How much to plan?

[SecondCor521]

Hi all.

I've been stewing the last week or so on the topic of how much to plan for the future. (Planning for the past is pretty much an oxymoron.)

The kind of planning I am talking about is any sort of spreadsheet or model that goes more than about five years into the future. Examples might include retirement tax planning to one's planning horizon, or looking at Social Security, or looking at RMDs and the tax torpedo.

Planning for the future appeals to me because it seems like there is always opportunity to do clever things and end up with more spendable income or wealth, which in turn provides options like travel, a better living situation when I'm older, giving more to charities, or leaving more money to my children. Further, I am a nerd who has lots of Excel spreadsheets and this sort of planning and analysis could be considered fun.

On the other hand, I am beginning to think that there are more negatives than positives:

1. It is complex. Between different kinds of accounts (traditional IRAs, Roth IRAs, taxable), federal income taxes, state income taxes, FAFSA, college accounts, real estate, Social Security, IRMAA, RMDs, multiple conflicting goals (spending now, preserving for later, tax avoidance, estate planning), things get complicated.

a. This complexity makes planning less fun. I once tried to develop an actual tax planning spreadsheet for 10 years into the future just using my own situation. It ended up being something like 350 rows long and took me hours and hours to do, and by the end of it, I sort of had a headache.

b. This complexity makes it difficult to get things right. In my tax spreadsheet mentioned in (a), I probably found 5 to 10 errors, each of which could have made the results inaccurate. There was possibly an error or two left which I didn't find before I gave up and threw the whole thing in the bit bucket. I have a similar planning worksheet on RMDs, and it's pretty complex too and has errors in it that I know about but am not willing to go in and fix (for example, it doesn't handle the two-year-offset aspect of IRMAA).

2. Future unknowable changes may make planning moot. Even if I could struggle past item #1 (most days I can't), it is possible that tomorrow's changes mean that the assumptions necessary to do the analysis are no longer true and the goalposts have moved. Changes related to inheritances, my health, my future life plans, my children's life situations, or tax laws are all possible to likely over the long term. These changes could very well make any extensive long-range planning irrelevant.

3. It may not matter. Sometimes when I try to do sensitivity analyses in my models, the end result doesn't change within a broad range of reasonable choices (convert to the top of X% bracket or Y% bracket, or take SS at 66 or 70).

4. It may not matter, part II. It seems I really don't spend that much money compared to what I have available to me, so my life won't change one way or the other if I have $X or $2X or $5X. My kids may end up with more or less; however I doubt they would bother to go back and figure out if I had taken SS at 66 instead of 70 then they could have had $15K more than what they did get. I'm having a hard time making the effort.

I'm not suggesting people don't plan. In fact, I'm not really suggesting anyone do anything differently than what they're already doing, if they're happy with their current state of planning.

I'm mainly throwing this out there to see what excellent thoughts you all have on the topic.

 

[Dtail]

Well it doesn't have to be all or none.
IMO, the most difficult part of the retirement planning is the tax aspect.
From my aspect, I do some basic tax planning and when to take SS (although for me it is only between 66-70.
I find using various retirement calculators along with a basic spreadsheet gives me enough confidence in the results. YMMV.

 

[RunningBum]

I go into a lot of detail on my current state, and detailed income, tax, and conversion planning for the year. I do multiyear planning on trying to preserve the ACA subsidy until 65, and to make sure I have cash flow to keep me from having to sell appreciated assets and throw my income over the subsidy cliff. I have a VPW spreadsheet showing a plan to the end of a long life, but I don't dwell on that as long as my actual progress isn't falling behind my projections.

Other than that, I go by some guiding principles. With SS and a small pension looming, it's clear to me that I'll have more income after 65 and 70, so I should try to reduce/eliminate tax deferred income with Roth conversions while my other income is lowest. With SS, I consider it longevity insurance, so my plan is to defer to 70 unless there is a downturn which would favor taking it early and investing it in a depressed market that seems primed for high returns in recovery. I ran spreadsheet scenarios for taking at each age with various market returns and SS benefit cuts, but ultimately I decided that longevity insurance overrides a breakeven point unless it's at an absurdly high age. So I set aside these kind of spreadsheets and execute by the principles I've set as best I can.

