Please note: Your parameters and data are completely private. ORP creates a unique identifier for each run you make. This identifier is shown at the top of the ORP report page. The only use for this identifier is to separate simultaneous users. There is no way to connect this identifier with any comments that you may send to us.
Should you wish us to look at one of your runs in conjunction with a question, please include the run's identifier.
Current Age
Your Current Age is the current age of the retiree or potential retiree at the beginning year of the retirement plan.
Your Beneficiary's Current Age is the age of the person who is the beneficiary of your Tax-Deferred Account and Roth IRA. For a married couple ORP assumes your beneficiary is your spouse.
The age of the retiree's spouse is needed to determine the joint life expectancy of a married couple. A blank, or not filled in, indicates that the retiree is unmarried. An unmarried retiree has a life expectancy of 16 years at the age of 70. The joint life expectancy of a married couple is taken from an IRS table using both partners' ages. The IRS life expectancy is used to compute minimum distribution rates after the retiree reaches the age of 70. For example, a retiree at age 70 with a spouse of age 67 has a joint life expectancy of 22 years. Under the term certain distribution method, the retiree's tax-deferred account must be empty by the age of 92. The life expectancy used by ORP can be determined from the Tax-deferred Report.
Since the spouse may have a Tax-deferred account that is independent of the retiree, if the spouse is a different age than the retiree then the minimum distribution requirement will begin at a different age.
If you are not now saving for retirement but plan on doing so in the future the set Current Age to the age at which you plan to begin saving for retirement.
See also: Age at which plan is to end.
Default: Required.
Balance of Tax-deferred Account (in $000)
The Tax-deferred Account includes all investments on which taxes have not been paid. Keogh, profit sharing, IRA, 401k, and 403b accounts are examples of Tax-deferred accounts. The beginning balance is stated in thousands of dollars. For example, enter a Tax-deferred account balance of 10,050 as 10.05. The default amount of 100 represents $100,000.
IRA account balances are included in this amount since they behave like any other tax-deferred plan for purposes of distribution and taxation. IRAs' have their own contribution field because IRA contribution requirements are different from other tax-deferred plans.
Retiree and spouse account accounts are entered separately because required minimum distribution will start at different times if the retiree and spouse are different ages.
ORP reports the combined After-Tax Account because it is entirely up to the retiree and the spouse as to where the money comes from after distribution begins. As long as taxes are paid the IRS doesn't care where the money comes from.
Default: 0
Balance of Roth IRA (in $000)
The initial balance of the Roth IRA may be either the current balance in the Roth IRA or the amount to be rolled over from a conventional Tax-deferred account in the very near future. An existing IRA can be rolled over into a Roth IRA for wage earners of $100,000 or less. Remember to allow for taxes while computing the roll over balance. Taxes may be paid across four years.
Default: 0
Balance of After-tax Account (in $000)
The After-tax Account includes all investments for which taxes have already been paid on the original investment. The After-tax account does not include money held in IRAs, 401(k)s, Roth IRAs, and other tax-deferred accounts.
The After-tax Account initial balance will include accrued capital gains on which no tax has been paid, and on which capital gains taxes must be paid at the time of the sale of the assets. This presents one of those problems at the margin that drive mathematical modelers nuts. What ORP should do is pay capital gains taxes on the accrued capital gains at the time it is withdrawn. This assumes that the original assets are not sold until withdrawal occurs. This is inaccurate because the assets may be sold in the near feature and reinvested. Capital gains will have to be paid before the reinvestment occurs.
This problem is significant only when there is a large (relative to the Tax-deferred Account) after-tax, untaxed capital gain in the After-tax Account. There are two adjustments that can be made to your input parameters to accommodate this situation:
The After-tax Account balance is stated in thousands of dollars. For example, enter an After-tax account balance of 10,050 as 10.05.
Default: 0
Maximum Annual, Tax-deferred Account Contributions (in $000)
Retirement savings contributions can be made to any or all of three accounts:
As described in IRS Publication 590 there are IRS limitations imposed on how much can be annually contributed to the first two, tax advantaged accounts. There is no limitation on after-tax account contributions.
ORP optimizes your integrated account contributions and withdrawal schedule. You specify the contribution limits for the tax advantaged accounts and the total amount of annual retirement savings that you plan to make to all accounts. ORP will the compute the amount to be contributed to each account. Your total contribution level may be less than, equal to or greater than your tax advantaged account contributions.
