Appendix F
What is Included, What is Excluded, and Known Limitations of the Program
Financial planning, especially tax planning, is a very complex subject. Accordingly, no single program can encompass every possible scenario or effect. This appendix explains which factors are and are not included in the calculations and results provided by the Rhino Retirement Analyzer.
Factors that are Included in the Rhino Retirement Analyzer Calculations
Taxes
The tax calculations of the Rhino Retirement Analyzer include the following considerations:
- FICA taxes, including Medicare contributions and OASDI.
- Capital gains, including the special treatment of capital gains and qualified dividends in the 10% and 15% brackets, and the maximum $3000 capital loss that can be deducted from income.
- Filing status, which starts out as married filing jointly and changes to single after the death of one spouse.
- Standard deductions, exemptions (including the over 65 special exemptions), and tax brackets.
- The special tax treatment of Social Security income.
- Increases in OASDI limits, income tax brackets, exemptions, and the standard deduction according to projected inflation.
- RMD calculations for withdrawals from retirement accounts.
- Calculations of taxes based on withdrawing money from various accounts in different orders, including taxable first, taxable and cash first, taxable and traditional retirement accounts first, and cash and traditional retirement accounts first.
- The effects of Roth accounts, including the possibility of adding withdrawals from traditional retirement accounts that are not needed in the current year. This excludes RMD’s, as required by IRS regulations.
- The partially nontaxable tax treatment of annuity payments when not all of the basis has been recovered.
- Estimates of the taxable portion of annuity payments for either one or two life annuities, if the actual taxable portions are not known.
Social Security
The Social Security calculations of the Rhino Retirement Analyzer include the following considerations:
- Calculation of full retirement age.
- Adjustments of payments based on starting date relative to full retirement age.
- The ability for a widow (or widower) to switch to the higher of the two benefits at his or her full retirement age.
- The special tax treatment of Social Security payments.
- A very rough estimate of the “primary insurance amount” used by the Social Security Administration to calculate benefits, based on the most recent year’s salary of the client. This should be used only when no other estimate is available.
Insurance Analysis
The insurance analysis of the Rhino Retirement Analyzer includes the consideration of insurance ratings of standard or above. The free version includes four ratings, with representative rates obtained from web sources.
Annuities and Pensions
The annuities and pensions calculations of the Rhino Retirement Analyzer include the following options:
- Single life or joint and 100% to survivor options.
- Return of premium option.
- Inflation adjustment option.
- Immediate or deferred fixed annuities.
- Cost and basis entries for calculating the return of premium benefit and the taxability of payments.
Assumptions
The assumptions of future rates of return and rates of inflation used in the Rhino Retirement are applied on a yearly basis at constant rates. The rates of return are applied to assets in the various investment accounts included in the calculations, and the inflation rate is applied to Social Security benefits and tax brackets, deductions, and exemptions, but not to salary.
Lifespan Estimates
The estimates of median and maximum longevity are computed according to Social Security Administration tables, modified by insurance ratings.
Factors that are Not Included in the Rhino Retirement Analyzer Calculations
Taxes
- The “Net investment income tax”.
- AMT calculations.
- State and local income taxes.
- The “Married filing separately” filing status.
- The 20% capital gains tax bracket.
- Itemized deductions.
- Income-based limitations on the standard deduction and exemptions.
- The penalty for taking money out of retirement accounts before age 59 ½.
- Taxes incurred by taking money out of Roth accounts less than five years after opening the first Roth account.
Social Security
- The possibility of taking Social Security as early as age 60 if you are a widow or widower.
- Automatic calculations of the spousal benefit that can top up the benefit of a very low paid worker.
Assumptions
The assumptions of future rates of return and rates of inflation used in the Rhino Retirement Analyzer are applied on a yearly basis without variation. For this reason, conservative rates of return should be used, as “sequence of return risk” is not considered.
Pensions and Annuities
Only fixed pensions and annuities, not ones indexed to or dependent on market conditions, are considered. CPI adjustments are included, however.
Known Limitations of the Program
- The Rhino Retirement Analyzer is intended for use with clients whose income is less than the amount that causes reductions in deductions, exemptions and so on, and who are not subject to AMT calculations or the net investment income tax. It can still be used in those situations, but the calculations will be less accurate.
- State and local income taxes are not included in the calculations. This is impossible because such taxes are deductible only if the taxpayer itemized deductions, and the program uses the standard deduction.
- Estate tax calculations are not included in computing the legacy left after the second spouse dies.
Disclaimer and Caveats
Of course, I cannot guarantee that the Rhino Retirement Analyzer’s results are correct even to the extent that the future unfolds as the scenarios calculated by the program suggest. Every complex program will have bugs of various levels of seriousness. Although I have made every reasonable attempt to debug and validate the results of this program, any reliance on the results of the program are at the risk of the user. As always when making financial decisions, do your own diligence and consult whatever financial experts you consider knowledgeable and reliable. You can also validate the tax calculations of the program by comparing them with a commercial tax preparation program; there is a validation mode that allows such comparison for future dates by eliminating the inflation adjustments to tax brackets and the like.