Specific modeling questions

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PeterJ
Posts: 3
Joined: Fri Jan 09, 2015 1:50 pm

Specific modeling questions

Post by PeterJ »

First of all, thank you for having such a great tool available!

I am 60 years old and just retired. My wife (now 58) plans to work for another five years. We both plan to take our Social Security at age 66.
On the main input screen I've entered my current age and retirement age at 60 and our current portfolio in "taxable portfolio value" and my rollover 401(k) in "tax-deferred portfolio value". In the retirement section i've entered retirement income start age, 60.

In the additional inputs section
I've entered Social Security income for both of us – this was pretty straightforward
I entered a future inheritance as "taxable savings" is this correct?

Here's where I'm having troubles –
Where do I put our total spending – in "annual retirement spending"?
Where do I put my wife's income until she is 63?
Where should I enter my wife's 401(k)

Thank you,

Pete

jimr
Posts: 585
Joined: Thu Feb 28, 2008 6:48 pm

Re: Specific modeling questions

Post by jimr »

All good questions...

Using taxable savings for the inheritance sounds correct. be sure to check out the year-by-year data in the 'Details' tab to make sure the planner is doing what you expect with it.

I'd suggest leaving the 'Annual Retirement Income' and 'Annual Retirement Spending' blank on the main page and using the Additional Inputs window to enter all your income and expenses. The additional inputs window lets you specify these things with more precision than the main page.

You'll need to choose one spouse to key all the ages off of. For example, your wife will work between ages 58 and 63, but if you key everything off your age, her 'retirement income' entry in additional inputs will show an age range of from 60-65 (again, keyed off your age). The same is true for SS. If you'll both start SS at age 66, use two different income lines in additional inputs. One Ss income line starting at age 66 (for you) and another starting when you're age 68 (for her). You can use the memo field to show what each item is for.

The planner doesn't break out each spouse's retirement accounts, so it's best to combine both spouse's retirement accounts and treat them as one. Doing this results in some inaccuracy in RMD calculations, but if you and your spouse are close in age, it's really not an issue.

It's also probably best to list expenses in additional inputs as well. You can just use 'Other Expenses' or be more specific with types of expenses. If you expect to have more spending early in retirement than later, you can enter two or three 'Other Spending' line items, each covering different age ranges (eg age 60-69, 70-79, 80-end of plan).

Be sure to use the detail view tab to verify that the total amounts of savings, income, and spending for each year make sense. One common error is to overlap entries (eg age 60-70, then age 70-80) which can result in double expense or income during the overlap year.

PeterJ
Posts: 3
Joined: Fri Jan 09, 2015 1:50 pm

Re: Specific modeling questions

Post by PeterJ »

Thanks for your reply. That helps.

As you suggested, I'm entering everything in additional inputs. What expense category should I use to mimic retirement income? I used "other expenses" but it doesn't allow me to show those as taxable.

jimr
Posts: 585
Joined: Thu Feb 28, 2008 6:48 pm

Re: Specific modeling questions

Post by jimr »

The 'Cashflow Type" dropdown box should show a handful of income options including Social Security, Pension, Annuity Income, and Misc Income. These should all let you specify a taxable percent.

PeterJ
Posts: 3
Joined: Fri Jan 09, 2015 1:50 pm

Re: Specific modeling questions

Post by PeterJ »

I misspoke. I'm trying to mimic retirement spending (not income). I'm certainly an novice here but withdrawals from our portfolios will be taxed, correct?

jimr
Posts: 585
Joined: Thu Feb 28, 2008 6:48 pm

Re: Specific modeling questions

Post by jimr »

The taxable portfolio is carried in the simulation with a basis of 100%. In other words, taxes on gains are deducted from the portfolio balance in the year the gains happen. This means there are no additional taxes due on withdrawals from the taxable portfolio. For most folks, it's likely that some unrealized capital gains will accrue over time, but taxing gains as they happen rather than letting them accrue untaxed is more conservative, so that's how the planner does it.

Any withdrawals from the tax deferred portfolio are taxed at the income tax rate automatically as they happen. You can see this on the year-by-year table in the Detailed View tab.

As an example, consider a case where all savings are in the tax deferred portfolio, the income tax rate is 20%, and annual retirement spending is set to the default $50k. After running the simulation, the Detailed View tab will show a $62,500 annual withdrawal from the tax deferred portfolio. This will yield $50k net after taxes to cover the specified expenses ($62500x20%=$12,500 in taxes due).

To see this in the planner, open a new simulation file, leave all inputs at their defaults, put $800k in the tax deferred portfolio, set the spending policy to stable, run the planner, and select the Detailed View tab.

(One side note on this example: If you look beyond age 69 in the detailed view table, you'll see the withdrawal amount increases suddenly starting at age 70 even though spending was specified to be constant at 50k in the setup. This is due to the excess part of the Required Minimum Distribution (RMD) being moved from the tax deferred portfolio to the taxable portfolio. If you click the 'Show More Detail' radio button at the top right of the detail view page, you can see details of how the RMD withdrawals are handled when annual spending is less than the RMD.)

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