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iORP Retirement Spending Models
Old 02-01-2017, 11:01 PM   #1
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iORP Retirement Spending Models

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?
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Old 02-02-2017, 07:13 AM   #2
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Quote:
Originally Posted by Brian99 View Post
Question: What are your views regarding "lifestyle" variable spending plans as shown in the iORP tool? - or in other modelling tools?
IMHO - These various spending plans reflect observed spending patterns of actual people. So they are a good reflection of what many people end up actually doing. I accept that but don't like it as a planning basis for what I might end up doing.

I want assurance my money won't run out plus I'd like to budget using as much of it as possible. Therefore, I use the constant spending model but rerun I-ORP yearly to set a maximum budget for that year. So after good market years, the following years budget will go up. After bad market years, it will go down. Several people on this board do similar things. Various modifcations are done including for example smoothing out the budget changes by setting a budget on the last 3 yrs of I-ORP run data.

The I-ORP author (James Welch) has documented the version of this method that is very close to the one I use in his white paper located on the I-ORP web site. Look for the white paper at the bottom of https://www.i-orp.com/ . It's called "A Three Step Procedure for Sustainable Retirement Savings Withdrawals" The paper and it's supplement (also on the website) are easy reads and provides back checking for the methodology as well as comparison to other withdrawal methods.
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Old 02-02-2017, 07:20 AM   #3
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Hi Brian,


I am not yet retired, but I think they make sense. Anecdotedly, my parents are now just about 80, and due to my mother's health, they don't a lot of things they used to - travel around the country, spend 3 months in a rental in FL (they live in NH), etc. My dad told me they easily are living on SS money now and have been for the last 5 years, which wasn't the case when they retired over 20 years ago at 57. Similar stories for my aunts/uncles and my father's parents before them.


One grandmother was in a nursing home on Medicaid for many years after her assets were depleted....so that is one of the "unknowns", of course.
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Old 02-02-2017, 08:39 AM   #4
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I am in the same position as kaudrey (until July!).

Until the past year or two I relied upon standard SWR for planning (beginning early with 5% wr, gradually decreasing to 3%--much to DW's chagrin as I kept adding years of work!). Now that we are close to retirement, I've expanded to examine the Bernicke/blanchett spending model, among others. The research behind that model backs up the anecdotes of kaudry and myself--spending does tend to decrease as you age, especially for more affluent retirees. If you haven't delved into the research, this Kitces post is a good place to start: https://www.kitces.com/blog/estimati...pending-smile/

I don't know that we'll spend as much as this model would allow in our early years; but it gives me a lot more confidence in using a fixed percentage withdrawal rate that is higher than I would be comfortable with in traditional SWR.
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Old 02-02-2017, 09:31 AM   #5
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My recommendation would be to use the constant spending, especially with the market at historical highs right now.

If you read the paper "A Three Step Procedure for Sustainable Retirement Savings Withdrawals", you'll realize that if you plan to run the model every year to determine your allowable spending, that annual spending value jumps around all over the place! In that paper, the allocation is set to 100% equities, so if you had a different AA, it wouldn't jump around as much, but even so, using this process, you should be prepared to accept steep budget cuts in down years. With the constant spending "on", you're making a more conservative model....one that might deal better with those inevitable dips in the market.
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Old 02-02-2017, 10:27 AM   #6
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[QUOTE=sengsational; If you read the paper "A Three Step Procedure for Sustainable Retirement Savings Withdrawals", you'll realize that if you plan to run the model every year to determine your allowable spending, that annual spending value jumps around all over the place! ...[/QUOTE]

Thanks, that's a VERY important point I should have mentioned. I think that's why some folks use that 3 yr average technique I mentioned in the earlier post. Others takes any "extra" not spent in a year and use it to buffer the "down" years. Others just plan for thin budget years. In any event, that's a critical point to be aware of.
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Old 02-05-2017, 11:10 AM   #7
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Thanks for all the thoughtful replies. I am still digesting the recommended material...

Quote:
Originally Posted by Whisper66 View Post
The I-ORP author (James Welch) has documented the version of this method that is very close to the one I use in his white paper located on the I-ORP web site. Look for the white paper at the bottom of https://www.i-orp.com/ . It's called "A Three Step Procedure for Sustainable Retirement Savings Withdrawals" The paper and it's supplement (also on the website) are easy reads and provides back checking for the methodology as well as comparison to other withdrawal methods.

