wednesday,(december(18,(2013 lewis(coopersmith,(ph.(d.(
TRANSCRIPT
Optimal Tax-efficient Retirement Income and Lifestyle Planning:
Making the Most of One’s Nest Egg (Part II)
INFORMS New York Metro Wednesday, December 18, 2013
Lewis Coopersmith, Ph. D. Associate Professor, Rider University
Copyright VestaEdge Inc. 2013
Outline
} Motivation for Service Development……………Slides 3-5 } Original Process For Planning Retirement
Withdrawals………………………………………..Slides 6-8 } Enhancements…………….……………………..Slides 9-11 } Benefits………………………………………….Slides 12-13 } Typical Scenario Results……………..............Slides 14-30 } Future Development…………………….................Slide 31
Copyright VestaEdge Inc. 2013
Motivation For Service Development
} Questionable Advice } Prior to retirement, I did NOT get the best planning advice } Wealth Manager, CPA cited Common Rules:
} Initially withdraw “safe” amount, increase annually by inflation } Draw your taxable savings before tax-deferred
Copyright VestaEdge Inc. 2013
Motivation For Service Development
} Complicated Tax Issues
} Tax deductions and exemptions offset taxes on tax-deferred withdrawals
} Higher tax brackets for delayed tax-deferred withdrawals due to federal required minimum distributions (RMDs) starting at age 701/2
} Taxable savings leverage: } Capital gains strategies } Managing capital losses
} Impact of Roth conversions
Copyright VestaEdge Inc. 2013
Motivation For Service Development
} More problems } Lifestyle issues: withdrawing a “safe %” implies adjusting
lifestyle to what’s left after taxes } More sensible to figure what is needed to live a desirable
lifestyle; then plan withdrawals for high savings growth; then assess risk “safety”
} Investment strategies: portfolio distributions vary depending on tax treatment, resulting in different ROIs and volatility risk for different account types
} Accounting for and evaluating impact of other income sources
Copyright VestaEdge Inc. 2013
Original Planning Process: Objective
} Provide decision support for retirees and their wealth managers in planning retirement withdrawals
} Use mathematical optimization to: } Determine amount to withdraw from each wealth source } Assure satisfaction of:
} Before-tax expense specifications } Federal RMD constraints
} Approximate federal income taxes as an integral part of the process to maximize final accumulated wealth (Final Total Account Balance – FTAB)
Copyright VestaEdge Inc. 2013
NO
Original Planning Process*
FIXED DATA Age, Account Values,
Tax info, etc.
DISCRETIONARY DATA
Before-tax Expenses, Average Account RORs
OPTIMIZATION MODEL
(e.g., linear programming)
FEASIBLE SOLUTION?
DATA
YES
OPTIONAL: Risk Analyses
(e.g., Monte Carlo Simulation)
RE-EVALUATE Before-tax Expenses?
RORs?
IMPLEMENT PLAN Selected From
OPTIMAL PLANS
NO
YES
*patent pending
OPTIMAL PLAN Account Withdrawals
Copyright VestaEdge Inc. 2013
Withdrawal Plan Determination
Original Planning Process: Data
} Income Sources } Both spouses’ Social Security start years, initial amounts } Initial savings: taxable, tax-deferred savings (e.g., IRAs),
tax-deferred fixed annuities } Anticipated annual RORs for each account } Annual expenses, with itemized deductions sub-totaled } Fixed: birth dates for spouses, planning horizon of 25
years, federal tax constants, inflation rate
Copyright VestaEdge Inc. 2013
Enhancements: Data
} Data } Income sources added
} Earned and other taxable } Tax-free
} Taxable income deductions, capital losses } Account sources and characteristics
} Addition of tax-free: Roths, munies } Specification of long term capital gains sources for taxable
savings } Proportions in cash, stocks, bonds for use in MC
Copyright VestaEdge Inc. 2013
Enhancements: Process
} Process } Married or single use } Choice of planning horizon: 15 – 30 years } Long term capital gains included in tax computation } Roth conversions/withdrawals:
