Tag: retirement income

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Presentation to over 1,800 financial advisors on retirement drawdown strategies

A webinar attended by over 1,800 financial advisors recently featured ETFMathGuy to discuss retirement drawdown strategies. Subsequently, the Retirement Income Journal wrote about this event. In this posting, we will discuss some of the highlights of this webinar. Please click the image below to view the 60-minute webcast. Or, you can browse the slides.

Webcast recording: A Deep Dive Into Retirement Drawdown Strategies.

Webinar highlights

As the title of the webinar indicated, its emphasis was on retirement drawdown strategies. Our host, Steve Parrish discussed some of the recent changes to Required Minimum Distributions (RMDs) that resulted from the SECURE Act, as well as where tax law may go in the future. Steve also wrote a really nice article recently in Forbes entitled “Three Reasons to Take Your RMDs Now“. Joe Elsasser, Founder and President of Covisum, a FinTech company specializing in retirement drawdown strategies, also presented. Joe showed how his firm’s software can identify the so-called “tax torpedo“, and assist retirees on how to plan accordingly.

After that, I discussed two research articles on retirement drawdown strategies. To begin, I quantified the impact of eliminating the stretch IRA for non-spouse heirs, which I highlighted in a previous ETFMathGuy posting. The key takeaway from this peer-reviewed article was that there is still a benefit to an heir to stretch their IRA drawdowns over the 10-years permitted by the SECURE Act. Doing so can increase the heir’s inherited assets by 11-17%, depending on their specific situation.

Emerging Research

I also spent a portion of my presentation to this large group of financial advisors discussing some of my latest research. This recent work builds upon some of my previous publications with Dr. Dan Ostrov at Santa Clara University. In this latest research, I identified the use of the Common Rule as a diagnostic for the next stage of optimal decision making for retirement income. The image below summarizes the preliminary findings for three categories of retirees.

The sensitivity of optimal drawdown strategies for three categories of retirees. Forthcoming research by DiLellio and Simon (2021)

Thank you for your feedback

I would like to thank the many financial advisors who recently tried out my retirement calculator. So, I am logging all these helpful suggestions for improvements. I hope to have this free calculator updated shortly that begins to incorporate many of these suggestions. I will discuss some of the calculator enhancements in a future post.

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 ETF efficient portfolios.

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Retirement taxes under Biden or Trump

With the U.S. presidential election less than three weeks away, now is a good time to consider how your retirement taxes may change. In this post, we highlight the differences in Biden Vs. Trump plans for retirees.

The 2020 Presidential Election may change your retirement tax planning.
The 2020 Presidential Election may change your retirement tax planning.
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 Taxes in Retirement

Most retirees face some amount of income tax. Social security benefits, pensions, interest on CDs, and bond coupon payments are just a few sources of that can produce retirement income tax. Any voluntary withdrawals from and IRA or 401(k)s, or taking required minimum distributions (RMDs) can also trigger income tax.

The Tax Cut and Jobs Act of 2017 established the current seven income tax brackets, with the lowest at 10% and highest at 37%. Both candidates wish to keep these tax cuts in place, which currently plan to lapse after 2025. But, Biden wishes to alter it so that households making more than $400,000 would pay higher taxes by limiting the value of itemized deductions. He also proposes to increase the top tax rate from 37% to 39.6%. For household making less than $400,000, Biden hopes to increase the standard deduction. Doing so should decrease taxable income and, subsequently, decrease taxes owed.

Capital Gains Taxes in Retirement

Current U.S. tax law states that qualified dividends and long-term capital gains from investments held for more than one year are taxed at a lower rate. Excluding the net investment income tax, the maximum rate is 20%. Trump has suggested lowering this rate to 15%. Biden wishes to tax long-term capital gains at income tax rates for households with over $1,000,000 in taxable income. He also plans to eliminate the step-up in cost basis realized by retirees wishing to pass highly appreciated assets to their heirs.

