What's the best way to model individual CDs and bonds online?
I have taxable CDs that mature certain years, and I have treasuries of various kinds (both zero-coupon and coupon) that mature certain years. Some are nominal, some are TIPs and some are ibonds.
My thinking is the "other income source" tab is the best location for all of these. I'd enter the return of principle as non-taxable-income the year it matures, and then add a secondary row taxable-income for the interest that comes at maturity. It probably makes most sense to group all the principle that gets returned in a given year and sum all the taxable interest payments so I only need two rows per year. Treasuries are not state taxed, but the "other income" pull-down doesn't allow that optin, so that aspect will need to be ignored? I haven't figured out an efficient way to figure out all the various coupon payments maturing paid each year; but in theory that could be included along with the maturing interest.
Is there a better way?
Wow, sounds complicated. For the coupon payments, that sounds well outside Pralana's wheelhouse. I think you would have to sum up the coupons external to the program and enter the total as a taxable windfall. I can't think of any workaround in the program to help you.
@ricke It's complicated in Pralana, but not uncommon in the home investmentment world to have a bond/treasury/tips/cd ladder if one is doing liability matching. Maybe a "future feature"?
The reason I'm thinking of using Other income for bond ladder rather than Windfall is the former allows a variety of tax situations, whereas the former only has a simple 'taxable' box.
For my TIPS ladder under Advanced Portfolio Modeling, I:
Create an Asset Class Name called "TIPS" then in the Rates of Return tab, I enter the return on the ladder, in my case 2.4%.
Under the "Asset Allocation/Location" tab, I use Mode1: Asset Location by Account and in the TIPS row, I enter the % of the account that is my total tips. That % will change each year, since the stock portion will grow faster,. Once I am done with the last rung of the ladder, it will be 0%.
@jkandell Please be advised that if you elect to model these investments using Other Income or Windfall Income, those investments are excluded from your portfolio and, thus, not included in your net worth until the payouts occur. The Pralana design intends for you to characterize all of your investments as asset classes (Advanced Portfolio Management) which then includes them in your net worth and gives you the ability to specify unique rates of return and standard deviations, and associate them with different taxation types when held in your taxable account. With that said, it doesn't model individual bonds at this point, so you have to characterize those investments into "averages" and enter that info into the tool.
Stuart
@smatthews51 Understood. While the Advanced Portfolio Management page does allow me to enter Treasuries (growth taxed as interest at the Fed level only), it does not allow any growth taxation column for zero-coupon treasuries, where you get things back upon redemption and pay tax on your gain as well. If I mark capital gain it will set other things off. I guess the lesser of evils is to have the money excluded from portfolio until payouts occur. That is pretty close to what is the case in real life, since the bond ladders have no liquidity. Am I rare for having a bond ladder or is just something that is on the list eventually for Pralana?
Am I rare for having a bond ladder or is just something that is on the list eventually for Pralana?
I see more and more people just taking the easy route and using bond funds like VGSH, VTIP, VGIT, BND, BNDX, which have been described as effectively bond ladders. Let someone else manage the ebb and flow at very low cost. But, if you enjoy managing them, they're a good thing. When bond fund shares are sold, remember, any gain is at LTCG tax rates, which are usually preferable in a taxable brokerage (as long as you've held them over a year, of course).
I don’t think the issue is the rarity of ladders, some folks that became gun-shy of funds in 2022 are building them. I think the issue is the complexity is mind-boggling for the model. Each instrument can have different characteristics in duration, federal/state/local taxability, coupon rate, payment frequency, cost basis, call provisions, credit risk. TIPS and I-bonds don't have call provisions or credit risk, but they add inflation adjustments to the witch's brew of variables.
I’m assuming this is a non-rolling ladder, where you consume the maturing CDs/bonds each year rather than re-invest. (If you re-invest, you just have a bond fund). Within what the program can do, using the income method is probably best, but realize that you have confused lots of the parts of the program.
Pralana would really like to be able to handle historical and/or Monte Carlo projections, but if inflation rages, the inflation adjusted value of your maturing nominal bonds are affected, so it's not fair to exclude them from the variation of Monte Carlo or Historical analysis. If you hold the ladder in tax deferred (the most tax efficient place), then RMDs and Roth Conversion calculations are messed up using the income method. On withdrawal rates, Pralana supports lots of different methods that depend on total savings balance, those will not work using the income method either. So you would need to think through each feature to see if it will still work reasonably well or will be confused.
@ricke All true. From a strategic level it may make more sense for me to exclude Bond ladder entirely from Pralana, and also out all essential expense entries, and use all Pralana's features just for calculating the discretionary portion of things. But as you say, this might mess up a lot of things related to taxation. I'm not sure entering a year's summation of each bond ladder is quite as bad as you portray though, since one is able to specify if a specific "other income" is taxed as Income or Non-taxable: So for taxable bonds, so long as I enter the yearly coupon income correctly and indicate any return of principle is tax free, what would get lost to the model? For bonds kept in a tax-deferred location, both the principle and the coupon payments would be marked as taxable on the year of withdrawal. So in theory, it might involve like 20 lines for 10 years, and maybe fewer if I can find some averages over a few years that make sense.
