LIving standard not constant

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When I model Roth rollovers to leave to my kids, I do so by making special withdrawals from our retirement accounts then matching special expenditures (non-tax related). These matching special expenditures essentially remove the money from possible use in calculating our living standard.

The resultant living standard that ESPlanner calculates is not constant. It increases when the rollovers decrease.

Is there some way to make the living standard constant?

Thank you.

Comments

dan royer's picture

When you make the special withdrawal, I assume you are making it from the ROTH account. Then, in the same year, you are creating a special expenditure in the same amount as the withdrawal. If your living standard is going up, you are somehow introducing more money into your economy somehow that you are not noticing. I'd have to see the report to figure this out.

I'm trying to think if there's any downside to just leaving the ROTH accounts out of ESPlanner altogether if you don't plan on using them for yourself.

Thanks Dan. Actually I'm just withdrawing the money from the traditional IRA, not ever letting ESPlanner know I'm putting it in a Roth. I just use the special withdrawal to remove it from the calculations completely.

Then I do the growth calculations on a spreadsheet.

I will attach a file so you can look at it.

FYI - your file is available for anyone to see (even when not logged in).

You certainly can increase/smooth your consumption/living standard per adult. There are probably a number of choices you can make to do this. Some quick thoughts include:

- You are constrained in regular assets at various points. By reducing this constraint (e.g. slow down mortgage payoff, increase special withdrawals earlier, potentially reduce 401k or related contributions, etc.), you could shift some assets/consumption from later years to earlier years.
- If you take this further, you could shift more assets (e.g. special withdrawals, etc.) earlier and delay SS even for a few years which will increase income later and should more than offset the shift in assets.

The only way to really know the impact of adjusting your profile is through experiments changing variables and running reports. By systematically doing this (sensitivity testing), you can determine which variables (or combinations) make a difference. To start, focus where you are constrained and think how you can reduce that constraint. This should get you started in the right direction. Also, if you haven't looked through the ESPlanner case studies or Spend 'til The End book, they may give you some ideas to help optimize your profile.

Best,
Brian

Hi Brian, thank you. I removed the file. We'll do some sensitivity testing. In one way, we like the increasing living standard so we can have some money to spend on grandkids tuition or nursing home care. But I thought ESPlanner automatically smoothed the living standard. So I was wondering if there was some error in the algorithm or the way we used it.

ESPlanner does smooth your living standard per adult within the constraints of your resources and based on your specific profile and inputs. In your case, if I remember correctly, you have a bit of a step-ladder formation of increasing living standard per adult (LSPA). Meaning that at "level 1" ESPlanner smooths LSPA until a constraint is removed (e.g. you start SS, your mortgage is paid off, or some other reason) and you now have "level 2" LSPA. This repeated a few times as some new constraint was removed (and replaced with a new constraint or you'd have infinite spending). From all indications the software is working fine (although this was admittedly a quick skim of ~2-3 minutes).

If you make different choices (and change your profile), you will see different results which could be higher and smoother. With enough effort, insight, and time experimenting with sensitivity testing, you may be able to increase your LSPA substantially while possibly reducing your overall risk. I call this profile optimization.

Remember that ESPlanner is not inherently an "optimization" engine which automatically tells you which approach is best. As each person's situation is different, there are many different ways to optimize and what works for one person, may not for the next. Also, from a practical standpoint, each of us will make different tradeoffs.

Beyond my comments in the earlier reply, here are a few ideas:

- If you have a long-term care policy, you can input that into special expenditures/receipts to explicitly cover this. This can include policy payments, benefits when in care, and expenditures when in care.
- You can also include some rough special expenditures for your grandkids. Both of these will increase your spending later in life and may smooth your results somewhat (or not).
- You have a bunch of special withdrawals and I'm 99% certain that adjusting these can increase and smooth your LSPA.
- One of your constraints is in regular assets. You can see this where it hits $0 which almost certainly coincides with a shift in the level of your LSPA. This is very common. There are numerous ways to cope (e.g. mortgage/529 payments, retirement contributions, increasing special withdrawals earlier, working 1 more year, saving more earlier, etc.).
- If you can make it work, it's probably worthwhile to consider delaying SS. Sensitivity testing can help here. If you delay, you may find you or your spouse are eligible for spousal SS benefits and will have higher monthly income with COLAs. Of course, you'd have to adjust other factors (such as special withdrawals) to make this work.

Hope this is helpful. There's a ton of possibilities here that can be explored. Another option is to work with Dan on a "One on One Service".

Best,
Brian

Hi Brian. Thank you for all of this. You have helped improve our understanding of how the software works.

We will redo our sensitivity testing now. Our previous conclusions were made just based on the first year living standard. We thought it was constant over time so we just tested various scenarios and chose the one that gave us the top first year living standard. It was just by accident that we discovered it changing in later years.

The increasing living standard in later years could actually be an advantage. Like for tuition payments, nursing home care, etc. etc. So we're not really sad about it.

Both my wife and I have commented many times that ESPlanner has enabled us to make conclusions with confidence. No other online program did that for us. We think the purchase price is small compared to the benefits.

Also, your response time in this forum is really great, and your answers are thorough and very helpful. Thank you for this!

dan royer's picture

Great comments by Brian. Thanks.

The smoothing, as Brian points out, only works when resources are available to do so. Solving the constraint often involves a value judgment and as you point out, some prefer to leave the constraint as is and just enjoy the higher living standard later as a cushion. Or, as Brian also says, you could program in future special expenditures. There's many many different ways to model things--and every person would make different choices with different patterns of living standard.

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