Introducing Our New Pre-Retirement Savings Forecast Tool

We just finished the development of a new savings forecast tool to help you in planning your retirement future. In today’s post, we will highlight this tool.

Our pre-retirement savings forecast tool can help you predict your future savings.
Our pre-retirement savings forecast tool can help you predict your future savings.

Forecast your savings

To determine your savings forecast, our online tool asks for a number of different inputs across the following categories.

  • Information about yourself, such as your current age, retirement and taxable account values, and future planned contributions.
  • Information about your spouse or domestic partner, such as their age, their retirement account values, and their future planned contributions.
  • Your savings horizon, in years, your current and future asset allocation, and your marginal tax rates.
  • Future rates for stock returns, bond returns, inflation and dividends.
  • Simulation inputs, such as number of trials, asset volatility, correlation and type of simulation used.

Like in our retirement income calculator, simple menus walk you through each of these inputs, along with tips on what these inputs mean. When you are done, simply press the “Forecast Retirement Savings” button to see an automated report. The tool adjusts all values down for inflation so are in today’s “buying power”. Also, for those considering drawing down a taxable account assets prior to retirement, negative contributions may also be used to see what taxable account balance (if any) remains at the end of this planning horizon. Advocates of FIRE (Financial Independence, Retire Early) may find this feature especially useful.

Forecast results

Our savings forecast tool provides two perspectives on retirement savings. The first perspective is what to expect or a so-called “best guess” based on a deterministic forecast. An example of a 10 year forecasted account values appears in the picture below for a current 52-year old and their 50 year-old spouse. You can then enter these account values and cost basis information into our retirement income calculator.

Our pre-retirement savings forecast tool can help you predict your future expected savings.
Expected values for account values after saving for 10 years, Retiree and Spouse

The second perspective is a probability distribution of future outcomes due to market uncertainty. Using 1,000 trials in a bootstrapped simulation with data from 1989-2021 for stocks, bonds and inflation, you can determine median (or 50th percentile) account values at the end of the planning horizon, along with visualizing the account values each year. Our software also supports geometric Brownian motion simulation, which can allow you to manually modify market returns and volatility, rather than sampling from historical values.

Our pre-retirement savings forecast tool can help you predict your median future savings.
Account values after saving for 10 years using bootstrapped simulation, Retiree and Spouse

The final images produced by this tool are a distribution of outcomes for account values at the end of the savings horizon. To provide savers with specific results, we also include a table with pessimistic, median and optimistic account values.

Our pre-retirement savings forecast tool can help you predict your future savings distribution.
Distribution of account values after saving for 10 years, Retiree

We hope you find this new tool helpful in planning for your retirement. Please drop us a message to let us know what you think!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in tax-efficient investing with ETFs

Survey results from recent webinar

We wish to thank all the investors and financial planners who recently attended our webinar. The webinar was hosted by the Financial Experts Network on March 1, 2022, and entitled Seeking Tax Alpha in Retirement Income. If you missed the webinar, you are welcome to watch it again with the link below.

Financial Experts Webinar hosted me as a presenter on March 1, 2022

This webinar contained several useful additional resources. For example, you can download the presentation and my latest whitepaper. Also, you can access the detailed reports presented for Case Study #1  and Case Study #2.

Survey Results

We also wish to thank the many respondents to our survey at the end of the webinar. We had quite a mix of individual investors and financial services professionals respond, as shown in the pie chart below.

Survey results for the type of user of our retirement income software

Prioritization of new features and capabilities

In the survey, we also asked about prioritizing new features and capabilities in our optimal retirement income calculator. So, here are the results, in rank order. Then, for any that were “close”, we assigned them with the same rank, to properly account for sampling error.