} Prohibit all, or } Specify annually-- either limit or unlimited
} Monte Carlo risk assessment } Income, initial account levels, living expense data fixed for each
simulated scenario; only annual RORs vary randomly } MC statistical results compared to plan based on anticipated
RORs to confirm if plan within anticipated risk
Copyright VestaEdge Inc. 2013
Enhancements: Results
} Added annual results } Taxed and tax-free income sources } Annuity use details
} Amount converted to 10 year fixed or lifetime } Amount of payments from all annuities } Future annuity payments
} Contributions to tax-deferred } Roth conversion amounts } Tax-free withdrawals
} Monte Carlo } Sustainability percent } Selected statistical account balance trends
Copyright VestaEdge Inc. 2013
Benefits
} Tax-efficient vs. Other methods } To retirees:
} Greater retirement wealth } Focus on meeting desired lifestyle income needs } Fast, flexible evaluation of impact of alternative lifestyle and/or
investment scenarios } Results feedback supports wide range of financial and lifestyle
decisions, including § Optimal management of retirement assets and expenses § Property sales § When to start Social Security
Copyright VestaEdge Inc. 2013
Benefits
} Tax-efficient vs. Other Methods } To financial planners:
} Greater assets under management } More assets under management for longer time period } Client loyalty and asset retention } Higher new client potential
Copyright VestaEdge Inc. 2013
Typical Scenario
} Fixed Data } A couple: Max – age 61, Melanie – age 59 } Planning horizon- 30 years
} First 4 years part time work § Combined annual earnings: $100,000 § Includes annual payroll taxes: $6,000
} Initial Social Security } Max: $24,000 starting 2018 } Melanie: $14,400 starting 2020
} Melanie’s pension: $15,000 starting 2016 } Assumed inflation rate: 2.3%
Copyright VestaEdge Inc. 2013
Typical Scenario
} Savings Data } Initial savings: $1,342,000 split
} Taxable savings/investments: $102,000 § Anticipated ROR: 3.1%, Interest: 23%; LTCG : 41%; Growth: 36% § 42% Stocks, 11% Bonds, 47% Cash
} Tax-deferred savings: $1,140,000 § Anticipated ROR: 5.1% § 36% Stocks, 64% Bonds
} Tax-free Roths: $100,000 § Anticipated ROR: 6.1% § 25% Stocks, 75% Bonds
Copyright VestaEdge Inc. 2013
Typical Scenario
Copyright VestaEdge Inc. 2013
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
$220,000 20
1320
1420
1520
1620
1720
1820
1920
2020
2120
2220
2320
2420
2520
2620
2720
2820
2920
3020
3120
3220
3320
3420
3520
3620
3720
3820
3920
4020
4120
42
Living Expenses + Payroll Taxes(Excluding Federal IncomeTaxes)
Common Rule:Initial SafeInflation Adjusted
AnticipatedDetailed
AnKcipated total over 30 years 7% less than CR
Mortgage Ended 2023
Reduce travel, entertainment, car expense aSer 2031
Typical Scenario
} Scenarios Evaluated 1. Common Rule (CR)
} Taxable first, then tax-deferred, then tax-free 2. Baseline Tax Efficient (TE)
} CR expenses, itemized deductions replace standard } Optimization model determines withdrawal sequence
3. Scenario 2 with detailed expenses 4. Scenario 3 with Roth Conversions 5. Scenario 4 with some tax-deferred annuities
Copyright VestaEdge Inc. 2013
Typical Scenario
Copyright VestaEdge Inc. 2013
Scenario Results Summary
Scenario 1: Common Rule
Copyright VestaEdge Inc. 2013
$-‐
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000 20
1320
1420
1520
1620
1720
1820
1920
2020
2120
2220
2320
2420
2520
2620
2720
2820
2920
3020
3120
3220
3320
3420
3520
3620
3720
3820
3920
4020
4120
42
Total Account Balances
Roth and other Tax-‐Free Savings Tax-‐Deferred Savings TaxableSavings
FTAB: $492,853 % Sustainable: 73% Total taxes: $567,741
Scenario 1: Common Rule
Copyright VestaEdge Inc. 2013
$-‐
$50,000
$100,000
$150,000
$200,000
$250,000
Revenue Sources
TotalIncome
