Standard of Living adjustment

I've Retired early and I'm income constrained for a few years until Social Security begins. Is there a way that I can have ESP increase withdrawals from my IRA's for a few years to increase (and smooth) income. I tried changing Std of Living to a number greater than 100% for these years with no change that I can see in the PDF report. I also tried decreasing Std of Living for my remaining years after this period with no apparent change either. Should this method work and is something broken, and/or is there a better way to accomplish this?


dan royer's picture

The standard of living percentage only works with available resources. Since there are a number of ways to accomplish a higher standard of living in a "borrowing constraint" situation, the program is not responsible for (or trying to) figuring out which one is the best. For example, you could cut contributions to retirement to raise current living standard--but that may not be the best option. You could take SS earlier. That would help some situations. There's so many variables and so many different ways to try to solve that liquidity constraint. The living standard adjustments only works with available assets etc. Borrowing constraint is a different kind of problem that is not meant to solve by changing living standard percentage. People might have too many special expenses early which could also cause borrowing constraint.

As a heavy ESPP user, I have essentially the same problem with my default profile. I tried playing with the standard of living inputs but was unable to get the results I desired. There are (at least) three other methods to do this. The first method is to increase the maximum indebtedness variable in the Assumptions Folder on the Inflation/Other Variables tab. This assumes that you can find a line of credit that you could actually use for a few years. The second method is to add a couple of years of Special Withdrawals in the Retirement Accounts folder. The third method is to show a portion of your retirement assets as special receipts. (More on that below...) Any will allow ESPP to smooth your standard of living.

I had been working around this by using the Special Retirement Asset Withdrawals method for a few years until Social Security kicks in. I would do a base run of ESPP and note the amount of retirement fund withdrawals that it recommended. I would then increase this a bit and manually enter a few years of the increased amount as Special Retirement Withdrawals.

The Retirement Special Withdrawal method works for generating a smooth living standard in the reports. However, it causes some side effects which can lead to some confusing values in the Monte Carlo reports. The living standard projections in the main body of the report are accurate but the plan risk as outlined in the Monte Carlo reports can be misleading. (It can lead to overly pessimistic Monte Carlo projections.)

I talked to Larry just last week about the Retirement Special Withdrawal method and its effects on the Monte Carlo reports. He recommended a workaround which preserves the good information in the Monte Carlo reports. The method involves setting aside a lump sum of your retirement assets in a safe asset class. You then omit that lump sum from your retirement assets when you enter them into ESPP. Instead, account for the distribution of that lump sum by spreading them across the desired number of years in the Special Receipts in the Special Folder. (if the lump sum was set aside from a taxable account, use Taxable Special Receipts.) Using this method seems to both smooth my standard of living until Social Security starts and it preserves the plan risk information in the Monte Carlo reports.

Hopefully, one of these methods will allow you to smooth your standard of living in your profile.


dan royer's picture

Add one more comment here for illustration.

Postponing Social Security in this program is frustrating. Larry's method seems unrealistic. If I have seven years to wait for SS until age 70, while retired during those years, I have to delete a huge chunk of retirement assets from the ESP program at the outset. That would take a large fraction of my retirement assets out of circulation and would remove all the investment returns that (diminishing) fraction would have earned over those seven years, greatly distorting the results. Since Maximize my Social Security tells me to wait until I'm 70 to start taking SS, I wish the ESP program had a way to smooth the discretionary income (I'm single, no dependents.) by slightly increasing the amounts from retirement assets until SS kicks in at the user-designated time. In other words, it would recognize the gap between retirement year and SS start year.

By the way, in my report, the "Living Standard per Adult" table under "Annual Suggestions" shows values between 40000 and 60000 for all years, but the "Living Standard per Adult" graph on the following page is blank, with just a red line at zero.

I'm coming to the conclusion that ESP is too difficult and complicated to use. It's supposed to smooth consumption, but neither the Living Standard nor the Discretionary Spending is smooth--it jumps by a factor of two over a short period of time after SS kicks in at 70. I have to say, I just don't understand what it's doing.

The key is to research and experiment with methods to "bridge the income gap" between the end of your working years to your SS start date. Since each person's situation is different, unfortunately there are many different ways to accomplish this and alleviate some of the liquidity/income constraints.

One simple option might be to purchase the "One-to-one" service and Dan can work directly with you on this. This benefits a lot of costumers who have similar issues.

Here are some general ideas:
- Can you start spousal social security during this time?
- Do you have a pension that can start earlier (during the gap years)? Since SS grows at 8%/year it's typically better to delay SS.
- Some might consider downsizing to free up home equity
- Reduce expenses in earlier years / save aggressively
- Paying off mortgage before retiring to increase consumption in later years
- Potentially reducing retirement contributions for a while to increase liquid assets
- Consider working 1 more year or part time to build assets and delay/reduce withdrawals

Specifically regarding ESPlanner inputs:
- Special withdrawals are the most common way to manually fill in "gap" years. With some experimentation, you should be able to smooth consumption fairly well up to your constraints. For example, if your consumption jumps by $30,000 after age 70, try an additional $25,000 in special withdrawals during the gap years. Then you can adjust each year up/down based on your specific results.
- As an alternative, if married, consider setting the last year of smooth withdrawals for one partner to around age 70. This forces more withdrawals during those years particularly if the ages work okay and they have assets that match those needed in your gap years.

Less common ESPlanner options (to be considered after trying other options):
- Consider some level of maximum indebtedness (although this may have issues)
- Adjust withdrawal order, key ages of withdrawals for yourself/spouse, reduce funding 529 plan, adjust retirement contributions vehicle (e.g. Roth, IRA, etc.) and/or amounts to save, % of non-annuitized assets to be spent, etc. There are a ton of ways to experiment to optimize your results although it does take time to work through these which is why they are less commonly used for this purpose.

It is possible, that you may not be able to smooth consumption by waiting until age 70 for both spouses. By experimenting, for example, you may find that you can delay to age 70 for 1 spouse and age 68 for the other.