RMD Calculations

[JoeyD]

Speaking of RMDs (sorry to hijack this thread a little)…

Is there any way to model Spousal RMDs? My spouse and I are 5 years apart and having both worked full time our entire lives we will each own a significant portion of our total 401k savings. RMDs on my wife's account will begin 5 years before they do on mine.

Currently in FRP I am basing it on my Wife's age, with our total 401k balance entered as a singe portfolio...so right now the RMDs are being simulated higher than they need to be. Is there any way to easily account for the fact that we have separate deferred tax accounts and that RMDs start during different years for each of them?

[jimr]

I've never tried this, but maybe you could change things to be based on your age and then use a pair of additional inputs "savings" entries to manually take the RMDs out of tax deferred and put the after tax net back into taxable for those first 5 years.

I think you'd need to use a negative tax deferred savings cash flow and a positive taxable savings cashflow (reduced by estimated taxes due). If you use an average RMD for those first 5 years, I think you could do it with just two additional inputs entries.

[JoeyD]

Thanks, Jim.

I might give that a try...should give a reasonable estimate of the RMDs for the first 5 years. After that when both of our accounts are subject to RMDs...the difference in RMD rates between our accounts I would say is close enough for these simulations.

However, I'm modelling our annual expenses based on mu Wife's retirement day mostly because that's when I want to model the start of our retirement spending. I'll still be working for several years ...so during that period when she's retired and I'm not I've added additional inputs for my income, 401k and roth savings , etc.), Using her retirement dates makes that scenario straightforward to model based on how FRP works.

I'll have to think about that...I may just leave it as is and assume that the simulation is a little conservativewith the results due to over aggressive RMDs.

[jimr]

That makes sense to me.

While it's good to capture the known inputs as well as you can, there's inherent uncertainty in long-range planning. Using tools like FRP involves accepting that there's a significant amount of built-in error signal that's impossible to ring out. For example, I'd bet 10-20 basis points of difference in your rate of return estimate would completely swamp any error signal from the imprecision in the RMD handling.

So getting as close and you can with the inputs then accepting some built-in fuzziness in the model can be a good reminder that the output isn't a prediction as much as just some extra information to hopefully help you make better decisions.

[BigEd]

Jim,

We're both retired and taking RMD's. My wife is 3.5 years younger and I'd like to account for her RMD separately. My assumption is that FRP treats the entire "tax deferrred portfolio" amount as one account/RMD as it does not know this is the aggregate of multiple IRA's and probably incorrectly estimates the RMD. Searching the forum, I ran across this from 2018 but it does not address the ongoing disparity in RMD's. Any suggestions?

"I've never tried this, but maybe you could change things to be based on your age and then use a pair of additional inputs "savings" entries to manually take the RMDs out of tax deferred and put the after tax net back into taxable for those first 5 years. I think you'd need to use a negative tax deferred savings cash flow and a positive taxable savings cashflow (reduced by estimated taxes due). If you use an average RMD for those first 5 years, I think you could do it with just two additional inputs entries."

Thanks,
BigEd

[jimr]

Unfortunately, the combined deferred assets thing is just a hard limit in the planner.

The more I think about it, the more I think doing special tricks/workarounds on this is more likely to confuse things than to help in the end. The more complicated the plan gets, the higher the chances you'll make an error with the inputs. It's tough to say for sure where to draw the line, of course.

A simple test you might try is to do one run with everything keyed off the older spouse's age and another run with everything keyed off the younger spouse's age to see how much of a difference it'd make.

Unless I'm mistaken, applying the older spouse's RMD schedule to all deferred assets would give you the most conservative result and applying the younger spouse's RMD schedule to everything would give you the least conservative result.