Curious on the paths people took to end up with Pralana software. What other products you try first? What issues with other products led you to try Pralana and to stay with it? Do you use others simultaneously. What do you think are it's "signature" features not found anywhere else? What are its limitations for you in your overall approach?
First I wrote my own spreadsheet. It had some things that were kind of cool, like 150 tabs, each representing a year since 1871. My solution to the end point problem (where historical traces only use the starting and ending years once, but the middle years over and over) was to wrap the data around. So after the final year of data, the next year in the sequence was 1871 again. I learned a few things from that
- When I put the results into bins, I found that the distribution of final estate value vs. historical frequency of occurrence was pretty linear, except for the top 25-30% of historical results and those great sequences all occurred after serious, long term, bear markets. Since we haven't had one of those recently, I tune my assumed returns to be about the 25%-30% of historical sequences as I know we are not living in the kind of bad times that set up the great future return sequences.
- I found that the US tax code is very, very complex and I was missing things so I shouldn't develop this any further 😀
I then ran across the bogleheads' Retiree Portfolio Model and it had features that I had missed in my own spreadsheet. I wanted Roth Conversion evaluation and it had more of the tax code, but was very manual. If you wanted to stay below an ACA limit or an LTCG phase-in, you had to do side calculations to determine how much to convert to hit those. It also had just one cell for adding expenses and one for windfalls, so I ended up writing very big formulas in those cells to accommodate the lumpiness of our plan. It had nothing to help with evaluating the effect on heirs' taxes from inheriting an IRA, or the effect of making gifts to the kids, so I made copies, one for each of our kids, filled in some guesses about their future and had formulas to move data between them. I made the mistake of trying to put in the iterative math needed to balance cash and that meant I played with the structure of the RPM program, so when the next year's version came out, I was stranded.
I ran across I-ORP and because of its LP engine, it could find ideas that you might not think of on your own, like using just a bit of Roth money to bridge cash flow gaps. However, when you started to constrain it, by, say, wanting an ACA subsidy, it might fail to converge. Also, the programmer had left out big chunks of that tax code and IRMAA was charged for the current year, not two years prior.
Then I happened to see Pralana advertised on the "Can I Retire Yet" blog and gave it a try. Wow! While Pralana has come a long way since then, even back then it was a breath of fresh air in its power and thoroughness.
I didn't try any of the others, but carefully read threads at bogleheads where folks compare them and it's clear that Pralana is far and away the leader in fidelity to the tax code and flexibility. Some of the others are reported to have better graphics that help in visualizing the results, so it's great to see Pralana adding some better graphs.
I am a statistics and spreadsheet person, and I had various spreadsheets going. (Still do.) I started a "big" one similar to Pralana, but found out pretty soon it was too easy to mess up on taxation and other details. Bogleheads RPM is widely admired, but I find it very counter-intuitive in its basic set up, too hard to figure out its formulas, and limiting in some things I wanted to do. In short I didn't feel it was worth the learning curve. At the same time, since I am a 'safety first', "lifecycle model" / "actuarial", I was using Ken Steiner's excel sheet to figure out my funded ratio and actuarial withdrawal.
I also fooled around with ERN (Kirstin Jeske's) Early Retirement Now SWR google sheet. I still use it, it is a work of art in doing historical analysis.
I-ORP was an eye-opener (pun intended), @Ricke, and it awaked my eyes to (1) the idea of optimization and linear programming, across the whole life-cycle, (2) the idea that when modeling, simplification of key elements is better than capturing every little details. (I think of I-orp a lot with some of the wish list requests I see for Pralana.)
I can't remember where I found Pralana, but what appealed to me was that it was excel and seemed very nuanced and nerdy. It only takes one "essential" feature to be a deal-breaker, and so far Pralana hasn't had any! It was also very reasonably priced. I didn't like having the formulas hidden from me. But I learned that Stuart (and now Charlie too) are very thorough and reliable in their methodology. They have very good instincts on what needs to be fixed or put off or ignored, and test new ideas for veracity. To be honest, I am stunned how few mistakes they have. And I really admire the way they vet new features. They also were very open and transparent. So in other words, even with formulas hidden, I could trust the results (i.e. trust them). That's priceless, and I can't say that for other software.
