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ORP NEWS 2000-2015

2015 News

11/28/2015: Spending Specification

A new parameter has been added to the parameter page with which the user can specify a level of spending and ORP will compute the maximum estate associated with that level.

10/28/2015: File and Suspend

The Social Security Administration has plugged the File and suspend loop hole and it has been removed from ORP.

9/15/2015: ORP's Second Article

A second article featuring ORP has been published in The Journal of Personal Finance:

A Quantitative Evaluation of Four Retirement Spending Models. See page 43

7/30/2015: New Spending Models Added

Three new spending models have been added to ORP. Previously ORP supported the constant spending indexed to inflation and Reality Retirement Spending models. The new models are described in the journal article to be published in September.

4/15/2015: ORP Gets Published

A article featuring ORP has been published in The Journal of Personal Finance:

Measuring the Financial Consequences of IRA to Roth IRA Conversions. See page 47

2014 News

11/18/2014: Affordable Care Act Cliff

An option has been added to the input form that will cause ORP to limit income subject to personal income taxes to be less than the limit required to receive ACA medical insurance premium subsidies. The limit applies from the start of early retirement until Medicare begins at age 65.

10/13/2014: Specifying Savings Accounts Minimum Balances.

Minimum balances for one or more savings accounts can be specified on the parameter screen. This allows the user to concentrate her estate in the Roth IRA or IRA to take advantage of preferential tax treatment of tax advantaged accounts.

10/08/2014: Assigning Different Stock/Bond Distributions to Different Accounts.

The ORP parameter form has been expanded to permit the user to specify different stock percentages to different accounts. For example the IRA could be 100% stocks and the After-tax account could be 0% stocks and thus 100% fixed income. This gives the user the ability to do separate glide path modeling for the three accounts.

10/01/2014: Spreadsheet Download

A link has been added to the first page of the ORP results to download a summary of the run in csv format suitable for use by Microsoft's Excel among others. There are two parts to the report. The first is the withdrawal report and the second is the Sources of Other Income report.

09/13/2014: Spousal Pension Benefit

Some pension allow for the spouse who lives longer to collect a percentage of a worker's pension, or vice versa. ORP now includes this feature.

08/22/2014: Government Pension Offset

Workers who contribute to a government pension and who do not contribute to Social Security are not eligible for spousal benefits. The signal to ORP that spousal benefits are not permitted is an explicit 0 (not a blank) in the amount of Social Security benefits field.

08/22/2014: Partial exclusion of Social Security benefits and pensions.

States are amazingly inconsistent in how they tax Social Security Benefits and pension income. Some states tax them not all, some state tax them all, and some states exclude part of them and tax the rest. Two new fields have been added at bottom of the ORP input form to specify how Social Security benefits and pensions are taxed or excluded from state taxes.

07/28/2014: Glide Path Option.

A Glide Path is a series of events or actions leading smoothly to a particular outcome. For retirement planning a glide path is making annual adjustments to the mixture of bonds and stocks in retirement savings to reduce portfolio volatility and to insure there is money available for spending without needlessly depleting savings. ORP normally assumes 100% invested in stock for the entire retirement term. ORP has been enhanced to include a glide path option.

07/16/2014: Tax Report Enhancements.

Two columns have been added to the Tax report.

  1. The taxes column from the Withdrawal Report is replicated on the right side of the report.
  2. A new column, titled CapGaina, displays the capital gain taxes paid on the increase in value of the assets in the stock sub account of the After-tax Account.

06/29/2014: The After-tax Account is divided into two sub accounts.

The After-tax account is now consists of two sub accounts, a stock sub account and a fixed income sub account. The two sub accounts are taxed differently; the stock sub account is subject to capital gains taxes while the yield on the fixed income sub account is subject to the same personal income taxes as the rest of the model.

05/10/2014: Taxes on IRA to Roth IRA Conversions

Several users have found the early, large IRA to RothIRA conversions and the accompanying high taxes to be implausible. To shed some light on this issue a check box has been added to the ORP parameter screen that will block IRA to Roth IRA conversions. No conversions, no taxes.

