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surprising and suspicious result

Submitted by NYCGuy on 21 May 2009 - 6:31am

I am running two scenarios. In both of them, these are true:

1. About half of total assets are in my retirement accounts
2. Inflation set for -1% until 2012, +2% thereafter.
3. Nominal returns assumptions: 3% retirement, 3% non-retirement
4. life expectancy: 95
5. Start taking SS at age 70

All other variables are the same except for the period over which I draw down retirement assets:

"Normal" scenario: retirement assets drawn down between ages 70 and 95
"Early" scenario: retirement assets drawn down between ages 63 and 68

The surprising result is that the consumption level of the Early scenario is about 10% higher than that of the Normal scenario.

How can this be?

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Submitted by Dick Munroe on 22 May 2009 - 6:18am.
1

Part of it could be taxation of your SS benefits.

Take a look at the tax differences between the two cases and I'll be you see some differences.

Best,

Dick Munroe

Submitted by NYCGuy on 23 May 2009 - 11:09am.
2

If I sum the taxes over the entire lifetime of the plan, we pay about $150,000 more in the Early scenario than in the Normal.

But it gets even more surprising. Since drawing it out of the retirement accounts from 63 to 68 gives a better level of consumption, then drawing it out and putting it into a Roth that my wife at least partially inherit should be even better, right? Well, not much. If I make those withdrawals Roth transfers which I then draw down from ages 70 to 95, our consumption goes up by about $300 per year. If I draw down only 50% from 70 to 95 so that my wife inherits the rest as a Roth, which was my original plan, our consumption goes down by about $3000 per year.

I find it hard to believe that these results could correct.

Submitted by Dick Munroe on 23 May 2009 - 1:34pm.
3

Well if you're convinced there's an issue, open a support ticket and upload your database for us to analyze.

We've done this a lot and have confidence in our computations, but we can't analyze without full information.

Best,

Dick Munroe

Submitted by esplanner on 28 May 2009 - 7:28pm.
4

Hi NYCGuy,

You are no doubt liquidity constrained in the normal scenario and seeing a higher living standard and consumption path after age 70 when your social security kicks in.

When you run the early scenario, you relieve this borrowing constraint and can have a higher immediate living standard at the cost of a lower living standard after age 70.

If this isn't what's happening, just call me at 617 834-2148.

best, Larry

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