The 3-PEAT paper refers to RIMO as the linear programming tool used. Is this the same as the iORP tool?

...and is it correct to assume that all the results in the 3-PEAT paper were performed using "constant spending" withdrawal model (re-run each new year to get a new withdrawal rate for that year)? (e.g. the 3-PEAT paper does NOT use any of the lifestyle withdrawal models, correct? - although it does refer to Delorme's for testing.)

There is much additional information on the ORP website that I still have to get through.


Quote:
Originally Posted by 2017ish View Post
If you haven't delved into the research, this Kitces post is a good place to start: https://www.kitces.com/blog/estimati...pending-smile/

I don't know that we'll spend as much as this model would allow in our early years; but it gives me a lot more confidence in using a fixed percentage withdrawal rate that is higher than I would be comfortable with in traditional SWR.

I'm familiar with Kitces/Guyton/Bengen/etc./etc. (with my layman's understanding) -- but will re-read the link you attached.

We're probably feeling the same about it: Maybe we'll spend more than the "constant" model, or maybe not. But it provides some confidence that the base plan should work.

Thanks.
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Old 02-06-2017, 07:28 AM   #8
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RIMO as the linear programming tool used. Is this the same as the iORP tool?
Basically yes. RIMO is a generic term the author uses for a "linear programming application that computes the optimal retirement plan; a tax efficient maximization of disposable income" (definition from Glossary). I-ORP is one such program and is the one the author uses for RIMO calculations in this paper. An earlier draft of the report used the term i-ORP. This was changed to RIMO in later drafts.

Quote:
Originally Posted by Brian99 View Post
...and is it correct to assume that all the results in the 3-PEAT paper were performed using "constant spending" withdrawal model (re-run each new year to get a new withdrawal rate for that year)? ...
Yes, the RIMO calculations done for the 3-PEAT procedure were done based on "constant spending". See note 5 in Figure 1 - "The straight line represent's RIMO's constant spending projection from the first RIMO run at age 65....." I suppose if one used an alternative spending model that allowed higher spending during early years, the variance in disposable income year to year would likely increase. Its already pretty high with the constant spending model (see Table 2) so something to plan for.
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Old 01-27-2018, 06:13 AM   #9
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Just tried using I-orp for the very first time by plugging in some conservative assumptions on the generic page (not Extended Orp). My model has me retiring at 55 with 60% in tax differed accounts and rest in taxable (upper 7 figures in investable assets). Here are my questions...

- The generic model produced a first year gross income equal to 2.9% of my total investment assets, not say 4%??
- The model shows pulling about 35% of my gross income from my tax differed accounts until age 60, then 100% from tax differed for ages 60 & 61, then a blend thereafter?? I cannot understand how it can assume such a small tax differed withdrawal as I would be subject to rule 72t from 55 - 59 1/2 unless it is assuming I would pay a 10% penalty
- I purposely left SS inputs blank so can I assume the Income output is projected as income only from interest, dividends each year from my taxable account?

I know I need to spend some real time reading/digging through the site/modeling, but was hoping someone could give me the quick Cliff Notes version?
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Old 01-27-2018, 08:03 AM   #10
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Question: What are your views regarding "lifestyle" variable spending plans as shown in the iORP tool? - or in other modelling tools?
When I retired, I had a basic level lifetime spending goal. But, the beginning assets I used in testing that goal were after I had carved out substantial amounts for "extra spending in the early years". Mostly, I wanted to catch up on all the travel I hadn't done while working. But, I also included some for larger gifts to kids.

I assumed I would burn all this excess in the first 10 years of retirement, but I didn't have any plan regarding exactly which years I'd spend which amounts.

I actually set up a tracking worksheet that had my initial carve out amount and then the annual drawdowns from it.
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Old 01-27-2018, 08:38 AM   #11
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I tried to find this information on the iORP site, but couldn't. Do you know if the iORP "disposable income" result means after taxes or before taxes? I'd think "disposable" means after taxes but I'd like to know for sure if it means that on the iORP calculator.
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Old 01-27-2018, 09:26 AM   #12
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Quote:
Originally Posted by Brian99 View Post
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?

Probably goes without saying, but your age at retirement makes a difference as well. The younger you are, the better to be conservative but comfortable initially.
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Old 01-27-2018, 09:41 AM   #13
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Age but also spending level. If your retirement plan is to live on 50k, that amount may decrease in your golden years but probably not the same % as someone who plans on 250k year income.

