Hi Rayman, As can be checked from our lifetime budget report, anything that lowers lifetime taxes raises lifetime discretionary spending by exactly the same dollar amount. So minimizing lifetime taxes is maximizing lifetime spending. And, yes, MaxiFi fully incorporates the loss in potential investment income from paying taxes early. Have you run the Roth optimizer? Email me at kotlikoff@gmail.com about what it shows for you. best, Larry
Hi Bob, Thanks for this careful and incisive comment. Let me respond as I believe MaxiFi is able to jointly handle all of your objectives. First, whatever you want to do, including making charitable contributions from your IRA, you want to minimize your lifetime taxes s.t., liquidity constraint returns, which MaxiFi's Roth Conversion Optimizer lets you handle. Second, our deterministic planning uses the risk-adjusted return on savings, namely the real return on TIPS. Hence, it's focused on spending responsibly for all your retirement years -- right up to your maximum age of life. Lowering lifetime taxes is part of acting responsibly. Third, in MaxiFi, you can enter gifts to your children, specify specific regular assets as reserve assets, which MaxiFi won't spend and just add to your estate, specify that you don't want to withdraw any or only a given percentage of your retirement accounts apart from RMDs, and specify bequests (under settings and assumptions) that you'll want to leave no matter when you die (This affects MaxiFi's life insurance calcs.) By adjusting you gifts (entered as special expenses), you can lower MaxiFi's annual discretionary spending to what you are now spending. As for using you IRA to make deductible charitable contributions, just leave those out of MaxiFi's IRA inputs since they are designated for that purpose. Finally, you can run LTC scenarios in which you specify potential LTC expenses as special expenses that are tax deductible. The run MaxiFi's Roth Optimizer for that profile. This is what I mean by stress testing. In the end, you'll get a clear sense of what a reasonable path of conversions is given the weight (taking into account your risk aversion) that you put on different stress test scenarios. One thing for sure. The answer will not be to equalize brackets. Yours, Larry
Go big and go home seems, to me, to be an overreach, relying heavily on modeling assumptions. Is there a scenario eliminating income taxes which the republicans push for (and you advocate for a cash flow tax), in which case, paying all of your taxes early in one year to get the lifetime increase in discretionary spending, seems like a big bet on the existing tax regime.
I was shocked when I reviewed my output of the MaxiFi model Roth optimizer, to convert most assets now. I look at Roth conversions more as a go slow hedging strategy against future tax rate increases. I may not get the most optimized answer, but I haven't put all my eggs in one tax regime basket either.
Larry, I’m a fully satisfied user of Maxifi, thanks for such a great product. In your description of the Roth Optimizer above, you state that the goal of the tool is to minimize lifetime taxes. Isn’t the goal to increase lifetime spending? There is a piece of the Roth conversion puzzle, the opportunity cost associated with potential investment gains on the money you pay in taxes during the roth conversion process. I Suspect your tool considers this, correct?
First of all THANK YOU, Larry. I’m a very satisfied customer of your Social Security maximization product twelve years ago, when I reached age 60. It has worked out really well for my wife and I, who are now ages 72 and 70 and thoroughly enjoying our retirement.
On this topic of Roth IRA conversions, I have no doubt that if one has minimization of lifetime taxes as his or her sole objective function, I have lots of confidence that your product does a great job.
However I can think of at least four objective functions for myself, and recognize that the optimization of each one can potentially have a deleterious impact on one or more of the others:
1. Minimization of the present value of lifetime taxation.
2. Maximization of our lifestyle / ability to spend responsibly for the fullest enjoyment of our remaining retirement years.
3. Maximization of the assets that will be bequeathed to our two children and their families when the last of us (my wife and I) pass away, that will be in harmony with our sons and their wives’ own financial planning and without imposing a big tax burden on them concurrent with the inheritance they will receive (admittedly this is a first world problem).
4. While we’re still alive, maintaining peace of mind about how we’re doing on objectives 1-3 should there be a huge financial crash or should one of us need expensive long term care requiring significant outlays from our IRAs. If we’re 100% in Roth at that time, we’ll get little or no tax deduction for the LTC expenses whereas if our IRAs are tax diversified, we could withdraw from the taxable IRA side and take advantage of the deduction.
I guess my point is, most of us have more than one objective function that we’re keeping our eyes on, and they certainly interact with each other.
