Recommended software to plan withdrawal streams?

[sturbridge]

What do you recommend for planning software to minimize tax consequences when taking out money from tax advantaged plans? I'm looking to pull the plug next year so I'd like to start playing around with some what ifs and see what would be the best sequencing under different scenarios.

My preference highly leans towards software to download and use on my computer, versus a cloud application where I'm putting all my information out there.

Thanks!

 

[pb4uski]

There's not much out there in that niche. I-orp is popular around here but it often recommends much more in Roth conversions than people are comfortable doing. Earlier this week I learned of LifeYield Portfolio Advantage that looks interesting. ESPlanner may meet your needs as well.

A lot also depends on your situation... give a broad outline and we can share our experience.

I retired at 56, have been living on taxable funds and a small pension and doing Roth conversions since ER. In the 6 years I have been retired, I have Roth converted about 1/4 of our retirement date tax-deferred balance and paid, on average, 7.4% of the amounts converted in federal income tax... unfortunately, growth of the portfolio has resulted in our tax-deferred portfolio today being 130% of the balance when we retired despite the withdrawals for Roth conversions. Definitely a first world problem.

 

[bUU]

Earlier this week I learned of LifeYield Portfolio Advantage that looks interesting.

Coincidentally I ran a LifeYield analysis for the first time earlier this week. I was able to access it through Quicken. This analysts was about asset allocation and correcting allocation drift and location drift for optimal tax advantage. Is anyone familiar with this analysis and willing to provide some insight into what is a reasonable amount of location drift? I ask because it recommends we incur a lot of capital gains this year, primarily to relocate international equities from taxable to tax advantaged. If I lock that down it provides other advice but with a significant higher location drift of course.

 

[pb4uski]

I prefer international equities in taxable rather than tax-deferred... in our case the foreign tax credit is much larger than the small ordinary tax on unqualified dividends.

In 2018, for every $100 of total dividends received, $67 was qualified (tax-free) and $33 was non-qualified and attracted $5 in tax at 15% ordinary marginal tax rate. For each $100 of total dividends our foreign taxes paid/foreign tax credit was $6.... so my net tax on that $100 of income was MINUS $1.10... a net tax benefit that offsets taxes on other ordinary income. In 2017, the net benefit was better.... $2.43.

YMMV, but I prefer to hold international equitiee in our taxable accounts.... in fact, as I rebalance I am reducing domestic equities in our taxable account rather than international because of this minor tax rate... 0% vs -1-3% difference... it allows me to do slightly more Roth conversions and pay no tax.

With international equitie in tax-deferred or tax-free the foreign taxes paid/foreign tax credit totally goes to waste.

Of course, YMMV.

 

[SumDay]

Not software, but I follow Retirement Manifesto, and he discusses this topic frequently in his blog. Here are a couple that may give you something to ponder:


Our Retirement Investment Drawdown Strategy - The Retirement Manifesto


The Retirement Manifesto Money Map - The Retirement Manifesto


How to Build A Retirement Paycheck From Your Investments - The Retirement Manifesto


May be a bit rudimentary for many on this board, but I ain't one of 'em.

 

[pb4uski]

Coincidentally I ran a LifeYield analysis for the first time earlier this week. I was able to access it through Quicken. ....

I've tried a couple times to run it through Quicken in the past week but it doesn't work for me. I can get to the LifeYield screen in Quicken and click on the Get Started button but nothing happens.

Oops ... spoke too soon... I was able to get it to work. My laptop has an odd thing where some programs will not work with the touchscreen but will work with the trackpad... and this seems to be one of them.

The results for me are odd... it is suggesting that I put sell total stock in our HSAs and buy domestic bond funds.... sell international at a taxable gain (even though I indicated that the tax rate on LTCG is 0%) and buy large cap equities.

Interesting, but suboptimal IMO... especially the part on international equities.

 

[mrfeh]

Interesting, but suboptimal IMO... especially the part on international equities.

Yes, I am perplexed at the guidance of moving equities form taxable to tax-deferred.

I may be missing something, but that seems backward to me (assuming the equities would be replaced w/ fixed income).

 

[bUU]

Yes, I am perplexed at the guidance of moving equities form taxable to tax-deferred. I may be missing something, but that seems backward to me (assuming the equities would be replaced w/ fixed income).

What we've been talking about is moving international equities from taxable to tax-deferred.

The target allocation LifeYield recommended to me was as follows. The Target column is the target asset allocation by asset class. The second and third columns show how much of our taxable and tax-deferred holdings should be devoted to which asset class.

