Category: Retirement

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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
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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
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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
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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.

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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.
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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.
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Upgrades to our Optimal Retirement Income Calculator

As promised, our free optimal retirement income calculator continues to improve based on your feedback. Thank you to everyone who has provided suggestions by contacting us! In this post, we highlight some of the most recent enhancements to this free online resource.

A Glide Path?

The term “Glide Path” is used to refer to shifting from one asset to another. Previously, our optimal retirement income calculator kept a retiree and their spouse’s asset allocation fixed. For example, our calculator previously maintained a fixed allocation (e.g. 60% stock and 40% bond) each year by drawing down accounts appropriately. Unfortunately, such an assumption is not entirely realistic. Instead, many retirees may wish to slowly reduce their “riskiness” in stocks and increase their “safety” of bonds during retirement.

A typical retirement glide path reduces portfolio risk each year. Photo by Pixabay on Pexels.com
A typical retirement glide path reduces portfolio risk each year. Photo by Pixabay on Pexels.com

One percent is a typical glide path, meaning that a retiree who is 60 years old starting with an asset allocation of 60/40 (stocks/bonds) will shift their asset allocation to 59/41 at 61 years old, 58/42 at 62 years old, and so forth.

Our optimal retirement income calculator now includes a glide path to transition from stocks to bonds during retirement.
Our optimal retirement income calculator now includes a glide path to transition from stocks to bonds during retirement.

Other updates to our optimal retirement income calculator

We also updated a number of the default values used to better reflect “typical” retiree demographics, as well as expected macroeconomics and capital market conditions. The list below summarizes these default changes.

  1. Retiree and spouse default ages changed to 65 and 62. This difference of three years is consistent with the average difference in retiree and spousal ages.
  2. The long-term rate of return of stocks and bonds set to 7.2% and 4%, based on the lifetime annualized returns for our stock and bond ETFs IVV and AGG.
  3. We set the retiree’s fraction of cost basis for stocks/bonds assuming a 10-year gain at their long-term rates. So, the cost basis for stocks stayed at 50%. But, the cost basis for bonds increased to 68%, since over 10 years, bond capital gains and reinvestment of dividends would yield a higher cost basis.
  4. Inflation rate set to 2.1%, based on an AR(1) stochastic process model and annual CPI (consumer price index) data from 1992-2020.

We hope you find these updates helpful as you plan for your financial future! Please stay tuned as there are still several suggestions we are still working on that will appear in the coming months.

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.
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Three Tips on Your Retirement Drawdown Strategy

Below are a few excerpts from my recent article published on the Pepperdine Business Blog. I hope you find these tips helpful when developing your retirement drawdown strategy, whether you are nearing or already in retirement.

Sources of Retirement Income

Your retirement income will differ in several ways from your working income. For many retirees in the U.S., social security will provide a “base” of income, and starts between ages 62 and 70.  Since the U.S. government keeps track of life expectancy, it is not surprising that retirees will receive smaller monthly social security payments if they begin drawing down social security at a younger age.  So, one drawn strategy could be to delaying social security until age 70, which can provide more income if the retiree expects to significantly outlive their peers.

Retirees often have many sources available to meet their retirement income needs.
Retirees often have many sources available to meet their retirement income needs.

To supplement social security, many retirees also employ a drawdown strategy to their taxable, tax-deferred (e.g. 401(k)s) and tax-exempt accounts (e.g. Roth IRAs). The Common Rule is the most common strategy, that begins by taking Required Minimum Distributions (RMDs). Then, the Common Rule draws funds from one account until no assets remain. This strategy then moves to the next account

Your heir’s tax rate

Extending portfolio longevity or increasing your heir’s inheritance requires some thought to your heir’s tax rate. Why? Tax-deferred accounts are more valuable when drawdowns occur at lower tax rates. So, if your heirs expect to have a high amount of taxable income, then it is usually more tax-efficient for you, the retiree, to draw down the tax-deferred account each year up to, but not exceeding, your heir’s tax rate. This drawdown strategy, which includes an assumption of your heir’s tax rate, is embodied in our free online calculator.

Click here to launch the Optimal Retirement Income Calculator by ETFMathGuy.
Click here to launch the Optimal Retirement Income Calculator by ETFMathGuy.

June 2021 ETFMathGuy Portfolios

As a final note, thank you to all of our premium subscribers! You can now access the June optimal portfolios, based on data through May 28th, 2021. Please note we built these ETF portfolios using our latest backtesting results.

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.
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Step-up in cost basis on inherited ETFs may soon change

The new proposal called the “American Families Plan” could end the step-up in cost basis for inherited assets. But, what does this mean for ETF investors? In this post, we discuss some of the key details of this proposed plan. This post is also a reminder to our premium subscribers that the May portfolios are now available.

