The Optimal Retirement Planner (ORP) computes your tax-efficient schedule of retirement savings withdrawals for your entire planned retirement. Withdrawals from your Tax-deferred account (401K, IRA, SEP...) are subject to the Federal progressive personal income tax. The order in which you make withdrawals from your Tax-deferred, Roth IRA, and After-tax accounts affects your total retirement disposable income.
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A Three Step Procedure for
The essential ORP narrative:
- Asks for your facts, in thousands of dollars ($000):
- Applies conventional wisdom to retirement policy issues:
- Assume constant retirement spending, indexed to inflation.
- Delay Social Security Benefits to age 70; the best long term investment money can buy. Live off of savings until Social Security benefits begin.
- Allocate 60% of savings to stock and 40% to fixed income at the beginning of retirement. Gradually reduce stock allocation to zero at the end.
- Sell the house and/or business, if any, at age 80.
- The planning horizon is age 95, the Joint Life and Last Survivor Expectancy for a 65 year old married couplei, according to the IRS.
- No estate at the end of the plan.
- IRA to Roth IRA conversions are not included. At least one quantitative study (See page 47) reports that conversions offer little economic advantage but their dramatic increase in taxes paid in early retirement tends to panic the novice.
- Uses generally agreed upon values for exogenous economic parameters:
- 2.5% rate of inflation, the Federal Reserve's stated target.
- 7% is the 10 year Rate of Return (ROR) for popular S&P 500 index funds as reported by Zacks.
- 3.5% Moody's . Aaa Corporate Bond Yield.
To override these assumptions go to Full
The article on page 17 in the 2015 Journal of Personal Finance contrasts ORP to the conventional wisdom of retirement savings withdrawals.
|Last Update |
November 9, 2016
James S. Welch, Jr.