One thing that really distinguished Pralana for me was the "mode 2" ability to set overall asset allocations, which constrains optimization. I had begged the I-orp creator to do this years ago, and despite detailed email exchanges, he didn't understand why I wanted it. Low and behold, Pralana had already incorporated it! Lack of "mode 2" was a deal-breaker with I-orp and it gave me false results. And a deal-breaker with most other programs!
On a selfish note, I also found that the Pralana programmers were open to my good suggestions (and filtered out my bad ones), and I feel like some major features have been built in to my and everyone's benefit. This would never happen with a large company.
I also like how they explain where numbers are coming from. So I can check up on things to make sure I am entering and understanding. In fact, usually if something doesn't make sense I learn something by following the numbers. ("Oh, when I die my taxable account gets a step up!".)
If I had to find fault, aside from the fact it's not as "shiny" as Portfolio Lab and Boldin, it's the lack of ability to explore total consumption rather than just total savings. There are "expense" graphs but I don't find them useful. In the lifecycle model, consumption (be it discretionary or total) is key, and I've been forced to download pages from pralana and then do this on my own in excel. I also cannot figure out my funded ratio or actuarial calculations with Pralana, so also use TPAW (tpawretirementplanner.com) to figure out my actuarial discretionary withdrawals. (Maxifi is based on the lifecycle model and linear programming, so I'm eager to compare it to Pralana.)
I also find Pralana's monte carlo very primitive, with crude sd, a normal curve that understimates tails, rather than a scaled bootstrap I prefer for my own modeling. So I mostly use deterministic mode, and historical mode (though ern's is more detailed). I tend to use "fixed amount phased" for my discretionary withdrawals and I use consumption smoothing to approximate i-orp.
I retired in 2017 and had a background in decision analysis where we used modelers who would build stochastic models in excel using financial engines add-ins to provide financial output based on a structured decision analysis process.
About 2 years before I retired I had Vanguard and Fidelity do what they called cash flow modeling and retirement readiness. I found it very lacking compared to models we used at work so I started looking for alternatives for retirement planning.
I had difficulty finding anything until I came across Pralana and gave it a try. I used it for a few years and then me and the lead decision analysis guy at work agreed to guide a number of co-workers through what to include and how to make decisions prior to and in retirement.
It became clear that building a model from scratch was not going to be a realistic approach. We also recognized that a generalized model would not be easy to apply to personal circumstances.
I convinced my partner to try Pralana and we both thought it was very good back then-before all the great upgrades. We introduced it to all the co-workers who were interested and then provided training on how to use it and how to interpret the results. We repeated this process for several years as new co-workers were nearing retirement.
During this process I was introduced to Steve Chen when he was in the early stages of developing what is now Bolden. I agreed to use the software and provide feedback.
I did not like how Steve was developing the software such as ROR inputs and optimistic and pessimistic vocabulary so I quickly moved on.
To date, almost all of the decisions I wanted input Pralana on have been made but I will continue to keep my plan up to date because I am sure others will pop up in the future and I think it is important to have clash flow projections. I do not use any of the withdrawal options such as fixed rate or consumption smoothing - just income and portfolio compared to specific spending projections. I played with them and they may be good approaches for others.
I am very impressed with the online version. Because of my comfort with excel I was a little concerned about the transition.
@golich428 Given your background in stochastic decision analysis, do you avoid Pralana’s simplistic optimizations and Monte Carlo, and stick to just the cash flow? How did you do optimization when retired without your former excel tools?
If I had to find fault, aside from the fact it's not as "shiny" as Portfolio Lab and Boldin, it's the lack of ability to explore total consumption rather than just total savings. There are "expense" graphs but I don't find them useful. In the lifecycle model, consumption (be it discretionary or total) is key, and I've been forced to download pages from pralana and then do this on my own in excel. I also cannot figure out my funded ratio or actuarial calculations with Pralana, so also use TPAW (tpawretirementplanner.com) to figure out my actuarial discretionary withdrawals. (Maxifi is based on the lifecycle model and linear programming, so I'm eager to compare it to Pralana.)
