I am thoroughly enjoying modeling various spending strategies and seeing the results.
I took the recommendation in the User Manual to heart and started reading "Spend 'til the End" by Laurence Kotlikoff and Scott Burns.
They make an interesting point right off the bat, which is that traditional financial planners often ask clients how much they need or want to spend in retirement, an approach they argue is flawed and lets the advisor duck out from doing the real work of planning.
Combined with running different spending strategies, it got me thinking. What if I just let the tool tell me how much I can spend, without putting any expenses in at the start?
This of course would give me a 100% success rating every time with a deterministic approach, but I wonder what would happen with consumption smoothing and other strategies.
Can I, or is it even recommended, to strip out all of my expenses in the Build feature, and then run consumption smoothing to see what my overall safe spending number would be? I could then build a simple budget around that overall number.
Yes there is no requirement that you divide things up into fixed vs. variable expenses. But you can see the value of doing so if you want to reserve funds in case of long term care, a big move, etc. Also, setting your fixed expenses at a "short of living in a tent, what would I need to spend even if the market was really bad" can be valuable in a Monte Carlo run as it will maintain that base spending in all scenarios. Monte Carlo or historical runs can give you a feel for just how "safe" your newfound spending power is- the nice, smooth, year after year, appreciation in your portfolio that we tend to assume in the deterministic model just isn't how the world works.
Hopefully everyone using this strategy takes to heart the advice in those books to use a very great age, like 100, for planning since unexpected longevity is a big portfolio risk in this spending strategy
Note that if you are doing any Roth Conversion planning that you have to iterate a couple times between the consumption smoother and the Roth Optimizer as they each affect the other.
Hi Joseph,
I try to avoid granularity unless it is needed. For expenses, I just put a fixed required value (above my real-world spending history) and ran the model. If the outcome were not good, then I might parse my expenses into required & discretionary. Similarly, I set our terminal ages to 100 when starting to use the tool. If I did not get favorable results, then I might consider estimating our lifespans more carefully. I paint a worst-case scenario and then tweak as needed (only changing one variable at a time) to get a favorable outcome.
@ricke Thanks, great points. I did notice the consumption smoother impacted Roth conversions. Is there a recommended order of operations to apply when using both aspects of the tool?
@boomdaddy3 Hi George, Yes, with other tools I have typically just use an overall spending number, based on several years of tracking my actual spending. But I can see some value in specifying discretionary and non-discretionary, as it shows you the areas you can really cut back in if things do head south. I do like the idea of setting longevity to 100, thank you.
I did the smoother first as that demands lifetime withdrawals from the t-IRA which is a big impact to Roth Conversions. Then I did the Roth Optimizer and then repeated each. That got within a couple of bucks of what I got if I repeated the iteration further.
@ricke Thanks, this is good to know.
I have prioritized Roth in Build > Management > Withdrawal Priority in order to keep ACA MAGI down.
How does running the smoother interact with that account priority setting?
The smoother does not affect the withdrawal order you selected, though it might possibly affect which withdrawal order you should use. You can check your presumption that Roth is the best source of funds initially with the withdrawal order optimizer (Analyze-Optimize Withdrawal Priorities). Don't forget that you can select different withdrawal orders in different time periods, so once you are 65 and on Medicare, you obviously wouldn't want to keep spending from Roth.
@ricke Hi Rick, When you rerun the Roth Optimizer, do you first clear all the values it recommended on the previous round? Also, when you say you "got within a couple of bucks" of what you would get if you kept iterating, what metric are you looking at?
@solowriter The value of this depends on how lumpy your spending is, and the fragility of your essential expenses. In my case, for instance, my expenses vary a lot depending on my son's college, end of life, selling our home, travel, and health costs. Finding out my maximum smooth withdrawal rate independent of expenses in this scenario will mean a widely varying discretionary amount. Entering expenses in my case allows me to smooth out discretionary income, Kotlikoff style, which is my main planning aim.
The metric is how much you can spend each year (smoothing forces the final account values to zero so the metric is how much you get to spend on the way).
You only need to wipe out inputs in the Roth Optimizer for manually selected entries for LTCG taxes, ACA FPL or IRMAA tiers. Any input you provided about ordinary tax brackets will be overwritten when you re-run the Roth Optimizer as the program will cycle through each ordinary tax bracket in each year to find the best answer.
