RMD Calculations

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

RMD Calculations

Post by mountainsoft » Mon Aug 20, 2018 11:31 am

I'm trying to understand how FRP calculates RMD values. For example, FRP shows my "Median RMD" values around $3200-$3800 with a starting portfolio value of around $85000 and a return of 6% at age 70. However, if I use those same numbers with Vanguards RMD calculator, the RMDs vary from $8000 to $22000. That's a huge difference between the two calculators.

Am I misreading the RMD in FRP, or is the calculation way off?

jimr
Posts: 544
Joined: Thu Feb 28, 2008 6:48 pm

Re: RMD Calculations

Post by jimr » Mon Aug 20, 2018 11:34 am

I'm not familiar with Vanguard's RMD calculator.

Do you know if they show results in present value dollars or in future value dollars?

The amounts reported in FRP are all in present value dollars.

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

Re: RMD Calculations

Post by mountainsoft » Mon Aug 20, 2018 12:31 pm

I don't know, today was the first time I've used Vanguards calculator. I tried a few other calculators too, and most showed RMD values higher than FRP is calculating. I don't know enough about RMD's to know what they're doing.

I'm mostly just wondering how FRP calculates the RMD, and whether the "Median RMD" is the calculated RMD I should be looking at?

Basically, I'm trying to figure out if we would have any tax advantage to converting to a ROTH IRA once we retire, or if we'll still be in the same tax bracket even with the RMD's.

jimr
Posts: 544
Joined: Thu Feb 28, 2008 6:48 pm

Re: RMD Calculations

Post by jimr » Mon Aug 20, 2018 12:58 pm

I took a look at Vanguard's calculator and it does appear that it's showing future value dollars. I did a little test to better understand the results

First, I used the Vanguard tool with a 6% return and an $85,000 portfolio to produce the following starting RMD amounts:
Birthdate of 1948 (eg current age 70) yields Vanguard starting RMD of $3102
Birthdate of 1958 (eg current age 60) yields Vanguard starting RMD of $5555
Birthdate of 1968 (eg current age 50) yields Vanguard starting RMD of $9948

Next, I deducted the FRP default inflation rate from the 6% rate of return to change Vanguard's tool from using a nominal rate of return to using a real rate of return (3% real). This sort of tricks the Vanguard tool into showing all future amounts in today's value dollars instead of inflated dollars.
Here's what I got when I did that:
Birthdate of 1948 (eg current age 70) yields Vanguard starting RMD of $3102
Birthdate of 1958 (eg current age 60) yields Vanguard starting RMD of $4168
Birthdate of 1968 (eg current age 50) yields Vanguard starting RMD of $5602

Finally, I started FRP with a new file and changed the following settings:
- Retirement age set to 70
- current tax deferred portfolio value set to $85,000
- investing style set to custom with return of 6% and std dev of 0%
Here's what I got when I did that and ran the planner with different current ages:
Current age 70 yields FRP starting RMD of $3102
Current age 60 yields FRP starting RMD of $4169
Current age 50 yields FRP starting RMD of $5602

For one last test, I left everything in FRP the same and set the inflation rate to 0%. Here's what I got when I did that:
Current age 70 yields FRP starting RMD of $3102
Current age 60 yields FRP starting RMD of $5555
Current age 50 yields FRP starting RMD of $9949

So it looks like the FRP numbers at 6% return with 3% inflation exactly match the Vanguard tool's numbers with 3% return and FRP numbers with 6% return and 0% inflation exactly match Vanguard's numbers with 6% return. That makes me think we're both using the same calculation approach except that vanguard is showing the amounts in future value dollars and FRP shows the amounts in today's value dollars.

How far are you away from age 70?

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

Re: RMD Calculations

Post by mountainsoft » Mon Aug 20, 2018 1:15 pm

I'm not sure I understand all that, but I'll take your word for it. :)

I'll be 55 in November. We're planning to retire in five years when I'm 60 (wife will be 55).

We're in the 12% tax bracket now, and our planned spending after retirement is 40K per year. Even with RMD's we should still be well within the 12% bracket (up to 77K for 2018). We're not planning to leave any money to heirs so I'm not seeing a big advantage to converting to a Roth. The only catch is if one of us dies it would bump the survivor up to the next tax bracket as an individual. Since the survivors spending would probably decline, I still don't know if it would be worth the trouble of converting.

jimr
Posts: 544
Joined: Thu Feb 28, 2008 6:48 pm

Re: RMD Calculations

Post by jimr » Mon Aug 20, 2018 2:04 pm

Got it.

You could probably use additional inputs to get an idea of the impact of higher tax rates on your plan's probability of success.

The trick is that you'd have to guestimate what your average tax rates would be after the death of a spouse. Then you could set up the higher rates in the top table of additional inputs to override the inputs on the main page, say starting at age 70 or 75.

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

Re: RMD Calculations

Post by mountainsoft » Mon Aug 20, 2018 2:15 pm

I'm trying to figure out how to model a multiple year Roth conversion in FRP.

Let's say I want to convert 25K per year to keep our income within the 12% tax bracket.

In the additional inputs section, would I add a Tax Deferred savings of ($25000), a negative value, to reflect deducting 25K from my traditional IRA, then another Tax Free savings of $22000 to reflect converting that 25K from traditional, minus the 12% tax, to the new Roth account? Then repeat those two entries for each year until all traditional funds have been converted to the Roth. Am I doing that right?

jimr
Posts: 544
Joined: Thu Feb 28, 2008 6:48 pm

Re: RMD Calculations

Post by jimr » Mon Aug 20, 2018 2:24 pm

That sounds about right.

Just be sure to check the detailed view table after you run the simulation to verify that the simulation is doing what you expect given the inputs.

You'll probably want to click the 'show more detail' radio button on the top right of the window, and maybe even right-mouse-click on a column header in the table and select 'show all columns' so you can see all the data that's available.

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

Re: RMD Calculations

Post by mountainsoft » Mon Aug 20, 2018 2:39 pm

Cool. That seems to work. I am getting some taxable savings showing up around age 73 and can't figure out where that's coming from, but it's not enough to matter.

A Roth conversion might make sense, but I would have to balance against income restrictions to qualify for healthcare subsidies. So we might need to make smaller conversions each year till Medicare kicks in. So many fine details to consider. :) Thanks!

jimr
Posts: 544
Joined: Thu Feb 28, 2008 6:48 pm

Re: RMD Calculations

Post by jimr » Mon Aug 20, 2018 2:42 pm

The taxable savings is probably because you have excess RMDs that aren't needed to fund spending in some years and those are 'invested' back into taxable savings automatically after the taxes are deducted from the withdrawals.

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