The SECURE Act and your retirement objectives, by DiLellio and Kinsman (2020), Vol 23, Issue 2, The Graziadio Business Review

What doesn’t appear likely to change

There are several areas of retirement taxation that likely won’t change. For instance, I recently published a peer-reviewed article about the SECURE Act. This law passed with broad bipartisan support, delays the onset of RMDs for younger retirees and changes rules for inherited IRAs.

For now, we encourage you to seek out a retirement calculator, like ours at ETFMathGuy, and we wrote about recently, to see what current U.S. tax law means to your retirement plans. We will update our calculator as tax law for retirement income changes.

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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New Features in our Optimal Retirement Income Calculator

Recently, we discussed our free web-based calculator to help you better plan for your retirement. At that time, it offered 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?

Now, our calculator includes many new features to address a broader group of retirees, especially those with a spouse or domestic partner with other sources of retirement assets or retirement income.

The Optimal Retirement Income Calculator by ETFMathGuy.com has many new features
The Optimal Retirement Income Calculator by ETFMathGuy.com has many new features

New Features

The newest version of our retirement calculator offers a better interface for inputs, by arranging them in logical groups. It also includes many new features relevant to many retirement plans.

  • A separate retirement horizon for a surviving spouse (or domestic partner) and their unique after-tax retirement income needs
  • New inputs for the spouse’s tax-deferred accounts, like Traditional IRAs, Rollover IRAs, 401(k)s, 403(b)s and 457 plans
  • New inputs for the spouse’s tax-exempt accounts, like Roth IRAs, Roth 401(k)s and Roth 403(b)s
  • An option to select your state of residence, so that the taxable brokerage account can be properly taxed whether (or not) the surviving spouse resides in a community property state
  • Added a starting age for social security and pensions for the retiree, and if applicable, their spouse, to delay these other sources of retirement income.
  • Input to choose whether (or not) to value the heir’s assets based on using the new 10-year inherited IRA stretch rules due to the SECURE Act.

Optimizing Retirement Income Withdrawal Decisions with a Spouse’s Contribution

Like the previous version, the calculator provides results using the Common Rule and our Optimal Rule. To develop a plan for a hypothetical couple, we used the default values in the calculator, but switched the input labeled “Do you have a spouse or domestic partner?” to “yes”. In this case, you would received the following summary of your plan.

Plan summary example when a spouse or domestic partner is included in the Optimal Retirement Calculator from ETFMathGuy.com
Plan summary example when a spouse or domestic partner is included in the Optimal Retirement Calculator from ETFMathGuy.com

Scrolling down the page, you will see the a forecast of withdrawals to meet this hypothetical couple’s after-tax retirement income needs. In this case, we assumed a 20-year retirement horizon for the retiree. Then, the surviving spouse lives an additional five years after the retiree passes away. Consequently, in years 21-25 of retirement, the surviving spouse is no longer filing their taxes as “married filing jointly“. Instead, their tax brackets are significantly lower in these later years with a filing status of “single“.

Our updated optimal retirement income calculator now includes results for a surviving spouse (or domestic partner)
Our updated optimal retirement income calculator now includes results for a surviving spouse or domestic partner .

The updated retirement calculator also tracks account balances, and now includes the spouse (or domestic partner) accounts as dashed lines.

Account balances now include spouse or domestic partner accounts.
Account balances now include spouse or domestic partner accounts.

We hope you find these new features helpful as you plan for your retirement! This new calculator continues to improve, and we welcome your suggestions.

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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Finding your Optimal Retirement Income

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.

Common Rule withdrawal sequencing leading to a $1,203,938.01 inheritance. optimal retirement income
Common Rule withdrawal sequencing leading to a $1,203,938.01 inheritance.

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.

Optimal Rule withdrawal sequencing leading to a $1,368,938.05 inheritance, a 13.7% increase. optimal retirement income
Optimal Rule withdrawal sequencing leading to a $1,368,938.05 inheritance, a 13.7% increase.

