Retirement Plan Summary

The Retirement Plan Summary gives a quick overview of ORP's results. All amounts are in thousands of dollars. It contains these lines:

1. After-tax Withdrawal: This is the most interesting single value that ORP produces. It is the amount of money, after taxes and in today's dollars, that is to be withdrawn for living expenses in each year of retirement. If there is no inflation then this amount would be the same every year throughout the life expectancy term.
2. Account Balances at Retirement: The amount of money in the Tax-deferred and After-tax accounts in the year that retirement begins. Since both accounts will continue to compound after retirement begins this is not the total amount of money that you have to retire on. The amount is shown in inflated dollars, not in today's dollars.
3. Total Plan Value: The sum of all withdrawals over the entire term of the plan. This is the value that is maximized by the ORP optimizer.

Withdrawal Report

The Withdrawal Report is the heart of ORP's results. ORP is implemented as a Linear Programming model. The Program in Linear Programming does not stand for computer programming but instead it stands for a program of activities selected for maximum economic advantage, from an even larger collection of possible activities. ORP maximizes the amount of money available for spending during retirement. The Withdrawal Report is ORP's program for achieving that. It tells you which accounts to withdraw from and when.

It is important to note that the numbers in the Withdrawal Report are not nearly so important as the patterns of the numbers in the report. The report will show withdrawing from one account until it runs out and then switching to another. The report may also show withdrawals from more than one account in a particular year. That is ORP's optimal program for your particular situation.

The rows of The Withdrawal Report are for age of the retiree. The columns of this Report are:

1. Age: Age of the retiree, i.e. your age. All plan reports show your age, and only your age, in the first column Age. The remainder of the report columns contain thousands of dollars for both you and your spouse. This can sometimes lead to some funny looking results. For example, if you are 30 years old, your spouse is 60 then your spouse will begin collecting Social Security benefits at age 70. Thus, your spouse's Social Security income will begin in the Withdrawal Report at (your) age 40.
2. TaxDef: The amount of money withdrawn from the Tax-deferred Account, investments on which taxes have not been paid. The amounts shown are before taxes have been paid. Withdrawals are assumed to be made at the first of the year.

   ORP's optimal withdrawal level honors the IRS requirement to fix all withdrawals before the age of 59½ at the same level. ORP does not to attempt to model the details of any of the three IRS sanctioned early withdrawal methods:

   1. Life Expectancy: which gives the smallest annual withdrawal.
   2. Amortization: which gives a larger annual withdrawal.
   3. Annuity Factor: which gives the largest annual withdrawal.
   ORP does provide the optimal level of withdrawal from the Tax-deferred Account for early retirement. You may then select the IRS sanctioned method that most closely matches the computed level. For a description of the IRS Early Withdrawal methods see the Retire Early Home Page.
3. AfterTax: The amount of money withdrawn from the After-tax Account, investments on which taxes have been paid. Withdrawals are assumed to be made at the first of the year.
4. RothIRA: The amount of money distributed from the Roth IRA Account. No tax is paid on Roth IRA withdrawals. For IRA to Roth IRA rollovers there is a 10% penalty charged for the withdrawal of the increase in account value within five years of the deposit in a Roth IRA. ORP conservatively assumes that the 10% applies to all of the early distribution. This will cause ORP to assess a larger than necessary economic penalty on early distributions and will cause ORP to prefer to avoid early distributions.
5. IRA2Roth: The amount of money to be rolled over from the Tax-Deferred Account into the Roth IRA during the year. This will occur when there is sufficient money in the After-tax Account to live on for the year without paying significant income taxes on the rollover. Then tax-deferred money can be rolled over to a Roth IRA while paying a low tax rate on the tax-deferred distribution. Remember that tax has to be paid on all tax-deferred distributions, even when rolling them over into a Roth IRA. There is a significant tax savings in rolling over at a low tax rate and then distributing out of the Roth IRA tax free at a later date when tax-deferred distributions put
6. Savings: The amount of money to be transferred from the Tax-deferred Account into the After-tax Account. This may occur to satisfy Minimum Distribution Requirements or when the return rate on the After-tax Account is significantly better than the Tax-deferred Account. This is done in years when there is a favorable income tax situation and the Roth IRA can be used in downstream years. This column will also contain amounts saved in the After-tax Account from Social Security Benefits, Pension or Earned Income.
7. SocSec: The amount of before-tax Social Security benefits, after adjusting for inflation.
8. Pension: The amount of pension income available for each year. Pension income is combined non-inflation adjusted and inflation adjusted income for each year.
9. Earnings: The amount of earned income for each year of retirement, up until the end of working specified on the parameter form. The earned income specified has been reduced by the payroll tax (Social Security contribution.)
10. RvrsMort: Payments from your reverse mortgage, either annually, adjusted for inflation, or as a single lump sum transferred into your After-tax Account.
11. Taxes: The amount Federal and state income tax paid in each year. These are taxes paid on Tax-deferred Account withdrawals, Social Security income, earned income, and pension income. It does not include taxes paid each year on the After-Tax account returns.
12. Spending: During retirement the spending values show the after-tax, inflation adjusted money being withdrawn each year to live on. If the plan begins before retirement the first entry is the spending level in the first year in today's dollars. but otherwise has nothing to do with retirement. The remaining pre retirement values show the impact of inflation on living expenses, but otherwise has nothing to do with retirement spending.