I also find Pralana's monte carlo very primitive, with crude sd, a normal curve that understimates tails, rather than a scaled bootstrap I prefer for my own modeling. So I mostly use deterministic mode, and historical mode (though ern's is more detailed). I tend to use "fixed amount phased" for my discretionary withdrawals and I use consumption smoothing to approximate i-orp.
I looked at the MaxiFi author's paper (and advertorial) about Roth Conversions and saw that MaxiFi uses a weird definition of discretionary income that makes it unsuitable to me. Perhaps to make it easy for an LP solver or otherwise avoid programming complexity, it put taxes in the discretionary income category. So it would propose doing Roth Conversions in early retirement while you eat rice & beans, so that when you are 90, you can really party. Crazy, but easy to program while including Roth Conversions in the mix.
Pralana's Consumption Smoothing method is much more sensible, with your listed mandatory expenses plus taxes as the underlying spending and then brute force solving for the discretionary spending you can have during your lifetime. The downside of Pralana's approach is doesn't lend itself to integrated solving with Roth Conversions, but I've found it converges if you Consumption Smooth then Roth Optimize and repeat 2-3 three times. Not elegant, but at least the answer is more physically meaningful to me than what MaxiFi is doing.
In reviewing Kotlikoff's paper, I tried duplicating the results in Pralana. Kotlikoff made it sound like no other software would get the answer, but it turned out that the big conversions recommended came from the unrealistic asset allocation (100% TIPS) causing giant tax drag in taxable. Minimizing tax drag is rocket fuel for Roth Conversions so both MaxFi and Pralana found large conversions useful and I could pretty much duplicate the Roth plan in Pralana, with the caveat that there's no reconciling MaxiFi's oddball treatment of taxes as discretionary.
Can you elaborate on what is in TPAW that you would like to see in Pralana? I tried the TPAW planner and it didn't click with me, but Stuart and Charlie are always on the lookout for useful features.
While return distributions may not be perfectly normal at relatively high frequencies (e.g., daily), return distributions become increasingly normal over longer periods (e.g., annually). Finally, financial plans require a significant number of other assumptions that will have a materially greater effect on the outcome (e.g., saving, spending, length of retirement, etc.) than the specific return distribution.
There is more uncertainty on the average ROR for each asset class than the shape of the return distributions. In most if not all planning software with maybe limited exceptions ROR is the only variable that we attempt to provide a range of uncertainty. The uncertainty in the tax code alone probably creates more so called error in future cash flows than the exact shape of realizedrates of return. What about the error in longevity - huge range of probable outcomes.
I am not sure what you mean by simplistic optimizations? Are you referring to social security and/or Roth conversions etc. I run those tools and use that information as a guide but I may have overriding reasons to deviate from the results.
As far as optimizing my plan - again optimizing what value. Is it maximizing end of life wealth portfolio balance, maximizing early retirement cash flow, maximizing tax free legacy, maximizing inflation adjusted income or minimizing income taxes or some combination of the above.
I don’t think it is possible to optimize. We can only create a reasonable plan that can help us make informed choices among the alternatives we have for each decision that is important to us.
For example, if we could have optimized our plan based on the previous tax laws, what would we think of that plan now that we have new laws - they could change again in a few years.
Planning is a process of making the best assumptions based on our current situation and then using the Bayesian approach of updating them as new information becomes available.
The tools I used before retirement were customized to a specific problem with unique variables that typically only applied to that particular investment.
I don’t think it is possible to optimize. We can only create a reasonable plan that can help us make informed choices among the alternatives we have for each decision that is important to us. ...
Planning is a process of making the best assumptions based on our current situation and then using the Bayesian approach of updating them as new information becomes available.
The tools I used before retirement were customized to a specific problem with unique variables that typically only applied to that particular investment.
I incorrectly assumed from your former career (of decision analysis using stochastic models in excel using financial engines add-ins), that you'd wanted to do the same thing with your own retirement now.
