Interesting Items:

04/13/08: IRA to RothIRA rollover added to the model.

Retirees with an Adjusted Gross Income (AGI) less than $100K can rollover all or part of their IRA into an existing or new Roth IRA. For purposes of this discussion AGI is defined on IRS form 1040 except that the amount of the rollover is excluded. A retiree's AGI is usually composed of Social Security Benefits and After-tax Account annual income as well as distributions from the Tax-deferred Account.

Income taxes have to be paid on the amount of the rollover at the time of the rollover. Normally a rollover is not considered to be an option because moving all of the IRA will put too much of the amount of the rollover into the top income tax bracket.

As a rule ORP will spend a retiree's After-tax Account first, if there is any. Since taxes are paid on an annual basis this distribution is really returned capital, not subject to income taxes. ORP will rollover enough of the IRA to bring the taxable amount plus AGI to the top of the first or second income tax bracket. No tax is paid on subsequent withdrawals from the RothIRA. Thanks to the progressive income tax if the IRA distribution is done later in the plan then it will be taxed at a higher rate.

Overall, controlled, partial rollovers of the IRA to the Roth IRA will provide significant saving on income taxes.

02/15/08: Model Description Rewritten

The Model Description paper has been substantially revised to reflect new additions to the ORP model. This paper is accessed through the Model Description button on ORP's home page.

01/26/08: Estate Default Value

The estate default value has been reduced from $1,000,000 to $10,000. The estate is set to the default value if the user does not fill in a value on the parameter form. In cases where the amount of money in the retirement plan is less than the default value the model will not solve. Reducing the default value lessens the likely hood of this infeasible situation occurring.

$1,000,000 is the point at which Federal estate taxes start to apply.

08/22/07: Trouble With Browsers

Users are reporting problems with restoring the form page parameters and with ORP's management of solution windows.

Both problems are attributed to new security features showing up in the newer browsers, especially Internet Explorer.

The saving and restoring of the input parameters is done with the use of a cookie on the client computer. If the client's browser is restricting cookie storage then this feature won't work. Restrictions on cookies appear in the Privacy area of Tool/Internet Options or something similar.

An active popup blocker is responsible for the partial failure of ORP solution screens. The idea is for ORP to put the solution results for each run in a small window and leave them up so that run results can be compared .to each other. When the browser's popup blocker is on it cancels these attempts. The symptoms are that the latest solution appears, full screen, in the window that formerly held the parameters. The popup blocker will also disable some of the options available from the solution report.

Browser upgrades sometimes cause the security parameters to be restored to their default values, thereby disabling these two features.

04/10/00: Social Security Administration Launches Retirement Planner

The Social Security Administration has a new online retirement planner to help Americans better prepare for their financial future. The online retirement planner lets individuals compute estimates of their future Social Security retirement benefits online. It also provides important information on factors affecting retirement benefits, such as military service, household earnings and federal employment.

04/08/00: Limit On Retiree Income Removed

President Clinton signed the bill on April 7, 2000 that allows senior citizens to earn money without losing Social Security retirement benefits.

The Senior Citizens Freedom to Work Act of 2000, passed unanimously by the House and Senate, abolished a law that reduced Social Security benefits for beneficiaries between 65 and 69 by $1 for every $3 of income earned above $17,000 a year. There was no limit on beneficiaries 70 years or older and the bill leaves intact a penalty for those between 62 and 64 who opt for early retirement and receive reduced benefits. Those retirees lose $1 in benefits for every $2 they earn over $10,080 a year.

ORP has been modified to reflect these changes in the law.

04/10/00: Social Security Administration Launches Retirement Planner

The Social Security Administration has a new online retirement planner to help Americans better prepare for their financial future. The online retirement planner lets individuals compute estimates of their future Social Security retirement benefits online. It also provides important information on factors affecting retirement benefits, such as military service, household earnings and federal employment.

01/29/08: Inflation of Estate

The desired balance for the estate is now entered in current dollars and ORP computes the estate at the end of the plan in inflated dollars.

11/07/00: Early Retirement

Withdrawals from the Tax-deferred Account before the age of 59½ are not subject to the 10% early withdrawal penalty providing that they are "part of a series of substantially equal periodic payments" taken at least annually until the age of 59½ or for five years, whichever is longer. (IRS Code 72(t)).

ORP's optimal withdrawal level now 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.

There can be some interesting results because spending increases by inflation every year even though Tax-deferred Account withdrawals are fixed. 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.

10/14/00: Adjust Timing

The ORP model is adjusted to provide for a little more realistic timing of events.

• Disbursements are made from all accounts at the beginning of the year.
• Returns are realized for all accounts at the end of the year.

This is a little more conservative that what was done previously, namely both events occurred at the end of the year. The new approach does not permit the collection of investment returns on money disbursed earlier in the year. Thus, this version of ORP will produce a slightly lower level of spending than did earlier ORP versions.

09/14/00: Conventional Retirement Calculator Mode

ORP can be run like a Conventional Retirement Calculator (CRC). A CRC asks you for an estimate of your spending needs during retirement and then computes your estate at the end of the plan.

