Order for Withdrawals

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pacificoast
Posts: 3
Joined: Mon May 24, 2021 1:07 pm

Order for Withdrawals

Post by pacificoast »

Hi Jim,

Fantastic tool - thanks for all that you do.

I was wondering whether it would be possible for you to add an additional option or change the way the user can select the "order for withdrawals" in the settings. I'd really like to have an option to pull from tax-deferred 1st, then taxable, then tax-free. Perhaps if you provided three drop downs and allow the user to select which type they want and what order for 1st, 2nd, 3rd? Or if not, maybe just add the option I'm looking for? :D

I'd really like to be able to model with pulling from tax-deferred 1st!

Many thanks,

Nick
jimr
Posts: 720
Joined: Thu Feb 28, 2008 6:48 pm

Re: Order for Withdrawals

Post by jimr »

I've heard this request from a few folks now and if it was easy I'd definitely do it. The GUI changes would be easy, but the trouble is that the simulation code that handles the withdrawals is pretty squirrelly and I'm hesitant to mess with it at this point out of concern I'd introduce bugs that are hard to catch.

I'm not positive about this, but if you aren't using the tax free portfolio, maybe you could substitute the tax free portfolio for the taxable portfolio and lower the average rate of return (just on that portfolio) to account for the tax drag on the return. The upper table in additional inputs lets you set separate returns for each portfolio. Then you could use the taxable, tax deferred, tax free order, with tax free standing in for taxable.
pacificoast
Posts: 3
Joined: Mon May 24, 2021 1:07 pm

Re: Order for Withdrawals

Post by pacificoast »

jimr wrote: Mon May 24, 2021 4:59 pm maybe you could substitute the tax free portfolio for the taxable portfolio and lower the average rate of return (just on that portfolio) to account for the tax drag on the return.
Great idea Jim, I’m not using the tax-free portfolio so I’ll give this a go.

Thanks! Nick
jimr
Posts: 720
Joined: Thu Feb 28, 2008 6:48 pm

Re: Order for Withdrawals

Post by jimr »

Nick,

Just as an FYI I ended up adding the ability to configure the simulation to withdraw from the tax deferred portfolio first. Since this feature is brand new and involved changes to the inner simulation logic, I'm going to keep this as a beta only release for a while.

Here's a link with more information about the beta release:
viewtopic.php?f=7&t=1381
pacificoast
Posts: 3
Joined: Mon May 24, 2021 1:07 pm

Re: Order for Withdrawals

Post by pacificoast »

That's awesome Jim. Thanks so much!

I'll give the Beta a try.

Nick
redderhead
Posts: 7
Joined: Sun Aug 09, 2020 11:46 am

04.04.01 beta6 (04.04.01beta6) on a Mac with Big Sur

Post by redderhead »

I'm using the June 7, 2021 released beta of the Flexible Retirement Planner on MacOS with no problems.

As always Jim thanks for your hard work.

MacBook Air (M1, 2020)
MacOS v 11.4 (Big Sur)
Java 8.291
ofgfrp
Posts: 1
Joined: Sun Jul 18, 2021 10:47 am

Re: Order for Withdrawals

Post by ofgfrp »

Super software.

Thanks for working on the option to withdraw from tax deferred first.
I tested 07/05/2021 04.04.01beta7 and found an issue with it.
Currently, if choosing that option, withdrawals immediately start coming out of the tax deferred pot even during the years below the age at which withdrawals can be done without a tax penalty (59.5).

What I would like is for withdrawals prior to that age to come out of taxable accounts first.
At age 60, I'd like to then test the results of changing withdrawal options including tax deferred first.

Does that make sense?
Last edited by ofgfrp on Sun Jul 18, 2021 4:16 pm, edited 1 time in total.
jimr
Posts: 720
Joined: Thu Feb 28, 2008 6:48 pm

Re: Order for Withdrawals

Post by jimr »

What you've noticed is basically by design. The withdrawal logic isn't smart enough to do that sort of real-time tax optimization and I'm reluctant to add more twists to that code because it's already very delicate. (it's over 15 years old now).

Depending on how many years of expenses you have before age 60, you may be able to fudge it and get close enough by creating negative savings cash flows out of the taxable portfolio during the retirement years before 60. Then you can adjust the expenses down by the amount of the negative savings cash flow. Although if the goal is to model a plan of drawing down tax deferred completely first, I though there was a way to do that without any early withdrawal penalty (in which case you could set the early withdrawal penalty in settings to 0).

The only caveat is that the negative savings cashflow hack is just that, a hack so if you use it it's sort of caveat emptor. The logic expected savings to always be positive so it doesn't check that there's enough in the portfolio to cover the cash flow. I added the ability to enter a negative amount for savings by user request. But the original savings logic will just let the portfolio go negative if there isn't enough cash for the negative cashflow. This usually isn't an issue for just a few years if there's no chance of the portfolio running out during the negative cash flow years.
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