Wednesday,(December(18,(2013 Lewis(Coopersmith,(Ph.(D.(

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


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



}  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



}  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


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)


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


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


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


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


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


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


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


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%


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


Typical Scenario


$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


Typical Scenario


Scenario Results Summary

Scenario 1: Common Rule


$-‐

$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


$-‐

$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)


$-‐

$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




Scenario 2: Baseline Tax Efficient (TE)


$-‐

$50,000

$100,000

$150,000

$200,000

$250,000

Revenue Sources

Total Income Roth and other Tax-‐FreeSavingsWithdrawal


Tax-‐DeferredSavingsWithdrawal (non-‐Roth)

Living Expenses Total Expenses

Scenario 3: TE + Detailed Expenses


$-‐

$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


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


$-‐

$50,000

$100,000

$150,000

$200,000

$250,000

Revenue Sources

TotalIncome

Roth and other Tax-‐Free SavingsWithdrawal


Tax-‐Deferred(non-‐Roth) SavingsWithdrawal

AnticipatedDetailed

TotalExpenses

Scenario 4: Scenario 3 + Roth Conversions


$-‐

$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



$-‐

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000 Total Account Balances


FTAB: $1,251,429 % Sustainable: 85% Total taxes: $404,631



$-‐

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000 Revenue Sources

TotalIncome




LivingExpenses

TotalExpenses

Scenario 5: Limited Roths + $600K To TDAs


$-‐

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000


AnnuityBalance & FuturePayments





$-‐

$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




LivingExpenses

TotalExpenses



$-‐

$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


THANK YOU


Wednesday,(December(18,(2013 Lewis(Coopersmith,(Ph.(D.(

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Transcript of Wednesday,(December(18,(2013 Lewis(Coopersmith,(Ph.(D.(