05/10/2014: Taxes on IRA to Roth IRA Conversions

Several users have found the early, large IRA to Roth IRA conversions and the accompanying high taxes to be implausible. To shed some light on this issue a check box has been added to the ORP parameter screen that will block IRA to Roth IRA conversions. No conversions, no taxes.

05/06/2014: Exempting Social Security Benefits from State Income Taxes

Twenty Seven states and the District of Columbia exempt Social Security benefits from state income taxes. A check box has been added to the ORP parameter input form for users who plan to retire to one of these states.

3/10/2014: Separate Life Expectancies

The ending age of the plan is no longer specified by a termination (Term) age. Instead, two separate life expectancies can be specified. At the younger age pension and Social Security benefits cease for that spouse and Spending is cut in half. If nothing is specified then age 92 is the end of the plan for both spouses.

This feature aids in the evaluation of widowhood situations.

02/10/2014: File and Suspend

File and Suspend (aka Claim and Suspend) is a method of maximizing Social Security benefits. When both spouses have Social Security benefits one spouse may file and suspend his benefits, from Full Retirement Age (FRA) to age 70. The other spouse receives spousal benefits but not her own benefits. This delays starting Social Security benefits for both spouses until age 70, when benefits are greatest, while at the same time providing some income for the couple between FRA and age 70. The file and suspend option is applied for married couples when both Annual Social Security Benefits are specified and neither Age to begin Social Security is specified. For details .

01/11/2014: Spousal Benefits

Spouses of retirement age who are eligible for little or no Social Security benefits based on their own employment record will receive benefits equal to one half of the retiree's benefits. The Social Security Administration automatically grants the higher amounts where spousal benefit requirements are met. ORP has been enhanced to include this option where appropriate.

01/04/2014: Mortgages on Illiquid Assets

Prior to this enhancement when an illiquid asset was sold the amount of money transferred to the After-tax account was the sale proceeds minus capital gains taxes. If the illiquid asset is encumbered by a substantial mortgage or other secured loan then paying off the loan should be included in this computation.

ORP's input parameter screen has been enhanced to include fields for specifying loans secured by illiquid assets.

2013 News

12/28/2013: Refine Sale of Illiquid Assets

ORP assumes that spending follows the annuity model in that the spending level is established at the beginning of retirement and that it's level is adjusted for inflation each year thereafter.

Unfortunately ORP gets into trouble with models that are a little short on liquid assets and depend on the sale of a valuable illiquid asset to fund the latter part of retirement. When the distribution of asset sales, spread across the remaining term of the plan, exceeds the spending levels of the early part of the plan ORP falls into a mathematical black hole.

The model formulation has been adjusted to violate the annuity assumption and allow for spending levels at a higher annuity level after the sale of illiquid assets.

This change will rid us of some of those nasty infeasible model messages.

12/01/2013: Update Estate Tax Tables

ORP's estate tax tables have not been updated since the start of ORP in 1996. That issue has been remedied. The estate tax tables really don't matter that much since most specified estates are well below the $5 million exemption boundary.

11/15/2013: Refined Account Returns

The choice of asset rates of return has a significant impact on the resultant retirement plans. Currently ORP allows for different kinds of assets to be assigned to different retirement accounts to reduce taxes and reduce overall portfolio volatility.

Investment strategies may be modified when retirement approaches. ORP has been enhanced to allow for different rates of return during the accumulation period as well as during retirement. Three additional parameters have been added to the ORP parameter form so that asset rates of return can be specified for different accounts in the two phases of the retirement plan.

9/23/2013: Bar Graphs Are Back

Bar graphs have returned to some ORP reports. They were formerly there but disappeared in the late 1990's when ORP switched to an Internet service provider that did not have the necessary graphing software. ORP has switched Internet providers again and the necessary software is available again.

2011 News

9/15/2011: New White Paper

A new white paper has been added to ORP's first page, right hand column, The ORP Advantage

In this paper retirement savings account withdrawal plans computed by a linear programming optimizer are compared to the ubiquitous, conventional wisdom strategy to measure the degree of improvement that the optimal plan offers.

