Flexible Retirement Planner Support Forum

I am newly retired find I need more than just foggy plans for how to manage finances for a hopefully reasonably long retirement (30yrs?). I do not think the "safe withdrawal rate/amount" approaches are desirable. Via various internet searches I found FRP. Before asking my multiple questions I do want to say how greatly pleased I am to have found it. FRP offers me enormous amounts of flexibility in setting up features and elements for a scenario to run simulations on and reports out a substantial amount of information to help me understand what that simulated scenario might actually be like.

I do have a number of questions (numbered just to ensure clarity of where one topic ends and another starts), some are simply that I am not sure I understand how to best use FRP, what FRP is reporting, or if there is a work-around that could be suggested for some element of my situation that my reading of the documentation seems to indicate is not clearly present. Others are questions about whether FRP is able to address certain objectives I may have. None of this should be viewed as complaint; FRP is a really remarkable system being readily offered to everyone and I much appreciate it.

1)
FRP uses only two tax rates; investment and income, both on the main window and the ‘additional inputs’ window. The ‘income’ tax rate applies to monies withdrawn from IRAs, 401Ks, and new earned income as well as pensions, social security as I understand it.

This standard income tax rate is unified for all income from IRAs, pensions and earned income, as I understand it. However for myself, some income such as pensions and social security are exempt from state income taxes, while new earned income would be fully taxed. Can you suggest how to best manage the fact that there will be different tax rates applied to income that is different than investment portfolio returns?

2)
What suggestions can you give for what to use for the ‘investment’ tax rate? Would it be appropriate to use this as the tax rate for investment returns that are taxed as long term capital gains and qualified dividends? Or something higher than that to adjust for not all investment returns are classified as capital gains or qualified dividends? Or some other perspective to guide a selection?

3)
In the printed report listing yearly simulation results, I would like to ensure I understand the number of failures listed. Is the number of failures shown for a given year a cumulative number, that the number of simulated courses that failed in the prior years is added to the additional number of simulated courses that failed in that particular year? Or is only the number of courses that failed from among all those that had not failed in prior years?

4)
I would also like ensure I understand what the % funded means for each year listed in the report. I understand it is the median % funded among all the simulated courses in a run. I understand that as long as less than 50% of simulated courses do not run out of funds, the lowest this could be is whatever is selected in the Settings window for the floor percent of the spending policy. If, however, the requested plan had a large fraction of simulated courses fail before the end of the plan, would the % funded then be influenced by the spending shortfall amounts that occurred up to the listed year of the plan? Or is it only courses among the 10,000 which had not failed up to that year that would be used to determine the median?

5)
FRP seems to not support a QCD charitable donation process from IRAs such monies can be withdrawn from a tax deferred account but not subject to income tax. This would require withdrawals from a tax deferred account all along the retirement plan while living and other discretionary expenses were withdrawn from accounts as specified in the Settings window. Is there some work-around to allow somewhat including that in simulation runs, or is this just something not feasible to apply?

Would it require creating a fourth category of portfolio, which is tax free and intended to used all along the retirement plan to supply only a portion of the annual spending until exhausted (ie, not part of the withdrawal ordering selected in the settings window)?

6)
I believe I have a financial objective that FRP is not well suited to investigate. I think it would need a different flexible spending policy than available in FRP. I have certain expenses that are essential expenses and must be satisfied each year or the simulated random course would be deemed a failure. I also desire a substantial amount of discretionary spending which would often be fully supportable but would be quite acceptable to decrease in the event of very poorly performing investment portfolio.

Reaching the end of the plan with a significant amount of funds left in the investment portfolio is unimportant, and in fact undesirable as it would mean there was too little spent on discretionary expenses. Variable spending would be used to apply as much as possible to the discretionary spending. The idealized plan would lead to the investment portfolio decreasing every year unless there was highly good investment returns that happened to outweigh the desired portfolio withdrawal. In contrast, FRP’s flexible spending policies seem to decrease spending whenever the current year’s investment portfolio is smaller than the first year of the plan.

Am I correct that FRP is simply the wrong software to try to evaluate this objective? I suspect it could be quite complex to incorporate this retirement objective into FRP, so do not expect you will do so soon, even if you were to decide to work on it.

For # 1, I'd suggest adjusting the "taxable percent" field in additional inputs to get to the correct average tax rate for specific income sources that have a lower average tax rate. For example, if you set the taxable percent on an income cash flow to 50%, this will have the effect of cutting the income tax rate in half for that particular cash flow, while not affecting other income cash flows.

For #2, the best approach really depends on your overall tax situation. People with lower amounts of retirement income may pay very little investment taxes while people with higher incomes could pay significantly higher average rates based on various surtaxes that kick in at higher incomes. Keep in mind that the simulation taxes all gains in the year they happen (eg no unrealized gains) so overall the resolution of this is pretty low. One thing that may offer some insight is to use sensitivity analysis to see how much of a difference different investment (or income) tax rates have on your plan's probability of success.

For #3, the number of failures in the last column of the detailed view table is the number of times the simulation detected that the portfolio was depleted in that particular year. It's not a cumulative number. Since the simulation runs 10,000 iterations, you can infer the cumulative number of failures by looking at the probability of success. If there were 3 failures (cumulatively), the probability of success will be 99.97, if there were 150 failures cumulatively, the probability of success would be 98.50.

For #4, each year ends up with 10,000 values that are sorted to get the median percent of expenses funded. Each value will ve either the target percent of expenses funded for that year as determined by the spending policy logic, or zero if the plan has already failed by that year. You can see this if you set a very high spending amount that causes the probability of success to fall below 50%. You'll see the percent of expenses funded fall from 100 down to the spending floor, then drop immediately to zero in the year that the probability of success falls below 50%.

For #5, I don't think it'd be easy or straightforward, but it's possible the planner's undocumented "negative savings cash flow" hack might possibly help with this. I don't fully understand how the QCD process works, but it might be possible to simulate the donation/annuity with the combination of a single year negative savings cash flow plus a no-cola annuity cash flow stream. Setting this up would definitely be an advanced user voids the warranty sort of thing. The negative savings cash flow hack lets you remove money from one of the portfolios and basically have the money just disappear. Following some user requests, I removed the check in the code that prevented a negative amount on savings cash flows. This means the negative cash flow won't impact other planner's calculations (eg no taxes due on the withdrawal, expenses aren't reduced by the withdrawal). This is a very kludgy feature that basically sidesteps all of the planner's normal withdrawal and income/expense tracking logic. The code doesn't even check to make sure there's enough money in the portfolio to support the withdrawal (so it's best to use this earlier in the plan when it's not possible for the portfolio to have been depleted already). OTOH, it can be useful if you want to remove a lump sum from the portfolio and just have it disappear. In this case, I'd guess you'd couple the single year negative savings cash flow with a multi-year income cash flow to represent the annuity.

For #6, I think you're correct that FRP wouldn't be able to help much with simulating what you've described.