RankFeature
1Roth Conversions
2IRMAA (Income-related Medicare Adjustment Amount)
2State Taxes (as applicable)
3 Reverse Mortgage
3NIIT (Net Investment Income Tax)
4Tabular format for later year income, taxes, and account balances.
4Rental Income
4Saving additional profile data for multiple retirees and spouses
5Saving reports to the cloud
5Estate Taxes
The rank order of most preferred new feature to our retirement income calculator

So, based on these survey results, Roth conversions were the clear leader on features sought-after. So, this will be the next feature we shall focus on in our retirement income calculator. To this end, we will be collaborating with Dr. Edward McQuarrie, Emeritus Professor at Santa Clara University. His latest research in this area is entitled “When and for Whom are Roth Conversions Most Beneficial? A New Set of Guidelines, Cautions and Caveats” and is available on the Social Science Research Network (SSRN). You can also read his work quoted at MarketWatch.

While the benefits from a Roth conversion are often small and slow to arrive, a Roth conversion will almost always pay off if given enough time, i.e., for life spans that extend past 90 and so long as annual distributions from converted amounts are not taken.

Dr. Edward McQuarrie, Emeritus Professor at Santa Clara Univeristy

New calculators coming soon!

We are also pleased to announce that there will soon be another free calculator to aid in retirement planning. The next calculator will focus on savings values prior to starting retirement and includes the use of a bootstrapping simulation, as mentioned in our post earlier in 2022. Stay tuned for the release of the new tool shortly!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in tax-efficient investing with ETFs

Tax-efficient retirement and upcoming webinar

Greetings ETFMathGuy subscribers! In this post, I will introduce you to our updated interactive calculator for tax-efficient retirement planning.

tax-efficient investing with the Optimal Retirement Income Calculator by ETFMathGuy
Optimal Retirement Income Calculator by ETFMathGuy
Note:  This post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Tax-Efficient Retirement

We moved the retirement income calculator location on our site. Updated for 2022 tax law, it provides insights into the following questions:

  • How long will my portfolio support my annual after-tax retirement income needed to support discretionary and non-discretionary expenses?
  • How much will my heir or favorite charitable organization receive?
  • What will my future tax liabilities look like?

We still assume a mixture of tax-efficient investing in stock and bond ETFs, like IVV and AGG. Specifically, we assumed ETF stock investments generate qualified dividends and ETF bond investments generate dividends taxed as ordinary income. Of course, these assumption are only relevant to taxable account assets held by a retiree. Retiree’s may incur income taxes when they withdraw assets from tax-deferred accounts, like 401(k)s and rollover IRAs funded with pre-tax dollars. Tax-exempt accounts (like Roth IRAs) are generally not subject to any tax if withdrawn after age 59 1/2. The image below summarizes how we modeled different retirement income sources and how they contribute to after-tax income.

Modeling Retirement Taxes in Our Retirement Income Calculator

What’s new?

We now offer the ability to expedite calculations by storing profile data, such as month and day of birth to determine your first Required Minimum Distribution (RMD) age, and state of residence for community property tax calculations. You can also find a “subscribe” button below your profile data. So, if after running the retirement calculator and viewing results from the Common Rule, you must subscribe if you are interested in seeing the details on the Modified Common Rule or Optimal Rule. For example, if you run the retirement income calculator with its default values, you will see the following information about your plan. But, only paid subscribers will be able to view future optimal drawdown decisions and other supporting information.

Default Retirement Income Calculator Results and Improvements Based on a Optimal Rule

Please note: You will need to register with us here for free and then confirm your email address with our new system. We have not transferred any previously provided email addresses, instead using them solely for distribution of this periodic commentary. We also plan for many additional upgrades and new calculators this year, as we discussed in our last post, or as you can see on our new home page.

Upcoming Webinar for Individual Investors and Financial Advisors

I will be presenting an in-depth review of this new online software, including details on how it is based on my latest research on tax-efficient investing, on Tuesday, March 1st at 9 am Pacific Time, 12:00 noon Eastern Time. Individual investors can register here, and financial advisors can register here. If you are unable to make the presentation, you are welcome to download my presentation here.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in tax-efficient investing with ETFs

Happy new year!

Happy new year from ETFMathGuy! In this post, we will provide some updates to our plans for 2022.

happy birthday to you wall decor
Photo by Anna Tarazevich on Pexels.com

New Priorities

As 2022 begins, we decided to reset our priorities for this website. Up until now, we provided the following services to our subscribers.