FWIW I agree with you about the limits financial optimization over long time periods given the huge number of unknowns. Like you, I use what you call a “Bayesian” approach. And it’s one reason I use a variable actuarial withdrawal method, because it has that assumption built in. I think it's why I am one of the more skeptical folks about Pralana's Roth optimizer. It's useful for what it is, but it doesn't take much to make its results incorrect over thirty and forty years.
@jkandell I said financial engines in my previous post in error. It was not the financial engines that most would think of that was developed for personal finance. It was an add-in that was used to take P10,P50 and P90 statistical data for each variable to create the probabilistic output for such calculations as NPV which was a key decision metric.
Can you provide a little detail on how you use a variable actuarial method on just your discretionary expenses. I assume it is similar to RMD approach which could result in a significant reduction in spending during a major bear market. Why did you select this method over other approaches. This approach would not work for me due to my desire to front load my discretionary spending.
Can you provide a little detail on how you use a variable actuarial method on just your discretionary expenses. I assume it is similar to RMD approach which could result in a significant reduction in spending during a major bear market. Why did you select this method over other approaches. This approach would not work for me due to my desire to front load my discretionary spending.
At the moment my actuarial process is basically something like the following. I'm not recommending it for anyone else, it fits my values and personality as described in my original post above. I hope your eyes don't glaze over, cause I'm sharing what works for me personally but I don't talk about much with others:
- Model essential expenses going forward till 25th percentile longevity for either of us, with "essential" defined liberally as a "dignity floor" that includes things like eating out every now and again, going to movies, hobbies not just medical/food/housing/taxes. (I do subscribe to the "go go, low go, no go" idea but less so for the dignity floor.)
- Maintain a liability-matching-portfolio of TIP bonds for as much of this as is practical, with duration-matched TIPs funds making up the difference. I also include 10% allocation of the essentials floor to TSM, just on principle.
- Model future income like social security and pension going forward to the 25th percentile longevity. I retired last year but my wife is still working several more years. Then I get SS at 70 and she at 62.
- From this I can derive an Lifetime Actuarial Balance Sheet, reflecting the Net Present Value of my portfolio + future income stream minus the Net Present Value of my Dignity Floor stream, using the 10 or 20 years TIP rate as the discount rate (currently ~2%).
- What is "left over" on that balance sheet (NPV income stream minus essential stream) is my total available at this time for discretionary withdrawal. I invest this "bucket" (theoretical, I don't keep it separate from my other funds) at an AA matching my risk tolerance, currently 50/50. Note this is a risk tolerance for discretionary knowing my dignity floor is covered by LMP. FWIW, my current AA (including the bonds necessary for rounding out the Essential Floor) is 40%.
- I do an "actuarial" equation (PMT in excel) on this extra amount using the expected returns of that bucket for the discount to determine how much to withdraw this particular year. At 50/50 I am currently using a 3.5% discount rate. (I use a cape-influenced model of expected stock returns, which rises after a crash, and decreases as cape rises.) I feel this is the best Bayesian decision because it takes into account not just the present but future income and expenses: so it does a sort of "time diversification".
- Note that this amount is variable in practice because it is re-run each year: the NPV on the income and expense side change as large expenses (like son's college) vanish or large CDs get cashed. (Or life throws a punch.) Also expected returns change, longevity increases (with each year you live), portfolio value changes, chronic health issues arise, and tax laws change.
- I cross-check the PMT figure in Pralana by using my essential floor as an essential-phased expense but using "constant consumption" to calculate the discretionary. (What Pralana derives from iteration should in theory equal the actuarial equation.) I also cross check with TPAW retirement planner for a monte carlo of the range of discretionary actuarial withdrawal stemming from the variability of returns, and to check for liquidity problems. (The actuarial withdrawal merely represents the median result--but I also need to know its range to make a wise decision.)
- Like you I also want to "front load" discretionary spending in our 70s while we are still healthy ("go go"). But that is easy to do within an actuarial model by simply adding a small growth factor to the pmt equation. I "bend" the constant consumption to slightly favor the earlier years at the expense of the later years. (This decision is subjective; it is equally rational for others with different preferences to bend the curve the other way, to favor later years, or to favor constant consumption.) (Here is an example spreadsheet of the growth-factor I suggested to Charlie as an example of what Pralana might incorporate into its own actuarial method.) . TPAW also includes this ability to adjust the slope of the "constant consumption" up or down as you see fit.
