Set a Minimum Balance for Taxable Savings?

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mountainsoft
Posts: 33
Joined: Sun Jan 22, 2017 8:34 pm

Set a Minimum Balance for Taxable Savings?

Post by mountainsoft » Mon Aug 27, 2018 1:25 pm

My taxable savings is a regular savings account that we plan to keep about 2-3 years worth of money in for living expenses, refilling from my tax deferred savings (IRA) as needed. Since FRP withdraws from taxable first, it completely empties my taxable savings before moving on to my IRA. Is there any way to set a minimum savings balance, so FRP would start withdrawing from tax deferred when it reached that threshold?

If I add an amount (say 15K) to my annual retirement spending (so I'm spending 55K annually instead of 40K), then add that 15K back to taxable savings on the additional inputs screen, it seems to work. But I don't know if that's an accurate model, or if I'm overlooking something. Also, 15K is close to three times what my RMD's would be, so am I correct that I could turn off the automatic RMD withdrawal in FRP using this approach?
Last edited by mountainsoft on Mon Aug 27, 2018 2:15 pm, edited 1 time in total.

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: Set a Minimum Balance for Taxable Savings?

Post by jimr » Mon Aug 27, 2018 2:12 pm

There isn't a way to set a minimum taxable savings balance.

I'm not sure how much of a difference it would make in the result if you could model this more precisely. I'd guess the difference would mostly be around the timing of the cash flows and I don't quite understand how that'd impact your probability of success.

Are you using separate rates of returns for taxable vs tax deferred?

mountainsoft
Posts: 33
Joined: Sun Jan 22, 2017 8:34 pm

Re: Set a Minimum Balance for Taxable Savings?

Post by mountainsoft » Mon Aug 27, 2018 2:18 pm

Are you using separate rates of returns for taxable vs tax deferred?
Yes, 6% return with 6% deviation on the main screen for the tax deferred, then a 1.6% return with 0% deviation on the additional inputs screen for the taxable savings.

I edited my original post to add a workaround. Does that sound like a workable solution, or am I overlooking something?

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: Set a Minimum Balance for Taxable Savings?

Post by jimr » Mon Aug 27, 2018 4:34 pm

I'm not sure that workaround will do quite what you want because of the way the order of operations works out.

The year-by-year cash flows are handled as follows:
1) Compute and deduct RMDs from tax deferred portfolio.
2) Calculate net withdrawal needed for expenses and withdraw according to set withdrawal order (default: taxable, tax deferred, tax free), taking into account net after tax RMDs available
3) Compute portfolio gains
4) add portfolio savings amounts.

Since gains are calculated before savings are added back in, I think you won't get 'credit' for earnings on your taxable savings. Your additional inputs savings gets added in step 4 above so it won't earn return in the year it gets added. Then in the next year, the taxable portfolio will get depleted in step 2, so by the time step 3 rolls around and the gain is calculated, the balance will be zero

I wonder if it'd be easier to just ignore the emergency fund in taxable and go back to using a combined return, but with maybe a couple dozen basis points knocked off the total return to account for the lower return on the emergency fund part of the portfolio.

Another way would be to again use a combined portfolio return, but increase expenses by the net reduction in return from the emergency fund (eg 4.4% x $15,000=$660) and not worry about modeling the cash flows exactly.

mountainsoft
Posts: 33
Joined: Sun Jan 22, 2017 8:34 pm

Re: Set a Minimum Balance for Taxable Savings?

Post by mountainsoft » Mon Aug 27, 2018 6:00 pm

Since gains are calculated before savings are added back in, I think you won't get 'credit' for earnings on your taxable savings.
Out of curiosity, instead of changing the Annual Retirement Spending on the main screen, could it be done by adding a negative value (-5000) for tax deferred, and a positive value for taxable (+5000)? Or is that just doing the same thing? I got weird results with the previous version, but the update you just uploaded seems a little more realistic with that.
I wonder if it'd be easier to just ignore the emergency fund in taxable and go back to using a combined return
I'll just ignore the emergency fund. We still have five years before we can retire, so it's fun to play with the numbers in FRP. We get 98% or better success rates anyway, but I'm always looking for that 100%! :)

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: Set a Minimum Balance for Taxable Savings?

