Interesting Items:

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.

9/15/11: New White Paper

A new white paper has been added to ORP's first page, right hand column, Conventional Wisdom

In this paper retirement savings account withdrawal plans computed by a linear programming optimizer are compared to the ubiquitous, conventional wisdom strategy to measure the degree of improvement that the optimal plan offers.

8/12/11: Illiquid Assets

ORP now supports two different types of illiquid assets:

1. The family dwelling
2. All other illiquid assets.

Other illiquid assets include businesses, partnerships, real estate, inheritances, collections, etc. The difference is that when selling the family residence there is a $500,000 exclusion from capital gains tax for married couples, $250,000 for singles. The full capital gains tax has to be paid on the profit of the sale of all other illiquid assets.

2/27/11: Separate Ages of Retirement

An alert user points out that in this day and age married spouses may have different ages of retirement because:

1. One spouse may be considerably younger than the other.
2. Chronic illness to one spouse and not the other.
3. Employment provides health insurance for the spouse too young for Medicare.
4. A mental model in which each spouse says my account is my account and there is no our account.
5. One spouse enjoys working and the other doesn't.

ORP's assumption was that when one spouse retired both retired.

ORP has been enhanced to give different ages for each spouse's retirement. Thus contributions to a tax advantage account may continue for one spouse while the other is drawing down their tax advantage account. ORP does not allow contributions to the Tax-deferred Account after age 69 as per IRS regulations.

10/04/09: Monte Carlo Option

A new toggle has been added to the bottom of the parameter input form. When it is checked ORP runs in its Monte Carlo mode, whereby each year's investment return is generated as a random number before each of a series of runs. Instead of a cash flow plan the Monte Carlo reports the average of the amount available for spending over all of the runs. See the Monte Carlo help document for more details.

02/22/09: Capital Gains on Sale of Illiquid Assets

Up until the age of divestment the balance of the illiquid asset 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.

07/01/08: Realistic Retirement Planning

In his 2005 paper Reality Retirement Planning: A New Paradigm for an Old Science, Ty Bernicke observes that older retirees tend to spend less per year as they grow older. He backs this up with substantial quantitative research.

A checkbox has been added to the ORP parameter form to select this option. When the box is checked ORP applies Bernicke's results to reduce retirement spending for each of the 65-69, 70-74 and the 75 and up age groups.

The end result is to increase spending in early retirement and lower it in late retirement. The early increased spending ends up reducing the total plan value by a small amount. This is due to increased personal income taxes in the early years of retirement and loss of investment return on money that is spent rather than saved.

Bernicke shows that late in life under spending will leave a substantially larger estate than is planned for by retirement calculators. The idea is spend it while you can enjoy it.

06/11/08: Reverse Mortgage

ORP now includes both lifetime payment and lump sum reverse mortgages. A reverse mortgage is a way for retirees to get access to the equity in their homes while continuing to live in them. Mortgage rates vary widely between institutions and some fees can be very expensive. A reverse mortgage starts off with a small balance which increases monthly by mortgage interest, real estate taxes, insurance and, in the case of the lifetime payment option, a payment to be used for spending. For some retirees the reverse is a great thing. The reverse mortgage is discussed in more detail in the parameter screen help file.

06/01/08: Scheduling Contributions

This enhancement extends ORP's optimization to the accumulation side of retirement, i.e. pre retirement contributions into one of the three account types: 1)Tax-deferred, 2)Roth-IRA and After-tax. ORP balances the withdrawal schedule against the contribution plan to compute which account to annually contribute to and how much to contribute. The user's best judgement is replaced by optimization. The account contributed to may change as the retirement year is neared.

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.

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.

Maintenance:

07/06/09: Estate Balance

ORP was not always honoring the user's requested estate. Turned out to be a limit on the money left over at end of the plan that was set too low by an order of magnitude.

07/06/09: Tax Rate

One entry in the progressive income tax table for a married couple was in error. Results were only marginally affected.

07/06/09: Contributions to tax advantaged plans.

ORP was being overly generous is allowing contributions to tax advantaged plans (IRA,401K,403B,etc., and Roth IRA, ) From IRS Publication 4530: You can make contributions to both a designated Roth account and a traditional, pre-tax account in the same year in any proportion you choose. However, the combined amount of all elective contributions made by an individual in any one year is limited by the 402(g) limit — $15,000 for 2006.

ORP interprets this as allowing contributions to tax advantaged accounts to not exceed the larger limit provided by the user. ORP may make contributions to both accounts but not in excess of the larger of the two limits.

02/02/09: Asset Returns

The section of the parameter form where the user enters the anticipated investment return for the three accounts, both before and after retirement, was not working. The values being input were not applied correctly. This section was overhauled to correct the error.

01/23/09: Lost Runs

ORP's optimizer has taken to prematurely terminating runs. One problem is that the size of the model has outgrown the capacity of the optimizer; particularly for younger users with optimistic estimates of life expectancy and complex retirement plans. The optimizer's new model dimensions are now doubled to 2,000 equations with 4,000 variables.

06/10/08: Social Security Lost

The ORP enhancement program lost Social Security Benefits for a weekend. They are now back.

04/13/08: Update Federal Tax Tables

Update ORP's Federal personal income tax tables to be with consistent with the IRS 2008 values as shown in IRS Form 1040.

Last Update February 7, 2012		© 1998-2011, James S. Welch, Jr