Contributions to the Tax-deferred Account may continue until retirement. These contributions are assumed to come from employment income and they cease at retirement. The amount is specified in today's dollars and ORP adjusts it for inflation in each year until retirement.
The maximum Tax-deferred contribution amount, which is the sum of all contributions made to all Tax-deferred Accounts, is specified in units of thousands of dollars.
ORP assumes that your contribution for this tax year will be made in the first quarter of the following calendar year, after you have figured out what your income and effective tax bracket are. For example, the contribution made of behalf of 2007 will show up in the 2008 Asset Balance Report and your 2008 contribution enters the account in 2009. ORP's approach is similar to that used by academics who are doing research on withdrawal strategies.
ORP imposes an limit of 999 for data entered in this field. The purpose of this limit is to detect when the user is entering dollars instead of the required thousands of dollars.
Default: No contribution.
Maximum Annual Roth IRA Contributions (in $000)
The maximum Roth IRA contribution is an amount imposed by the IRS.
Roth IRA contributions are assumed to come from employment income and they cease at retirement. The amount is specified in today's dollars.
ORP does not model the restriction that distributions cannot begin until after five years from the data of the first contribution.
The amount is entered in units of thousands of dollars.
Default: No contribution.
Maximum Total Yearly Contribution to Retirement Savings (in $000)
The maximum total contribution is the maximum level of all retirement savings to be divided up among the three retirement accounts, as the optimizer see fit. This value is before taxes. Contributions to the Roth IRA and After-tax accounts are reduced by Federal and State income taxes.See Federal Tax Rate
Contributions to the After-tax Account may continue until retirement. After-tax contributions are assumed to come from employment income and they cease at retirement. The amount is specified in today's dollars and is adjusted for inflation in each year until retirement.
The amount is entered in units of thousands of dollars.
Default: No contribution.
Current Effective Federal Tax Level (%)
The maximum Roth IRA and total retirement savings are specified in before tax dollars. ORP reduces these contributions by Federal and state income taxes. This field specifies the percentage your Federal income taxes are of your total income. This may be a Federal tax bracket threshold or some value in between as long as it is representative of your Federal income tax rate.
The amount is entered as a percentage.
Default: 15%.
Current Effective State Tax Level (%)
The maximum Roth IRA and total retirement savings are stated in before tax dollars. ORP reduces these contributions by Federal and state income taxes. This field specifies the percentage your state income taxes are of your total income. This may be a state tax bracket threshold or some value in between as long as it is representative of your state income tax rate.
The amount is entered as a percentage.
Default: 15%.
Illiquid Asset (in $000)
Illiquid assets are assets that are not readily converted into cash and which you may not want to dispose of until some years into retirement. Examples include your home, a business, a limited partnership, investment property, etc.
The amount is entered in units of thousands of dollars.
Default: 0
Cost basis: (in $000)
The cost basis for the illiquid asset is the amount of money spent to purchase the asset and to up grade it.
The cost basis is necessary in order to compute the profit on the sale of the illiquid asset and the capital gains tax on the profit.
The sale of your primary residence is a special case that requires an adjusted cost basis. Capital gains of $250,000 for a single person or $500,000 for a married couple are excluded from taxation. Thus the cost basis for your and your spouse's home is the cost of purchase plus improvements plus $500,000. This may sound like a lot but 20 years from now, when its time to sell your house the inflated value will probably require some capital gains tax be paid.
The amount is entered in units of thousands of dollars.
Default: 0
Year to sell illiquid asset.
Specify the year in which the illiquid asset is to be sold, converted to cash, and added to the After-tax account.
The default age of 0 will cause the illiquid asset to be converted to cash at the end of the plan and included in the estate.
Default: 0
Age to begin reverse mortgage distributions.
In a nutshell, a reverse mortgage is a loan against your home (mortgage), providing that you are age 62 or older and at least you or your spouse are living in it. The mortgage balance starts off small and every month it increases by the amount of monthly interest, real estate taxes paid, insurance, and a payment to you for living expenses. The end result is that a considerably smaller estate is passed to your heirs since the, now much larger, mortgage has to be paid off before your house can change hands.
