ORP Overview

The Optimal Retirement Planner (ORP) is a Decision Support System intended to illuminate the process of doing retirement financial planning and to debunk the myths and half truths that are the currency of the field.

ORP provides guidance for:

1. Pre retirement: How much to save in which retirement account.
2. Post retirement: in which order in which to draw down which retirement saving account while minimizing taxes and meeting IRS regulations.

The process is easy:

1. In the Facts Section of the ORP parameter form specify the facts of your current situation; age, IRA balance, Social Security Benefits, etc.
2. In the Choices Section of the ORP parameter form specify your retirement plan choices; age to start social security, the amount of contributions to retirement savings; life expectancy, when to sell your house, etc.

ORP turns this into a Linear Programming model and solves it.

ORP runs in two different modes:

1. Simulation Mode: ORP generates a retirement plan for your particular set of choices.
   1. ORP computes the maximum amount of after-tax money available for spending in each year of retirement. This is a single number that summarizes your entire retirement picture. Because ORP is an optimizer there are no better solutions – guaranteed.
   2. ORP’s Withdrawal Report shows the cash flow that yields this result.
   3. Other ORP reports show the flow of money into and out of your retirement savings accounts and shows the progressive income tax picture throughout retirement.
2. Monte Carlo Risk Assessment Mode: Demonstrates how your particular set of choices will behave in an uncertain economic environment.

Both modes have their weaknesses:

1. The Simulation Mode assumes a constant rate of return on the retirement account when in fact the stock market is quite volatile.
2. For mathematical reasons the Monte Carlo method will seriously underestimate the amount of money available for annual spending.

The fundamental flaw with both modes is their assumption that the retirement account is passively managed, i.e. its valuation goes up and down with the stock market. A better method is to actively manage the retirement account in such a manner as to reduce the volatility of the value of the retirement account. This topic is addressed fully in the paper Simple Market Timing. Active account management to reduce volatility makes the Simulation Mode's fixed rate of return assumption more viable.

Last Update: August 25, 2010		© 1998-2009, James S. Welch, Jr