How have inherited ETFs been taxed up to now?

ETFs owned by retirees typically reside in one of three different kinds of accounts. The Secure Act changed the rules for assets in retirement accounts, like IRAs. I published an article about the reduced benefit of the stretch provision in IRAs recently. In summary, non-spouse beneficiaries must now draw down their IRA assets within 10 years. Previously, beneficiaries could limit their withdrawals to Required Minimum Distributions.

However, the American Families Plan proposes new rules on ETFs inherited from a retiree’s taxable account. Currently, an heir enjoys a full step-up in cost basis on inherited ETFs residing in a taxable account, meaning the heir could immediately sell the ETF and not owe any capital gains tax. For example, suppose a retiree purchased $100,000 of SPDR S&P 500 Index ETF (ticker: SPY) on April 30, 2001, and reinvested all dividends for the next 20 years. On April 30, 2021, the investment would be worth approximately $484,000, not including any taxes due on the dividends generated by holding this ETF.

Growth of a $100,000 investment in the SPDR S*P 500 Index ETF (ticker SPY). Source: www.etfreplay.com
20 years of growth of a $100,000 investment in the SPDR S&P 500 Index ETF (ticker SPY). Source: www.etfreplay.com

Selling appreciated ETFs under this new plan

If the retiree sells this ETF investment prior this his or her death, capital gains would be owed on it up to 20% of the $384,000 gain, or $76,800. However, if the retiree passes away, an heir could sell it immediately and not pay any capital gains taxes. The heir received a step-up in cost basis. The new basis is assigned to the day the retiree passed away. However, under the new plan, this step–up is removed, and replaced by a $1,000,000 exemption. So, in the previous example, the heir would not owe any additional taxes. However, as larger sums of ETFs assets are bequeathed, an heir may owe taxes up to the 39.6% rate. And, there is still the estate tax that may apply if the retiree has more than $11.7 million of assets at death for 2021.

Will this plan pass congress?

No one knows yet what will eventually be passed by congress, so it is likely too early to start making any changes to a retiree’s estate. Time will tell how this may or may not impact your ETF assets passed to your heirs.

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.
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Future tax uncertainty

The economic stimulus signed this past week by President Biden has many investors wondering if taxes may change in the future. So here, we discuss the possibility of future tax uncertainty. We also show you how to assess this uncertainty in your retirement income plan using an upgrade to our optimal retirement calculator.

$1.9T of economic stimulus

On March 11, 2021, President Biden signed the $1.9T stimulus package. There are many elements to this aid package, including how it will be paid. However, the level of debt held by the U.S. government continues to grow relative to total economic output, as measured by Gross Domestic Product (GDP). One simple solution to reducing this debt burden is to increase individual and/or corporate taxes. And, in 2026, the Tax Cuts and Jobs Act (TCJA) expires. So, what plans should an individual investor be making today if tax rates change significantly in the coming years?

Our optimal retirement income calculator now models tax uncertainty

Since we don’t know what the U.S. Congress will decide in 2026, nor what a future president may sign into law, future tax uncertainty is important for retirement planning. To this end, we recently upgraded our optimal retirement calculator to include this future uncertainty.

Now, under section “Other tax-related information“, you will see two inputs to model this uncertainty. First, there is new input for a percent increase or decrease of future income and capital gains tax rates after the TCJA expires. The 2nd entry is the year this higher or lower rate will occur. The default input values assume that the TCJA will be extended throughout your retirement horizon.

Future tax uncertainty inputs for optimal retirement income planning. Source: app.etfmathguy.com
Future tax uncertainty inputs for optimal retirement income planning. Source: app.etfmathguy.com

A simple example of rising tax rates on a retirement income plan

So, what happens if tax rates increase by 20% in 2026? A retiree using the Common Rule strategy can expect their bequest to shrink by about $92,000, from $1.227M to $1.135M. However, the Optimal Rule only expects to shrink the inheritance by about $36,000, from $1.638M to 1.602M.

What can we conclude from this? First, and most obviously, higher tax rates will reduce an heir’s inheritance. But, more importantly, optimal drawdown strategies become even more important when tax rates rise, since there is more of an opportunity for tax efficiencies.

Acknowledgments

We would like to thank Mr. Phil DeMuth at Conservative Wealth Management LLC for suggesting upgrading our calculator to include future tax uncertainty. Additionally, we wish to thank Mr. Noah Beecher at Cipolla Financial & Insurance Services for noting a discrepancy in our calculator’s pension income, which has now been corrected. For the many others who have sent us suggestions on other improvements to our online calculator, please stand by. More enhancements will be appearing in the coming months. Thank you for your suggestions and your patience!

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.