SimRetirement Help – Simulation details

The program predicts whether retirement will be successful by simulating retirement 50,000 times with different (random) market conditions and collecting statistics about how often different situations happened.

An individual retirement simulation goes through time, month by month, simulating the markets, applying those market changes to the couple’s finances, and paying expenses. At the end of each year, the program calculates taxes owed and the checks for death of the couple or their bequeathers. If the couple runs out of money, the run is marked as “Failed”. Otherwise, the run ends when the couple dies. In this case, the default status is “Success”. But, if at any time, the couple didn’t have enough money to buy a property or fund their legacy the run is marked as “Failed to fund goal”. If, at any time, the couple had to reduce their expenses the run is marked “Success with reduced expenses.”

Steps for running a simulation

  1. Simulate the financial markets – Generate new values for inflation, stock returns, dividend yield and bond yield. (See the Markets page for more details about how this is done).
  2. Calculate asset gains
    1. For each asset (or account) apply the stock/bond/real-estate/inflation growth based on the asset’s “Growth Type”.
    2. Taxable accounts with a Growth Type of stock or bond generates capital gain income equal to the dividends paid or bond yield.
    3. Bequeather’s asset values are increased
  3. Check for property sales or purchases
    1. If it is time to buy a property, do so.
      1. If there isn’t enough money to buy the property, mark the run as “Failed to fund goals”.
    2. If it is time to sell a property, do so and place the proceeds in the taxable account.
      1. If the sale is taxable, add the difference between the sale price and the basis to the year’s capital gain income
  4. Start social security if it is the optimal time (See the social security page for more info)
  5. Start equal lifetime payments from IRAs – computes which method would generate more income and uses that method. This will also switch IRAs from the amortization method to the life expectancy method if the life expectancy method would generate more income.
  6. Check to see if we have enough money to pay this month’s expenses. If not, sell any property that is marked as “Sell in Emergency” (add the capital gains and proceeds just like for a planned sale).
  7. Increase expenses and the desired legacy amount by inflation.
  8. Calculate income from any annuities. Add the income to the taxable account. If the annuity is taxable, add the income to the year’s normal income.
  9. Calculate income from any IRAs (this can by equal lifetime payments or age 70+ required distributions). Add income to the taxable account and to the year’s normal income.
  10. If our the difference between our expenses and income is more than a percentage of our total account value, the couple is falling behind their austerity setting and will need to reduce expenses.
    1. Before reducing expenses, check to see if we can start social security payments early.
  11. Calculate income from social security. Add the income to the taxable account and to the year’s social security tax income.
  12. If expenses are still too high, impose austerity and reduce expenses by the amounts set on the expenses page.
  13. Pay the expenses
    1. First pay any HSA qualified expenses (non-insurance medical expenses) from HSA accounts.
    2. Pay all expenses from the taxable account
      1. Convert stock/bond/other assets to cash and add the net capital gains to the year’s capital gains.
      2. Pay as much of the expenses as possible.
    3. If there is a traditional IRA with an owner older than 59 1/2, pay remaining expenses from that IRA. Add all capital gains to the year’s normal income.
    4. Pay remaining expenses from Roth IRA basis (this doesn’t generate taxable income)
    5. Pay remaining expenses from traditional IRAs, even if the owner is too young. This costs extra because of the 10% early withdraw penalty and the full amount is added to the year’s normal income.
    6. Pay remaining expenses from Roth IRAs, even if there is no basis. This results in the 10% penalty and adds to the year’s normal income.
    7. If we still haven’t paid all the expenses, the run is marked as a failure.
  14. If this is December do year end stuff:
    1. Pay taxes.
      1. First increase the tax brackets and deductions by the year’s inflation.
      2. Compute federal and state taxes based on the social security, capital gain and normal income accrued during the year.
      3. Divide the tax bill by 12 and add it to the expenses the couple owes next year.
    2. Check to see if anyone dies – all tests for death are performed by generating a random number and comparing it to the odds of death for that person (odds of death are based on sex, longevity and current age)
      1. If both members of a bequeather row have died and the beneficiary is still alive, randomly decide how much was inherited (evenly distributed between the min and max) and add the amount to the taxable account. (There are no tax consequences of inheritance in the simulator. If you are inheriting >$5M manually reduce the amount for the taxes you’d owe.)
      2. If one member of the couple dies:
        1. Pay out the termination benefit of their annuities.
        2. Increase the basis of the taxable account
        3. Switch the ownership of any IRAs to the survivor
        4. If both people in the couple are dead, end the simulation as a success.
    3. Increase medical expenses by the year’s inflation plus the extra medical inflation. Then increase medical expenses due to the age of the couple.