You are correct that the actuarial equation will reduce withdrawals after a crash, and vice versa in a bull market. However, the actuarial method as I do it tempers this considerably by (a) increasing the discount rate as CAPE crashes, and decreasing the discount rate as CAPE rises, (b) taking into account the entire lifetime balance sheet (npv of future income like SS and pension, and LMP--treating them like a bond), not just "the portfolio"--all of which considerably cushions the effects of any crash or lottery win in one particular year. Yes, the RMD method is similar, but (a) uses a discount rate of 0%, so will tend to grow over time rather than being front loaded, and also (b) only looks at the portfolio ignoring the future lifetime income--so has more dramatic swings.
You ask why I chose this method. I explained it in my original post, but to elaborate: Because I think it is the rational reaction to changing world and personal conditions: If my portfolio crashes 50%, I need to take that change into account looking forward (but not to over-react to it either). If cape is at record highs, I need to take that into account. What I like about the actuarial method is that it bases just this chunk of my withdrawal on these factors, but leaves open all the rest for the future. And that modesty and even-temper suits my personality. As I explained in my original post, it also works for me behaviorally. Because of my lack of "safety net" (generational wealth) on both sides, which I think makes me different from many Pralana users, I have a fear of withdrawal of the nest egg that took me so long to build. My temptation is to keep anything extra "just in case" (in case cancer hits, my assets get snatched by totalitarian govt, we hit returns like Japan for 30 years, etc). I recognize this is not a rational. By knowing that my dignity-floor is covered with TIPs (assuming its actual ror), and knowing that my method diversifies risk across time by using NPVs, gives me the courage to take that "fair chunk" of what's left with determination for "fun". The cross-check monte carlos help with this too. "Fun" for me includes giving to charity and back to society in various ways (which I've not been able to afford while accumulating).
I looked at the MaxiFi author's paper (and advertorial) about Roth Conversions and saw that MaxiFi uses a weird definition of discretionary income that makes it unsuitable to me. Perhaps to make it easy for an LP solver or otherwise avoid programming complexity, it put taxes in the discretionary income category. So it would propose doing Roth Conversions in early retirement while you eat rice & beans, so that when you are 90, you can really party. Crazy, but easy to program while including Roth Conversions in the mix.
I don't know Maxifi beyond what I read. Did you find something beyond the youtubes and his substack ? Larry K is full of himself, which puts me off.
But I was under the impression Maxifi used linear programming in order to fully optimize things (like SS or Roth conversions) taking into account way more than Pralana including taxes of all kind, but also roth-induced changes in current and future taxes; Required future minimum distributions from non-Roth retirement accounts; extent and degree of Social Security benefit taxation; Medicare Part B IRMAA premiums; Cash-flow constraints; willingness to accept a lower living standard in the short term in order to enjoy a higher living standard in the long term; regular assets, Roth and non-Roth retirement accounts, Social Security, and other income streams; assumed nominal return on regular assets and retirement accounts; assumed future inflation rate; household’s demographic composition.
Since my main interest is maximizing discretionary income I thought a program devoted to that concept might be better than Pralana. (Pralana handles my essentials, but I need to use phased essential expenses to try to estimate my true dignity floor I want protected in any consumption smoothing.)
Taxes should count as essential, for sure, and I'm surprised to hear it is not counted that way in maxifi. (It's actually one of my peeves of financial software in general. The boglehead's VPW for instance assumes you'll take out the actuarial amount ... and then withdraw taxes and expenses from it.) I see at least one recent review by Harry Sit says Maxifi does count taxes as essential, so I'm going to double check.
Pralana's Consumption Smoothing method is much more sensible, with your listed mandatory expenses plus taxes as the underlying spending and then brute force solving for the discretionary spending you can have during your lifetime. The downside of Pralana's approach is doesn't lend itself to integrated solving with Roth Conversions, but I've found it converges if you Consumption Smooth then Roth Optimize and repeat 2-3 three times. Not elegant, but at least the answer is more physically meaningful to me than what MaxiFi is doing.