As for the comment on spending IRA money before 60, you can do Roth conversions ahead of time to allow it or 72t. Havenít seen anyone recommend the 10% penalty.

If I didnít want to leave an inheritance I would be more apt to model realistic spending declines as I age. And I like the idea mentioned of having a constant spending base amount and a separate younger age fun money account. Easy to set up 2 accounts on vanguard to put a dotted line between the $
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Old 01-27-2018, 10:22 PM   #14
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I tried to find this information on the iORP site, but couldn't. Do you know if the iORP "disposable income" result means after taxes or before taxes? I'd think "disposable" means after taxes but I'd like to know for sure if it means that on the iORP calculator.

On the i-ORP Results Report, at the top of the first page, it reads:

"Your projected, maximum, annual disposable income is $XXX,000 in today's after tax dollars."


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Old 01-28-2018, 06:52 AM   #15
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On the i-ORP Results Report, at the top of the first page, it reads:

"Your projected, maximum, annual disposable income is $XXX,000 in today's after tax dollars."


omni
Sheesh, I looked and looked. How could I have missed this, right at the top??
It's been a long few months...maybe I need to retire (grin!)
Thank you!
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Old 01-28-2018, 09:45 AM   #16
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Originally Posted by DawgMan View Post
Just tried using I-orp for the very first time by plugging in some conservative assumptions on the generic page (not Extended Orp). My model has me retiring at 55 with 60% in tax differed accounts and rest in taxable (upper 7 figures in investable assets). Here are my questions...

- The generic model produced a first year gross income equal to 2.9% of my total investment assets, not say 4%??
- The model shows pulling about 35% of my gross income from my tax differed accounts until age 60, then 100% from tax differed for ages 60 & 61, then a blend thereafter?? I cannot understand how it can assume such a small tax differed withdrawal as I would be subject to rule 72t from 55 - 59 1/2 unless it is assuming I would pay a 10% penalty
- I purposely left SS inputs blank so can I assume the Income output is projected as income only from interest, dividends each year from my taxable account?

I know I need to spend some real time reading/digging through the site/modeling, but was hoping someone could give me the quick Cliff Notes version?
Careful using I-ORP if you have entered different glide path numbers in tax deferred accounts and taxable accounts. For instance, if you have 100% bonds in tax deferred and 100% equities in taxable, it will show that you will need to move funds from tax deferred to taxable. Its trying to maximize your spending and it will do it at the expense of changing your equity/bond ratio of your overall portfolio. Don't know of a workaround, I just take my overall equity/bond ratio and make it consistent across tax deferred, taxable, and roth accounts for the I-Orp.
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Old 01-28-2018, 10:01 AM   #17
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Are you sure that i-orp will do something different based on bond vs equities? Certainly for taxable vs not, but it doesn't make sense for it to recommend a different plan based on asset allocation because certainly the optimal plan is the one that ignores all that (fewer constraints means more solutions) and you adjust the allocation within the tax category. The presumption I've gone with was that those equities to bond numbers were for calculating return.
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Old 01-28-2018, 10:39 AM   #18
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Are you sure that i-orp will do something different based on bond vs equities? Certainly for taxable vs not, but it doesn't make sense for it to recommend a different plan based on asset allocation because certainly the optimal plan is the one that ignores all that (fewer constraints means more solutions) and you adjust the allocation within the tax category. The presumption I've gone with was that those equities to bond numbers were for calculating return.
You are correct the equities to bond numbers are used for calculating return. Based on those returns extended I-Orp will make different plans. Those plans may not agree with what you want for your overall portfolio's equities to bond ratio.
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Old 01-29-2018, 07:59 AM   #19
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Ok, I think you're saying that i-orp will tell you to spend or move tax advantaged funds at certain times and that by doing so, that would throw your asset allocation off target? I think that would be true if adjustments we're not made. But say it has you pulling and spending out an account with equities when the market happens to be down. You do spend those equities, but you buy equities in the other account. Since you funded that equities purchase with bonds, you have essentially funded your spending with bonds. Another way to look at it is you spend from where it tells you to, and rebalance back to target.

I'm not at my computer right now, but an easy way to test this would be to set after tax to 100 equities and tIRA to 100 bonds with equal amount in each. Then swap it to bonds in after tax and equities in the tIRA. I predict the same result, but if not, I'd have learned something.
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Old 01-29-2018, 08:49 AM   #20
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iORP is on target. Our VG guy said very close to the same.
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