early withdrawal (-1 none)
rrp 0 Spending Model.
IRA2Roth 0 Maximum IRA to Roth IRA Conversions.
StktxDfR 100 % in tax deferred stocks at retirement
StkRothR 100 % in Roth stocks at retirement
StkTxblR 0 % in After-tax stocks at retirement
StktxDfE 100 % in tax deferred stocks at plan end
StkRothE 100 % in Roth stocks at plan end
StkTxblE 0 % in After-tax stocks at plan end
gainsira 6 % IRA return on stocks
gainsrth 6 % Roth IRA return on stocks
gainsaft 6 % After-tax return on stocks
yieldira 3 % IRA return on fixed income investment
yieldrth 3 % Roth IRA return on fixed income inv
yieldaft 3 % After-tax return on fixed income inv.
Inflatn 2 Inflation rate for income
InflatnS 4 Spending inflation rate
TaxRateI 15 Combined Capital Gains Tax Rate
FedTxLvl 15 Current Marginal Income Tax Rate
StateMin 0 State Income Tax Std. Deduct. & Exemptn.
StateRte 0 State Personal Income Tax Rate.
essfst 0 Exclude Soc Sec benefits from State Tax.
penex 0 Pension Exclusion From State Taxes
Extra1A 0 Age of 1st Extraordinary Event
Extra2A 0 Age of 2nd Extraordinary Event
Extra3A 0 Age of 3rn Extraordinary Event
Extra4A 0 Age of 4th Extraordinary Event
Extra5A 0 Age of 5th Extraordinary Event
Extra6A 0 Age of 6th Extraordinary Event
Extra1D 0 Amount of 1st Extraordinary Expense
Extra2D 0 Amount of 2nd Extraordinary Expense
Extra3D 0 Amount of 3rd Extraordinary Expense
Extra4D 0 Amount of 4th Extraordinary Expense
Extra5D 0 Amount of 5th Extraordinary Expense
Extra6D 0 Amount of 6th Extraordinary Expense
Extra1I 0 Amount of 1st Extraordinary Income
Extra2I 0 Amount of 2nd Extraordinary Income
Extra3I 0 Amount of 3rd Extraordinary Income
Extra4I 0 Amount of 4th Extraordinary Income
Extra5I 0 Amount of 5th Extraordinary Income
Extra6I 0 Amount of 6th Extraordinary Income
VWSyear 0 Year to begin VWS simulation.

-terms- Values -text-
VWSfloor 0 Essential spending.
VWSceil 0 Maximum of discretionary spending.
MonteC 0 Monte Carlo Risk Assessment

Here is 100% Bond in Tax Deferred. 100% equity in After Tax, income 41K/year

-terms- Values -text-
CurrAge 55 Current Age of Retiree
Spouse 0 Current Age of Spouse
TaxDef 500 Beginning Tax-Deferred Account Balance
TaxDef2 0 Spouse Initial Tax-Deferred Account Bala
TDNoTaxr 0 Retiree tax-deferred, after tax balance.
TDNoTaxs 0 Spouse tax-deferred, after tax balance.
ContDef 0 Contribution to Tax-Deferred Account
ContDef2 0 Spouses Contribution to Tax-Deferred Acc
RothIRA 0 Roth IRA account Balance
RothIRA2 0 Spouses Roth IRA account Balance
ContRoth 0 Contribution to Roth IRA Account
CntRoth2 0 Spouses Contribution to Roth IRA Account
MinRoth 0 Minimum Roth Balance
AfterTax 500 After-Tax Investment Balance
aftxCost 1000 Cost Basis of Initial After-tax Balance
ContSave 0 Contribution to Savings Account
MinTaxbl 0 Minimum After-tax Account Balance
Estate 0 Minimum Estate Size
Illiquid 0 Illiquid Asset Value.
Illiqudh 0 Illiquid Asset Value (home).
TaxBasis 0 Illiquid Asset Tax Basis.
TaxBassh 0 Illiquid Asset (Home) Tax Basis.
Uprinbal 0 Unpaid Principle Balance
Uprinblh 0 Unpaid Principle Balance (home).
SellYear 0 Year to sell illiquid asset.
SellYerh 0 Year to sell illiquid asset (home).
MortYear 0 Age to Begin Reverse Mortgage
LifeTime 0 Reverse Mortgage: Life time income plan
LumpMort 0 Reverse Mortgage: Lump Sum Distribution
SocSec 0 Social Security. 0 for Null, -1 for 0
SocSec2 0 Spouses Soc Sec. 0 for Null, -1 for 0.
SocSecA 0 Age to Begin Social Security.
SocSecA2 0 Spouses Age to begin Social Security.
DisableR 0 Retiree receiving disability benefits
DisableS 0 Spouse receiving disability benefits
ssFullFn 0 1 if Soc Sec fully funded after 2035
PensionI 0 Pension, Adjusted For Inflation.
PensinI2 0 Spouses Pension, Adjusted For Inflation.
Pension 0 Pension, NOT Adjusted For Inflation.
Pension2 0 Spouses Pension - NO Inflation.
PensionA 0 Age to start Pension.
PensinA2 0 Spouses Age to start Pension.
PensionS 0 Pension Survivors Benefit %.
PensinS2 0 Spouses Survivor Benefit %.
EarnInc 0 Earned Income.
EarnInc2 0 Spouses Earned Income.
EarnIage 0 Age to end Earned Income.
EarnIag2 0 Spouses Age to end Earned Income.
annudr 0 Retiree Initial Annuity Dividend.
annuds 0 Spouse Initial Annuity Dividend.
annufr 0 Annuity Premium Transfered for IRA.
annufs 0 Spouse Premium Transfered for IRA.
annuar 0 Retiree age to begin dividends.
annuas 0 Spouse age to begin dividends.

