Projection of MD Method versus Amortization Method
L1: Projection of MD Method versus Amortization MethodI’m hoping to begin a 72t plan early next year. I have lots of flexibility and can wait till the conditions I want become reality. So I can wait for the 120% mid term rate to get a bit higher and I can wait on the account balance to get where I want it to be. Below are the details:
Date of Birth: Dec 27, 1964
IRA balance anticipated $1,200,000
Non IRA balance anticipated: $200,000
Budget: $60,000, no mortage.
Rate: 2.00% to 3.00% hopefully
Amortization method versus MD method
Annual SEPP: about $50,000
I suppose my question is, given the low 120% rates (my opinion) and I suppose my relatively young age; In EVERY excel projection, the annually recalculated MD amount surpasses the fixed Amortization amount at about age 55 +/-. So my plan is to change to the MD method when that payout becomes higher than the Amortization amount. That assumes some modest growth of the assets, while I’m drawing them down. I consider my assets to be heavy in IRA assets and light on non IRA assets and therefore I’m trying to not wipe out the non IRA asssets too early. Is there any issue with switching to MD, not to lower the payout, but to increase it.
Also, from those that have been consuming their assets, what is a reasonable growth rate based on your experience. I’m assuming 8-9%, but I realize a straight line projection is not reliastic.
Apologize in advance, as I know this is not an investment board, just looking for some seasoned opinions.
firedin20102013-03-07 16:29, By: firedin2010, IP: [126.96.36.199]
L2: Projection of MD Method versus Amortization Method
An 8% to 9% return in today’s economy is probably very unrealistic. Especially with the fed restating its intent to keep rates low. A rate of 4% to 5% would probably be more realistic.
MD Switch: A lot depends on interest rates, but it takes several years when a a switch to the MD method generates a higher payout then the amortization method.
The best way to check when the MD distribution exceeds the amortization amount… don’t compare one to the other unless you start the MD distributions after 5 to 7 years based on the projected ending assets of the amortization method at the end of the 5 to 7 years. My guess is that the MD payment will NOT exceed the amortization payment.
Depending on what you are trying to accomplish, take a look at using annual recalculation on the amortization method. READ.
2013-03-07 17:03, By: Gfw, IP: [188.8.131.52]
L2: Projection of MD Method versus Amortization MethodFired- If youtest your existing AMORT payout after the end of each year against the one time switch toMD, and MD is preferred, then you can plan on making that change, but set up your payment schedule so first payment of new year allows you enough time to issue change orders, so an annual (or even monthly) payment is not fired off to you before you can tell them to change, as an example.It just makes it a bit cleaner. It will have tobe recalculated each year after that, once you change to MD. I tested it out 7 years forward for you, and MDis almost as much as AMORT at that point, (using same $1.2mill) so you may get to it being advantageous at some point, depending on whether or not you can maintain or increase on the original balance.As far as investment assumptions are concerned, I would look at what has happened to things like your 401k or other investments over the last 5-7 years, to see what the past has done for you.I would not rely on a factor higher than about 3-5% myself, and that is from my own experiences in these past years since I started a SEPP in 2006. You may then be pleasantly surprised. If you can get 8-9% fgor several years running, please share that secret with us!!
It seems to me that it has been a long time since the allowable 120% rate was in the 2-3% range, and I would be surprised if it went back up that much in next year from the almost 1% range.This is the first post I have seen where a strategy of going to MD to increase the payment has been mentioned for a SEPP, but the low allowable int rates seems to make this a possibility. My ratewas 5.39% I think(Jan 2006 rate) and I changed to MD in 4th year to lower my annual payment from about $100K to about half of that, with lower acct balance in 2009 (after the crash) “helping” to make MD payment much lower than the AMORT one. Luckily, the lower payment in last two years of the SEPP, and a reboundfrom the losses in the IRAhas been made backafter 6 years, but there is still a hole from the crash that may never be recovered. I started at age 56, so you will have a much longer period for required payouts.
A quick run thru calculator using your figures yielded a payment of $41.9K using current 1.21% interest rate, so I don’t think you can get to $50K payment result in next year unless acct balance goes up quite a bit, and or rate goes up quite a bit. Good luck.
p.s. Gordon makes a good point in terms of sugesting that you check out AMORT with recalculation, since rates can’t get much lower.2013-03-07 17:19, By: Ken, IP: [184.108.40.206]