Why are withdrawals the same every year?
In every scenario I have tried, my retirement account withdrawals are the same amount every year (from the year I specified as the year for the first withdrawal). Similarly, my wife's withdrawal amount is the same in every year. I would expect the amounts to vary in different years. For example, I would expect that as regular assets are drawn down and therefore throw off less earnings, the amount withdrawn from retirement accounts would rise (to make up the difference and also because more of the retirement withdrawal would be taxed at lower rates). Also, I would think that the amount withdrawn from retirement accounts would change when I or my wife starts receiving Social Security. I would also expect that the amount withdrawn would change when a person's regular IRAs are depleted and withdrawals start to be taken from Roth IRAs. In this last case, I see a change in taxes paid when the switch from regular to Roth happens, but the amount withdrawn stays the same.
Can someone explain why a given person's retirement withdrawals are the same for every year? Or is it just an assumption of the program that you would want to withdraw the same amount every year. (I understand that you ARE forced to withdraw a constant amount every year if you start before age 59.5, but it is my understanding that constant withdrawals aren't required otherwise, and it seems to me that an optimal strategy would call for different withdrawal amounts in different years.)
RSS
I'll let Larry fill in the details, but the short answer is that the retirement account withdrawals are the optimal ones that smooth your standard of living at the highest possible level taking into all the factors available to ESPlanner, e.g., taxes of all kinds, income levels, special expenditures, etc.
Best,
Dick Munroe
Thanks for the response, Dick. I'm still not able to figure out why the withdrawal amount doesn't vary with varying tax and social security situations, so I anxiously await Larry's explanation.
Hi,
We set up the program to generate the same real withdrawals each year except when that violates the minimum distribution requirements on non-Roth accounts.
The program adjusts saving and dissaving of regular assets to smooth your living standard. It could, in principal, automatically withdraw from retirement accounts for you to help smooth your living standard were you liquidity constrained. It could also, in principal, automatically make withdrawals to determine your best withdrawal strategy with respect to paying the least in remaining lifetime taxes.
But those "automatic" calculations would not occur automatically in terms of the amount of time it would require the program to run before you got back results. Because of these processing considerations and because we sense that people want to set their withdrawal patterns on their own, we set things up as we have.
But we see your point and that of others that we need to let users enter alternative withdrawal patterns that differ from simply "take out the same real amount each year." We've put on the top of our to do list providing users with extra options on the patterns of withdrawals. You should see this implemented in the update after the next one.
best, Larry
I see my retirement withdrawals appear constant also. Based on the previous response can I assume that the RMD requirement has been taken into consideration in the withdrawals, even though the withdrawals are constant as opposed to the RMD which would rise as one ages?
As long as your draws result in a RMD that is lower than the draw you're taking, the RMD doesn't apply.
Best,
Dick Munroe
Has the improvement that was planned to make possible different withdrawals ever completed? Esplanner still seems to make constant retirement account withdrawals, even when it makes little economic sense.
robb.lutton at gmail.com wrote:Has the improvement that was planned to make possible different withdrawals ever completed? Esplanner still seems to make constant retirement account withdrawals, even when it makes little economic sense.Robb,
So far we haven't planned on making different withdrawals possible. We have completed code that enforces the RMD more stringently than previously when taking the order of withdrawal into acount.
Still, we have it on our list somewhere but higher priority stuff is eating up resources.
Best,
Dick Munroe
I only asked because a year ago Larry said it was on the top of the list of changes to be done.
In the meantime, is there a workaround to do it manually?
What variables affect the amount withdrawn from my IRA each year? I'm seeing big changes in the amount when I change the inflation rate and investment return. I expect the investment return to affect the withdrawn amount but not inflation. What have I missed?
Thanks
James
Withdrawals are all calculated in nominal terms internally. Since the draws are made in nominal dollars but held constant in real terms, increasing inflation can throw you into the RMD or change your withdrawals easily.
Well, what Larry says is on the "top of the list" and what actually needs to (or we have the resources to) do are two different things.
We WERE very close to doing the implementation for varying withdrawals. Internally we were all set for a specific model, but... that plan changed so we're kind of back to square 1. Don't know if it will make the May cut or not, I have to redo relatively major portions of the CE to get the new plan to work and I have other things on the top of the list (and since I'm doing the CE work, I'm not sanguine about getting what I have to get done and tested accomplished if I also have to do the varying withdrawals).
If you want to see the details of the current proposal, check out:
http://www.esplanner.com/forum/consumption-smoothing-procedure
Best,
Dick Munroe
And this has, yet again, been put on the back burner. I suspect we'll address this when we put in support for HSAs since we need to deal with similar issues there (random withdrawals from something that looks kinda-sorta like an IRA).
On the other hand, the 01-May-09 release WILL have support for 529 plans, a brand new spanky feature requested by many folks, so progress is being made.
Best,
Dick Munroe
I'd certainly appreciate this update / change. Without the ability to override the level payments I am creating a big $$ variance over 3 years which should be spread out over 10-12 years. I like your product -- solving this would really help my personal planning. Thanks
Has the RMD withdrawal problem been resolved? I still see the same RMD withdrawals each year. Thanks.
Joel
Joel,
Don't know if this answers your question but over 1 year ago, ESPlanner added the ability for your to enter the amount you want to withdraw from your IRA each year until your date of death. If you only enter amounts for a few years, ESPlanner than takes the remaining IRA amount and it's growth and withdraws it equally for the remaining years.
I'm not sure what happens if you elect in any one year to withdraw an amount less than the Required Minimum Distribution amount the program calculates at age 70.5 and older. Dick should be able to answer
Hope this helps
James
Joel,
I tested James' idea and it worked for me - meaning I set "special" withdrawals to $1,000 at age 75 and the resulting withdrawals where higher (at RMD level).
ESPlanner tries to have identical withdrawals from tax-sheltered retirement assets (per Larry's comment on this page which also describes the reason). If it can't do this, then it varies as appropriate while ensuring RMDs are met.
One way to force the program to only withdraw at the RMD level is under "Retirement Accounts", "Smooth Withdrawals", "Specifiy percent of non-annuitized asset to be spent". Set that field to a lower number for the person with the most assets. You'll have to experiment to see when it changes, but I'd try 90%, 80%, etc. and eventually you should see a cross over point where this occurs.
Best regards,
Brian
I don't know if this got entered on a "to-do" list. Dick will have to respond