-terms- Values -text-
tontindr 0 Retiree, Initial Tontine Dividend
tontinds 0 Spouse, Initial Tontine Dividend
tontinfr 0 Retiree: Premium transfered from IRA
tontinfs 0 Premium transfered from IRA
obamaC 0 Affordable Care Act, PTC
ACAlid 0 MACGI upper limit for ACA,
HSAcont 0 Health Savings Acc Contribution,
RetAge 65 Age to Begin Retirement Plan.
RetAgeS 65 Age at which spouse retires.
Termr 92 Retiree Planning Horizon
Terms 92 Spouse Planning Horizon
earlyr 0 Retiree early withdrawal (-1 none)
earlys 0 Spouse early withdrawal (-1 none)
rrp 0 Spending Model.
IRA2Roth 0 Maximum IRA to Roth IRA Conversions.
StktxDfR 0 % in tax deferred stocks at retirement
StkRothR 0 % in Roth stocks at retirement
StkTxblR 100 % in After-tax stocks at retirement
StktxDfE 0 % in tax deferred stocks at plan end
StkRothE 0 % in Roth stocks at plan end
StkTxblE 100 % in After-tax stocks at plan end
gainsira 6 % IRA return on stocks
gainsrth 6 % Roth IRA return on stocks
gainsaft 6 % After-tax return on stocks
yieldira 3 % IRA return on fixed income investment
yieldrth 3 % Roth IRA return on fixed income inv
yieldaft 3 % After-tax return on fixed income inv.
Inflatn 2 Inflation rate for income
InflatnS 4 Spending inflation rate
TaxRateI 15 Combined Capital Gains Tax Rate
FedTxLvl 15 Current Marginal Income Tax Rate
StateMin 0 State Income Tax Std. Deduct. & Exemptn.
StateRte 0 State Personal Income Tax Rate.
essfst 0 Exclude Soc Sec benefits from State Tax.
penex 0 Pension Exclusion From State Taxes
Extra1A 0 Age of 1st Extraordinary Event
Extra2A 0 Age of 2nd Extraordinary Event
Extra3A 0 Age of 3rn Extraordinary Event
Extra4A 0 Age of 4th Extraordinary Event
Extra5A 0 Age of 5th Extraordinary Event
Extra6A 0 Age of 6th Extraordinary Event
Extra1D 0 Amount of 1st Extraordinary Expense
Extra2D 0 Amount of 2nd Extraordinary Expense
Extra3D 0 Amount of 3rd Extraordinary Expense
Extra4D 0 Amount of 4th Extraordinary Expense
Extra5D 0 Amount of 5th Extraordinary Expense
Extra6D 0 Amount of 6th Extraordinary Expense
Extra1I 0 Amount of 1st Extraordinary Income
Extra2I 0 Amount of 2nd Extraordinary Income
Extra3I 0 Amount of 3rd Extraordinary Income
Extra4I 0 Amount of 4th Extraordinary Income
Extra5I 0 Amount of 5th Extraordinary Income
Extra6I 0 Amount of 6th Extraordinary Income
VWSyear 0 Year to begin VWS simulation.

-terms- Values -text-
VWSfloor 0 Essential spending.
VWSceil 0 Maximum of discretionary spending.
MonteC 0 Monte Carlo Risk Assessment

 

[bizlady]

If one runs Monte Carlo in i-orp, are those figures AFTER tax?

 

[Fired Up]

I can't seem to save the parameters in i-orp. HAving to enter them each time is a pain. any ideas? I'm using firefox.

I think it uses cookies to store the data locally, do you have this enabled in Firefox? Also are you using the Save Form button to store the values, and then the Reset Form to recall your stored values?

 

[walkinwood]

I think it uses cookies to store the data locally, do you have this enabled in Firefox? Also are you using the Save Form button to store the values, and then the Reset Form to recall your stored values?

