My confusion is similar to the post "Roth Optimization not as good a manual result". However, the problem has not healed itself. I have attached a spreadsheet with the pertinent columns. You can see the Roth Conversion amounts jump around. For some strange reason, PRC recommends large conversions in the last two years of my wife's expected life term. What if she dies earlier?
We are both retired. My wife is not currently subject to RMD. No annuities or windfalls. Just social security and investment income. I read Stuart Matthews comment in the post "Roth Optimization not as good a manual result" that PRC optimizes on several factors. The PRC team has put a lot of thought into the logic. Why should I trust the Roth Optimizer?
I found that manual roth conversions provide similar end-of-life portfolio values -- as noted in the earlier post.
[personal info attached removed by site admin]
@pr73734r Hi, I moved this from the PRC Excel Gold/Bronze section to the Pralana Online section. Also, I am deleted the attachment containing your personal information that otherwise all subscribers can see (some may have already seen it).
You may find it more convenient to use the Pralana Online Feedback feature to ask questions like this that pertain to your personal information. The site admins can access your plan projections, so there is no need to extract and post spreadsheets....easier for you.
The R/C optimizer algorithm is explained in the user manual. In short, it tries hundreds of permutations of ordinary income bracket limits over your conversion years. For each permutation, it does a full scenario recalculation and saves the final effective savings. When done, the 'best' solution is the one with the highest final savings.
See also More > Resources > FAQ: Does "Optimize Roth Conversions" evaluate all permutations of the ordinary tax brackets during the conversion years? Can it also optimize for other inputs such as account priority and maximum LTCG tax brackets, etc?
Re: "What if she dies earlier?" You specify her life expectancy and many other inputs, like inflation rates, asset/account rates of return, etc. Pralana makes projections based on your inputs. You can certainly test alternative scenarios by copying scenario 1 to scenario 2, reduce her life expectancy and see the impact on your the final effective savings.
Thanks for removing the file. Will use feedback, as I have in the past.
In short, your response is "Que sera, sera". Methinks the PRC Roth optimizer needs a rethink.
- Life expectancy is just that. A wild guess. PRC uses it as a cliff. PRC should assign probabilities around the specified life expectance. PRC uses the Monte Carlo approach to investment returns. Life is just another gamble.
- Suggest PRC uses one or more goals for roth conversion, such as, "Convert 80% of IRA to Roth", "Maximize Roth account".
Is the PRC approach to roth "Take action on the first year, come back a year later and run the optimizer again"? i.e., don't look at the series of values as a defined path. Act now. Calculate again in a year.
@pr73734r IMHO, all Roth Conversion planning should be done on a year by year basis. So much can change from year to the next that you cannot really rely on a past years analysis. I am not sure how much planning you have already done in this area and apologize if some of this is redundant.
Hope others find it useful and perhaps share a few tips as well....
As part of your Conversion analysis you have to start with who you are Optimizing for:
- Couple
- Surviving Spouse
- Heirs
The optimization will be very different depending on your priorities. Typically optimizing for the Couple will generate very different results than optimizing for a Surviving Spouse or Heirs. A lot depends on your specific situation.
That said, I modeled it this way (we are optimizing for the Couple, Survivor, Heirs):
- Scenario 1 - We both live to our desired lifespan
- Scenario 2 - Scenario-1 but adjusted for me passing next year
- Scenario 3 - Scenario-1 but adjusted for my wife passing next year
** Now I have to save and reuse the Scenario spaces **
- Scenario 2' - Scenario-1 but adjusted for me passing at half my remaining life expectancy (from Scenario-1)
- Scenario 3' - Scenario-1 but adjusted for my wife passing at half my remaining life Expectancy (from Scenario-1)
Plus other scenarios as well as needed.
This can give you a rough idea of how to stay on the target for your plan but forget about hitting a bullseye. Way too many unknowns in the future.
Note: the optimizer may find a very small difference between strategies -- I often consider that well below the margin of error without enough juice to trigger a change in strategy. Always check and review.
Bonus tip: I always run Scenario-1 with No Conversions and pay close attention to how long it takes for the Tax Adjusted Portfolio to breakeven with Conversions. If it's close to my expected lifespan (e.g. 88 when I expect to live to 90) that factors into how strong a signal there is to convert.
