General Questions

Fixed spending refers to spending a predetermined amount of money each year, whereas flexible spending options, such as Smile and Dynamic, adjust spending based on age or market volatility. All spending strategies have their advantages and disadvantages, and the most appropriate approach will depend on your financial circumstances, risk tolerance, and personal preference.

  • Smile spending withdraws more in the early and late stages of retirement, and less in the middle. According to research, retiree spending patterns are not constant, but follow a curve that resembles a smile. Retirees tend to spend more in the early years of retirement, when they are more active and enjoy traveling, eating out, and other discretionary expenses. This is the first part of the smile. Then, as they age, they tend to slow down and spend less on these activities. This is the bottom part of the smile. However, later in retirement, their spending increases again, mainly due to rising health care costs. This is the second part of the smile.

    Smile spending research: Estimating the True Cost of Retirement
  • Dynamic spending withdraws 5% of your investment portfolio in the first year. In the following years, if the inflation-adjusted amount falls below 4% of the portfolio, the distribution rises to 4%. Conversely, if it exceeds 6% of the portfolio, spending is limited to 6% of the portfolio. Dynamic spending is a simplified version of the Guyton-Klinger guardrails spending strategy.

    Dynamic spending research: When It Comes to Retirement Spending, Flexibility Pays

All spending strategies are indexed to inflation. Fixed spending may automatically reduce your annual expenses depending on the Annual Spending Reduction setting under Assumptions, which is set to 1% by default.

The general approach to withdrawal order in retirement is to first spend down taxable accounts, then tax-deferred accounts, and finally tax-free accounts. By delaying withdrawals from tax-deferred accounts, retirees can allow these accounts to continue growing tax-deferred for a longer period, maximizing their potential for compounding growth. While this can be a good starting approach it does not focus on minimizing your overall tax bracket throughout retirement.

IW Retirement Planner uses the below order for withdrawals after first consuming non-investment income like employment, Social Security, and pension income.

Tax-Deferred Investments Taxable Investments Tax-Free Investments Cash & Equivalents

By default, tax-deferred accounts are withdrawn from before taxable accounts, but the Withdrawal Strategy feature lets you switch the order to experiment with the most effective way to lower taxes for your situation. Some reasons to withdraw from tax-deferred accounts before taxable accounts:

  • Reduce potential tax consequences of Required Minimum Distributions in the later stages of retirement
  • Minimize the tax impact of the 10-year rule for inherited tax-deferred funds. The 10-year Rule requires that beneficiaries receiving Traditional IRAs and 401(k)s, withdraw all funds within a 10 year period, which can have significant tax implications.
  • Take advantage of the step-up in basis rule, which raises the cost basis for inheritors to the market value of investments on the date of the previous owner's death, reducing future capital gains taxes.

Additionally, Cash & Equivalents accounts are withdrawn from last to preserve liquidity, ensuring immediate access to funds for unforeseen expenses or emergencies without incurring penalties or tax consequences.

IW Retirement Planner uses Monte Carlo stress testing in conjunction with the Geometric Brownian Motion model to assess the risk associated with your straight-line plan. This analysis involves running a thousand computer-generated scenarios using different combinations of investment, inflation, and other growth rates. These scenarios naturally factor both positive and negative investment years, including the possibility of significant losses of 30 percent or more.

Please note that the Probability of Success score generated by Monte Carlo stress testing may fluctuate slightly between runs. These variations are a natural consequence of the randomness inherent in Monte Carlo simulations. Consider running multiple stress tests and averaging the scores if you require a more consistent estimate.

IW Retirement Planner uses the below compounded annual growth rate (CAGR) return values as defaults for stocks, bonds, dividends, and interest rates.

Asset TypeInterestDividendCapital GainTotal ReturnIndex
Stocks-2%8.2%10.2%S&P 500 (1971 - 2022)
Bonds3.9%--3.9%10 Year Treasury Bond (1999 - 2022)
Cash1.6%--1.6%3 Month Treasury Bill (1999 - 2022)

Forward-Looking Returns
Both Vanguard and JP Morgan provide forward-looking investment return assumptions. You can choose to refer to the reports below when determining your growth rates.

Excess Income
Any income remaining after annual expenses is automatically deposited in the Cash & Equivalents bucket.

Excess Cash
Funds in the Cash & Equivalents bucket can be limited to an amount specified in the Invest Excess Cash field, with any overage automatically harvested and invested in Taxable Investments annually to maximize growth. Harvesting requires a Taxable Investments bucket and a minimum of $5,000 before a transfer is initiated from Cash & Equivalents to Taxable Investments.

Yes. IW Retirement Planner utilizes income bucket growth rates to automatically grow savings each year leading up to your retirement month. You can supplement your pre-retirement savings in Extra Savings.