8/12/2011: Illiquid Assets

ORP now supports two different types of illiquid assets:

  1. The family dwelling
  2. All other illiquid assets.

Other illiquid assets include businesses, partnerships, real estate, inheritances, collections, etc. The difference is that when selling the family residence there is a $500,000 exclusion from capital gains tax for married couples, $250,000 for singles. The full capital gains tax has to be paid on the profit of the sale of all other illiquid assets.

2/27/2011: Separate Ages of Retirement

An alert user points out that in this day and age married spouses may have different ages of retirement because:

  1. One spouse may be considerably younger than the other.
  2. Chronic illness to one spouse and not the other.
  3. Employment provides health insurance for the spouse too young for Medicare.
  4. A mental model in which each spouse says my account is my account and there is no our account.
  5. One spouse enjoys working and the other doesn't.

ORP's assumption was that when one spouse retired both retired.

ORP has been enhanced to give different ages for each spouse's retirement. Thus contributions to a tax advantage account may continue for one spouse while the other is drawing down their tax advantage account. ORP does not allow contributions to the Tax-deferred Account after age 69 as per IRS regulations.

2009 News

10/04/2009: Monte Carlo Option

A new toggle has been added to the bottom of the parameter input form. When it is checked ORP runs in its Monte Carlo mode, whereby each year's investment return is generated as a random number before each of a series of runs. Instead of a cash flow plan the Monte Carlo reports the average of the amount available for spending over all of the runs. See the Monte Carlo help document for more details.

02/22/2009: Capital Gains on Sale of Illiquid Assets

Up until the age of divestment the balance of the illiquid asset account grows at the rate of inflation. At the age of divestment the balance of this account is transferred into After-tax account. The amount of transfer is reduced by capital gains tax on the difference between the value of the asset and its basis. ORP assumes that the illiquid asset is the retiree's home. The capital gains exclusion ($250,000 for a single retiree, $500,000 for a couple) is applied before capital gains taxes are computed. Both the capital gains rate and the illiquid asset basis are on the ORP input form and discussed in that form's help document.

2008 News

9/21/2008: Early Roth IRA Withdrawals

An astute ORP user points out that when doing a partial IRA to Roth IRA conversion the money can't be distributed from the Roth IRA for 5 years without incurring a 10% penalty.

07/01/2008: Realistic Retirement Planning

In his 2005 paper Reality Retirement Planning: A New Paradigm for an Old Science, Ty Bernicke observes that older retirees tend to spend less per year as they grow older. He backs this up with substantial quantitative research.

A check box has been added to the ORP parameter form to select this option. When the box is checked ORP applies Bernicke's results to reduce retirement spending for each of the 65-69, 70-74 and the 75 and up age groups.

The end result is to increase spending in early retirement and lower it in late retirement. The early increased spending ends up reducing the total plan value by a small amount. This is due to increased personal income taxes in the early years of retirement and loss of investment return on money that is spent rather than saved.

Bernicke shows that late in life under spending will leave a substantially larger estate than is planned for by retirement calculators. The idea is spend it while you can enjoy it.

06/11/2008: Reverse Mortgage

ORP now includes both lifetime payment and lump sum reverse mortgages. A reverse mortgage is a way for retirees to get access to the equity in their homes while continuing to live in them. Mortgage rates vary widely between institutions and some fees can be very expensive. A reverse mortgage starts off with a small balance which increases monthly by mortgage interest, real estate taxes, insurance and, in the case of the lifetime payment option, a payment to be used for spending. For some retirees the reverse is a great thing. The reverse mortgage is discussed in more detail in the parameter screen help file.

06/01/2008: Scheduling Contributions

This enhancement extends ORP's optimization to the accumulation side of retirement, i.e. pre retirement contributions into one of the three account types: 1)Tax-deferred, 2)Roth-IRA and After-tax. ORP balances the withdrawal schedule against the contribution plan to compute which account to annually contribute to and how much to contribute. The user's best judgement is replaced by optimization. The account contributed to may change as the retirement year is neared.

