A Comparison of ORP and Forecaster3
In August 2008 Laura Saunders, a Forbes Magazine contributing editor, suggested a comparison
between Bruce Martin's
Forecaster3 retirement calculator
and the Optimal Retirement Planner (ORP).
to show how the two seemingly similar computer programs are fundamentally different.
Forecaster3 requires that contributions
and withdrawals are specified either by the user or are rules built into the software.
ORP computes optimal schedules for contributions and withdrawals.
Essentially Forecaster3 is a calculator while ORP is a planner.
A glossary at the end is provided for readers not familiar with the terminology
of retirement planning.
- Both programs were written by and are supported by veteran computer programmers
with long experience in the field.
- Both programs are available free of charge over the Internet.
- Neither program is affiliated with any financial institution nor any
other commercial sponsor. They are more a labor of love than a commercial enterprise.
- Both programs separately model the retiree's and spouse's tax advantaged accounts,
Social Security benefits, post retirement income and pension income.
- Both programs have a similar, detailed list of parameters to be filled in
by the user.
- Both programs provide reports summarizing annual asset account status and
cash flow during retirement.
- Both programs offer a Monte Carlo risk assessment option.
Order of Account Withdrawal
Forecaster3's default strategy for selecting the order of account withdrawal is
the conventional rules of thumb :
The Forecaster3 user has the ability to specify any sequence order of
accounts to use for withdrawals, and to even change the sequence order
multiple times through the retirement years. This is explained at
- Spend the After-tax account first.
- Spend the Tax-deferred account second.
- Spend the Roth IRA last.
On May 1, 2008 New York University hosted a one day conference
addressing the question of The Optimal Retirement Withdrawal Strategy. One conclusion
of the conference was that the progressive Federal income tax turned withdrawal
strategy into a non trivial exercise.
Papers presented at the NYU conference show that in many situations the conventional
rules of thumb are inefficient because the retiree will be paying unnecessary income taxes.
ORP recognizes that the withdrawal strategy is highly situational in cases when there are savings in
two or more accounts. After Social Security benefits, pensions, earned income
and Minimum Requirement Distributions have been accounted for, ORP
computes the optimal withdrawal strategy. Generally, the strategies are:
The amount of money in each account will have a tactical impact on ORP's schedule.
- If there is money in the After-Tax Account and money in Tax-Deferred Account then ORP spends the
After-tax Account and does partial rollovers from the Tax-deferred Account into a Roth IRA
for as long as the After-tax Account lasts. When the After-tax account
is empty then ORP will withdraw from the Tax-deferred Account and the Roth IRA in parallel. This
strategy keeps the retiree in lower income tax brackets throughout retirement.
- If there is money in the Tax-deferred Account and the Roth IRA then ORP withdraws from the
Tax-deferred Account and the Roth IRA in parallel.
- If there is money in the After-tax Account and money in Roth IRA then ORP follows the
conventional wisdom and spends the After-tax Account first.
The sale of the retiree's house
at some future age will put a large sum into the After-tax Account which ORP will schedule
according to the strategies described above.
Adoption of this strategy will have an impact on which account will receive contributions
before retirement. In some situations ORP will recommend stopping contributions to the
Tax-deferred Account during the last few years before retirement and contributing to
the After-Tax Account instead. Then strategy #1. above comes into play.
In this manner ORP optimizes across the retirement boundary.
Descriptive vs Prescriptive Reports
Superficially Forecast3's reports are similar to ORP's reports.
Their fundamentals are different
- Forecaster3 requires that the user specify the retirement savings accounts withdrawal rate.
Forecaster3 then computes the size of the estate or the year in which
retirement funds run out. Forecaster3's reports are descriptive in that Forecaster3 reports the
consequences of the user's parameter choices but does not offer planning guidance.
- The ORP user specifies the desired estate size. ORP computes the maximum after-tax amount of
money available for annual spending. The optimizer guarantees that the
reported plan will yield the maximum amount of money available for spending during retirement
(after taxes). ORP's reports are prescriptive
in that they define a plan for contributing to and withdrawing from the user's retirement
- Forecaster3's reports are much more attractive than ORP's reports.
Random Value Generation
After the deterministic phase is complete both programs can be switched to a Monte Carlo calculator .
Forecaster3 computes the probability of ruin,i.e. the chances of the money running out before life expectancy.
ORP computes average and standard deviations below average of the amount of money available for spending,
- Forecaster3's random value generator for investment returns creates a normal distribution in which
successive years are independent of each other. This practice is condemned by academics who have studied
the use of Monte Carlo techniques in financial modeling. 
Forecaster3 contains these unique features:
- Forecaster3 is a deterministic calculator. Run it once and get the state of play for each
year of retirement. The amount of account contributions and the rate of withdrawals are determined
by the user input parameters.
ORP contains these unique features:
- At the heart of ORP sits an industrial strength linear programming optimizer which finds the
very best model solution from the set of the model's possible solutions.
ORP does more than compute future states of the retirement savings accounts.