                     Target             Taxable        Tax-Deferred
Cash                  5.00%              13.72%               0.00%
Domestic Bond        25.00%               0.00%              39.34%
Global Bonds          0.00%               0.00%               0.00%
International Equity 20.00%               0.00%              31.47%
Large Cap Equity     35.00%              86.28%               5.58%
Others                0.00%               0.00%               0.00%
Small Cap Equity     15.00%               0.00%              23.60%
Unclassified          0.00%               0.00%               0.00%

If I followed that advice I'd end up with a 6.79% asset class allocation drift (which is good according to the analysis, but I thought we should be redistributing when asset class allocation drift exceeds 5%), and a 11.77% location drift.

 

[bUU]

Now, if I were to lock the one account within which I have that mess of International Equities in taxable, the revised analysis is as follows.

                     Target             Taxable        Tax-Deferred
Cash                  5.00%              13.72%               0.00%
Domestic Bond        25.00%               0.73%              39.90%
Global Bonds          0.00%               0.02%               0.00%
International Equity 20.00%               28.90%              14.90%
Large Cap Equity     35.00%              55.10%              23.47%
Others                0.00%               0.03%               0.00%
Small Cap Equity     15.00%               1.51%              22.74%
Unclassified          0.00%               0.00%               0.00%

If I followed that advice I'd end up with a 1.92% asset class allocation drift (which really is pretty good), and a 25.27% location drift (which obviously LifeYield considers too high).

 

[bUU]

Incidentally, for comparison purposes, I put in some fake transactions and re-ran the analysis, just to get the actual drift numbers for what I started out with last week. (I didn't mention this before, but all this is being prompted by rolling about 1/6 of our entire portfolio out of my previous-employer 401k and into an IRA. As such, since the money is currently in transit, it appeared to all be cash in tax-deferred, when in reality what it was before the rollover was bonds and small cap.)

My original asset class allocation drift was 5.22% and my original location drift was 24.12%. So LifeYield's initial recommendation actually bumped up my asset class allocation drift a bit, but of course slashed my location drift. Locking that one International Equities holding that has too much unrealized capital gains right now to sell (afaic) basically means that I'm locking in my current rate of location drift.

Which leaves me scratching my head about what to do. If I'm not going to sell that one International Equities fund, then I'm not going to really improve location drift. I'm basically left with a simple asset class reallocation and considering whether it is worth paying the tax on a significant but not overwhelming amount of capital gains to get my asset class allocation drift down from 5% to 2%.

 

[mrfeh]

What we've been talking about is moving international equities from taxable to tax-deferred.

Yes, I understand that. However, assuming index funds, the difference between US equities and ex-US equities is minimal.

I don't understand why either would be moved to tax-deferred.

 

[Gotadimple]

I had not heard the term "asset allocation drift" before. Turns out, according to Investopedia, that is another phrase for the condition where one needs to re-balance to the desired allocation. "Location Drift," means your percentage of assets in each type of account, also needs re-balancing.

Over time, if you set an allocation and a location (taxable, tax-deferred, tax-free) and don't do anything, the balances will drift. Most people set a band (a range +/- a set percentage) and when an investment type exceeds the band, they re-balance by either selling or adding $ to the investment. As for asset location, there are specific rules about which type goes where: bonds in tax-deferred or tax-free, equities in taxable or tax-free, etc.

So, the recommendation is 30% bonds/70% equities with 20% of equities in International. The software you are using is supposed to provide guidance for optimal tax advantage (the location part). Taking equities which can provide profits or losses and putting them into tax-deferred accounts (i.e., 401K, Traditional IRA), immediately eliminates any tax-savings because (1) any losses don't count, (2) all gains and dividends are taxed at regular rates, and (3) in the case of International you lose the ability to claim any pass-through taxation. So this software is recommending a tax-inefficient asset location.

If however, you are several years away from using the money, and your current tax-deferred is a Traditional IRA, consider partial conversions to a Roth. Specifically, equities excluding International should go into the Roth, same for bonds: all earnings, profits come out tax free. Alas, losses are losses and you get no credit for them.

International should stay in taxable: to take advantage of dividends taxation, and claim the international taxes as an offset to the Income Taxes that are due.

See Rick Ferri, All About Asset Allocation.

- Rita

 

[bUU]

Okay then LifeYield is bunk. (I was coming to that conclusion myself, already. Confirmation greatly appreciated.)

 

[mrfeh]

I had not heard the term "asset allocation drift" before. Turns out, according to Investopedia, that is another phrase for the condition where one needs to re-balance to the desired allocation. "Location Drift," means your percentage of assets in each type of account, also needs re-balancing.

I hadn't heard those terms either.

As for "location drift", there is no such thing if you treat all accounts as a single portfolio. There's no need to have an AA for individual accounts; doing so will likely cause tax inefficiencies.