TaxableSavingsWithdrawal
Tax-‐DeferredSavingsWithdrawal (non-‐Roth)
Roth and other Tax-‐FreeSavingsWithdrawal
Living Expenses Total
Expenses
Scenario 2: Baseline Tax Efficient (TE)
Copyright VestaEdge Inc. 2013
$-‐
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
Total Account Balances
Roth and other Tax-‐Free Savings Tax-‐Deferred Savings TaxableSavings
FTAB: $713,734 % Sustainable: 76% Total taxes: $417,224
Scenario 2: Baseline Tax Efficient (TE)
Copyright VestaEdge Inc. 2013
$-‐
$50,000
$100,000
$150,000
$200,000
$250,000
Revenue Sources
Total Income Roth and other Tax-‐FreeSavingsWithdrawal
TaxableSavingsWithdrawal
Tax-‐DeferredSavingsWithdrawal (non-‐Roth)
Living Expenses Total Expenses
Scenario 3: TE + Detailed Expenses
Copyright VestaEdge Inc. 2013
$-‐
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000 20
1320
1420
1520
1620
1720
1820
1920
2020
2120
2220
2320
2420
2520
2620
2720
2820
2920
3020
3120
3220
3320
3420
3520
3620
3720
3820
3920
4020
4120
42
Total Account Balances
Roth and other Tax-‐Free Savings
Tax-‐Deferred Savings TaxableSavings
FTAB: $ 1,164,614 % Sustainable: 85% Total taxes: $ 397,892
Scenario 3: TE + Detailed Expenses
Copyright VestaEdge Inc. 2013
$-‐
$50,000
$100,000
$150,000
$200,000
$250,000
Revenue Sources
TotalIncome
Roth and other Tax-‐Free SavingsWithdrawal
TaxableSavingsWithdrawal
Tax-‐Deferred(non-‐Roth) SavingsWithdrawal
AnticipatedDetailed
TotalExpenses
Scenario 4: Scenario 3 + Roth Conversions
Copyright VestaEdge Inc. 2013
$-‐
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$1,000,000
$1,100,000
$1,200,000
$1,300,000
$1,400,000
$1,500,000
$1,600,000
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
Roth Con
versions
Accoun
t Balances
Comparison of Account Balances and Roth ConversionsRoths vs No Roths
Limited RothConversion
Unlimited RothConversion
Account BalancesScenario 3
Account BalancesUnlimited Roths
Account BalancesRoths Limit $50K
Scenario 4: Scenario 3 + Roth Conversions
Copyright VestaEdge Inc. 2013
$-‐
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000 Total Account Balances
Roth and other Tax-‐Free Savings Tax-‐Deferred Savings TaxableSavings
FTAB: $1,251,429 % Sustainable: 85% Total taxes: $404,631
Scenario 4: Scenario 3 + Roth Conversions
Copyright VestaEdge Inc. 2013
$-‐
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000 Revenue Sources
TotalIncome
Roth and other Tax-‐Free SavingsWithdrawal
TaxableSavingsWithdrawal
Tax-‐Deferred(non-‐Roth) SavingsWithdrawal
LivingExpenses
TotalExpenses
Scenario 5: Limited Roths + $600K To TDAs
Copyright VestaEdge Inc. 2013
$-‐
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
Total Account Balances
AnnuityBalance & FuturePayments
Roth and other Tax-‐Free Savings Tax-‐Deferred Savings TaxableSavings
FTAB: $979,595 % Sustainable: 93% Total taxes: $390,287
Scenario 5: Limited Roths + $600K To TDAs
Copyright VestaEdge Inc. 2013
$-‐
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000 Revenue Sources
TotalIncome
Tax-‐Deferred Annuity Withdrawal
Roth and other Tax-‐Free SavingsWithdrawal
TaxableSavingsWithdrawal
Tax-‐Deferred(non-‐Roth) SavingsWithdrawal
LivingExpenses
TotalExpenses
Scenario 5: Limited Roths + $600K To TDAs
Copyright VestaEdge Inc. 2013
$-‐
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Accout Bala
nces
Year Ahead
Key Monte Carlo Account Balances Results
Anticipated RORs Average MC Min MC 25th %ile MCMedian MC 75th %ile MC Max MC
Max
75th %ile
25th %ile
Min
Median
Future Development
} Add assessment of account values prior to age 591/2 resulting in “lifetime” income planning
} Enhanced Monte Carlo methods } Greater tax computation accuracy } Scenario suite, including guidance in evaluating:
} Age to start Social Security } Immediate annuity } Selling property
Copyright VestaEdge Inc. 2013
THANK YOU
Copyright VestaEdge Inc. 2013