There are several types of reverse mortgages. ORP models only two. The Federal Reserve Bank of Boston found that the lifetime income plan and the lump sum distribution were by far the most efficient. AARP has an excellent glossary of reverse mortgage terms.
For people who qualify a reverse mortgage is a terrific thing. It is a way of taking equity out of your house while still living in it, unlike selling it as an illiquid asset. No personal income taxes are paid on any of these payments since they are equity distributions. Real Estate taxes and mortgage interest continue to be deductible from your personal income taxes.
The Age field specifies when the reverse mortgage is begun, which may be now or may be years later. In fact there is literature about at what age a reverse mortgage should begin. to yield the maximum benefit.
Default: no reverse mortgage.
Lifetime Income Plan Annual Payments: (in $000)
With the lifetime income plan monthly payments are made to you for spending. An insurance provision is part of the mortgage so that the payments never stop, no matter how long you stay in your house. AARP's reverse mortgage calculator is useful for determining how much of a reverse mortgage you qualify for. In ORP's model the annual payment is increased at the rate of inflation.
The annual lifetime payment amount is entered in units of thousands of dollars.
Default: no lifetime income payment.
Lump Sum Distribution.
A lump sum distribution is where all or part of the mortgage is transferred into your After-tax Account to be used for living expenses over time. A lump sum distribution may be taken in conjunction with lifetime payments. A lump sum distribution taken to pay off existing debts, including an existing mortgage, has no effect of future retirement account cash flow and should not be modeled in ORP. In general trying to model both a reverse mortgage and a illiquid asset disposal, selling your home later on is probably putting too fine a point on it and should be avoided.
The lump sum amount is entered in units of thousands of dollars.
Default: no lump sum distribution.
Social Security Benefits (in $000)
Estimate the annual amount of Social Security benefits that you can expect at retirement, in today's dollars. This amount is based on retirement age and earning history. Web sites that are helpful in making this estimate are:
Social Security Administration
Retirement Benefits publication.
Social Security
Administration Benefit estimate computer program.
Insert the amount that you are eligible to receive at your normal retirement age at your current annual salary. ORP will inflate your benefits until retirement because your annual salary is assumed to be inflated between now and retirement. If you choose to retire before your nominal retirement age ORP will reduce your benefits according to Social Security rules. If you choose to retire after your nominal retirement age ORP will increase your benefits accordingly.
A nominal value that may be used is 16 ($16,000) for someone with a pre retirement salary of $60,000 or above.
The spouse's social security account is independent of the retiree's and is entered independently.
The amount is entered in thousands of dollars of expected benefits per year.
Default: No Social Security benefits are expected.
Age to Begin Social Security Benefits:
If you plan on delaying the start of your Social Security benefits until sometime after you start withdrawing from your personal retirement accounts then fill in the age at which you and your spouse intend to apply for Social Security benefits.
You and your spouse may apply for social security benefits at different ages.
There are two possible reasons for delaying Social Security benefits:
Default: If left blank ORP uses the value that applies to Anticipated Retirement Age.
Taxable pension, adjusted for inflation( in $000)
Estimate your annual pension income in today's dollars, if your pension will be adjusted for inflation each year. If your pension is not subject Federal and state income taxes, omit it.
Other taxable income such as rental income or royalties may be included in this value if they are to be adjusted for inflation.
The amount is entered in thousands of dollars of income per year.
Default: No inflation adjusted, taxable pension.
Taxable pension, not adjusted for inflation( in $000)
Estimate your annual fixed pension in today's dollars, if your pension will be the same amount each year and in not adjusted for inflation.
The amount is entered in thousands of dollars of income per year.
Other taxable income such as rental income or royalties may be included in this value if the income is not subjected to inflation adjustment.
Default: No fixed, taxable pension.
If you or your spouse plan to retire before your pensions are to begin then fill in the age at which your pensions begin.
Default: If left blank ORP uses the value that applies to Anticipated Retirement Age.
Earned income is money earned from working after starting retirement. Many people plan to continue working, sometimes in different careers, early in retirement. Their annual earned income will be supplemented by Tax-deferred Account distributions, pensions, and social security benefits.
Earned income is inflated since retiree's probably will enjoy cost of living increases but few merit raises.
The amount is entered in thousands of dollars of income per year.