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!

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 SECURE act and Your Retirement

On December 20, 2019, the SECURE act (Setting Every Community Up for Retirement Enhancement act) was signed into law. This new law made a number of changes that could effect your plans for retirement. We discuss a few highlights of this new law in this post.

New age for Required Minimum Distributions (RMDs)

The SECURE act recognizes that more individuals are delaying retirement. So, the new law changes the age to take initial RMDs from tax-deferred accounts, like 401(k)s, 403(b)s and traditional IRAs. Previously, initial RMDs were triggered in the year you turned 70 1/2.

Required Minimum Distributions (RMDs) are changing.
Tax laws for retirement are changing. source: Getty Images

The new age under the SECURE act is 72 for individuals who reach 70 1/2 in 2020. Using a handy online age calculator or performing a little mental math, that means anyone born after June 30, 1949 can wait until the year they turn 72 to take RMDs.

How will this new RMD age affect your retirement plan?

In late 2019, we developed a retirement calculator that included income and capital gains tax forecasts. It also included RMDs under the old law. We are happy to announce we have updated our calculator to include this new law. Please check it out! We also added a tool tip for each input in the calculator, to help you better understand how the model works.

We updated our retirement calculator to include the age change of RMDs from 70 1/2/ to 72.

Bad news with the SECURE act

Unfortunately, there is also some bad news for retirees coming from the SECURE act. The so-called “Stretch IRAs” are now not nearly as valuable as they were prior to this law. Previously, IRAs that are passed to nonspouse heirs could be withdrawn over their life time. This feature made inherited IRAs very appealing to younger heirs, who could stretch their payments, limit their income taxes, and stretch pre-tax gains over a longer time. The new law limits this time to 10 years. In a bit of good news, this law does not affect existing inherited accounts.

Conclusions

Tax law will continue to change. We shouldn’t expect congress to continue to keep the taxes status quo. Instead, current and future retirees should consider diversifying their retirement income sources to accommodate possible future changes.

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Retirement Calculator by ETFMathGuy

Seasons greetings to all! We hope this post finds you well. We are happy to introduce a new and evolving feature available to ETFMathGuy subscribers: a new Retirement Calculator!

Retirement Calculator

You may have noticed a new menu option when logging into ETFMathGuy.com labeled “Retirement Calculator”. Please be sure to log-in to our site to access this interactive calculator. If you don’t recall your password, it can be reset here. You also may need to refresh the page containing the calculator.

A new retirement calculator to help you better understand the feasibility of your retirement income.
A new retirement calculator to help you better understand the feasibility of your retirement income.

Another Retirement Calculator?

There are certainly many retirement calculators available online, either free, as part of your brokerage account, or by subscription. I have been using the Fidelity Retirement Income planner for some time, which is free to Fidelity account holders. While there are similarities between our retirement calculator and others, here are a few of the features our retirement income planner includes.

  1. We assume qualified stock dividends and non-qualified bond dividends. Some planning tools tax stock and bond dividends the same. So, we made the assumption that stock and bond investments in a taxable brokerage account hold ETFs like the iShares Core S&P 500 ETF (ticker IVV) and the iShares Core U.S. Aggregate Bond ETF (ticker AGG).
  2. We assume taxable account withdrawals trigger only long-term capital gains taxes. Some planning tools include all taxable account withdrawals as part of ordinary income, which only occurs for capital gains in investments held for less than one year.
  3. We model capital gains taxes and qualified dividends at either the 0%, 15% and 20% rates, with income levels based on taxable income for the current tax year. Some planning tools either exclude taxation of these sources of retirement income, or tax them all at the 15% rate.

Questions or feature requests

We encourage you to try out our new calculator, which also provides more detailed information on how it models retirement income and taxes. We also would love to hear about features you would like to be included in the calculator as its development continues.