 

[bUU]

I hadn't heard those terms either. As for "location drift", there is no such thing if you treat all accounts as a single portfolio. There's no need to have an AA for individual accounts; doing so will likely cause tax inefficiencies.

The "location drift" problem is real. Certain asset classes belong in tax-advantaged accounts and certain asset classes don't, and when that drifts out of the proper balance it should be remedied. The point pb4uski and Gotadimple made clear is that the way LifeYield determined it was flawed (specifically, presuming that international equities should be in tax-advantaged accounts).

 

[mrfeh]

The "location drift" problem is real. Certain asset classes belong in tax-advantaged accounts and certain asset classes don't

Why? The only reason I can think of is tax efficiency, and that consideration prescribes equities should be in taxable accounts.

 

[pb4uski]

Okay then LifeYield is bunk. (I was coming to that conclusion myself, already. Confirmation greatly appreciated.)

That's where I came out... but it does make some nice, fancy, good-looking reports and those not familiar with tax-efficient placement will likely be led to poor placement decisions by this software.

 

[rkser]

This is a very informative thread & will be helpful to many on this board.

 

[CDRE]

I leaned about Flexible Retirement Planner from this ER forum. Although it takes a bit of time to load this free downloaded desktop software with your data, FRP shows a graphic of investment (taxable, tax deferred, tax free) withdrawals over time.

 

[bUU]

Why? The only reason I can think of is tax efficiency, ...

That's why.

... and that consideration prescribes equities should be in taxable accounts.

It seems to me that you're not actually following the thread's discussion. Go back and read through the posts in order and I think you'll understand how we got to this point.

That's where I came out... but it does make some nice, fancy, good-looking reports and those not familiar with tax-efficient placement will likely be led to poor placement decisions by this software.

Yup. Style over substance.

 

[pb4uski]

Interesting bUU.... we found something that we cold agree on... who'd have thunk it.

 

[CDRE]

I just remembered another path I had found on this ER forum. It is an extremely detailed spreadsheet that seems to be supported and frequently updated from the Bogleheads forum. Here's a link to the overview and it has a link to download the free spreadsheet:

https://www.bogleheads.org/forum/viewtopic.php?t=97352

 

[kskmfire]

I pre-plan my taxes (Roth conversions and quarterly payments) in detail each year taxes using Intuit taxcaster or a planning xls like: https://sites.google.com/site/excel1040/home/2018-tax-planner-new-tax-law

As for how the tax optimized (love 0% LTCG) plan evolves over the years, I currently only have a simple xlsx for tracking the shrinking qualified accts.

At different times, it's very helpful to use the online tools.
Maybe you could use round numbers and browser private mode or a VPN, maybe opera browser...

 

[Jerry1]

I just remembered another path I had found on this ER forum. It is an extremely detailed spreadsheet that seems to be supported and frequently updated from the Bogleheads forum. Here's a link to the overview and it has a link to download the free spreadsheet:

https://www.bogleheads.org/forum/viewtopic.php?t=97352

I've been reading this thread because I have the same question - how best to withdraw money given that I have most of my money in tax deferred accounts and all the variables that go along with the withdraw with an eye on reducing taxes. The tread and the spread sheet show that this is a pretty complex analysis and it is also a very important thing to understand. I'll do my best to absorb it. Thanks all for the information.

For my rant, it is this: I go to the FA (Fidelity) and they want to charge me about 1% (which on my $2M is $20K/year) for what I can tell is to handle my portfolio. I find this no more complicated than figuring out a comfort level for an asset allocation and managing it (rebalancing it) on a regular basis. Something I can do. Then I ask them about taxes and an analysis on a withdraw scenario and they have a blank stare. I would be much more willing to pay them to handle the withdraw function in a tax beneficial manner - something I understand but find it hard to do and which will take more time than I care to commit. I think this has much more potential to get screwed up than managing my asset allocation. And, in doing so, cost some real money. My simple example is riding the 12% tax bracket and then realizing you have a large one time expense - like a roof. Well, if not planned correctly, that roof can cost an extra 10% (going from 12% to 22%). Thanks to this forum, I learned and obtained a HELOC to give me some flexibility. It just seems like this is an area that some professional help, coordinated with your FA would be worth spending a bit of money on and again, all I got is a blank stare from Fidelity. If I was going to hand over my money to a full service advisor, they would certainly have to have a very good handle on this topic.

 

[kgtest]

I know people refer to I-orp.org but I understand that has its faults as well.

Any of these "calculators' will have different attributes and assumptions. I really find building my own spreadsheet is worth the $20,000 I would have to spend on someone else doing the same thing.

I understand saving is the easy part. Figuring out how to spend it is the hard part yeah?