As a widow, I'm not sure if I would live in my house forever with help, or want to go into assisted living at some point. I have read that if you meet the criteria for needing enough help with your ADL's (Activities of Daily Living), these expenses may be tax deductible, so it would be smart in that case to have not spent down my IRA completely.
If I wanted my IRA not to go below a certain amount by a certain age, is there a way to model that in Pralana Online? Such an assumption would then affect my Roth conversion strategy, so it would be good to know now.
@debrazebra There is not an explicit capability to stop Roth conversions at a user-specified tax-deferred balance, but this is on our enhancement list and we're now considering giving it high priority because it really does seem like an important feature.
Stuart
@smatthews51 Doesn't just "turning off" roth conversions year-by-year that take levels too low after optimization solve that problem?
@jkandell not really, or it would take a lot of trial and error, because of the interplay with RMDs. I think the metric would need to be end life with say $50K in tax deferred.
As a widow, I'm not sure if I would live in my house forever with help, or want to go into assisted living at some point. I have read that if you meet the criteria for needing enough help with your ADL's (Activities of Daily Living), these expenses may be tax deductible, so it would be smart in that case to have not spent down my IRA completely.
If I wanted my IRA not to go below a certain amount by a certain age, is there a way to model that in Pralana Online? Such an assumption would then affect my Roth conversion strategy, so it would be good to know now.
I would certainly appreciate high priority, since I am currently in a 2-4 year window where I could make more conversions, but not sure if I should. This metric is certainly one of my considerations. As I said below, I would think the easiest metric might be "reach end of life with a certain amount in tax-deferred (i.e. $50K)"
Interesting... I added 3 years of LTC at each spouse's end of life. I assumed that when Pralana Online looks at optimizing withdrawals it would pull this from my tax deferred accounts. But it looks like it's pulling LTC funds from Taxable Investment and Roth instead. I'm now unsure if this is best for my situation or a shortcoming of the optimization algorithm...
@jkandell This seems reasonable but I've been playing with it a little and have a test case where there's about $200K of conversions in the final year after the optimization. If you wanted to stop the conversions while leaving only $100K in tax-deferred, you wouldn't be able to do it with this method.
Stuart
@debrazebra I did some prototyping on this yesterday. It's one thing to limit Roth conversions in any year such that tax-deferred accounts don't go below a specified level IN THAT YEAR, but it's an entirely different thing to optimize and limit conversions year-by-year such that the end-of-life tax-deferred balance doesn't go below a specified level. Those are two completely different analyses, the first being pretty simple, the latter being extremely difficult and computationally intensive. I didn't actually prototype the latter method; just thinking about it made me want to retire again. So, my question for you (and others) is: would it be helpful to add another limiting control that prevents tax-deferred balances from going below a specified level on a year-by-year basis? And if so, would you want to specify that level for every year, or just once at a global level? And if at the global level, would that be an inflation-adjusted amount or a fixed amount?
Stuart
@smatthews51 I get what you are saying. It's interesting, because I suspect that for me this ship has already sailed, but it may be useful for others. I think you are right, to pick a year by which the TD balance doesn't go below a specified amount, and then of course stop Roth conversions in and beyond that year. It seems that would accomplish the purpose.
It's one thing to make this work in the static projection mode with low expenses so there is no need to ever withdraw more than the RMD. That's a lot of math, but at least you can iterate and find a number. I think it's really difficult to integrate it with the Roth Optimizer as that's already iterative. I don't see it as being at all feasible in historical or Monte Carlo (or real life) where future returns are not knowable.
It's also against the logic of key withdrawal strategies like Amortization, Variable Withdrawals or Consumption Smoothing where the withdrawal method forces you to draw down your portfolio to maximize your enjoyment of your wealth during your lifetime.
The power of Pralana is the ability to integrate all these complex analyses, it's not just the simple static projection case.
My own approach to Roth Conversions is to run the Optimizer and then go back and challenge it with lower IRMAA tiers and tax brackets. You will find the optimizer is doing lots of conversions for small gains as that's what optimizers will do. But that may be a risky plan. Folks should recognize that the benefit of Roth Conversions is dependent on future rates of return being as high as you hoped. In bad sequences of return, Roth Conversions actually hurt you since you can't "unconvert" if markets go down and you find yourself in a lower tax bracket in the future. You can prove this risk to yourself by enabling a historical sequence starting in, say, 1928 or 1965, and examining how your wealth would change with Roth Conversions Enabled vs. Disabled. I find my own comfort level between the smaller and smaller gains of larger and larger conversions and my desire to have some left to cover long term care or to have a convenient way to give money to charity.
