Retirement Modeling
This is a brief introduction to topics that are covered in more depth in the JRTN manuscript.
Retirement Modeling Landscape
Retirement modeling can be broken into 3 independent parts as show here. The spending model captures your anticipated after-tax spending needs over time. This might be based on a budget or on spending experience. The Portfolio model captures your investments; a key aspect of this is the expected rate of return and risk level. The retirement funding model shows how this all comes together to produce spendable income.
Most of the focus of JRTN is on the Retirement Funding model. The retirement funding model itself is best visualized of as a table of data with one row for each year of concern (roughly speaking from now through life expectancy) and a number of different columns for:
- Ages
- Outside Income such as SS, Wages, Pensions, and Annuities
- Account Balances for IRAs, Roth, and unqualified accounts
- Draw amounts (draw is money to support spending)
- Other IRA withdrawals (for Roth conversions and RMDs)
- State and Local Taxes
- Spendable Income
It would look something like this:
| Age | Income | Bal. | Draws | Other IRA | Taxes | Spend |
| 64 | ||||||
| 65 | ||||||
| 95 |
The “model” is responsible for projecting what this table will look like over the years. Most of these columns represent a set of actual columns, so it is a little more involved than it looks, but, still, it is not really all that complicated. Of course, the devil is in the details. Calculation of taxes is far from trivial and projection from year to year requires assumptions about inflation and rate of return on investments.
Retirement Model Inputs
There are three different types of inputs to the model. The first and most obvious are the starting conditions. These include:
- Retiree Ages
- Anticipated wage income over time
- Other sources of income such as passive ownership
- Anticipated Social Security at different commencement years
- Pensions and adjustment/survivorship rules
- Annuities and adjustment/survivorship rules
- Account Balances
Another set of inputs relate to predictions for the future. For example:
- Return on investment
- Inflation Rates
- Mortality for both Partners
- Changes in expenses, for example due to health
- Changes to tax law
- Changes to tax jurisdiction (will we move?)
Yet another set of inputs relate to guidance to the model such as:
- Minimum balances to try to maintain
- Spending Goal
- Spending adjustment capacity. How much can spending realistically change under adverse conditions?
- Spending assumption for surviving spouse
- Guidance on what accounts to draw from when there is a choice
- Tax situations to try to avoid
- Optimization goals such as maximize spending or find optimal Roth Conversion.
Retirement Questions
The purpose of the model is to help you to answer questions such as:
- When can I retire?
- How much will I be able to spend in retirement?
- When should I start Social Security (or a pension)?
- How should I manage Roth Conversions?
- How much should I give to charity? When?
- Should I be gifting before I pass? How much and when?
- What will my estate look like?
- Will my estate be a “tax burden” to my heirs?