In addition to your income buckets, you have the option to incorporate one-time or recurring income events in Other Income. Examples include pre and post-retirement income from inheritance, lump sum pension distributions, and royalties.

Please note that the amount entered should reflect the after-tax value and is not adjusted for inflation.

Yes. You can include additional post-retirement expenses in Extra Expenses. Examples include debt, child's wedding or tuition, long-term care costs, or taking your family on a memorable vacation. Extra Expenses are not adjusted for inflation.

Yes. Both part-time or full-time annual employment can be included in your Employment income buckets. Full-time employment can be included for continued spousal employment, while part-time employment can help supplement retirement income.

Employment buckets are exclusively for post-retirement. Pre-retirement income can be included by adding annual pre-retirement savings in Extra Savings.

You can include long-term care costs as an expense in Extra Expenses. If you have or plan to purchase a long-term care policy, take care to include only the cost not covered by your insurance policy. Additionally, you may need to factor in annual healthcare inflation for the years you plan to use long-term care services.

Yes. IW Retirement Planner automatically reduces survivor spending by 1/3 when Fixed and Smile spending strategies are being used.

Social Security Questions

Full retirement age (FRA), also called "normal retirement age", is the age when you are entitled to 100% of your Social Security benefits, which are determined by your lifetime earnings. FRA age is gradually increasing as people are living longer. FRA was 65 for many years, but increased to 66 and 4 months for people born in 1956, then increased to 66 and 6 months for those born in 1957 and, ultimately, 67 for people born in 1960 or later.

Yes. IW Retirement Planner automatically estimates Social Security spousal benefits and widow/widower benefits as they become available in your retirement plan.

Spousal Benefits
Starting at age 62, the spouse that earns less can get spousal benefits even without accruing Social Security credits through work. If the lower-earning spouse's benefit is less than half of the higher-earning spouse's, they can get 50% of the higher earner's benefit or their own, whichever is higher.

If the lower-earning spouse has their own benefit, IW Retirement Planner will use the benefit start date for the spousal benefit. If not, the start date of the higher-earning spouse's benefit is used. In both cases, the higher earner must have started taking benefits, and the lower-earning spouse must be 62 or older.

Spousal benefits are reduced if taken earlier than full retirement age, 35% less at age 62, and do not receive delay credits after full retirement age.

Survivor Benefits
If the spouse who earns more passes away, the surviving spouse is eligible to receive a survivor benefit starting as early as age 60. At full retirement age or later, the surviving spouse typically receives 100% of the benefit that the higher earner was entitled to. The benefit is reduced if taken earlier, 28.5% less at age 60.

The surviving spouse gets the higher of their own retirement benefit or the deceased spouse's benefit. No delay credits are available for survivor benefits after full retirement age.

Social Security Maximizer simplifies the complex decision-making involved with selecting the optimal Social Security filing strategy. It evaluates more than 700 filing strategies to identify the one that maximizes lifetime benefits within your retirement plan.

This powerful tool takes into account retirement, spousal, and survivor benefits, and incorporates key benefits rules:

  • Early benefit reductions
  • Delayed retirement credits
  • Earnings test adjustments
  • Restricted application and deeming rules
Please note that incorporating an optimal Social Security filing strategy into your retirement plan may affect your stress test score in certain situations.

Yes. IW Retirement Planner automatically reduces Social Security benefits by 25% starting in 2033.

The Congressional Budget Office (CBO) believes the Social Security trust fund will be depleted by 2033, two years earlier than the trustees have forecast. Unless changes are made before then to shore up the program, Social Security recipients would see their benefits cut by 23-25%.

Yes. IW Retirement Planner supports cases where a spouse passes away before claiming Social Security benefits, which can help uncover potential survivor benefits. To enable this feature, activate Additional Social Security Scenarios in Assumptions.

Yes. IW Retirement Planner applies the Social Security retirement earnings test for workers who are earning a salary and collecting benefits before full retirement age.

There are two different income limits for the earnings test: There's a lower limit for workers who are more than one year away from FRA and a higher limit for workers who are one year or less from FRA. The lower limit witholds $1 in benefits for every $2 in earnings above the exempt amount. The higher limit witholds $1 in benefits for every $3 in earnings above the exempt amount.

The retirement earnings test also affects spousal benefits. The salary of the higher-earning worker will impact both the worker's benefit and any spousal benefit passed on to a spouse.

IRA Questions

Yes. The Roth Conversion feature converts funds from Tax-Deferred Investments to Tax-Free Investments by "filling up" your chosen federal income tax bracket for the years specified.

A Roth conversion can reduce or eliminate future required minimum distributions (RMDs), providing greater control over your retirement income and tax planning. The ideal timing for a Roth conversion is typically during periods of lower taxes, which often occur after retirement but before Social Security and RMDs begin.