Hi Rayman, As can be checked from our lifetime budget report, anything that lowers lifetime taxes raises lifetime discretionary spending by exactly the same dollar amount. So minimizing lifetime taxes is maximizing lifetime spending. And, yes, MaxiFi fully incorporates the loss in potential investment income from paying taxes early. Have you run the Roth optimizer? Email me at kotlikoff@gmail.com about what it shows for you. best, Larry
Hi Bob, Thanks for this careful and incisive comment. Let me respond as I believe MaxiFi is able to jointly handle all of your objectives. First, whatever you want to do, including making charitable contributions from your IRA, you want to minimize your lifetime taxes s.t., liquidity constraint returns, which MaxiFi's Roth Conversion Optimizer lets you handle. Second, our deterministic planning uses the risk-adjusted return on savings, namely the real return on TIPS. Hence, it's focused on spending responsibly for all your retirement years -- right up to your maximum age of life. Lowering lifetime taxes is part of acting responsibly. Third, in MaxiFi, you can enter gifts to your children, specify specific regular assets as reserve assets, which MaxiFi won't spend and just add to your estate, specify that you don't want to withdraw any or only a given percentage of your retirement accounts apart from RMDs, and specify bequests (under settings and assumptions) that you'll want to leave no matter when you die (This affects MaxiFi's life insurance calcs.) By adjusting you gifts (entered as special expenses), you can lower MaxiFi's annual discretionary spending to what you are now spending. As for using you IRA to make deductible charitable contributions, just leave those out of MaxiFi's IRA inputs since they are designated for that purpose. Finally, you can run LTC scenarios in which you specify potential LTC expenses as special expenses that are tax deductible. The run MaxiFi's Roth Optimizer for that profile. This is what I mean by stress testing. In the end, you'll get a clear sense of what a reasonable path of conversions is given the weight (taking into account your risk aversion) that you put on different stress test scenarios. One thing for sure. The answer will not be to equalize brackets. Yours, Larry
Go big and go home seems, to me, to be an overreach, relying heavily on modeling assumptions. Is there a scenario eliminating income taxes which the republicans push for (and you advocate for a cash flow tax), in which case, paying all of your taxes early in one year to get the lifetime increase in discretionary spending, seems like a big bet on the existing tax regime.
I was shocked when I reviewed my output of the MaxiFi model Roth optimizer, to convert most assets now. I look at Roth conversions more as a go slow hedging strategy against future tax rate increases. I may not get the most optimized answer, but I haven't put all my eggs in one tax regime basket either.
Larry, I’m a fully satisfied user of Maxifi, thanks for such a great product. In your description of the Roth Optimizer above, you state that the goal of the tool is to minimize lifetime taxes. Isn’t the goal to increase lifetime spending? There is a piece of the Roth conversion puzzle, the opportunity cost associated with potential investment gains on the money you pay in taxes during the roth conversion process. I Suspect your tool considers this, correct?
First of all THANK YOU, Larry. I’m a very satisfied customer of your Social Security maximization product twelve years ago, when I reached age 60. It has worked out really well for my wife and I, who are now ages 72 and 70 and thoroughly enjoying our retirement.
On this topic of Roth IRA conversions, I have no doubt that if one has minimization of lifetime taxes as his or her sole objective function, I have lots of confidence that your product does a great job.
However I can think of at least four objective functions for myself, and recognize that the optimization of each one can potentially have a deleterious impact on one or more of the others:
1. Minimization of the present value of lifetime taxation.
2. Maximization of our lifestyle / ability to spend responsibly for the fullest enjoyment of our remaining retirement years.
3. Maximization of the assets that will be bequeathed to our two children and their families when the last of us (my wife and I) pass away, that will be in harmony with our sons and their wives’ own financial planning and without imposing a big tax burden on them concurrent with the inheritance they will receive (admittedly this is a first world problem).
4. While we’re still alive, maintaining peace of mind about how we’re doing on objectives 1-3 should there be a huge financial crash or should one of us need expensive long term care requiring significant outlays from our IRAs. If we’re 100% in Roth at that time, we’ll get little or no tax deduction for the LTC expenses whereas if our IRAs are tax diversified, we could withdraw from the taxable IRA side and take advantage of the deduction.
I guess my point is, most of us have more than one objective function that we’re keeping our eyes on, and they certainly interact with each other.
Again, THANK YOU for the fine work you do!