Yes, that all makes sense. And Pralana's need for iteration of separate consumption smoothing and roth conversion (that I do too) is a crude yet effective hack to solve the problem!
In reviewing Kotlikoff's paper, I tried duplicating the results in Pralana. Kotlikoff made it sound like no other software would get the answer, but it turned out that the big conversions recommended came from the unrealistic asset allocation (100% TIPS) causing giant tax drag in taxable. Minimizing tax drag is rocket fuel for Roth Conversions so both MaxFi and Pralana found large conversions useful and I could pretty much duplicate the Roth plan in Pralana, with the caveat that there's no reconciling MaxiFi's oddball treatment of taxes as discretionary.
If I try out the program I'll let you know how my results compare to Pralana's.
Can you elaborate on what is in TPAW that you would like to see in Pralana? I tried the TPAW planner and it didn't click with me, but Stuart and Charlie are always on the lookout for useful features.
I'm pretty conservative with suggestions I make to Stuart and Charlie, since I strongly feel a change needs to be desired by a large number of users and also needs to fit the overall philosophy of the program. I'm not sure the type of Lifecycle model used by TPAW is at all popular among Pralana users. (Their inclusion of "actuarial" and "consumption smoothing" is I suppose an argument the other way.)
What do I like about TPAW? I like TPAW's focus on consumption rather than just portfolio value, which seems to me the right focus. It's focus is on npv of lifetime consumption, with a signature feature of taking into account future social security and pension, which it treats as bonds. I much prefer this version of an actuarial method compared to Pralana's or VPW, since it treats future income (and expenses) as part of the mix, and so diversifies risk across time. Any shocks to the portfolio (or lottery wins) are diluted out in the larger income stream, which seems to me the right approach compared to e.g. VPW. I also like TPAW's ability to fine tune subjective utility of future consumption vs present; and it's ability to fine-tune Relative Risk Aversion directly (with Asset allocation a dependent variable arising out of that, not the other way around). I don't see the average Pralana user caring about any of that.
Having said that, I have made some wish-list suggestions for Pralana: (a) Pralana include lifetime discretionary/variable consumption on its monte carlo screens in addition to just EOV; (b) a "growth factor" entry on the actuarial withdrawal screen, to shape the slope of the actuarial withdrawal for the benefit of those who want to withdraw more sooner when they're healthier (at the price of less later) or vice versa; (c) and the ability to do bootstrapping historical analysis and scaled bootstrapped forward monte carlo analysis; and (d) I've supported those wanting to see the Funded ratio/ lifetime actuarial balance sheet.
It's not essential to the model, but TPAW happens to use scaled bootstrapping for its monte carlos. Users can adjust the block size. This gives more refined results IMO, left off of most monte carlos, reflecting aspects as autocorrelation of stocks and cross-correlation between stocks and bonds, and better models the "5th percentile" so crucial for risk management. I also like how TPAW adjusts expected returns (i.e. discretionary portfolio discount rate) to CAPE, tempering some of the problems with other actuarial calculators.
One thing I don't like about TPAW is the "Merton share", an equation Merton developed as a student, as a means of setting asset allocation. (With Merton Equity Share = Equity Premium / (RRA * variance).) RRA is a constant somewhere around 2.0 for most people, but I find it problematic. On the one hand, the Merton share builds in the "price" of risk into the AA. Since 60/40 might make more or less sense depending on bond yields. But I find the equation much too sensitive to inputs to be useful compared to the "old fashioned" age in bonds type thinking. But at the same time I think the way TPAW has you set RRA in reverse by looking at the monte carlo bands change "live" as you move the risk slider is a master-of-elegance for such a complex idea.
Sorry to give you a rambling answer arising out of my mixed feelings about TPAw.
I think MaxiFi lacks anything similar to Pralana's Mode 2, so will give bad answers if the user has anything but the same asset allocation in all accounts.
Odd that Mode 2 was added several years ago, yet Pralana's competitors never caught up with it.