At this point the Optimizer is focusing on Tax Adjusted Portfolio value. FWIW I would like to see other Roth Conversion Goals as well:
- Estate/Inheritance Tax
- Special Needs/Spendthrift Trusts
- Resilience to unexpected expenses (would love to be able to enter a Standard Deviation to help better model this)
Anyway, my $.02 FWIW.
Not sure if you ran any numbers to estimate the size of the computations you are hoping for the program to do. You want the program to run a cloud of cases, from immediate death to the tail of the life expectancy tables for each spouse and then optimize conversion in each year for each case? As Charlie explained, they already do hundreds of iterations to evaluate the best path for one combination of death ages. If you are 65, the mortality tables can go 55 more years, so that is over 3000 age of death combinations for a married couple and doing hundreds of iterations for each, so it would require hundreds of thousands of cases.
And I don't see that kind of answer as all that useful. We just aren't given the capacity to see the future that clearly. Health can deteriorate, markets giveth or taketh away, family situations can change, you may take on a major expense, move to a different state with different taxes, get a job or leave a job, etc.
That's the essence of planning, you take a shot at what you think are likely outcomes and evaluate alternate scenarios testing good and bad results. And then repeat the process when one of the things you didn't anticipate comes to pass. One of the cool features in Pralana is you can take your Roth plan and stress test it with good or bad historical return and inflation sequences. Simply go to Analysis - Historical Analysis and in the box near the top labeled Historical Sequence Analysis, click the check box that says "Activate Historical Sequence".
hmmm.... What a concept !!! 🤔 Why / Who / What am I doing? 😀
Not sure what I chose nor if I chose anything on this front. Will look into it.
Optimizing for:
- Couple
- Surviving Spouse
- Heirs
Was afraid of that. Roll, roll, roll. Roll the ball up the hill. And do it again and again and again. 😮
We just aren't given the capacity to see the future that clearly. Health can deteriorate
Hence, my request to treat the Date of Death (DoD) as a wild guess.
Life expectancy is just that. A wild guess. PRC uses it as a cliff. PRC should assign probabilities around the specified life expectance. PRC uses the Monte Carlo approach to investment returns. Life is just another gamble.
Excellent recommendation -- set a goal for PRC's Roth calculation. Searched PRC docs. But, I could not find where I could specify the goal. Sorry to bother you. Could you guide me on this front?
Was afraid of that. Roll, roll, roll. Roll the ball up the hill. And do it again and again and again. 😮
You’re actually not rolling the ball up “again and again” like Sisyphus. You’re rolling it a little, then taking stock from the new vantage, deciding your next step up the hill, and then doing the same again.
That isn’t a defect! It’s the best way to deal with an unknown future. You make each step to best of your ability, based on current info, but realize that each year results will charge because the world changes
Hence, my request to treat the Date of Death (DoD) as a wild guess.Life expectancy is just that. A wild guess. PRC uses it as a cliff. PRC should assign probabilities around the specified life expectance. PRC uses the Monte Carlo approach to investment returns. Life is just another gamble.
In theory you are correct that the Monte Carlo should take longevity into account as a probability not a cliff. And the roth conversion optimizer too. But that is simply beyond the technical capabilities of any finance software.
If you are really interested in this line of inquiry you could download scenarios from pralana and do experiments in excel. I’ve done longevity-weighted net present values, for instance (mirroring mike piper’s opensocialsecurity). I use the ssa longevity tables to generate the weights at each year out. But …. this is beyond what I expect or want Pralana itself to do.
Thanks for the note. Was having a little literary fun -- roll, roll etc. Sorry, I cannot use excel. Complex excel tools do not run reliably on Libre Office. Would like to read a document, if it is available.
Do you know where I could set the goal for the Roth optimizer? Such as Couple, Surviving Spouse, Heirs -- any others?
@pr73734r You need to keep this in mind as you setup and compare Scenarios. Pralana does not manage this for you ...
@caroblover Thanks for the note.
I plan to use a PRC Scenario to for Couple, Surviving Spouse, Heirs. However, I do not see where I could set the goal. For example, which settings would I use for the goal "Heirs"?
Would I set Roth goal like this:
- Scenario 1 - Heirs: We both live to our desired lifespan
- Scenario 2 - Spouse: Scenario-1 but adjusted for me passing next year
- Scenario 3 - Me: Scenario-1 but adjusted for my wife passing next year
@pr73734r Best you can do is use your Heirs Effective Tax Rate for the calculation.
@caroblover Sorry. I edited my previous response and saved just before I saw you post about effective tax rate. Does my post make sense?
