Does anyone know how the Lifetime Planner calculates the RMD?

QPWQPW Member ✭✭✭✭
OK we all know that the Lifetime Planner hasn't been updated in years. The Social Security estimator seems to be using tables that were accurate around 2001. But what I'm seeing defies even just having an old table, it seems like completely different rules.

I purposely excluded any Roth or savings/CD (taxable) accounts. Basically giving it only social security and traditional IRAs to work with.

Now we also know that if you look at the value of the IRAs at the end of the year you turn 70 1/2 you get your next year's RMD by dividing by 27.4 (unless you have a young spouse, and even then it is fixed divisor). Well depending on the situations I have setup I have got the reverse calculation for the divisor from the Lifetime Planner, and it has been all over the place, like 46, 935, and even a zero amount.

It is clearly not just different divisor. In fact it seems to have a "threshold of the amount in the IRAs or the amount of income you have".

Just to make sure the social security wasn't affecting it (it shouldn't!), I changed the amount and I basically found that if the total in the IRAs for the previous year was $180,000 it wouldn't take out anything! Now clearly as I change the amount of social security different amounts are left in the IRAs, but I have never seen any rule that say "if your income is below XXX, you don't have to take a RMD."

I tried $10,000 for social security and the line for RMD doesn't even show up.

I tried $15,000 for social security and the line for RMD is there, but doesn't even show an amount for three years past when I said I'm 70 1/2.

Does anyone know if in the past there was such threshold?

I just tried something and it is definitely to be tied with the social security.

I changed my age so that it thinks I'm 70 1/2 this year, that means it thinks I have hundreds of thousands in my IRAs, and still the thing that triggers the amount going up or down is how much I put in for what I would get for social security.

I guess that in fact no one really knows what this thing is doing, and everyone should take its predictions with a very large grain of salt.



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Comments

  • mshigginsmshiggins SuperUser ✭✭✭✭✭
    edited March 2017
    What other income do you have in the LTP? Is it taking out more than the RMD to cover expenses?
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  • QPWQPW Member ✭✭✭✭
    edited October 2018
    The only income I had in these tests was social security.  And then I had hundreds of thousands in regular IRAs, and expenses of about $40,000, (no other kind of account, no houses, savings, brokerage, Roths...).  I even took out my spouse.  So basically I'm forcing it to deal with only the SS/IRAs.

    With SS at zero, I get zero RMD.
    With SS at $20,000 It says I have an RMD of $12,018.

    I just tried another test.  I made SS zero, and added an "other income" of $20,000, and it says I have an RMD for $11,767.

    Clearly the Lifetime Planner thinks you are not forced to take out the money if ...

    DUH!

    How stupid of me!

    The rules say you have take out a certain amount from your IRAs.  Well if you are taking out money from them to cover expenses then it will show up on the expenses lines, and only the difference of what you need and what you are forced to take out will show up on the "excess" line.  And that is in fact why they are calling it "excess" instead of RMD!

    I now need to go back and figure up a scenario where none of the expenses come out of the IRAs, so that all of the RMD goes towards that excess line.
  • QPWQPW Member ✭✭✭✭
    edited October 2018
    I set the tax rate, investment rate, and inflation to zero to take these out the picture.

    Now run expenses at $38,583, 70 1/2 this year, $500,000 IRAs at end of 70 1/2 year, look at next year for the RMD/excessive line
    $100,000 extra income starting at age 71.

    Lifetime Planner takes out $32,680 from IRAs, and $32,680 on excessive line ($32,680 deposit). Total Portfolio: $561,417. Note $500,000 - $38,583 + $100,000 = $561,417.

    But clearly the RMD calculation the Lifetime Planner is using is seriously wrong.
    $500,000 / $32,680 = 15.3  (I guess life expectancy has changed a lot since the Lifetime Planner was created, and most likely the laws and calculations).

    The correct divisor is 27.4, so RMD should have been: $500,000 / 27.4 = $18,248.18.
  • mshigginsmshiggins SuperUser ✭✭✭✭✭
    edited March 2017
    Where does 27.4 come from?
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  • QPWQPW Member ✭✭✭✭
    edited October 2018
    Straight from the IRS. :smile:
    There are two different tables, one for when the sole spouse is 10 years younger than you, and then one for everyone else.
    I'm referring to the one for "everyone else".
    http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Required-Minimum-Distribution-Worksheets
    I have enclosed an image of it on the original question.
  • QPWQPW Member ✭✭✭✭
    edited October 2018
    P.S.  The IRS is very "generous" if you ask me. :smile:
    70 + 27.4 = 97.4 years old, as in you have to reach 97.4 to have taken all the money out of your retirement accounts as promised.
  • mshigginsmshiggins SuperUser ✭✭✭✭✭
    edited March 2017
    So is the LTP just wrong or is it using an out dated number?
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  • QPWQPW Member ✭✭✭✭
    edited October 2018
    Frankly I don't really know which it is...  If you judge by the table they used to estimate SS you can figure they stopped updating it in about 2001.  The numbers are not exact, but close around that time.  That table has a different max for every year so it is possible to make a guess at which year they had the max set to.  With the RMD I can't really get any history on how it was calculated in that same time frame, so I can't really check.  One thing I think I'm going to do is run a few more different "last year IRA values" through it and also look at a few more years to see if it is even a constant number.  I guess I could also look at that other table for younger sole spouses and see it is even close.  I really doubt it.  Its purpose is to compensate for the age difference, and you would think that by the time the person gets to be 70 that it would line up with the main one.

