Tax-Efficient Retirement Withdrawal Planning Using a Linear Programming Model

Coopersmith, Lewis W.; Sumutka, Alan R.
September 2011
Journal of Financial Planning;Sep2011, Vol. 24 Issue 9, p50
Academic Journal
A common rule (CR) for withdrawing retirement savings is to withdraw taxable savings before tax-deferred savings, but this strategy can inflate required minimum distributions (RMDs) and reduce tax efficiency and wealth. However, tax-efficient (TE) withdrawal schemes can determine withdrawals that maximize the final total account balance over a retirement horizon. We consider identical scenarios (for example, initial wealth, living expenses excluding federal taxes, Social Security, tax deductions), but use different withdrawal methods (TE using a linear programming spreadsheet model versus CR) to taxes while satisfying RMDs over a 25-year planning horizon (to age 90). We compare the final total account balances for various combinations of taxable rates of return (ROR), tax- deferred ROR, initial taxable savings, and itemized deductions. Results show that TE models can significantly outperform CR when taxable ROR is greater than tax-deferred ROR, initial taxable wealth is greater than 10 percent of total retirement wealth, and itemized deductions are greater than the standard deduction. For a realistic combination of these conditions, total remaining account balances for TE are shown to be more than 16 determine withdrawals and federal percent higher than CR.


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