4/13/2008: IRA to Roth IRA Conversion

Beginning in 2010 all or a portion of an IRA can be converted into a Roth IRA without restriction, ORP has been enhanced to model this change in the law. ORP will do a series of partial conversion to reduce personal income taxes. Conversions will appear in the Withdrawal, Tax-deferred Account and Roth IRA Reports.

01/29/2008: Inflation of Estate

The desired balance for the estate is now entered in current dollars and ORP computes the estate at the end of the plan in inflated dollars.

2007 News

7/31/2007: The 2003 Tax Law Revision

The ORP tax tables are updated to reflect the percentage tax and tax bracket upper bounds as legislated by the 2003 tax law revision.

2001 News

04/09/2001: Passing Your IRA Through To A Beneficiary

ORP has assumed that your estate will liquidate your Tax-deferred Account, pay the personal income taxes due, and distribute the remainder to your beneficiaries.

The IRS provides an option that is more attractive to the beneficiary of your IRA, if you designate one. If your are married ORP assumes that your spouse is your IRA beneficiary and your IRA becomes your spouses IRA without any tax consequences. If you are unmarried and you specify a beneficiary for your IRA then your IRA passes to that beneficiary with no tax consequences.

The advantages of this approach to an unmarried individual are:

  • Her beneficiary will continue to enjoy the compounding advantages of a Tax-deferred Account.
  • She does not have to manage the distribution from her IRA in a manner intended to lower her personal income taxes.
  • Assuming that her beneficiary is more than 10 years younger than she is, she will have a lower minimum required distribution. See the next item below.
Of course the beneficiary will have to pay personal income taxes on all distributions.

ORP has been modified to pass the Tax-deferred Account to the estate without paying personal income taxes. This assumes that only one partner of a married couple survives to the end, that the After-tax Account has been converted an IRA, and that the surviving partner has designated a beneficiary for the IRA. Under the new IRS regulation discussed next this is all very easy to accomplish.

Since the tax consequences of inheriting an IRA are passed to the beneficiary, ORP will compute a slightly higher annual spending amount using this revised formulation.

2000 News

11/07/2000: Early Retirement

Withdrawals from the Tax-deferred Account before the age of 59½ are not subject to the 10% early withdrawal penalty providing that they are "part of a series of substantially equal periodic payments" taken at least annually until the age of 59½ or for five years, whichever is longer. (IRS Code 72(t)).

ORP's optimal withdrawal level now honors the IRS requirement to fix all withdrawals before the age of 59½ at the same level. ORP does not to attempt to model the details of any of the three IRS sanctioned early withdrawal methods:

  1. Life Expectancy: which gives the smallest annual withdrawal.
  2. Amortization: which gives a larger annual withdrawal.
  3. Annuity Factor: which gives the largest annual withdrawal.
ORP does provide the optimal level of withdrawal from the Tax-deferred Account for early retirement. You may then select the IRS sanctioned method that most closely matches the computed level. For a description of the IRS Early Withdrawal methods see the Retire Early Home Page.

There can be some interesting results because spending increases by inflation every year even though Tax-deferred Account withdrawals are fixed. If there are sufficient funds in the After-tax Account the difference is made up from there each year. If the After-tax Account is small then the fixed withdrawal will be larger than necessary during the early years and the excess is transferred to the After-tax Account. Then the After-tax Account is used to cover the difference between spending and Tax-deferred Account withdrawals during the years just before 59½, or the 5-year expiration.

Recent News

What's New!

New Journal Article

A Three Step Procedure for Sustainable Retirement Savings Withdrawals

Part of retirement planning is to coordinate income from multiple sources such that savings are not depleted prematurely, no large undesired surplus is left behind, and disposable income is maximized. This paper describes 3-PEAT, a practical, retirement savings withdrawal procedure that addresses these objectives.

To appear in Journal of Financial Planning on August 2017

Recent News

ORP Editorial Assistance

Enough ORP users have applied their editing skills to the semi-literate prose of the ORP help documents so that it seemed time to set up a communication channel for such contributors that would be easy enough to use such that they would be encouraged to apply their skills.