Looking at the entire time period,
ORP computes a schedule of contributions and withdrawals.
- ORP models the progressive Federal income tax. This is vital because tax levels affect the choice
of accounts to withdraw from and the levels of withdrawals. Academic research   shows that tax
withdrawal significantly affects the total amount of money available for retirement
spending. Personal income taxes determine the choice of which account to contribute to
and which retirement account to withdrawal from.
- ORP's Monte Carlo option uses a random value generator that is based on S&P500 returns from 1955 to the present.
The generator incorporates a feature that links successive year returns which leads to some trend following.
How the software is made available to the user is not mathematically critical; it is
more of a matter of user convenience.
- Forecaster3 runs entirely on the user's
computer. Thus a download
of the software is required. Generally, this is a risky
practice but this case is a trusted exception. Additional downloads
are required to obtain later releases. Forecaster3 currently runs only on Windows PCs.
- ORP is an Internet client/server implementation. The only thing that runs on the
user's computer is
an Internet browser displaying pages from the ORP server.
All of the computations take place on the ORP server.
ORP users are always running with the latest software. ORP runs all computers that
support a web browser.
Forecaster3 and ORP are significantly different from one another. Forecaster3's basic calculator is
similar to other retirement calculators on the Internet. ORP's linear programming
core is unique in the field of retirement calculators.
The second fundamental difference between the two calculators is that the Forecaster3 user specifies withdrawal
rates and Forecaster3 computes the estate. The ORP user specifies the estate and ORP computes the
optimal withdrawal schedule.
The third fundamental difference is the order of account access for withdrawals is fixed as part of Forecaster3's input parameters.
ORP computes the order of withdrawal so as to level income tax payments.
A model's usefulness is determined by how well its results fit the real world situation being
modeled. In retirement planning personal income taxes matter. Welch  indicates
that factoring taxes into the picture and computing the retirement plan accordingly
will increase the amount of money available for retirement spending by 4% to 6%.
That's not chump change for a $3M retirement account.
To put it another way Forecaster3's results are overly pessimistic and will call for under spending
during retirement, sacrificing the retiree's standard of living in favor of a larger estate
while overpaying personal income taxes.
- With an After-Tax Account, usually a conventional brokerage account, money is
saved after taxes have been paid and where capital gains and personal income
taxes are paid annually. Funds may be withdrawn from the After-tax account without
paying additional taxes and without paying any penalties.
- The initial Amount of Retirement Withdrawal is computed as the user specified withdrawal rate multiplied by
the total assets at the year retirement. This amount is withdrawn each year, increased by
inflation, from any or all of the retirement savings accounts.
- The estate is the amount of money to be left at the end of the plan that may
be inherited by the retiree's heirs or, in ORP's case, serve as insurance for a longer than
the user specified life expectancy.
- Life Expectancy or Term of the Plan is the age at which the retiree expects to die.
- A Monte Carlo calculator runs the model many times with random values for
the asset return rate and the inflation rate . The results are a statistical profile of
the model under uncertainty.
- Roth IRA savings are made after taxes have been paid on earned income. There are
contribution limitations. No taxes are paid on withdrawals except penalties have
to be paid on early withdrawals. During retirement Tax-deferred account withdrawals
may be rolled over into the Roth IRA after taxes have been paid on the IRA withdrawal.
- The Tax-deferred Account receives before-tax contributions from earned income.
That is contributions to the Tax-deferred Account are deducted from earned income before
taxes are computed.
Personal income taxes are paid on all withdrawals. Penalties are applied to
withdrawals before retirement. There are contribution limitations.
- Withdrawal rate is the percentage of the retirement assets
to be withdrawn as determined during the first year of retirement. It is used to compute the
amount of retirement withdrawal. Most retirement calculators require that the
user input her preferred withdrawal rate. The withdrawal rate usually ranges from
4% to 7% of the assets at the year of retirement.
- Withdrawal Location with Progressive Tax Rates; Stephen M. Horan; Financial Analysts Journal;
June 2006; Volume 62, No. 6; pages 77-87
- Extending Retirement Pay outs by Optimizing the Sequence of Withdrawals, John J Spitzer and
Sandeep Singh; Journal of Financial Planning; Apr 2006; 19, 4; ABI/INFORM Global pg. 52
Optimal Retirement Withdrawal Strategy , James S. Welch, Jr., July 2008.
- Can You Afford It?, Forbes 2009 Retirement Guide,
Laura Saunders, October 2008, p35.
A Critique of Monte Carlo Retirement Calculators James S. Welch, Jr., July 2008.
- Advanced Linear-Programming Computing Techniques, William Orchard-Hays, McGraw Hill, 1968
The Optimal Retirement Withdrawal Strategy Conference ,
New York University, May 1, 2008
- Evensky,H.; Heading for Disaster; Financial Advisor, April 2001, pp. 64-69
- Nawrocki, David, professor of finance, Villanova University;
Finance and Monte Carlo Simulation; Journal of Financial Planning/November 2001;