Additionally, it is important to assess the potential implications on Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharges. The IW Retirement Planner Tax Analysis charts can help identify lower-tax years and highlight any potential impacts on IRMAA surcharges.

Tax Treatment
Converted funds are taxed as ordinary income and paid from the Cash & Equivalents and Taxable Investment buckets within the same year. IW Retirement Planner does not use retirement accounts to pay taxes owed on Roth conversions. Doing so would lower your retirement balance, which could cost you thousands of dollars in growth over the long term. Any remaining Roth conversion taxes are added to the following year's expenses and may trigger underpayment fees and penalties, which are not estimated by IW Retirement Planner. It is recommended that you have enough in your Cash & Equivalents bucket to cover your conversion taxes.

Yes. IW Retirement Planner will automatically withdraw from Tax-Deferred and Tax-Free buckets in an attempt to bridge income gaps before 59 1/2.

Withdrawals from Tax-Deferred and Tax-Free buckets before age 59 1/2 are assessed a 10% early withdrawal penalty along with any income taxes resulting from the withdrawal.

Required minimum distributions (RMDs) are the minimum amount you are required to withdraw from your retirement accounts each year. You generally must start taking withdrawals from your tax-deferred (401K, Traditional IRA, SEP IRA, SIMPLE IRA) retirement plan accounts when you reach age:

  • 72 if born before 1951
  • 73 if born between 1950 and 1960
  • 75 if born after 1959

If you have sizable tax-deferred accounts, RMDs can have a significant impact later in retirement by forcing annual income into higher tax brackets.

Tax Questions

IW Retirement Planner estimates a range of taxes based on withdrawals, wages, and other forms of income. These estimates are used to provide a practical withdrawal schedule and help you optimize taxes in your retirement plan.

  • Federal
  • State
  • Capital Gains (long-term)
  • Net Investment Income
  • FICA (Social Security and Medicare)

IW Retirement Planner provides a reasonable estimation of taxes using the standard deduction method and should be regarded solely as general guidance. As needed, consult a tax professional for a more precise tax estimate. Tax liabilities computed for the current year are included in your expenses, one year later. Roth conversions are the exception where tax liability for converted funds are paid within the same year, when possible.

* Federal taxes updated for 2024 including marginal and capital gains tax brackets. NII and FICA remain unchanged for 2024.

IW Retirement Planner provides the Withdrawal Strategy, Roth Conversion, and Tax Minimizer features to let you experiment with the most effective way to lower taxes for your retirement plan.

Withdrawal Strategy
The Withdrawal Strategy feature lets you choose which bucket to withdraw income from first, Tax-Deferred or Taxable Investments. For example, select Tax-Deferred Investments if 401Ks and Traditional IRAs constitute a large portion of your retirement savings, as it could significantly reduce the tax impact of Required Minimum Distributions later in retirement.

Roth Conversion
If 401Ks and Traditional IRAs constitute a large portion of your retirement savings, the Roth Conversion feature allows you to convert Tax-Deferred Investment funds to Tax-Free Investments within a chosen federal income tax bracket. Funds converted to Roth are taxed as ordinary income but can reap benefits later in retirement by reducing the tax impact of Required Minimum Distributions. Additionally, heirs that inherit Roth IRAs do not have to pay taxes on withdrawals.

Tax Minimizer
The Tax Minimizer feature attempts to lower taxes to a specified federal income tax bracket by replacing Tax-Deferred Investment withdrawals, which are taxed as ordinary income, with Tax-Free or Taxable Investments, which are taxed as long term capital gains. This feature can lower taxes by replacing just enough ordinary income to stay within a chosen tax bracket. Tax Minimizer can be beneficial if Required Minimum Distributions are not expected in retirement.

Yes. Annual interest from the Cash & Equivalents bucket is taxed as ordinary income.

Yes. Dividend yields from the Taxable Investments bucket are treated as non-qualified dividends and are taxed as ordinary income.

Dividend yields from Tax-Free Investment buckets are not taxed while yields from Tax-Deferred Investment buckets are taxed as ordinary income when withdrawn.

Yes. Medicare IRMAA surcharges are automatically calculated and can be found under the Tax Analysis tab. Income-related monthly adjustment amount (IRMAA) is a monthly surcharge on Medicare premiums for Medicare Part B and Part D, and is based on your income from two years prior. For example, your 2024 IRMAA surcharge is determined by examining your income from 2022.

* Medicare IRMAA thresholds and surcharges updated for 2024.

Yes. Federal income tax brackets and capital gains tax brackets are automatically adjusted annually based on the general inflation rate specified within your retirement plan. Additionally, Medicare IRMAA income brackets and surcharges are also inflation adjusted.