For 2022, we’ve decided that the cost to produce and maintain the free and premium portfolios was simply too high. We also recognized that, while these portfolios did exceed their objective in 2020, they did not in 2021. All premium subscribers will receive a pro-rated refund of their subscription payments shortly. In the meantime, free and premium subscribers can now access the final monthly portfolios, based on data through December 31, 2021.

Coming soon

So, after receiving very positive praise on our retirement calculator, we’ve decided to make improving it a priority. Also, thanks to significant feedback from individual investors and financial services professionals, below is a list of features we hope to provide in the near future:

  • Projection of retirement assets at beginning of retirement for pre-retiree planning
  • Optimized social security starting age for single or married couples
  • Medicare Income-Related Monthly Adjustment Amount  (IRMAA) tax
  • State taxes, as applicable
  • 3.8% medicare surtax
  • Roth conversions using either IRA or taxable account funds
  • Robustness checks with an automated sensitivity analysis for selectable uncertain variables
  • Risk assessment with simulation of uncertain stock market returns, life exptancy, after-tax income needs, and others
  • Real estate income and residual value
  • Support for Financial Independence, Retiree Early (FIRE)
  • Online storage of previous results for future reference

Of course, our retirement calculator already has many features discussed in the FAQ and listed at the top of the calculator. Also, if you are interested in greater details, you are welcome to download this whitepaper that we developed recently to describe the current model in greater depth.

We hope you have a wonderful 2022!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in tax-efficient investing with ETFs

Inflation Hedging

Inflation hedging continues to be of great interest for investors large and small. In this post, we quantify some possible ways to combat inflation based on a recent article in the WSJ.

Historical Inflation Trend

Inflation is currently around 6%, well above the 2% rate seen recently. The chart below shows how most of this change occurred in 2021. This rate is well above the 2% long-term target set by the Federal Reserve. So, what are some options for investors in this current inflation climate?

Inflation is about 6% in late 2021

Treasury inflation-Protected Securities (TIPS)

TIPS are one of the most obvious places investors look for inflation hedging. The iShares TIPS Bond ETF (ticker: TIP), with over $30 billion in assets, is a popular option. This ETF has performed notably better than a broad bond benchmark, like the iShares Core U.S. Aggregate Bond ETF (ticker: AGG), as the chart below illustrates. Note that while TIP has slightly higher volatility than AGG, it performance in 2021 is noticably better. In fact, according to ETFReplay.com, the 2021 year-to-date return of TIP is 5.4%, versus -1.0% for AGG.

Commodities

There are certainly other options investors can consider. For example, investors often seek commodity investments when inflation rises. This recent study by Vanguard indicated that a 1% rise in inflation could produce a 7-9% rise in commodities. This estimate looks surprisingly accurate, as the ETF DBC (PowerShares DB Commodity Index) should be up 28-36% in 2021, given the inflation rate increase this year from 2% to 6%. In fact, DBC is up 32.7% in 2021, according to ETFReplay.com

Updated optimal portfolios

For subscribers of our ETF optimal portfolios, we encourage you to log in to see the latest updates. Note that, based on our latest backtesting, monthly portfolios change more quickly now to respond to market dynamics.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

Inflation and Tax Brackets

Inflation has been in the news quite a bit lately, as the CPI (Consumer Price Index) has shown a year-over-year increase of over 5% since June of 2021. Higher inflation means a loss of buying power. Fortunately, the U.S. tax system does take inflation into account when tax brackets are updated each year. In this post, we discuss the implications of updated tax brackets for 2022 due to inflation.

quote board on top of cash bills
Photo by Karolina Grabowska on Pexels.com
Note:  This post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Income Tax

Income tax brackets determine what tax rates apply to each additional dollar of taxable income. These rates are especially important for retirees. Below are the 2021 and 2022 tax brackets. As you can see, the Internal Revenue Service has increased the income limits up for all rates and for all types of tax filers. Thus, if your taxable income did not change from 2021 to 2022, your after-tax income will likely increase.

