Hi,
With two identical scenarios (2 and 3 for me currently), I'm finding that changing the Asset Allocation By Account is not affecting the numbers (e.g., final savings result isn't changing). I have asset allocation mode = by account. I currently have scenario 2 with 80:20 (Stock:Bond) and scenario 3 with 50:50, and they're producing the same results. What am I missing?
Thanks,
-Steve
Do you mean you are doing simple portfolio modeling and on the Build-Financial Assets - Simple Portfolio Modeling-Rates of Return you have selected rates various rates of returns for different accounts? And then under Advanced Portfolio Modeling-Asset Allocation/Location you changed asset allocations? If so, those two things don't go together (simple vs. advanced). It sounds like you chose Simple so it is not paying attention to Advanced settings.
I would not mess with Simple at all and would go straight to selecting "Advanced Portfolio Modeling" on Build-Financial Assets-Management-Account Growth Settings. Then on Build-Financial Assets-Advanced Portfolio Modeling-Asset Allocation/Location-Active Asset Allocation Mode (why oh why are the menu choices so long and wordy!), select Mode 1 or Mode 2. Mode 1 requires the same allocation in all accounts. Mode 2 allows you to hold different allocations in different accounts while keeping the portfolio asset allocation constant. Mode 2 allows tax efficient placement of bonds in tax deferred and stocks in taxable/Roth, so that's the best way to set up your portfolio.
For Mode 2, on the subtab Mode 2:Portfolio Allocation set an overall allocation and any forced allocation choices you want the program to make (until it has to over-ride to keep the portfolio on track). I just select 100% stocks for my taxable, Roth and HSA and 100% bonds for everything else. Then on the Mode 2: Account Prioritization tab, select the order of priority of which account should preferentially hold stocks.
On Build-Financial Assets-Advanced Portfolio Modeling-Rates of return, enter you choices for stock vs. bonds. The hard part is the next sub-tab which is Growth Taxation. For that, look up your most recent 1099 for qualified and non-qualified dividends, divide that by the average portfolio balance for the year that the 1099 refers to in order to get a qualified and non-qualified dividend yield.
Then divide those by the total return (real return + inflation) that you expect for stocks. My real return expectation is 5%, with 3% inflation, so 8% total. My qualified dividends are about 1.6% of the portfolio value, so I divide 1.6/8 = 20% of the total return. So I enter 20% as Growth Taxed as Qualified Dividends. My non-qualified dividends (in IRS terms Ordinary Dividends minus Qualified Dividends) were about 0.4% of the portfolio, so I enter 0.4/8 = 5% in the Growth Taxed As Interest. The remaining 75% I enter in Growth Taxed as LTCG When Withdrawn.
@ricke Thanks - turns out I did have "Simple Portfolio..." set. I'll try out Mode 2. Mode 1 does allow different allocation by account - but then I can't have a target portfolio allocation - so the way you've described using mode 2 should be better. For growth taxation - if I have all stocks using something like VOO (S&P ETF) then I think it would be < 2% dividend and 98% Taxed as LTCG when withdrawn. Guess I don't follw why you're doing the 1.6/8 etc.
@email12520gmail-com The differentiation is because Qualified Divs are taxed as cap gains, whereas NQ Divs are taxed as ordinary income, I believe.
@chrisb Think I follow the 1.6/8 now. The tool wants to know what % of the overall stock gain is taxed as qualified dividends (which is 1.6/8 = 20% of the gain). Something like VOO ETF typically is all qualified. Thanks for the help, all!
Yes, when you try to study Roth Conversions, if you have different allocations in different accounts, Mode 2 is mandatory if you want reasonable answers. Mode 1 (and all competing products on the market) seriously mess up Roth Conversion math when allocations in all accounts are not all the same.
When Roth Conversions are done in Mode 1, you are telling the program to take money out of the account that has a high percentage bonds (t-IRA) and put in the account that has all stocks (Roth). So it changes the overall portfolio allocation towards more stocks and that is way more important to your overall final estate value than the tax benefit of Roth Conversions (at least in the ideal model world where stocks steadily return more than bonds). The resulting Roth Conversion recommendations in Mode 1 (and competitors' programs) can be horribly high. I've read examples of folks that will never get out of the 22% bracket actually converting into the top bracket because of the flawed recommendations of other programs. I've become a super-fan of Pralana mostly because of the Mode 2 feature.
One other subtlety, make the taxable as the account that has the most stocks. One thing Pralana does not do is account for rebalancing tax costs if you ever have to start rebalancing in taxable. It also generally makes sense from a tax efficiency standpoint to keep bonds out of taxable.
I wish there was better documentation, with illustrations, or a video, or something, for the setting up of all of the numbers for Advanced Portfolio Management, mode 1 and especially mode 2. I read all of the posts, and it is daunting. I don't understand the math described in this post, but I could probably follow along. This is all very confusing.
I love Pralana and I do also wish there were tutorials. I have the Bill Hines book, which has been helpful, but I still don't understand some of this setup stuff.
