We introduced a new feature to ETFMathGuy.com in 2019 to help current and future retirees plan for the future. We have now upgraded it to find optimal retirement income. Fortunately, the calculator still offers answers to the many commonly posed questions for those nearing or currently in retirement.
- How long will my portfolio support my discretionary and non-discretionary expenses?
- How much will my heir or favorite charitable organization receive?
- What will my future tax liabilities look like?
This calculator models income tax, capital gains taxes and other important elements of U.S. tax law relevant to individuals and couples in retirement. However, this model does not represent tax advice, and is for educational purposes only.
Sequencing Withdrawals for Optimal Retirement Income
In the former version of our calculator, we only applied the so-called “Common Rule“. Using values for a hypothetical 60-year old couple with a 20 year retirement horizon, the figure below shows how the couple can achieve $150,000 of annual after-tax retirement income. Notice how this “married filing jointly” couple has a effective 0% income tax bracket, as labeled on the right of the figure, due to use of the standard deduction. In 2020, this value is $24,800. To re-create these results or create your own, please visit our our interactive retirement calculator.
While the “Common Rule” is widely adopted by financial planners and major discount brokers like Fidelity and Vanguard, it is known to sub-optimal. Why? This rule typically produces very little tax burden in the earlier years of retirement, unless they are triggered by Required Minimum Distributions (RMDs). Consequently, later retirement years can see very high income tax to maintain retirement income at acceptable levels. This rule also doesn’t take advantage of the step-up in cost basis realized by the retiree’s heirs.
Optimizing Retirement Income Withdrawal Decisions
The latest version of the retirement income calculator can now optimize withdrawal decisions using an “Optimal Rule“. So, using the same values for the calculator as our previous hypothetical couple, their heir’s inheritance increases by 13.7%, or $165,000. If their heir is a qualifying charitable organization, the inheritance increases by $335,343.94 or 26.1%. We encourage you to try out your own scenarios to see how you can improve your retirement withdrawal decisions.
Plans for the Future
We have plenty of other plans for our retirement calculator. For instance, delaying social security, including tax-free municipal bond interest, and assessing the benefits of a Roth conversion are just a few. If you have any thoughts of what you would like to see, please send us your feedback!
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