2021 Income Tax Brackets
2022 Income Tax Brackets

Capital Gains Tax and Standard Deductions

Capital gains taxes, as well as the standard deduction, also have increased from 2021 to 2022 tax years. The increase in standard deductions is $400 for single filers and $800 for married individuals filing a joint tax return. These higher deductions mean that, all else being equal, a taxpayer will likely have lower taxable income, and higher after-tax income and gains. Also, higher income limits for capital gains mean that qualified dividends and long-term realized capital gains on most investments should produce fewer capital gains taxes.

Other Changes

While there are quite a few other changes to taxes in 2022, there is no change to the contribution to Individual Retirement Accounts. But, for those with access to workplace retirement plans, like 401(k)s, 403(b)s, and 457 plans, individuals can contribute $20,500 in 2022, an increase of $1,000 from 2021. While such a decision will defer taxes and should lead to higher account values in the future, anyone concerned about future tax increases may wish to consider contributing to Roth 401(k)s and Roth 403(b)s if their workplace makes them available. You may also wish to use our free online calculator to forecast your taxable and retirement assets in retirement.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

Bitcoin ETFs may arrive soon, but returns may surprise ETF investors

Investor interest in cryptocurrency and bitcoin remains high. This week, ETF investors may see the first futures-based bitcoin ETFs. Here, we discuss the introduction of bitcoin ETFs, and why they may not perform as ETF investors expect.

person putting bitcoin in a piggy bank
Photo by Alesia Kozik on Pexels.com

Set to debut this week and next week

According to this ETF.com article, October 18th could be the first effective date that two bitcoin ETFs are set to debut. And, another bitcoin ETF could become available a week later, on October 23rd, and a fourth potentially available on October 25th. But, its important to note that each of these ETFs depend on futures contracts for their bitcoin exposure. Therefore, none of them hold bitcoin to provide direct exposure to the spot market. Instead, the most direct exposure for investors seeking bitcoin remains the Grayscale Bitcoin Trust (GBTC), which typically trades at a premium. In fact, we wrote about the risks and taxation of GBTC earlier this year.

What can happen with futures-based ETFs?

Sadly, futures-based ETFs can often not match the corresponding price performance of the spot market. For example, ETF investors wishing exposure to West Texas Intermediate crude oil price changes could buy the United States Oil Fund ETF (ticker: USO) Unfortunately, a phenomenan called “contango” can occur when the price of the futures contract exceeds the expected future spot price. So, the fund loses money when it replaces expiring contracts with near-term future contracts. Consequently, over time, futures-based ETFs tend to underperform the spot price market.

“These kinds of vehicles are primarily meant to be used by active traders to hedge or short positions.  They are not meant as long-term buy and hold vehicles.”

source: CNBC.com.

A better way to track bitcoin in an ETF

Fortunately, there is some good news about bitcoin ETFs. Greyscale has indicated it may convert its current bitcoin fund into an ETF. If they do, this ETF’s investment returns wouldn’t be subject to contango, and won’t suffer from the return drag of futures-based bitcoin ETFs. However, the Securities and Exchange Commission (SEC) current commissioner has stated he prefers approving ETFs backed by bitcoin futures. So, ETF investors interested in bitcoin may wish to continue to wait or seek alternatives outside the ETF space.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

The latest news on proposed tax changes

There is good and bad news on the latest proposal for tax changes on investments. In this post, we summarize the latest in a developing set of changes to future taxes on long-term investment gains.

Good news on proposed tax changes

According to the WSJ, the House Ways and Means Committee will not raise taxes on long-term capital gains to over 40%, as proposed by the Biden administration. So, an ETF investor should hopefully not see their long-term capital gains tax nearly double by realizing them.

Instead, the current rate of 23.8% would increase by 5% to 28.8%. This rate typically applies to qualified dividends too, such as those produced by an S&P 500 index fund like IVV. Additionally, lawmakers appear to be preserving the step-up in cost basis for inherited assets. This is good news for ETF investors, as we noted previously.

quote box ontop of stack of paper bills
Photo by Karolina Grabowska on Pexels.com

Bad news

Unfortunately, the proposed tax changes can have a significant impact on the windfall resulting from the sale of a home or business. Home sellers do have an exemption, but these limits can easily be exceeded for those living in high cost of living areas. And, since some home sellers may be recently widowed, these individuals would be even more adversely affected. Recently widowed individuals will see their exemption cut in half as they can no longer file their tax returns as married. For business sellers who may have invested much of their nest egg into building their business, this additional tax could significantly reduce the after-tax value of their sale.