Duh! I should have guessed that. I allowed cookies from the site and it works now. THANK YOU!

 

[Fired Up]

If one runs Monte Carlo in i-orp, are those figures AFTER tax?

Yes, the Monte Carlo reports spending dollars, taxes are already paid.

 

[sengsational]

Just a few comments. I believe we came to the same conclusions. Was not able to get the same results you had with your sample scenarios. Maybe, the starting age you picked just happened to give you the same spending dollars in each case.

When I think about it, I-ORP is constantly rebalancing each account to its respective glide path for that year.

I also set the glidepaths across each account equal to my overall Stock/Bond ratio to help I-Orp be my guide and keep my target Stock/Bond and therefore indirectly growth closer to my actual accounts. Haven't even thought how qualified vs. ordinary dividends would come to play, since I need to fake out I-Orp on the amount of bonds in taxable. Hopefully, its a minor component and can be ignored.

The starting age I used was 65, I think. It probably does something different because it was hitting the 10% penalty from age 55 to 59.5. Also, I didn't set the allocations to zero...I set them to 1% because there was a case where the optimization did something strange when it was zero one time, so I just was avoiding that possible problem.

In my personal case, I don't need to worry about how dividends are treated since I don't have any that are in after-tax. But I do have to fake-out i-orp because I have an investment where all the gains must come out first, and only then do I get my basis back (without tax consequences). That's unlike a tIRA or 401k, where gains and basis come out in proportion.

I think it's "wrong" for i-orp to warp the asset allocation by selling off bonds; people set their allocation across all account types and don't change it except to get more conservative over time. I can see how selling bond first WOULD generate a higher solution, but I don't think it's realistic nor desirable to have the optimization always shift to a less conservative allocation, which is what selling bonds does. If it were up to me, I would have the input for one asset allocation for all tax flavors of account. Or at minimum a warning to the user that, if they make the allocations different, then the optimization will forcefully change their overall asset allocation to one that is less conservative.

 

[StuckinCT]

I definitely think these models can be accurate, but they are only as accurate as the input, i.e. is it realistic to assume you will spend less money over time?

For me, I think it would be difficult to keep up the level of spending I am at now. Health insurance is 10% of our budget so there is flex, but this is not always the case. I think health insurance and education/kids expenses are the big x factors. If the kids are out of the nest and Medicare is less than five years away, it becomes less of a moving target. For people in their 40s like me, there are a lot of X factors.

 

[sengsational]

Take a look at the retirement spending plan. There are 5 different choices. The default is "level", which is conservative, but, as you say, might not be realistic.

 

[Fired Up]

Looked at the documentation more last night. Below is from the FAQ.

"Modeling the After-tax Account
My After-tax Account is invested in solid dividend paying stocks. 60% of its returns are from dividends and 40% are from value appreciation. How do I model this in ORP?
ORP's view of the After-tax Account is that it is divided between stocks and bonds.

Stocks are bought before retirement, and held until they are sold to fund a distribution. You specify the stocks' cost basis. The growth in value of stocks is from their compounding Rate of Return (ROR). The difference in the value of stocks at distribution and their cost basis is subject to capital gains taxes. ORP further assumes that through conservative, active asset management that account value volatility is low so that the constant ROR is a reasonable assumption.
Bonds' annual interest is taxed as personal income and contributes to disposable income. Bonds are held to maturity and redeemed at their original investment value. The ratio of stock and bonds in the account is held to target throughout retirement.
The tricky part is that is that your real life brokerage account will contain bonds which which fluctuate in price and are sold before maturity, thus taking on some characterisics of a stock, and contain stocks that pay significant dividends, with low price volatility, i.e. act like a bond is some ways.

Your mission is to characterize to ORP the behavior of your After-tax Account so that it looks to ORP the way it actually behaves in real life. ORP provides you with knobs that can be adjusted to approximate that. The knobs are % of the account held in stocks, stocks' rates of return, bond interest rate, and cost basis.

With the glide path parameters, you might characterize the account as 60% bonds where the dividends are construed as interest and assets are sold for their purchase price. The remaining 40% is stocks where there are no dividends but with capital gains profits. In other words by setting the percentage of stocks and bonds in the account, and coming up with rates of return and interest rates that are reflective, not of a pure stock/bond situation, but of the behavior of your investments. I realize this is a hell of a load to dump on the casual ORP user but that is the best I can offer. (This sort of fudging goes on in the Operations Research world all the time.) It doesn't matter what you call it as long as its behavior is characteristic of the situation being modeled."

 

[Fired Up]

Also there was a change in June of last year.