Post by jimr » Mon Aug 27, 2018 6:06 pm

mountainsoft wrote:
Mon Aug 27, 2018 6:00 pm
Since gains are calculated before savings are added back in, I think you won't get 'credit' for earnings on your taxable savings.
Out of curiosity, instead of changing the Annual Retirement Spending on the main screen, could it be done by adding a negative value (-5000) for tax deferred, and a positive value for taxable (+5000)? Or is that just doing the same thing? I got weird results with the previous version, but the update you just uploaded seems a little more realistic with that.
I think you'll still have the same result of not getting any investment earnings on the emergency fund because the taxable balance will always be 0 at the exact point in the logic where the earnings are calculated.

Basically, the withdrawal logic, which runs before the "portfolio gain" logic, is going to always want to clean out any funds sitting in taxable and use them to fund expenses. Then when the logic goes to calculate gains, the taxable balance will be zero. After that, the adjustment will be made, leaving a non-zero taxable balance that will again get depleted in the next year, just before those gains are calculated.

BrianH55
Posts: 1
Joined: Sun Sep 02, 2018 2:59 pm

Re: Set a Minimum Balance for Taxable Savings?

Post by BrianH55 » Sun Sep 02, 2018 4:25 pm

Same topic as Mountainsoft regarding Taxable Savings. In our case, we have a large amount of cash sitting in CDs, and Internet savings accounts (more for peace of mind). It would be nice to have a way to include an interest rate on the taxable savings especially if interest rates keep going up, and then maybe using the interest rate or even term length to include those accounts in the order of process for the withdraw calculations ? Like you say, it probably isn't worth it now, but if fixed income rates go up, then perhaps it might be worthwhile to have a way to include them.

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: Set a Minimum Balance for Taxable Savings?

Post by jimr » Sun Sep 02, 2018 7:56 pm

You can specify separate rates of return for taxable, tax deferred, and tax free accounts using additional inputs.

That said, I recommend extreme caution in using this feature because there are some subtleties in setting this up that might not be obvious.

The problem is that the separate return paths for each portfolio type are not correlated and will move independently. That independence creates an additional diversification effect (because now you have three portfolios moving independently). This will muffle out some of the volatility that you would likely experience in real life, since the portfolios in real life are unlikely to be truly independent of each other.

mountainsoft
Posts: 33
Joined: Sun Jan 22, 2017 8:34 pm

Re: Set a Minimum Balance for Taxable Savings?

Post by mountainsoft » Mon Sep 03, 2018 12:42 am

You can specify separate rates of return for taxable, tax deferred, and tax free accounts using additional inputs.
That said, I recommend extreme caution in using this feature because there are some subtleties in setting this up that might not be obvious.
We have a high interest online savings account. I am treating this as my "Taxable Portfolio Value" on the main screen, and adding $6000 per year under "Taxable Annual Savings". Then I entered a "Taxable Return" on the additional inputs screen (start of plan to end of plan, 1.6% interest, 0 deviation).

Does this sound correct or will I get misleading results with the way FRP does it's calculations? It looks like it's calculating as I would expect on the detailed views.

jimr
Posts: 518
Joined: Thu Feb 28, 2008 6:48 pm

Re: Set a Minimum Balance for Taxable Savings?

Post by jimr » Mon Sep 03, 2018 7:01 am

Do you have assets in your tax deferred and tax free portfolios in addition to the taxable portfolio?

If you do and you have a normal diversified investment mix in both, you may get that diversification effect that I mentioned above between those two portfolios. This isn't a huge deal, but you may want to bump up the standard deviation on both portfolios to offset this effect.

Since the taxable portfolio has a standard deviation of 0, the added diversification effect isn't a factor for this portfolio because you're guaranteed to get the same return every year in all simulation paths.

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