How do I change the order of both regular assets and retirement accts.?

The User Manual indicates that, at least for retirement accounts, that withdrawals will occur in the order specified on the Smooth Withdrawal screen, i.e. say IRA's before Roth IRA's. Yet when I look at the various assets reports all assets seem to be drawn down regularly from start date to end of life dates for myself and my spouse. What I want to model is that all of my Regular Assets (which are in taxable accounts) are withdrawn first until depleted, then Individual Deductible Accounts (IRA's) next until depleted, and finally the Roth accounts last after all other assets are gone. I believe this would produce the most advantageous tax regime and therefore increase the Living Standard. But how do I get the program to do this? Thanks.

Comments

dan royer's picture

The qualified assets do follow the withdraw pattern that you see there with ROTH being the last by default. ROTH going last does not always mean a better tax advantage, but most of the cases I've built do benefit a little bit by taking the ROTH last. You'll sometimes see the taxes go down in the year the ROTH kicks in, but there's no other way to track in the software when those ROTH withdrawals begin since they all show up in the same withdraw column. I think there are tax situations where taking the ROTH early may help.

As far as Regular Assets go, I don't believe there is a tax advantage to using those first, but even if there were, the program needs to use the regular assets to smooth discretionary spending through a very uneven and algorithm-driven pattern of saving and dissaving over the years. Without this pattern, it would be impossible to smooth discretionary spending in view of the many changes in taxes, Medicare B, Social Security, declining mortgage, special expenditures, etc. So the regular assets are withdrawn or saved as the program needs to in order to achieve its priority which is to smooth your discretionary spending.

Dan (and others who contributed up till Sunday afternoon, West Coast time) - Thanks for the prompt response (don't you ever take weekends off??).

I appreciate the suggestions for adjusting various program inputs to "force" the withdrawals from Regular Assets earlier, some of which I have already experimented with. However, they seem to have the unintended (at least in my case) effect of leaving a larger estate at the end of life.

Without such "tricks" what I see in my Retirement Accounts Report (my retirement assets are split about two thirds IRA, one third Roth IRA) and my wife's Retirement Account Report (all Roth IRA) is that withdrawals are made from each of the these accounts in constant amounts over the remainder of our expected lives (I'm 74 and she's 70). At the same time my Regular Assets Report shows savings positive and growing and consequently the level of regular assets also growing up until my expected demise and only then shrinking to zero upon my wife's expected end of life 9 years later. From this I get that the program is not drawing from Regular Assets first, IRA's next and Roth's (at least my wife's which is pure Roth) last. What am I missing here?

By the way, the reason I think withdrawing regular assets first should be a tax advantage is that it would allow the tax deferred IRA's longer to accumulate earnings tax free as well as defer the retirement account withdraws until I would anticipate being in a lower tax bracket. The Roth's last is usually a no-brainer.

I am also puzzled (as some other writers have been under the "withdrawl" type comment tabs) as to how to determine each year when I update the program how much to withdraw from each type of account. As a suggestion for future updates couldn't a report be provided which would break down those numbers? Or is there a way to calculate that breakdown from existing reports? It seems like many like me would find that very helpful in practically managing our finances in retirement.

What you are seeing is relatively common. The key to remember is that the software is first focused on a solution that produces your sustainable living standard given your specific profile and inputs. It is not inherently an optimization engine. That's why I've mentioned experimenting with different variables and sensitivity testing to see which combinations produce better results for your specific situation.

As I mentioned in my post on Sunday around noon, there are several options which can be used individually or in combinations to achieve much of what you are looking for. I would be very surprised if you aren't able to increase your living standard through some combination of the withdrawal variables. It may not be large, but could still be worth the effort.

You mention, "From this I get that the program is not drawing from Regular Assets first, IRA's next and Roth's (at least my wife's which is pure Roth) last. What am I missing here?"

To this point, the default results generally show relatively smooth withdrawals from tax-sheltered (TS) retirement assets and varying withdrawals from regular assets to smooth your income level necessary for smooth consumption given your specific constraints. This TS amount is always at least the RMD level or higher. If you want higher regular withdrawals, force the program to withdraw at RMD levels as described elsewhere in the thread and this will automatically be supplemented with larger regular withdrawals per the program.

To your next point about withdrawal order, there is no way to know which order or combination of variables will produce the optimal results for your profile without testing this in the software. The program defaults for withdrawals are a good starting point, but can be tweaked to see if other adjustments are beneficial. You may be surprised at how often the results are counter intuitive. We've done a couple of "optimization challenges" and this area always has made a difference. It may not be huge, but there are gains which can be realized through sensitivity testing.

To your final point, I hope that Roth withdrawals and assets can be broken out in the Total Income and Net Worth reports along with Detailed Ret. Accts reports. That would make this easier to adjust as well as clearer in specific years. Having said that, the Total Income report does show the tax-sheltered withdrawals for each spouse. The Detailed report also shows this in more detail for each spouse with the "X's Ret. Accts" reports. If you've set up Individual Deductible Accounts or Employer Accounts first, those will be captured here in your initial years. After they are exhausted, assuming you have Roth assets last in order of withdrawals, you will see that in the Total Income or Detailed "Ret. Accts" reports. There may be a few years where you run out of assets of a certain type and transition to the next type. In those cases, you will see the Total Income report show withdrawals above your Individual Deductible Accounts assets, for example. The remaining withdrawals for that year will be for the next asset type in your withdrawal order along with regular assets as described above. When you update the program each year with your new asset amounts, the reports will show the new year's results. You may want to tweak your profile again to re-optimize at a "lightweight" level unless you have had major changes.

I hope this is helpful.