Updated optimal portfolios

For subscribers of our ETF optimal portfolios, we encourage you to log in to see the latest updates. Note that, based on our latest backtesting, monthly portfolios change more quickly now to respond to market dynamics.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

Retirement tax alpha and optimal retirement drawdowns

Tax alpha refers to the additional rate of return generated by making tax-efficient investment decisions. For retirees, we provide an optimal retirement income calculator that models the U.S. tax code and determines an optimal drawdown strategy. Here, we discuss a recent upgrade to this calculator that quantifies your potential retirement tax alpha using an optimal drawdown strategy.

retirement tax alpha and your optimal retirement income strategy
Retirement tax alpha and your optimal retirement income strategy
Photo by Nataliya Vaitkevich on Pexels.com

What is alpha?

In the investment world, the return not captured by the movement in the broad market is alpha. Thus, for many investors, it means a risk-less return. In fact, we’ve even talked about it before in the context of CAPM and its counterpart, beta. Alpha and beta provide portfolio statistics important for consideration by any investor.

What is tax alpha?

Tax alpha is a relatively new term and may differ based on the source. We like the following definition.

If “alpha” is the return generated by an advisor’s skill in picking and managing investments, then “tax alpha” protects that return and generates a boost by making sure that taxes don’t eat away more of a client’s wealth than absolutely necessary.”

Source: https://www.atstax.com/p/what-is-tax-alpha

What about in retirement?

In retirement, tax alpha focuses on tax-efficient drawdowns. In addition, the industry standard for retirement income drawdowns from taxable, tax-deferred, and tax-exempt accounts is the Common Rule. The image below shows a summary of the default case used in our optimal calculator, which compares its results with those from the Common Rule.

Summary of Optimal Retirement Calculator. Source: https://app.etfmathguy.com/

This last line (line 4) indicates the value of tax-alpha of 0.57%. That is, a retiree would need to generate pre-tax returns 0.57% higher using the Common Rule to generate the same after-tax inheritance for their heirs. Therefore, by making optimal drawdown decisions in retirement, a retiree can expect to increase their investment returns using the Common Rule. Interested in seeing the details of this example or inputting your own assumptions for retirement? If so, please try our free online calculator.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

Backtesting for 2021 and ETFMathGuy portfolio enhancements

Due to portfolio performance not meeting our recent expectations, we revisited our backtesting results from August 2018 and produced important new insights and portfolio construction enhancements. We discovered that a longer sample period, identified previously, no longer applied. The image below shows that a three-month sample period produced the best returns from January 2020 to August 27, 2021. Each point on this line plot represents annualized backtested performance for 19 monthly portfolios over this testing period.

Backtesting for 2021 to find the optimal sample period (months) for ETFMathGuy Portfolio Construction
Backtesting for 2021 to find the optimal sample period (months) for ETFMathGuy Portfolio Construction

What performance predictions occurred with this shorter sample period?

Using this shorter sample period, we produced the plot below of total return since January of 2020. We chose this time period to include the full pre and post-term effects of the coronavirus on the world economy. In addition, and based on subscriber feedback, we now exclude ETFs that issue K-1 tax forms to investors. We made this decision because these 22 ETFs had a marginal effect on backtested performance that used over 1,000 other ETFs that do not issue K-1s. We also increased our ETF filter threshold of median volume to improve liquidity for future portfolios that will likely have a higher turnover rate. The consequences of these decisions on backtested performance appear below.

Backtested Returns from 2020-2021 of the ETFMathGuy Optimal Portfolios
Backtested Returns from 2020-2021 of the ETFMathGuy Optimal Portfolios

Future ETFMathGuy portfolios

Given the improvement potential identified from this updated backtesting for 2021, all portfolios published in September 2021 and later will follow these updated findings. This update for the September portfolios will likely indicate a significant change from the August portfolios. However, future monthly portfolios will change less significantly. So, we encourage subscribers to log in and see the September ETFMathGuy portfolios that are based on this evidence-based analysis.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.