I am having trouble conceptualizing how to properly use the car floor and ceiling. The manual states that it is central to the plan, and I am not sure how to properly use it as related to yearly spending/withdrawals. Currently I keep a cash account with our total spending for the year. At the beginning of the next year I replenish it with the next years spending. For some reason I am having trouble wrapping my head around how Pralana handles the cash.
@joeandmaria97 Please take a look at Review > Cash Flow > Cash Flow Statement. In Pralana, all Spendable Income (generally income excluding amounts contributed to a 40k1/IRA/HSA or deducted for payroll taxes) is deposited each year in the Cash account. There are other deposits to the cash account as well, for example RMDs. Likewise, expenses are deducted from the Cash account.
The Cash Flow statement shows the Total Cash Inflows and Outflows each year and the preliminary cash balance which is the Cash starting balance for the year plus the Net Cash flow. If the Cash balance falls below your specified cash floor, say $10,000, Pralana will transfer funds from another account at the end of the year to bring the cash balance back up to $10K. If the Cash balance is above your cash ceiling, say $25k, the excess amount will be transferred at year-end to the Taxable investment account.
So Pralana automatically handles the cash balance. You don't need to worry about making sure you have enough cash in the cash account to cover the year's expenses because Pralana does that for you.
However, most people do specify a Cash Floor and Ceiling so that the Pralana cash account balance mirrors real life where they carry a cash balance that has a near-0% real rate of return.
So, I suggest you set your cash floor and ceiling at approximately your average cash account balance for the year. If your average annual expenses are $80K and the average cash balance over the course of the year is $40K, then you might set the floor and ceiling at $35K and $45K, for example. That balance will earn whatever you have set for your Cash account Rate of Return (if using Simple Portfolio Modeling) or the ROR for the assets you specify to be held in the Cash account (if using Advanced Portfolio Modeling).
I hope this is helpful.
Charlie Stone,
Pralana
Here's an example. We are going to sell some property. One strategy might be to keep some of the proceeds in cash and use it to live on for the next couple years. Pralana lets us look at that, we just set the ceiling high enough to keep some in cash leave the floor at the minimum amount we usually keep. Pralana will calculate the cash needs each year and spend down our excess cash as needed.
Keeping cash superficially seems like a great idea and it certainly avoids the decision of what to sell. But is it financially wise? Pralana can test it and will tell us it's not a good financial move in our case; we should invest the money and then sell when needed, keeping a low cash ceiling. Had we been younger and trying to maximize an ACA premium credit, spending down cash might have been a good idea, so it's good the program lets us test.
If you are going to have a high cash balance at some point, you you may need to look at later time periods as well. For instance, once RMDs start, we will have more cash coming in each year than our projected spending, if we had a period of time early on that had a high cash ceiling, we would want to enter a second time period with a lower ceiling or Pralana will allow cash to build back up.
Thank you for the replies. It is starting to make sense now.
@joeandmaria97 Think of it this way: In normal circumstances, at what point do you start getting nervous about your combined balance in cash accounts (checking, savings, money market, CDs...)? That's your floor. At what point do you start looking at your cash balance and think, "I should move some of this over to my taxable brokerage and invest it..." That's your ceiling. It's all tied to your individual risk tolerance level. Factor in your emergency fund, usually six months or so of essential expenses in case of layoff, disability, etc.
In abnormal circumstances. say you're getting ready to buy a house in the next few years, make sure to account for that in your floor. It should be "safe" money. We don't get to phase these, so you'll have to remember to lower your floor after buying that house. Or else, keep it in the taxable brokerage and account for it as cash there, as one solution.
Remember that as the tool sees your cash balance building up due to positive cash flow, and indicates a transfer to taxable brokerage, you have to follow through and actually do that in real life 🙂