The total withdrawals from both accounts will exceed living expenses in the final year of the plan. The excess will fund the estate requirement.

The inflation adjusted living expenses (Spending) of this report is the driving force of the model. The living expenses for each year of retirement must be satisfied by withdrawals from one or both of the two accounts or from other income sources.

Asset Balance Report

The Asset Balance Report provides an overview of the assets in the retirement plan at the beginning of each year, both before and during retirement. The right most column shows the total assets in the plan. Typically the total will increase each year until some time in the seventies and then decrease to the value of the estate at the end of the plan.

1. Age: Age of the retiree.
2. TaxDef: The Tax-deferred Account balance changes according to compounded investment returns, distributions, and contributions. It demonstrates the results of compounding of investment returns, before taxes have been paid.
3. AfterTax: The After-tax Account balance changes according to compounded investment returns, distributions, contributions, and annual tax payments. It demonstrates the results of compounding of investment returns, after taxes have been paid.
4. RothIRA: The Roth IRA Account balance changes according to compounded investment returns, distributions, and contributions. It demonstrates the results of compounding of investment returns, on which no taxes will be paid.
5. Illiquid Value of the illiquid asset. Up until the age of divestment the balance of this account grows at the rate of inflation. At the age of divestment the balance of this account is transferred into After-tax account. The amount of transfer is reduced by capital gains tax on the difference between the value of the asset and its basis. ORP assumes that the illiquid asset is the retiree's home. The capital gains exclusion ($250,000 for a single retiree, $500,000 for a couple) is applied before capital gains taxes are computed. Both the capital gains rate and the illiquid asset basis are on the ORP input form and discussed in that form's help document.
6. Total: The total column contains the sum of the other of all asset accounts columns.

Tax-deferred Account Report

The Tax-deferred Account Report shows the yearly activity for the Tax-deferred Account. All amounts are in inflation adjusted, thousands of dollars. The rows of this report are the age of the retiree. The columns of this report are:

1. Age: Age of the retiree.
2. Accbal: Tax-deferred Account balance at the beginning of each year. This value changes according to compounded returns on investment, distributions, and contributions.
3. Contrib: Pre-retirement contributions to the account are planned contributions to IRA, profit sharing, 401k, or 403b plans. Contributions increase at the rate of inflation.
4. Distrib: The amount of money distributed from the Tax-deferred Account before taxes are paid. This is the amount of reduction of the account.
5. IRA2Roth: The amount of the rollover from the Tax-deferred Account to the Roth IRA. This will occur in years when spending comes from the After-tax Account and income taxes are low. The Tax-deferred required minimum distribution cannot be rolled over to a Roth IRA. Only amounts in excess of the minimum distribution can be rolled over.
6. MinDist: The IRS requires a minimum distribution level each year after the age of 70. The recalculation method of computation is described in IRS Publication 590. The minimum distribution for each year is the life expectancy divided into the Tax-Deferred Account balance on the first day of the calendar year. Table I of Appendix C contains the IRS estimates of life expectancies based on age. The Tax-Deferred Account balance is the sum of all tax-deferred accounts (IRA, 401k, 403b, etc.) that are active on the first day of the year. Roth IRAs are not tax-deferred and are not subject to the minimum distribution requirement.

