ORP Overview

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

ORP computes the maximum amount of annual income available for spending, expressed in today's dollars, for your given parameters.

ORP provides guidance for:

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

The process is easy:

  1. ORP's Fact Variables is where you specify the facts of your current situation; your age, your spouse's age, IRA balance, Social Security Benefits, etc.
  2. ORP's Policy Variables is where you specify your retirement plan choices; the age to start social security, the amount of contributions to retirement savings; planning horizon, when to sell your house, etc. These are the variables that you maniuplate to explore your retirement options.

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

ORP runs in two different modes:

  1. Deterministic 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 Deterministic 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 offers a pessimistic view of the amount of money available for annual spending.

Both modes assume that the retirement account is passively managed, i.e. its valuation goes up and down with the stock market. A better policy is to actively manage the retirement account in such a manner as to reduce its valuation volatility. Active account management to reduce volatility makes the Simulation Mode's fixed rate of return assumption viable.

The unplanned retirement is
Uncle Sam's delight;
more taxes collected, less
Social Security paid.

March 28, 2016

1998-2016, James S. Welch, Jr