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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Taxation and your ETF investments

Taxation of your ETF investments is an important consideration. As we discussed in our previous post ETF Tax Efficiency vs. Mutual Funds, ETFs are quite tax efficient. Here, we summarize taxation of your ETF investments when held in a taxable account.

ETF taxation occurs in two ways. First, taxes occur when an ETF issues a dividend. Also, taxes occur when an investors sells their ETF for a gain (or loss). So, let’s first look at the preferred (lower) level of taxation available for ETFs.

ETF taxation of qualified dividends and long-term capital gains

ETFs issue two types of dividends, called qualified and non-qualified. As shown below, ETF investors prefer taxation of qualified dividends, due to their lower capital gains rates. Many stock-based ETFs issue these types of dividends. For example, the iShares core S&P 500 index ETF (ticker: IVV) currently distributes a qualified dividend yield of 2.05%. Investors who buy an ETF and sell it at least one year later also realize these preferred rates.

Tax rates for qualified dividends and long-term capital gains. source: https://taxfoundation.org/2019-tax-brackets/
Tax rates for qualified dividends and long-term capital gains.
source: https://taxfoundation.org/2019-tax-brackets/

ETF taxation as ordinary income

Unfortunately, ETFs can also be taxed at the higher rate of ordinary income. The tables below shows the current rates and income brackets for unmarried, married, and head of household tax payers.

Tax rates for non-qualified dividends and short-term capital gains. source: https://taxfoundation.org/2019-tax-brackets/
Tax rates for non-qualified dividends and short-term capital gains.
source: https://taxfoundation.org/2019-tax-brackets/

ETF investors face these taxes when either the ETF issues a non-qualified dividend, or is bought and sold in less than one year. Most bond-based ETFs issue non-qualified dividends. For example, the iShares Core U.S. Aggregate Bond ETF (ticker: AGG) generates non-qualified dividends, currently with a yield to maturity of 2.52%.

Don’t let the “tail wag the dog”

While taxation is an important aspect of ETF investing, it should not be the sole consideration. Indeed, Federal taxes could be minimized if one only needs the interest payments from municipal bond ETFs, like the iShares National Muni Bond ETF (ticker: MUB). But, a diversified portfolio should have a variety of asset classes. Instead, consider holding your portfolio of ETFs in a retirement account like a traditional or Roth IRA.

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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Your Retirement Nest Egg

In a recent issue of the Wall Street Journal, there was an excellent retirement article. In it, the author responded to a reader’s question “How much does my nest egg need to be?”. Your retirement nest egg is very important! So, we prepared a summary and some additional insights to consider. Our perspective is drawn, in part, from our award-winning research on retirement income planning.

retirement nest egg

Article summary by ETFMathGuy

The article starts with predicting your expenses. This is arguably a difficult task, and where many people stop. But, without this information, there is really no way to estimate the “right size” of a retirement nest egg.

In summary, the article suggests the following calculation.

  1. Start with an estimate of your expenses. A common approach to this is to assume a percent between 60-80% of expenses pre-retirement. This approach assumes that your expenses go down in retirement. That may be true for many retirees, as they no longer have mortgage payments or dependent expenses. Of course, a more precise estimate can be done.
  2. Subtract from this any guaranteed income, such as social security and after-tax pension benefits or annuities.
  3. Take this difference and multiply it by 25. In this article, they assume that a 65-year old lives until 90. This age is a conservative estimate, based on information from the Social Security Administration.

What isn’t stated in the article about your retirement nest egg

While I enjoyed this article, it made some assumptions about your retirement nest egg. For instance, the suggested value doesn’t include uncertain investment returns or inflation. The net effect of including both of these would typically give a retiree more years of retirement income. The extra income would come from a conservative investment in retirement, less inflation. Using a 4% conservative after-tax average return and 3% average inflation, this net effect would provide a 1% gain (on average) each year.

We hope you enjoyed our commentary! If you would like to see more like these, please send us a message.