Default: No earned income
Age to end retirement earned income:
Earned income is money earned from working after starting retirement; it is not income earned before retirement. The age to end earned income is later than retirement age.
Earned income is usually considered an option only in early retirement, and is dropped later on.
If social security benefits are to be received in addition to earned income ORP will cap earned income with the maximum allowed by the IRS until the age of 65. If you anticipate that you will have earned income beyond this cap then you might consider delaying social security benefits until either the earned income stops or until the age of 65 when the cap goes away.
Default: If left blank ORP will provide earned income for the term of the plan.
After-Tax Account Anticipated Estimated Federal Tax Rate(%)
Estimate the tax rate that is expected to apply to the After-Tax Account returns for the term of the plan.
ORP assumes that the After-tax Account contains stocks and bonds and that it is actively managed; which is to say that some assets are bought and sold on an annual basis incurring both short term gains and loses and long term gains and loses. On balance most of the transactions are taxed at the long term capital gains rate. Currently, the maximum long term capital gains rate is 15%. See Topic 409 - Capital Gains and Losses for more details on this topic. ORP assumes that all taxes on the After-tax Account are paid on a pay-as-you-go basis and that when funds are withdrawn from this account that no personal income taxes due. ORP further assumes that most of the taxes on the After-tax Account are capital gains and that there are not enough short term gains, taxed as personal income, to effect your personal income tax bracket. Therefore, loss of accuracy caused by this generalization is minimal.
The value entered in this field can best be estimated from the transactional history of your After-tax Account, being sure to include any state taxes.
Default: 15% rate.
State Personal Income Tax Standard Deduction and Exemption (in $000)
Fill in the amount of money that is exempt from taxation by the state in which you reside or will reside when you retire. This value comes from your state income tax instructions and is usually the Standard Deduction plus the Personal Exemption (times 2 if you are married). Click here for state income tax rates.
The amount is entered in units of thousands of dollars.
Default: State does not have an income tax.
State Personal Income Tax Rate(%)
Fill in the tax rate (as a percentage) that is applied by your state to income amounts beyond the amount that is exempt from taxes. This value comes from your state income tax instructions. Click here for state income tax rates.
The amount is entered as a percentage.
Default: State does not have an income tax.
Will EGTRRA be repealed in 2010 and tax code reverts to 2001?
EGTRRA will expire in 2010. If Congress takes no action the tax code will revert to what it is in 2001. ORP will make this assumption if this box is checked. Leaving the box unchecked will cause ORP extends EGTRRA in the form that is projected to be in 2010.
Default: Not Checked; EGTRRA is extended.
Average Inflation Rate(%)
Estimate the average inflation rate that you anticipate for the term of your plan. Enter the amount as a percentage. The default amount of 3.5 represents 3.5%, the inflation rate recorded for the past few years. Inflation rate is an important parameter because it has a significant impact on plan withdrawal levels as measured in today's dollars. Recently inflation has been low at 2.9%. Over the past 30 years the average has been 5.4%. The leaders of many of the world's central banks are attempting to hold inflation is the 2 to 3% range.
Default: 3.5
Tax-Deferred Account Average Investment Return(%)
Estimate the average return that is expected from investments in your Tax-Deferred Account throughout the term of the plan. The default value of 10% is the historic average for common stocks.
ORP Assumption: One of the several assumptions that ORP, as a mathematical model, makes is that the average rate of investment return on your portfolio will average out to be constant over time. In the short term this can be a hazardous assumption. For example someone who retired in the year 2000 and started drawing on her IRA at that time would seriously deplete her portfolio already reduced in value by the drop in the market. Thus when the market recovery began in 2002 the remaining portfolio would recover but the withdrawn amounts would seriously degrade overall portfolio value and performance.
Market Timing: An arguably better approach is offered by MDP Associates. MDP uses proprietary quantitative techniques to preserve capital by exiting the market in favor of interest earning cash during market downturns. When viewing a graph of the S&P 500, MDP’s techniques have the effect of trimming off the bottoms of the low parts of the graph but leaving the tops alone. MDP's techniques normally preserve assets during market down turns which tends to even out the bumps in market's annual returns bringing them more in line with the anticipated long term return average.
Disclaimer: I, James S. Welch, Jr., have contracted with MDP Associates to manage a significant portion of my IRA.