• The minimum distribution requirement imposed at age 70, and thereafter, exceeds the money needed for living expenses. The surplus is moved to after-tax investments rather than pay a 50% insufficient distribution penalty.
• Moving money from the Tax-deferred Account to the After-tax Account at some point during retirement reduces the amount of income subject to income taxes in a higher tax bracket during subsequent years.

After-Tax Account Report

The After-tax Account Report shows the yearly activity, in inflation adjusted, thousands of dollars, for the After-tax Account. The rows of this report are the age of the retiree. The columns of this report are:

1. Age: Age of the retiree.
2. AccBal: This column shows the account balance at the beginning of each year. It demonstrates the results of compounding of investment returns, after taxes have been paid.
3. Savings: Savings in the After-tax Account can come from : Pre-retirement investments after taxes have been paid. Since defined contribution plans have a maximum yearly contribution, any additional savings and investments will be made to the After-tax Account. Contributions increase at the rate of inflation.
4. IRA2Std: Transfers from the Tax-deferred Account or savings from Social Security income or pension income, during retirement.
5. Distrib: After-tax Account withdrawals used to meet spending needs. This column is the same as AfterTax column of the Withdrawal Report.
6. Illiquid Value of the illiquid asset. Up until the age of divestment the balance of this account grows at the rate of inflation. At the age of divestment the balance of this account is transferred into After-tax account. The amount of transfer is reduced by capital gains tax on the difference between the value of the asset and its basis. ORP assumes that the illiquid asset is the retiree's home. The capital gains exclusion ($250,000 for a single retiree, $500,000 for a couple) is applied before capital gains taxes are computed. Both the capital gains rate and the illiquid asset basis are on the ORP input form and discussed in that form's help document.

Roth IRA Report

The Roth IRA Report shows the yearly activity, in inflation adjusted, thousands of dollars, for the Roth IRA Account. The rows of this report are the age of the retiree. The columns of this report are:

1. Age: Age of the retiree.
2. AccBal: This column shows the account balance at the beginning of each year. It demonstrates the results of compounding of investment returns, after taxes have been paid.
3. Contrib: Pre-retirement investments after taxes have been paid. Contributions increase at the rate of inflation.
4. RothTrns: The amount of the rollover from the Tax-deferred Account to the Roth IRA. This will occur in years when spending comes from the After-tax Account and income taxes are otherwise low.
5. Distrib: Roth IRA Account withdrawals used to meet spending needs. This column is the same as RothIRA column of the Withdrawal Report. No tax is paid on Roth IRA withdrawals. For IRA to Roth IRA rollovers there is a 10% penalty charged for the withdrawal of the increase in account value within five years of the deposit in a Roth IRA. ORP conservatively assumes that the 10% penalty applies to all of the early distribution. This will cause ORP to assess a larger than necessary economic penalty on early distributions and will cause ORP to prefer to avoid early distributions.

Income by Federal Tax Bracket Report

The Income by Federal Tax Bracket Report shows the amount of gross income that falls into each Federal income tax bracket. Income from the After-tax Account is treated separately as capital gains and not included in this report. Included are withdrawals from the Tax-deferred Account, Social Security income, and pension income.

The report shows the retiree's age in the left most column. The other columns show the amount of gross income that falls into the various Federal income tax brackets. The first column shows income on which no income tax is paid, i.e. the amount that is covered by the standard deduction and exemptions. The headings of the remaining columns show the percentage tax rate on income show in that column.

If the run is being made with the "Will EGTRRA be repealed in 2013" box checked then this report will look a little disjointed. The cause is that the tax brackets for the two tax structures don't match up, e.g. the Bush tax cuts have no 20% bracket and the pre Bush taxes had no 10% bracket.