For quite some time Pralana has had a sophisticated consumption smoothing algorithm tucked away under Analysis : Spending Strategies. I don't see it mentioned much, but it's really a hidden gem.
In short form, Pralana's Consumption Smoothed Spending, by trial and error (iteration), finds the maximum amount of withdrawal "left over" in your model after income, essentials, taxes, specified extra expenses, etc. So, at its most basic, CSS allows you to gain insight into the amount of margin that exists in your plan: the amount by which your annual spending can be increased without you running out of money in your expected lifetime.
The main use of CSS is to determine your "retirement paycheck" that draws down your portfolio to supplement social security and pensions. That is, Pralana CSS calculates the value of your yearly supplemental cheque that augments your social security and pension. You enter how much legacy you want to leave at the end and Pralana, taking into account your income and expenses, divides the rest out evenly in inflation-adjusted dollars over the rest of your life.
How much of this "retirement paycheck" would be allotted to fun versus expenses depends on your social security amount and on what extra expenses you enter into your model. If you take the simple approach that probably works for most, you just consider this CSS amount to be just like a salary to include everything not covered by ss and pensions: things like groceries, clothing, car expenses, in addition to trips, fancy meals, luxuries, etc. If you had any large expenses you wanted to 'bracket off' from the consumption smoothing (like a wedding, or large trip) you could enter those as scheduled withdrawals ahead of time. How you approach this retirement paycheck is up to you. You could even enter a whole "dignity floor" as a phased expense if you wanted the CS to just reflect "fun money" beyond bills. Most users likely don't need this level of detail.
The other great use of Consumption Smoothing is to do quick evaluations for comparing major life decisions. You can easily set up two identical scenarios, change one model entry, and run a quick CSS on both to see the impact on your yearly discretionary budget. (I'd recommend Deterministic for this use of CS, for speed.)
I'm thinking of evaluating big things like,
- Retiring sooner or later
- Changing jobs
- Two houses versus one
- Paying off mortgage early
- Downsizing your home
- Effects of a big expense like a trip or wedding
- Relocating
- Pension vs lump-sum pension
- Having another child
- Leaving different legacy amounts
To my knowledge, only one other competitor has consumption smoothing, Maxifi; and that's all it does. The fact Pralana includes it as a "bonus" addition to its other powerful tools is one of the reasons Pralana is "best of class" among retirement software. Kudo's to Stuart for being head of the curve.
@jkandell Thanks for this! I'm moving it to the Community forum so it's readily visible to all.
Stuart
I have not used Maxifi, but it seems like Consumption Smoothing adds a very similar capability to Pralana that Maxifi has at its core, plus Pralana has all of its other capabilities.
I have not used Maxifi, but it seems like Consumption Smoothing adds a very similar capability to Pralana that Maxifi has at its core, plus Pralana has all of its other capabilities.
@bfisher101, Because it's all it does, Maxifi has some features that are nice. For instance, Maxifi's optimizers look to maximize consumption, and its monte carlo looks at consumption trajectories as well; whereas, as we know, Pralana's optimizers only focus on the end-of-life-portfolio. Also, Maxifi smooths consumption based on per-person consumption, not in absolute dollars. So one partner dying or a kid leaving home (reducing expenses) will adjust the flat withdrawal amount into a series of steps, which a useful way of looking at it. However, despite its programming sophistication, I noticed that Pralana's tax calculations and other components of essential expenses are more accurate than Maxifi's. And Pralana is, to say it mildly, much more flexible. There is another free program, TPAW, that also allows consumption smoothing, too, and it is excellent if that is your focus. But it doesn't have any of Pralana's sophisticated modeling of taxes and other essential expenses and optimizations.