The CRC mode is one of the scenarios available from the Scenario Menu display.

09/10/00: What If Scenarios

A common question from ORP users begins with "How do I ..." and continues on to seek advice on how set the ORP parameters to run a particular scenario and how to interpret the results.

A set of pages has been added to the ORP web site to assist users in creating these common scenarios. A Scenario Menu display is linked to from any ORP report page. The scenario menu page is a list of pages that address how-do-I questions. There is a link to each page. The scenario page itself contains a description of its particular scenario, those parameters that may be altered to create that scenario, and a Run button. Filling in parameters on the scenario page and clicking the run button will cause ORP to run the scenario and create a new results display.

08/30/00: Scenario Management

Modeling systems are more useful if they include scenario management. This allows the user to make multiple runs (scenarios) and then compare the results of the scenarios.

ORP now has scenario management. The result of each run occupies a separate window so that windows can be lined up side-by-side and the reports compared. A new link is added at the front of each report to access a summary of all runs of the current session.

07/18/00: Additional Investment Returns

The parameter input form has been extended with two additional investment return fields. Previously, the user could enter separate average investment return percentages for the Tax-deferred Account and for the After-tax Account. Now the user can enter two investment return percentages for each account. The first return percentage is for the period up until retirement and the second for during retirement. This recognizes the need of some users to invest their assets more conservatively after they retire than before.

02/22/00: Lower Retirement Age

The minimum retirement age has been lowered from age 40 to age 30. This will accommodate professional athletes and others whose professional life ends earlier most. For example, a 24-year-old NFL running back with a $5M signing bonus, who will earn $3M per year, and who will retire at age 32 can now evaluate his retirement using ORP.

02/19/00: Separate IRA Contribution Input Field

Regular IRA contributions are now specified separately from other Tax-deferred Account contributions. IRA contributions are not subject to being increase by inflation; they are stuck of a maximum of $2,000 until Congress changes the law. Other Tax-deferred Account contributions are tied to personal income and therefore increased by the rate of inflation. IRAs balances are still included with other Tax-deferred Account balances since a withdrawal from an IRA is treated the same as other Tax-deferred Account withdrawals.

Minimum Required Distribution Changes:

04/09/01: Passing Your IRA Through To A Beneficiary

ORP has assumed that your estate will liquidate your Tax-deferred Account, pay the personal income taxes due, and distribute the remainder to your beneficiaries.

The IRS provides an option that is more attractive to the beneficiary of your IRA, if you designate one. If your are married ORP assumes that your spouse is your IRA beneficiary and your IRA becomes your spouses IRA without any tax consequences. If you are unmarried and you specify a beneficiary for your IRA then your IRA passes to that beneficiary with no tax consequences.

The advantages of this approach to an unmarried individual are:

• Her beneficiary will continue to enjoy the compounding advantages of a Tax-deferred Account.
• She does not have to manage the distribution from her IRA in a manner intended to lower her personal income taxes.
• Assuming that her beneficiary is more than 10 years younger than she is, she will have a lower minimum required distribution. See the next item below.

Of course the beneficiary will have to pay personal income taxes on all distributions.

ORP has been modified to pass the Tax-deferred Account to the estate without paying personal income taxes. This assumes that only one partner of a married couple survives to the end, that the After-tax Account has been converted an IRA, and that the surviving partner has designated a beneficiary for the IRA. Under the new IRS regulation discussed next this is all very easy to accomplish.

Since the tax consequences of inheriting an IRA are passed to the beneficiary, ORP will compute a slightly higher annual spending amount using this revised formulation.

04/02/01: Minimum Required Distributions Simplified

The IRS has simplified the computations for determining a retiree's Minimum Required Distribution (MRD) from her IRA upon reaching the age of 70 1/2. From a retirement modeling point of view the main change is that the number methods for computing the MRD has been reduced from six to one. The remaining method is similar to the old Recalc method. ORP has been modified to reflect these changes.

A second change to ORP is the ability for a single retiree to designate a beneficiary for her Tax-deferred Account, and use the beneficiary's age in computing the MRD for the single person. When the beneficiary is considerably younger that the retiree a substantial reduction in the MRD results. For a married couple ORP assumes that the beneficiary is the spouse. A good treatment of the changes to the MRD regulations can be found at Microsoft's http://www.moneycentral.msn.com.

 

Maintenance:

08/13/07: Duplicate Text in View Summary Table

Microsoft has changed how popup windows are processed causing duplicate information to appear in the View Scenario Summary window. This has been fixed.

06/28/07: Maximum Contribution

Effectively removed the maximum contribution to a tax-deferred account to allow for special situations that occur from time to time. There is still a check to catch entries in dollars rather than thousands of dollars.

06/19/07: Links Page

Edited the page of links to other retirement resource to add some cross linking, new links and delete some obsolete links.

07/04/00: Blown Runs

The ORP model formulation has been revise to make the LP model smaller for younger users. This will help eliminate two kinds of lost runs.

• Those caused by numeric instability.
• Those that were rejected because the model was too large for the optimizer.

---

Last update February 15, 2008

© 1998-2008, James S. Welch, Jr.