    I think testing to see if it is a constant number is the most critical.  If it isn't a constant number then basically it can vary all over the place depending on the calculation, and it will be hard to judge the affect to the prediction.
  • mshigginsmshiggins SuperUser ✭✭✭✭✭
    edited March 2017
    Have you thought about joining the beta for Q2016?
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  • QPWQPW Member ✭✭✭✭
    edited October 2018
    The calculations are constant (you get the same divisor for the same year for different amounts in the IRA account(s)).  I have built up a table comparing the first five years.
    27.4 - 15.3 = 12.1
    26.5 - 15.6 = 10.9
    25.6 - 13.9 = 11.7
    24.7 - 13.2 = 11.5
    23.8 - 12.5 = 11.3

    I think the bigger amount for the starting year and the lower one for the next, is just how each deals with the 1/2 year.
    The three years after that seem "fairly" constant at about 11.5 years difference, I think the reason it is getting lower is the fact that in the new table you see .4, .5, .6, ..., which I guess is some kind of compensation for a non whole year prediction of lifespan or some other quirk like that.

    Anyways currently the Lifetime Planner is going to predict you taking more out than you have to, and to pay taxes on it.
    How far off this is going to be depends on how much you have in your regular IRAs.  The more you have in them, the more the number is going to be wrong.

    The truth is that as I have looked at what it takes to put together a good retirement planner, there is a LOT of complicated things to handle, and for the most part the Lifetime Planner does a very good job, but you just can't leave a program like for years and years and believe "it will be OK".

    And the lesson to users, is to use it only as a very rough approximation.

    There is a lot of potential here, but people have to understand its limitations.
    For instance the tax rates.  You have before and after retirement.  This is a simplification because they didn't want to try to put a tax program into the planner.  The truth is though for most people with regular IRAs you are going to have at least 3 tax rates.
    Before retirement, just after retirement, and from 70 1/2 on.  But even that doesn't capture it correctly because as you use money from your IRAs at 70 1/2 the total goes down, and the amount you are forced to take goes down.  In an ideal world the tax rate would be based on the amount of taxable income.

    Other things that are "pie in the sky" features that would be really nice would be the ability to have multiple plans saved, and to be able to compare them.  Also instead just always going from today onward it would be nice to compare a plan to reality.

    It is very easy to say "I believe inflation is 3%" plug it into a planner, and each year look at it and basically have no idea if that number is correct.  Inflation is a very "personal" thing, it all depends on what you spend your money on.  I see the Lifetime Planner like the budgets.

    You have these people that say "how can I change the budget numbers for the past".  They have missed the whole point of a budget in my opinion.  A budget is a prediction of the future, and then the comparison to reality to see how good you did, and to correct and get better for the future.  The same holds for the Lifetime Planner, but there is no reality check in this system.

    It would really be cool to have a graph of what really happened in your finances by comparing income and expenses predicted in the planner to what they really were.
  • QPWQPW Member ✭✭✭✭
    edited October 2018
    "Have you thought about joining the beta for Q2016?"

    Yes, but only as a new "anonymous" tester.  No more of the beta forum posting for me.
    I created an account, maybe it will get accepted, maybe not.

    Frankly I think that Quicken 2016 should be looked at with great hopes and fears by long time users.
    The hope is, that given the survey, Intuit might be working on two of the major features that need work being brought up to date.
    The fear is that Intuit hasn't had a very good track record with this kind of thing, it would be a real shame to lose the Lifetime Planner.
  • QPWQPW Member ✭✭✭✭
    edited October 2018
    Very nice program.  Using it I notice another thing that the Lifetime Planner gets wrong.
    Depending on the income you get besides Social Security (like RMD) varying amounts of your Social Security income is taxable.
    Anywhere from 0% to 85% of your Social Security is taxable.  The Lifetime Planner just multiplies the "after retirement effective tax rate" times the all the income including the Social Security income.  So to get this number right for the Lifetime Planner you would have to basically already run the numbers through a tax program, and average it, and I might add that as money is withdrawn from your IRAs and the "divisor" goes down because you are not expected to less and less "live in you", you should actual expect this effective tax rate to go down over the years, so you now have to try to predict a reasonable number for "all the years" of retirement.
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