For example, next year is going to be a good year to convert a big chunk of my remaining tIRA. Would it be better to convert less and then convert more between 65 and 70? Maybe, but perhaps I'll want to take SS at 65, which means I'd rather not take on even more income then. I haven't tried to project this in a spreadsheet, it's just too dependent on factors I can't control.

I've also made some errors in my spreadsheets and made some poor decisions based on them, but nothing fatal. I can't even recall what they were. I correct them and move on.

Not sure if this is the kind of thing you were looking for. Even if not, it doesn't hurt for me to think about my own process and evaluate it. I feel good about it, but I try to be willing to learn and change.

 

[Dash man]

Plans are worthless. Planning is critical. Or something like that. As said above tax planning is the most difficult, because it’s a moving target with rules and regulations changing all the time. But tax planning is an important part of how your overall portfolio should be structured. Where to put tax efficient equities and fixed income, or how much tax deferred vs. taxable accounts can matter. If you plan on using ACA or not will tell you how to structure your income. Knowing when and how much tIRA to Roth conversions has been a hot topic on here of late. Tax planning doesn’t need to be done to the dollar in future years, but planning for the flexibility to manage income later needs to start yesterday.

 

[stepford]

There is enough uncertainty that I believe only coarse planning is really appropriate (use a couple of established models to determine required assets for required income, determine target AA and done). Any result of modeling with finer granularity is likely to be overcome by events. So we all build in a certain amount of padding.

I do think one can maximize assets with more careful planning and active management, but I think this is a second order effect and unlikely to determine whether retirements succeed or fail. So it comes down to whether personal finance is an enjoyable hobby for you. If so, then have at - model and manage down to the last penny. Your heirs will thank you.

Personally I padded my required assets from FireCalc and Fidelity RIP by 50%, called it good and don't worry about it much.

 

[REWahoo]

Best planning advice I ever got: Measure with a micrometer, mark with a grease pencil and cut with an axe.

Translation: Plan precisely, adjust when appropriate and be prepared to change everything if necessary.

Works every time.

 

[Dtail]

There is enough uncertainty that I believe only coarse planning is really appropriate (use a couple of established models to determine required assets for required income, determine target AA and done). Any result of modeling with finer granularity is likely to be overcome by events. So we all build in a certain amount of padding.

I do think one can maximize assets with more careful planning and active management, but I think this is a second order effect and unlikely to determine whether retirements succeed or fail. So it comes down to whether personal finance is an enjoyable hobby for you. If so, then have at - model and manage down to the last penny. Your heirs will thank you.

Personally I padded my required assets from FireCalc and Fidelity RIP by 50%, called it good and don't worry about it much.

Bolded by me
Not everyone can just pad their expenses by 50%. Not a negative comment; just an observation.
I have 30% in discretionary expenses, but although am at 100% success, it is only by 10%.
Thus some planning is necessary, at least for me.
Where I do spend more time and I enjoy doing it, is developing a yearly budget and keeping to it with my yearly spending.

 

[levindb]

For me and my DW, we PLAN to run out of money by my age 105. We know how much we have right now. We know how much we will get from SSA, rentals and we assume growth on our investments of 3% more than inflation. We have no idea what inflation or taxes might be, so we do not include that in the plan at this stage.

The concept is pretty simple...solve for $0 at age 105...that tells us how much we CAN spend each year. We actually need less than half of that for essentials, so we have a pretty good size discretionary budget which allows us to travel quite a bit...and we are away from home 8-9 months/year right now. We do not want to run out of money.

That is the base plan, then we do some tax planning for the year each November. With the learning on short term taxes, we make tax related decisions for the next 5 years, or more, but not in fine detail. That helps with things like Roth conversions.