Default: 10%
Roth IRA Average Investment Return(%)
Estimate the average return that is expected from investments in your Roth IRA throughout the term of the plan. Some people use a different investment strategy for their Roth IRA and After-Tax Accounts than they apply to their Tax-Deferred Account. For example, the Tax-Deferred Account may contain growth common stocks while Roth IRA may contain corporate bonds and the After-Tax Account may contain tax free municipal bonds. You may wish to enter different values for the period before retirement and during retirement. This permits you to evaluate the option of investing more conservatively during retirement.
A blank entry defaults to the value specified for the Tax-Deferred Account rate of return.
Default: Tax-Deferred Account Return
After-Tax Account Average Investment Return(%)
Estimate the average return that is expected from investments in the After-Tax Account throughout the term of the plan. Some people use a different investment strategy for their After-Tax Account than they apply to their Tax-Deferred Account. For example, the Tax-Deferred Account may contain common stocks while the After-Tax Account may contain bonds. You may wish to enter different values for the period before retirement and during retirement. This permits you to evaluate the option of investing more conservatively during retirement.
A blank entry defaults to the value specified for the Tax-Deferred Account rate of return.
Default: Tax-Deferred Account Return
Anticipated Retirement Age
Retirement age is the age at which retirement is planned or at which retirement took place. This is the age at which account contributions cease and account withdrawals may begin.
While you don't have to retire to take advantage of Section 72(t), you do have to follow specific guidelines laid out by the IRS, including:
ORP enforces the "equal periodic payments" restriction. ORP does not to attempt to model the three IRS sanctioned early withdrawal methods:
There can be some interesting results for early retirees. Spending is increased by inflation every year. Tax-deferred Account withdrawals are fixed at the same level before the age of 59½. If there are sufficient funds in the After-tax Account the difference is made up from there each year. If the After-tax Account is small then the fixed withdrawal will be larger than necessary during the early years and the excess is transferred to the After-tax Account. Then the After-tax Account is used to cover the difference between spending and Tax-deferred Account withdrawals during the years just before 59½, or the 5 year expiration.
There is no Spouse Retirement Age because for this purpose ORP treats a couple as a single entity. ORP stops Tax-deferred Account and After-tax Account contributions for both husband and wife at retirement age. Withdrawals from may begin at Retirement Age. Earned income after Retirement Age should be specified above.
Retirement ages less that 30 are not permitted.
Default: 65
Age at Which the Plan is to End.
The length, or term, of the retirement plan need not be tied to the IRS actuarial tables. This parameter specifies the retiree's age at which the retirement is expected to end. An age that is smaller than the IRS life expectancy indicates a shorter life span and investments are to be drawn down at an accelerated rate. A larger number will provide for a longer life span, possibly avoiding the situation of outliving investments by withdrawing at a slower rate. For example, a term of 100 will run the term of the plan to the age of 100. The default value of blank will cause the IRS life expectancy to be used as the term of the plan. The value chosen for this parameter does not affect the computation of the tax-deferred minimum distribution.
See also:
Current Age. for a discussion on the IRS
life expectancy computation.
Default: blank means use the IRS life expectancy as described in Spouse's Age.
Amount of Desired Estate (in $000)
The estate is the balance of all assets that is to remain at the end of the term of the plan. The amount is entered in units of thousands of dollars. The default value of 10 represents $10,000. $1,000,000 is the largest estate not subject to Federal estate taxes. The amount entered is in current dollars. ORP will apply the inflation rate to get the amount used at the termination of the plan.
The estate value also represents the buffer available should the retiree outlive the planned term. If the annual withdrawals are small compared to the estate then the estate value may be adjusted downward to balance the amount available for living with the estate. For example, a $10,000 after tax-annual withdrawal would not seem to warrant a $1,000,000 estate when a $100,000 estate would yield a much larger annual spending level. Many users set their estate value to be roughly 2 years of withdrawals after the end of the plan.
Default: 10
Enter a brief description of the run that you are about to make to distinguish if from other runs that you may have made during this session.
This text will appear at the top of the run output and again in the scenario summary.
Check this box to cause the parameters from input screen to be saved as a cookie before every run. The parameters are restored each time the Parameter Input Form is referenced. If this box is checked then resetting the form will cause the form to be set to the values at the time of the last run. If this box is not checked then resetting the form will cause the form to be cleared.