An Optimization Model for Scheduling Withdrawals from Tax-Deferred Retirement Accounts

Ragsdale, Cliff T.; Seila, Andrew F.; Little, Philip

doi:10.1016/1057-0810(94)90016-7

Cited by 7 publications

(4 citation statements)

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“…6 Coopersmith and Sumutka (2011) highlight the benefits of general-purpose optimization routines, as well as the mathematical and implementation challenges it faces due to non-linear constraints imposed by progressive taxes. Their work builds on the pioneering work of linear programming for retirement income planning by Ragsdale et al (1994). Most recently, Welch (2016Welch ( , 2017 showed how linear programming models can measure tax-exempt conversion effectiveness and be adapted to upward or downward trending markets.…”

Section: Objective Wealth Functions and Tax Law Modelsmentioning

confidence: 99%

“…However, the use of utility functions prevents their direct application by FinTech companies interested in building software tools needed by the unique circumstances that current and future retirees face. Cook et al (2015), Al Zaman (2008), DiLellio and Ostrov (2017, 2020, Coopersmith and Sumutka (2011), Ragsdale et al (1994), among others, used an alternative optimization approach. These authors impose an objective function to maximize portfolio longevity and/ or the size of the bequest.…”

Section: Modelmentioning

confidence: 99%

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Seeking tax alpha in retirement income

DiLellio,

Simon

2023

FSR

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We provide a framework to find an optimal decision for tax-efficient retirement income. By developing a model for income and capital gains tax with stock and bond investments in tax- deferred, tax-exempt, and taxable accounts, we identify three categories of retirees based on their income needs and net worth. We propose and evaluate a simple heuristic to determine the optimal retirement income strategy, quantifying a 0.5% annual return benefit. We call this benefit tax alpha and show its robustness to varying model input parameters. We also suggest approaches for large institutions or FinTech firms to improve their existing financial planning tools.

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Section: Objective Wealth Functions and Tax Law Modelsmentioning

confidence: 99%

Section: Modelmentioning

confidence: 99%

Seeking tax alpha in retirement income

DiLellio,

Simon

2023

FSR

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“…The all-time approach that we have found in the literature uses linear programing algorithms to optimize withdrawals. This line of research begins with Ragsdale et al (1994), which worked with a TDA and taxable account. This was extended to include Roth accounts and additional features in Coopersmith and Sumutka (2011) and Coopersmith and Sumutka (2017), who also concentrated on analyzing the effect of different rates of return in accounts, and in Meyer and Reichenstein (2013), Welch (2016), andWelch (2017), who "assign a single rate of return to all accounts to concentrate on the effects of taxes" as we do in this paper.…”

Section: Literature Reviewmentioning

confidence: 99%

Toward constructing tax efficient withdrawal strategies for retirees with traditional 401(k)/IRAs, Roth 401(k)/IRAs, and taxable accounts

DiLellio,

Ostrov

2023

FSR

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We construct an algorithm for U.S. retirees that computes individualized tax efficient annual withdrawals from tax-deferred, tax-exempt, and taxable accounts. Our algorithm applies a new approach using informa- tion from all years that generates an individualized strategy, in contrast to most previous approaches that chronologically generate a suboptimal strategy. Results equal or improve the chronological “na ̈ıve” with- drawal strategies advocated by many financial institutions, as well as the chronological “informed” strategies advanced by academics. Our approach allows us to determine the optimal switching times between tax- exempt and taxable account consumption, as well as between tax-deferred and taxable account consumption. It also allows us to understand the significant impact of an heir’s tax and withdrawal rate on a retiree’s opti- mal withdrawal strategy. Our model, which can work to optimize either portfolio longevity or the bequest to an heir, accommodates many salient tax code features, including dividends, different taxable lots, and required minimum distributions.

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“…Applied mathematical models to cover optimal retirement behavior (Ragsdale, Seila, and Little, 1994;Welch, 2008) discuss salient points involved in our article's RVD procedure. They also examine concerns beyond our RVD emphasis such as that by Welch (2015).…”

Section: Introductionmentioning

confidence: 99%

Procedure to determine the optimal Roth IRA versus deductible IRA allocation

Hull,

Hull

2023

FSR

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We offer a procedure to guide the Roth IRA versus deductible IRA (RVD) allocation decision. We require users to input 10 values to generate outputs that include contribution and withdrawal tax rates; maximum gain; and, optimal amount to allocate between the two major IRA types. By being at their optimal RVD allocation, we find that a modest earning couple can achieve a lifetime wealth gain amounting to about $180,000 in today’s dollars. We provide figures and tables illustrating RVD outcomes when there are changes in key variables such as salary match, adjusted gross income, portfolio returns, and withdrawal years.

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An Optimization Model for Scheduling Withdrawals from Tax-Deferred Retirement Accounts

Cited by 7 publications

References 0 publications

Seeking tax alpha in retirement income

Seeking tax alpha in retirement income

Toward constructing tax efficient withdrawal strategies for retirees with traditional 401(k)/IRAs, Roth 401(k)/IRAs, and taxable accounts

Procedure to determine the optimal Roth IRA versus deductible IRA allocation

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