Plans are something we deviate from...they just tell us if we are headed in the right direction...or more importantly, they tell us if we are headed in the wrong direction.

With all of this knowledge, we then plan to have fun...pretty simple

 

[Bir48die]

I did five scenarios. Yes it was tedious. I used one inflation rate and rate of return which was conservative. Differences were major loss of value and timing of SS. Then four or five flexible budgets. I had the time. Haven’t used any except one due to the market. But, I have contingencies

 

[FlaGator]

I think you're right to be questioning the slavish devotion to planning out 5-40+ years. One caveat later.

After I realized my kids needed me more than more employer, I set about determining, with some confidence, that I could pull it off. I ran the available models, my then-FA did his and it looked good. But, all those did was confirm my "high level" assessment that it could work. That assessment was nothing more than dividing my taxable assets by my annual spend and determining if that would last until my kids were on their own. There are tax-deferred accounts that I assessed would be sufficient after that.

In the 5+ years since, many things have changed. My annual burn rate is higher, I'm soon to be married, I'm giving money to my kids I didn't initially plan, spending across categories is different than expected. A market that is better than I hoped is helpful, but I didn't plan for any growth when I did my straight line calculation. This generous market has pushed out the life of my taxable account by a few years more than I initially planned for.

At this point, I'm reviewing periodically throughout the year, evaluating Roth conversions each Q3 and taking it as it comes. I still do the taxable assets/annual spend, as well as running the models periodically. All the methods tell me I am more anxious than I need to be.

The caveat - I was going to hang it up when I did, the only question was how comfortable we would be. The long term planning helped me see there would not be a big lifestyle change, at least until the kids left home. Could say I needed that to get through the SOR risk years, which has passed for me.

Planning beyond one year, especially for taxes, holds no appeal. Too many variables in my life to think I can do it with enough precision to justify the effort. Took a while to realize the futility of it.

 

[Markola]

I take comfort in trying to plan for my portfolio to cover the long term, big “Needs”, like housing, transportation, healthcare, portfolio survival until full withdrawal amount at age 70, etc. For the “Wants”, I hope and plan for the portfolio to cover them but also know I can adjust down or up as conditions present.

 

[audreyh1]

I try to just do the coarse planning.

I do sit down to those spreadsheets every couple years to get a feel for what may drive our future expenses/taxes/income, but these spreadsheets are usually quickly out of date!

 

[Ronstar]

I try to make my plans simple. Planning for one's financial future (and everything that goes into it) is a daunting task. So I do smaller sub plans. Granted they should all fit together, but for me it's easier to make a lot of small plans than it would be for one big complicated plan. And smaller plans are easier to monitor and change.

 

[Badger]

There is enough uncertainty that I believe only coarse planning is really appropriate... So it comes down to whether personal finance is an enjoyable hobby for you. If so, then have at - model and manage down to the last penny. Your heirs will thank you.

Personally I padded my required assets from FireCalc and Fidelity RIP by 50%, called it good and don't worry about it much.

“When you are a Bear of Very Little Brain, and you Think of Things, you find sometimes that a Thing which seemed very Thingish inside you is quite different ..." My plan from the very beginning was to prevent having to eat cat food in my later years so I although I enjoyed my life and job and had a great time with a supportive spouse we also saved like a drunken sailor drinks. Our retirement savings went way beyond anything I could have imagined. It may not be as much as some but more than enough for us. We are still very frugal but now don't need to think any more about financial plans and now just spend as we want. If it doesn't work out then it will be because the entire country/world will be in deep do-do for a very long time so it won't matter. In the meantime we will enjoy our time and not waste it with hypothetical thinking.


And thank you all for the guidance and ideas.



Cheers!

 

[marko]

I try to just do the coarse planning.

I do sit down to those spreadsheets every couple years to get a feel for what may drive our future expenses/taxes/income, but these spreadsheets are usually quickly out of date!

