I have a feeling the answer is going to be obvious, but I can't figure it out. I've searched the user manual, and see the phrase "Activate Historical Analysis" mentioned, but no explanation as to what it does. Same with the forum. I see a post from 2021 but I don't really understand how it applies to Pralana Online. I get what happens when I run the Historical Analysis, but all I can see happening when I check the "Activate Historical Sequence Analysis" is a change in the Deterministic box. And now I have just noticed that Absolute vs Effective Savings are the same, despite having an effective tax rate of 20% entered. I am definitely confused.
Activate Historical Sequence changes the deterministic analysis from using your guesstimates of inflation, stock and bond returns to use the historical sequence that started in the year you selected (default is 1965 as that is a real stinker). So go to Review and see how your returns and net worth spike up and down from year to year. It's a great way to see a year-by-year stress-test of your plan.
I particularly like to use it to test how risky extra Roth Conversions might by - I enable Roth Conversions and look at the final estate value starting in a bad year like 1965 and then disable Conversions and do it again. It lets me see that there is risk involved, it's possible to have poor market sequences where Conversions lose you money.
@ricke I am not sure I follow your comment "it's possible to have poor market sequences where Conversions lose you money." Do you mean if a poor market starts after you do a Roth conversion? I am not sure how that would be different then any other investment strategy. Doing a Roth conversion during a market downturn is the best time to do one, within reason. I must be missing something 🤔.
@ricke I think you left me a reply, but I don't see it . I did see the notification, twice in fact, that you replied about an hour ago. Stuart Matthews knows there is a problem with posts duplicating. Not sure if this is related.
Yes, you optimize your Roth Conversion plans around assumed rates of return. If you convert and then those returns don't materialize or turn into losses, then the conversion isn't as good as you thought and can actually be a negative.
I wanted to reply here as this has been top of mind lately for clients. In another thread recently, @jkandell and @pizzaman were discussing something along theses lines but that thread was declared closed.
The important point is that sequence risk is not only a big success factor when it comes to withdrawal/spending rates, it also factors into whether doing Roth conversions will be a good or bad thing. If you're aggressive in equities/stocks in your portfolio and reliant on them for withdrawals in the near term, and the stock market takes an extended bear market/downturn, you could run out of money. The best example, as @ricke says, is that long period of stagflation starting around 1965.
The wonderful Roth conversion optimization results you might be seeing are assuming the returns you've laid out will happen, on average over the years. People are second guessing doing them now, because we seem to be inviting 1965-style stagflation all over again, those "not so golden" years. Odds of recession are going up dramatically.
The point is, prioritize your money moves. Perhaps paying down any debt is a better play than paying taxes this year on a big conversion, or boosting your savings in case of job loss or other large expense, such as helping family members who lost their jobs. The Wall Street Journal just said we're on track for the worst April since the Great Depression.
Spend time looking at your portfolio, do you have the kind of US vs international diversity that Vanguard has always held in their target date funds? This is why they do that. Perhaps review your assumptions in Pralana one more time, are you being overly optimistic? Are you sure those expected returns are real vs nominal? It makes a difference. Yes, US and international companies and returns are intertwined, but the rest of the world is working very quickly to fix that, with the recent chaos. For example, building their own trade agreements. China is now buying soybeans from Brazil, not us. We saw a run away from our bonds in the big market drop last week, extremely unusual and a harbinger. We have a massive 9 *trillion* debt bomb coming due by June, that will likely have to be renegotiated at a much higher interest rate (very bad), if we don't just default (worst case, but lately nothing would surprise me).
That said, Roth conversions are a hedge/insurance against future high tax rates, which are also pretty much a certainty and threat to your success. In the right circumstances, they're a very important tactic but don't be myopic. Prioritize various strategies. The good news is that we have an amazing tool that allows us to do that!
I don't believe threads are ever really physically closed, so you can add on any time you would like. @jkandell and I had a good discussion going but we kind of ran out of steam and it seemed others had dopped out. Sometimes it's hard to tell if you and the other person are the only ones interested in what is being discussed. I understand that the vast majority of PRC users are forum "lurkers", but it would be helpful if you are reading a thread you like, please post something as simple as "good thread, please keep it going". There's nothing I would like better then to post paragraphs of interesting information 😆.
Hey Bill, mostly all good points (there is a whole thread on investing in US vs international markets😜). If you are someone who has a Roth IRA or Roth 401k, you usually take money out of them only after exhausting your taxable account and most of your regular IRA, generally speaking. That means you have time to recover from prolonged market turn downs. I agree 100% that future tax rates are going up. I started a thread that talks about nothing else. If the stock market continues it's downward slide and maybe even into to recession, this year would be a GREAT time to convert 😉.
