Consumption not smooth
I'm a newbie and have been using E$Planner for less than a week. So this maybe a dumb question.
I assumed that "consumption smoothing" meant I would see a constant "Discretionary Spending" amount for each and every year. I'm not.
I'm near retirement and modeled an inheritance about 15 years in the future at which point my Discretionary Spending jumped by about $10K. Not what I expected; given I thought consumption smoothing was by definition constant Discretionary Spending.
Although net worth at the point is still quite high, regular assets are exhausted (=0). Seems that what is going on is that consumption smoothing is smooth consumption of regular assets not smooth Discretionary Spending.
Am I right? If so how I model this to so that Discretionary Spending is smooth?
Thx much
Bill
RSS
What you are seeing is probably correct and merely an example of what Prof. Kotlikoff would call "borrowing constrained" or "liquidity constrained." (many of us are). This simply means that you have some future available resources that you simply can't get to now and not enough resources in the present to smooth over to that future windfall.
A few things to explore: are you contributing to retirement now? If so, and if you really want resources now, then consider not contributing more to the future (through 401K contributions or whatever).
Of course if you tell the system you are willing to go into debt now to payback later, that would perhaps solve the liquidity problem, but it also may not be wise.
Dan
Thanks much Dan. I'm getting my "sea legs" and am beginning to see how various knobs can be turned.
Dan, I'm seeing something similar with SS. If you wait until 70 to take SS, but retire earlier, I see an income jump upon taking SS. I've been thinking this is liquidity constrained - and it may be - but I don't think so. What I think is happening, based on the text in ESP, is that retirement assets are spent smoothly over the retirement lifespan - but do not seem to be coordinated with SS unless it is taken at the same time. This is just a plausible guess on my part, but fits the information and behavior available to me. Anyway, I'd look for a bug there, or perhaps not a bug but something that may need a better user interface. With the assets I have modeled, there is no reason I can see this could not be solved for a level living standard. The IRA (etc) assets are substantial, but are not spent more heavily up front to even spending until SS kicks in.
As I said, I've been thinking this is being constrained, but that really does not make much sense. There are plenty of assets. The only way I know to fix this is try and put in some special expenditures on the transition years, but that is a pain at best and would vary with each case run - not very practical.
Thanks for your interest.
What you are seeing makes sense to me. The program does not pull out extra from the IRA or the retirement assets to smooth consumption while it waits for SS (for example) UNLESS you tell it to in the "Special Withdrawals" tab in the Retirement folder. You'll see it there. Look and see what it's already withdrawing, then bump it up and through a little trial and error you will force it to take the right amount to get you smooth there.
Are you seeing an income jump or a std-of-living jump? The income will jump when you start receiving SS (unless you try to coordinate it with your retirement assets using the Special Withdrawals), but this income jump doesn't necessarily mean that your consumption isn't smoothed.
BTW, I was able to raise my consumption by almost $1K/yr by using Special Withdrawals to withdraw more per year before collecting SS. I'm pretty sure this is a result of lower overall taxes using this approach. By withdrawing more money before collecting SS, then less money after, I'm basically moving some money from a higher tax bracket to a lower one.
Yes, the retirement accounts are withdrawn smoothly. We do not use retirement accounts for smoothing (this has been discussed a length in various places in the fora) and will not for technical reason. Thus you can delay your SS until 70 but you will look as if you're borrowing constrained until you start drawing benefits. The work around is to make a special withdrawal from the appropriate retirement account.
Best,
Dick Munroe