+1
I'm an Excel freak myself (some people do crossword puzzles) and love building models, but the more complexity you plan for, the greater likelihood of it's eventual inaccuracy, IMO.

It's fun as a mental exercise, but you can drive yourself mad. I have dozens of old "this is my best model yet", tweaked to the nth degree that I haven't gone back to look at in years.

For serious financial plans, I tend to use broad 'windage' and try not to build in too many factors. When I was building forecasting tools at work I always found 'rules of thumb' to be good enough . YMMV.

 

[imoldernu]

Deja Vu already!
Reading the OP was reliving my (our) decision to retire. For two months after closing my home business @age 53, it was dozens... dozens of those big green spread sheets...yes filled out with all kinds of of variables. Literally hundreds of hours spent agonizing over every possibility. Very nervous. Starting a career over again at age 60 or so, is possible, but it wasn't a plesant thought.

Net, net.... the detailed plan went by the wayside early on, but the uncertainty was also gone. The planning allowed us to take any changes in stride, and we never looked back.

A waste of time? Maybe, but I don't think so. The confidence in understanding the effects of taxes, inflation, buying and sellling cars and homes, and the long term costs (back then in 1989) of healthcare (at age 53)... plus the safety (in our case) of buying to the limit of Ibonds, because we never relied on the stock market.

Somehow, even though we aren't wealthy, we are financially safe and happy.
The two months of planning directed our decisions.. from early on, living in a campground, to directing our active social lifestyle in an affordable way, and finding the right places to live.

So... Deja VU.... our "How much to plan?" story.

http://www.early-retirement.org/forums/f27/sharing-23-years-of-frugal-retirement-62251.html

 

[marko]

Net, net.... the detailed plan went by the wayside early on, but the uncertainty was also gone. The planning allowed us to take any changes in stride, and we never looked back.

+1
Despite what I said in my previous post, any plan is better than no plan and if a plan helps remove some doubt, fear or trepidation that's a good thing.

 

[mrfeh]

I'm mainly throwing this out there to see what excellent thoughts you all have on the topic.

I think it depends on what phase you are in (accumulation, near retirement, in retirement).

When we were in accumulation phase, we didn't do any kind of planning; we simply saved as much as we could and invested aggressively (100% equities). Once FI becomes a possibility, things change. Your AA should become more conservative, you need to examine your expenses, and analyze when/if you can stop working.

The available tools (firecalc, etc) are enough for me; I never generated my own spread sheets.

 

[target2019]

I'm mainly throwing this out there to see what excellent thoughts you all have on the topic.

I think it depends on what phase you are in (accumulation, near retirement, in retirement).

When we were in accumulation phase, we didn't do any kind of planning; we simply saved as much as we could and invested aggressively (100% equities). Once FI becomes a possibility, things change. Your AA should become more conservative, you need to examine your expenses, and analyze when/if you can stop working.

The available tools (firecalc, etc) are enough for me; I never generated my own spread sheets.

Yes, it depends on what phase of retirement you happen to be in. I know that the comments on spreadsheets and tools interest me, and I seem to try every one. But I really need very little from the tools to find out things will be ok.

I've constructed a spreadsheet, and just find it cannot change the future. My assumed 5% just does not happen year-to-year.

 

[enjoyinglife102]

Simple and broad based planning works for me. Even at a higher level, many variables and life in general make for on-going modifications. If I did it on a more granular level it would be purely for enjoyment of the process; some may like that but not me. One of my basic tenets is to emphasize the go-go and even slow-go years. I fear not living the life I want now and then sitting around during the no-go years and counting my money more than I do running out of money (though my broad based plan gives me confidence neither will occur).

Something that always baffles me is I've yet to see anyone figure out their inflation rate. With substitution, elimination or any other consumption or product change - I don't know if it's possible. Much like no one follows the 4% withdrawal approach, no one buys the fixed basked of goods used for the government computation. The only thing I'm sure about that number is it's not anybody's personal inflation rate. Yet, both are often referenced and all kind of detailed analysis is based on them. A plug number is not helpful to me.