Best,
Brian

I may be missing the point, or misunderstanding ESPlanner, but it seems to me that if you set “select age at first smooth withdrawal” (on Retirement Accounts > Key Ages) to a very advanced age, the program only withdraws the RMD, until whatever age you’ve chosen. (And of course the IRS requires the RMD after 70.5, you can’t choose to wait until you’ve spent all the regular assets.) In my case, that boosted annual spending by a small but significant amount. I guess, depending on your particular situation (and in particular the relative amounts in qualified and non-qualified accounts, among many other things), ESPlanner may not be able to generate smooth spending with that restriction, but it seems to work in my case.

You've got that right. Another option is in the Smooth Withdrawals tab, under "specify percent of non-annuitized assets to be spent". If you reduce this amount, the program will try to spend less from tax-sheltered assets (or closer to RMDs) until later in life. This can be used in combination with the "select age at first smooth withdrawal" option. Both options eventually typically lead to larger tax-sheltered assets requiring more significant withdrawals later in life, but even these can be adjusted through special withdrawals in specific years if you want to go into that level of adjustments.

Best,
Brian

dan royer's picture

I forgot about the setting Brian refers to: percent of non-annuitized assets to be spent. Setting that to 0 will not raise your living standard but it will, it appears, cause you to only spend RMD through to the end leaving your estate with a Net Worth that is higher than merely the value of the home, which is the default. I had forgotten about this setting. This is not really to Guinness's question, just an observation. Brian, you seem to be suggesting that the tax-sheltered options will eventually be fully withdrawn, but it appears to me that the the retirement assets can be left on the table with the exception of RMD.

Hi Dan,

I've experimented with that field with several different test profiles and settings from 100% down to 0%. The results depend on the specific profile in question. In a number of cases, I see some benefit (often small) in the living standard per adult by using a number less than 100% and sensitivity testing can help narrow down to a value that works for the specific profile in question.

With the 0% setting, I just tested 2 different profiles and see one with most of the retirement (tax sheltered) assets still available at end of life. In another, they are spent down through RMDs with little remaining. They both fit into the consumption function, but there doesn't appear to be a hard and fast guideline for how it will impact each profile.

To the original post, there are several settings that can be adjusted to have some form of control over tax-sheltered asset withdrawals. These include:

• Special withdrawals (e.g. year, amount, and account type for each spouse)
• Ages for first and last smooth withdrawal for each spouse
• Percent of non-annuitized assets to be spent for each spouse
• Withdrawal order for each spouse

It is up to the user to experiment to see which combinations lead to better results. Sensitivity testing is important here along with thinking through options which may improve your results. For example, some combinations will reduce your lifetime taxes and/or constraints leading to increased Living Standard Per Adult. While this can be complicated, it is highly likely to provide at least some benefits and can be essential, in some cases, to smooth your living standard. When combined with other factors, this area can help alleviate various constraints and provide a nice boost to your overall Living Standard Per Adult.

Best,
Brian

dan royer's picture

It's certainly counter intuitive to think that not spending all of your money (i.e., leaving some on the table) could result in a higher living standard. But I ran across something the other day where a reserve fund was so high that setting a higher rate of return on it kicked in the tax exemption phase out and penalized the living standard far more than the higher interest rate helped.

Spending less most often works with the older spouse in a married couple. It seems to be much less common for a single person or the younger spouse (meaning the one who is forecast to die later through maximum age of life).

The interaction between the different variables can certainly provide for interesting results that can definitely be counter intuitive. The best way I've seen to cope is through carefully thinking through your overall profile including constraints and potential for optimization, then doing sensitivity testing to see what works individually and then in combinations.

Best,
Brian

Do I understand correctly that specifying percent of non-annuitized assets to be spent is essentially creating a permanent reserve fund of a percentage of your retirement accounts?

That's not quite right. The program always tries to provide a solution with smooth consumption (or living standard per adult) where possible.

For married couples, in my experience, this variable can be lowered to less than 100% (most often for the oldest spouse) which can make the profile more tax efficient and slightly raise the results. It doesn't happen all the time and you have to experiment to see which value works best.

To your point, it does normally act to do as you say, but you have to experiment to see how it reacts in your specific situation. Also, there are always other factors such as RMDs that must be taken into account and lead to mandatory tax-sheltered withdrawals.

Best,
Brian

dan royer's picture

Chris, I think that's correct. As Brian says, the retirement funds are subject to RMD, which the program will force you to take. I just ran a quick case with 100K in retirement assets for a 25 year old. In the end, it left the retirement account balance at 83,831 on the table at age 100 (instead of $0 of course) and the withdrawals were all RMD. Obviously the living standard suffered because we're not spending all of the available money.

This is another way of building in a cushion I suppose, or leaving net worth greater than the value of the home.

Hi Dan,

I think of using a 0% setting as an unusual special case. If you use 0% or another very low number it will act as a reserve fund as you describe.

However, a more realistic setting, in my experience has been between ~65% and 90% or so for the oldest spouse. Of course, this will differ for each profile.

With these settings, in the test profiles I've run, the profile can sometimes become more tax efficient until end of life for the oldest spouse. Then the small to modest amount of tax-sheltered assets remaining can be used for the consumption of the youngest spouse. This approach can reduce regular asset constraints, in some cases, which can increase the living standard per adult somewhat.

It's the latter approach that I have been referring to.

Best,
Brian

If I could accurately predict and model a reverse mortgage to leave a net worth of exactly 0, that would be good. :)

dan royer's picture

Ah, "spend til the end" with a vengeance. :)

That was tongue-in-cheek but it's not my primary goal to leave a financial legacy. Others may choose to. I don't share that philosophy. That's not to say I won't give my kids (or other family members or charity) a boost while I'm still around.

dan royer's picture

I hear you. . . . I'm the same way.

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