"06/07/2017: Revised After-tax Account Model

ORP's method of modeling the After-tax Account has been revised. The After-tax Account is divided into two asset types: stocks and bonds. Stocks grow in value over the years and when they are sold the proceeds are taxed at the capital gains rate. Bonds yield interest each year which is taxed as personal income. Bonds do not grow in value and are redeemed at face value. Stocks do not issue dividends."

Also, I think this line says the best in the FAQ: "ORP is not an accounting program, it generates guidelines."

 

[sengsational]

Thanks for calling out those portions of the documentation.

About generating guidelines...that's what I use it for. Tax law can change, but the best we have to go on is how they tax us now. i-orp offers a multi-year plan, but the only actionable thing is what to do now. Usually that means which of the three tax flavors of account to pull from for this year's spending. As to the magnitude of the spending, I use other tools to double check the result I get from i-orp, and even adding the present value of SS and other annuities, i-orp takes it a bit closer to the edge than some other tools. But the offer of a prescription for which tax flavor to pull from is huge.

 

[IrishMoss]

The tool has changed quite a bit (and not for the better, IMO).

I'm on the ACA so I have a limit to my taxable income until I can go on Medicare at age 65.

I also do partial conversions of IRA to Roth IRA, to the extent I can, to stay within the ACA income limit.

iOrp used to show a column in the nominal and real withdrawal report that included all expected income (investment income + other income). That column is gone and instead the only column shown is "guaranteed income" (like pension or SS or annuity). That change screws up my partial roth conversions estimate because the model is no longer accounting for any divs/interest income AND it's telling me to withdraw a much larger number from my IRA to convert to Roth because it doesn't think I have any income coming in. Had the model included income from investments, as it used to do, the amount to withdraw from my IRA to convert to Roth would be much smaller.

Also the HSA contribution was taken away as well, which screwed my calculations as well.

I don't understand why the model has been changed in this way, particularly no longer counting the returns/income from investments.

 

[orplanner]

Hi - I've been running a series of inputs through iORP and find the tool quite useful.

For its "Retirement Spending Plan" it uses "Constant Spending", with inflation adjustments, as its default - understandably the most common approach.

When I select any of the other "Retirement Spending Plan" models (i.e. Reality Retirement, Changing Consumption, Lifecycle Spending or Age Banding) it produces first-year suggested withdrawals substantially higher than the "Constant Spending" model - sometimes as much as 30+% higher. Subsequent growth and/or changes in the future annual spend are, of course, reduced according to each selected spending model.

At this time, I am comfortable with the result produced by "Constant Spending". However, I am wondering if we could/should "live it up" more in the early years as these lifestyle driven spending models indicate. It's the ever-present conundrum: spend more early when you can enjoy it vs. risking a shortfall later.

Like any plan, I'm sure we'll move with the ebb and flow - if we splurge one year, we don't have to the next year. But it is not my goal to leave a huge estate.


Question: What are your views regarding "lifestyle" variable spending plans as shown in the iORP tool? - or in other modelling tools?

There is a scholarly paper on this topic under ORP's Article tab. Basically researchers have used survey data to describe how people are living in retirement and developed variations on the constant income model to functionally describe the observed behavior.

 

[IrishMoss]

In the "Nominal Withdrawal Report" (Model ID: M19680G3kfS0r21w) I'm only seeing the following 9 columns as shown in the attachment.

However, according to the Reports Help File for the Nominal Withdrawal Report, there should be 11 columns. The additional columns not appearing in this report are:

- AftxTrns
- Yield

 

[sengsational]

I have found that if the model doesn't have any data at all for a column, it will not be included in the downloaded spreadsheet. This is not to say that your model should have no data in those columns, but unless something has changed to cause columns with data to be hidden, it might be that the model hasn't put data in those columns.


Does this happen with all models, even very simple ones (without the complexity of ACA and/or Roth Conversions)?

 

[IrishMoss]

I just ran the model with no ACA or Premium Tax Credit and the AftxTrns and Yield fields are now showing in the reports where they should and are populated with data as well.

So the problem is occurring around the ACA field.

Further, the underlying model calculation that was made to assume all taxable accounts are 100% cash when the ACA field is populated (as mentioned in the reports help file), is incorrect and gives a false result, which screws up anyone who is using the tool and is on the ACA.

 

[orplanner]

I have found that if the model doesn't have any data at all for a column, it will not be included in the downloaded spreadsheet. This is not to say that your model should have no data in those columns, but unless something has changed to cause columns with data to be hidden, it might be that the model hasn't put data in those columns.


Does this happen with all models, even very simple ones (without the complexity of ACA and/or Roth Conversions)?

This is correct: The existence of a column of zeros indicates that ORP computed small but non zero values. A column of nulls and exact zero's is not printed.

 

[indiajust]

looks like a declining spending pattern is the most common. https://www.kitces.com/blog/estimat...penditures-and-the-retirement-spending-smile/