 

[Spock]

There are several aspects of planning that are beneficial regardless of complexity of the model:

1. By trying to model/plan, you get a greater understanding of the problem. You may uncover "gotchas" that are both either beneficial or harmful.
2. Ignoring the accuracy of a model/plan, by creating it you become aware of what and how life changes (including tax laws) could impact you when they occur.



At the risk of dating myself, when I was in college I bought a TI-59 programmable calculator. It had various specialty modules that could be plugged in for things like Engineering Economics math (FV, PV, IRR, etc). The modules came with detailed books with sections for each functions. In more than one case I found those TI books and sample code to be more helpful and clear than either the text books or lectures for the course material.

In one power systems class, I wrote a FORTRAN program to graph out an electric motors power factor as the variables changed. By writing (and debugging) that program, I understood the motor power factor equations better than the instructor.

By programming (spreadsheeting) your model, you get a greater understanding of how things interact because you created those interactions as you built the spreadsheet. The level of detail (number of interactions/amount of complexity) you put into your model is up to you. But by creating your model you understand the "whys" better than just blindly using a web calculator.


A last note on complexity: Mathematicians create abstract models to simplify a large task. While my favorite home built spreadsheet is grown into an ungainly mess over the years, its my own fault for not retreating back to simpler methods once I've validated they are just as valid as the extreme detailed approaches.

 

[T-Minus]

SC - I am a planner by nature. Without a plan, I become nervous. True, I may get hit by a bus or meteor tomorrow, rendering my plan obsolete, but my heirs would be able to comprehend the plan to some degree. After losing a parent who was a planner, it really helps when things are completely laid out (i.e. where to be buried and appropriate documents, a centralized description of accounts and holdings, an up-to-date will/trust documents, etc. etc. etc.). Using the aforementioned bus/meteor scenario, my wife and/or son would have no trouble locating resources, understanding income flows, dealing with remains, legally transitioning assets, etc. A good plan reduces part of the emotional impact that significant life events bring.

For me, I enjoy the planning process. For 2020, on the expense side I have 52 planning categories that I track - accounting for everything from Utilities, Insurance, Taxes, Travel, and such. Each one is accurate, adjusted for inflation, based on a previous consumption history, and time-tracked. If there is an unexpected or unplanned change, it can potentially point to a problem (i.e. Water Leak, change in direction at an insurance company, etc.), and take appropriate action. Income planning is similar - I know what is expected and when, and can then dial-up or -down income as needed to take advantage of incentives (tax brackets, ACA subsidiary, etc.). Could I live happily by doing less? For me - no. For somebody else - of course. Again, I like it, but your level of planning detail is up to you. However, I believe that, as Benjamin Franklin said — 'If you fail to plan, you are planning to fail!'

 

[LOL!]

Plan for the future? I don't think it is so hard.

First, remember what you were planning 5 years ago. Seriously. What were you doing about the future then? How have things turned out 5 years later?

For myself, everything has turned out hunky-dory. The children have graduated from college. The portfolio has done the expected.

About the only thing I didn't have in my plan was that my children now take me out to dinner and pay for it.

 

[target2019]

If hope is some type of plan, I am greatful that things have turned out well.

At the end of each year I've noticed that my previous guesstimate turns out "wrong", but it's still ok. If there is a large divergence from the expected, I'll need to go back and look at expenses, assumptions, and try to recover from the un-expected.

 

[W2R]

To me, planning is fun. I always do a lot of different scenarios, to give me a sense of how I would do if, say, SS got cut, or the market cratered completely and forever, or what if we had Katrina II, or whatever. I think the reason I enjoy looking at the "what if"s, is that I feel more secure knowing that I could figure out how to survive.

The one thing I cannot seem to plan for is, what if F should happen to die before I do. That's not a financial concern but more of an emotional concern, I suppose. I'd need to go on somehow, but what a blow that would be.