I looked at the MaxiFi author's paper (and advertorial) about Roth Conversions and saw that MaxiFi uses a weird definition of discretionary income that makes it unsuitable to me. Perhaps to make it easy for an LP solver or otherwise avoid programming complexity, it put taxes in the discretionary income category. So it would propose doing Roth Conversions in early retirement while you eat rice & beans, so that when you are 90, you can really party. Crazy, but easy to program while including Roth Conversions in the mix.
I think you might be remembering it incorrectly. Maxifi manual says the following about discretionary income:
Discretionary spending typically includes all the spending you have in a given year apart from what is treated in the report as "fixed spending" (taxes, housing, contributions to retirement, Medicare B, special expenses). So in other words, discretionary spending will include your groceries, gasoline, utilities (unless you entered your utilities in the housing area), clothing, etc. There is no need to enter groceries or dining out, for example, as a separate expense item. So Total Spending minus Fixed Spending equals everything else spending. This "everything else spending" is what MaxiFI refers to as "discretionary spending." You may know what your utility or gasoline spending is in the current year, but it's pure speculation to presume to know about 30 years from now--or for that matter, whether cars will even run on gasoline 30 years from now. So we treat everything that is not fixed spending as discretionary spending and you can budget that spending allowance on an annual basis as you see fit each year going into the future.
So for maxifi taxes are essential, but groceries, utilities, clothing are discretionary, because we can't predict what they'll be in 30 years!
Is this perhaps the weird definition you were thinking of?
In contrast, when I do consumption smoothing in Pralana I estimate an amount per year for groceries and eating out a bit and hobbies and utilities under phased expenses, which I indicate is "essential" (i.e. 'dignity floor'). It sounds like Maxifi expects you to just take it out of discretionary funds. Granted one has limits to estimating grocery prices in 30 years, but that's just as true of taxes and housing maintenance and health care! How odd.
I looked at the MaxiFi author's paper (and advertorial) about Roth Conversions and saw that MaxiFi uses a weird definition of discretionary income that makes it unsuitable to me. Perhaps to make it easy for an LP solver or otherwise avoid programming complexity, it put taxes in the discretionary income category. So it would propose doing Roth Conversions in early retirement while you eat rice & beans, so that when you are 90, you can really party. Crazy, but easy to program while including Roth Conversions in the mix.
I think you might be remembering it incorrectly. Maxifi says about discretionary income,
Discretionary spending typically includes all the spending you have in a given year apart from what is treated in the report as "fixed spending" (taxes, housing, contributions to retirement, Medicare B, special expenses). So in other words, discretionary spending will include your groceries, gasoline, utilities (unless you entered your utilities in the housing area), clothing, etc. There is no need to enter groceries or dining out, for example, as a separate expense item. So Total Spending minus Fixed Spending equals everything else spending. This "everything else spending" is what MaxiFI refers to as "discretionary spending." You may know what your utility or gasoline spending is in the current year, but it's pure speculation to presume to know about 30 years from now--or for that matter, whether cars will even run on gasoline 30 years from now. So we treat everything that is not fixed spending as discretionary spending and you can budget that spending allowance on an annual basis as you see fit each year going into the future.
So taxes are essential, but groceries, utilities, clothing are discretionary, because we can't predict what they'll be in 30 years!
Is this perhaps the weird definition you were thinking of?
In contrast, when I do consumption smoothing in Pralana I estimate an amount per year for groceries and eating out a bit and hobbies and utilities under phased expenses, which I indicate is "essential" (i.e. 'dignity floor'). It sounds like Maxifi expects you to just take it out of discretionary funds. Granted one has limits to estimating grocery prices in 30 years, but that's just as true of taxes and housing maintenance and health care! How odd.
OK, what I saw in the MaxiFi article is just that it reduced your discretionary spending during the years of Roth Conversions, it was my guess as to why. In any case, that seems to be the opposite of what folks want - requiring less consumption up front to get more later. Worse, if I understand what it's doing, I think MaxiFi is doing bad math, mixing the effects of Roth Conversions with the effects of short term low spending. That is, your far future discretionary spending would automatically increase if you cut your spending back for a few years even if you did no Roth Conversions at all.