As an alternative there may be a way to specify an asset "Individual Bonds" and figure out the taxable growth breakdown and set standard deviation to 0. The rub there is that the program might treat it as liquid and recommend taking out or adding money to that "asset" before maturity.
I had a few issues in mind with holding a ladder in tax deferred. One is problem is calculation of RMDs. If your bond ladder goes out past RMD age, then just entering the income from it messes up the RMD calculation. Also, in Asset Allocation Mode 2 (which is what allows you to keep your asset allocation constant while preferentially putting bonds in tax deferred), you need to know the value of the bonds you have.
Monte Carlo and historical simulators get messed up with ladders as the value of the ladder really does vary with market conditions. It's just that each bond returns to par at maturity - TIPS in real $, nominal bonds in nominal $. But we will only experience this return to par if we never have to withdraw early. Plus if we pass before the ladder ends, our heirs face the valuation problem. In the deterministic mode in a calculator, we can just assume no need to break the ladder, but Pralana wants to go further and tie back to historical and Monte Carlo and let you explore spending more money, including breaking the ladder.
During 2022, we saw TIPS funds go up and down with nominal bond funds of similar duration. TIPS moved somewhat less, the difference in magnitude was explained based on market expectations of future inflation. But I'm not aware of a dataset on how to value the difference - in fact a reason the Treasury gives for issuing TIPS is so they can get a sense of market expectations of future inflation, if there was a way to figure it out from other indicators, they probably wouldn't bother to sell them (they rather like being able to inflate away their creditors' claims).
The typical customers of Pralana are the very numerate types that like to build detailed plans - the kind of folks that have heard of a TIPS ladder and have actually built one - so it's worth Stuart's and Charlies' time thinking about how to do it. I just know I would be stumped.
Excellent points by @ricke. All a reminder that before jumping on the latest article with a hack or strategy, think about how much complexity it will add to the management of your financial life (and your spouse/partner!) and gauge whether it's really that much of a difference money-wise, in the long run. Simple, easy to understand and implement techniques like bucketing can protect you from stock (and bond!) bad behavior.
If what you're doing makes it hard for a critical planning tool to do its job, is it a worthwhile endeavor? Yes, some folks need to maximize every dollar to make things work. In my experience though, the community of folks using a tool like this are in very good shape, the tool typically shows them they're in far better shape than they had previously thought, especially by doing the work of optimization for them.
@hines202 For the record I don't think Pralana needs to bend around those of us who use individual treasuries; as has been pointed out it makes things too complicated for the program to get to the level of individual investments. Simplicity ensures there is accuracy to the results of the tool.
But... I do think it's dangerous to jump to the conclusion--as you seem to imply with your statement--that the fact pralana has difficulty modeling it implies the practice of individual bonds themselves is unsound, and that I am "jumping on the latest article with a hack or strategy." To put things more generally: Just as we have to be cautious of unneeded complexity, at the same time we have to be equally careful to not confuse a tool with reality, for that puts the cart before the horse. Pralana is just a tool, with its own biases and limitations.
FWIW, liability matching isn't a fad or whim, but a reasonable strategy part of best-practice lifecycle finance models. My "safe" bond funds have not matched inflation the last ten years, and that taught me and many others a valuable lesson that bond funds are not actually the same as a bond ladder. The fact that can't be modeled easily doesn't change that fact, it just means Pralana will not be a perfect fit for my particular situation.
@jkandell Yes, for sure. I didn't mean to imply that bond ladders are some latest fad or complex hack. Age-old technique. They're more work than funds, but have advantages and if you're understanding of all that and willing to maintain them, and your spouse/partner (if any) understands the maintenance if something happens to you, it's all good. Same as with stocks, don't be tempted due to some spike/news/other to panic, bail out and put them up for auction and take that loss without thinking it through.
Lots of interesting points. As stated in another thread: Pralana is a Retirement Planning tool, not a Financial Planning tool ????. I would rather have Stuart work on other enhancements ????. I personally only have short term CDs and T-bills (all one year or less) in my taxable account and therefore they only payout at maturity. In my regular IRA I have zero coupon treasuries laddered from 5 to 10 years. They only payout at maturity, which is what I will do. I set that up in October 2023 when treasuries were near there highs (I bought a lot, so yes I got a little lucky ????). The idea is to mainly live off of these treasuries during that time frame. This basically eliminates sequence of return risk. I just averaged the % return of that ladder into my bond asset class in Pralana. Done. Can I zero in on that 5 year time span to determine what's going on in detail, no. Don't care ????. I know exactly how much money I will get (will use only at maturity) because the rate of return is guaranteed. After ten years I will live off of my investments which are mainly in the total US stock market Fidelity mutual fund FZROX. https://www.fidelity.com/mutual-funds/investing-ideas/index-funds
Obviously that's just how I do it, not saying anyone else should do it that way, everybody is different. I certainly like going into the weeds myself, but big picture, keep it simple ????.
On the topic of Keep It Simple, an article appeared in The Finance Buff web site titled "2 Ways to Use Fidelity as a Bank Account": https://thefinancebuff.com/fidelity-cash-management-checking-savings.html
I personally use Fidelity for all my investing/banking needs. Fidelity did not pay me to say this, I am just very satisfied with them. I invest in their zero fee/cost index mutual funds such as FZROX. My checking account is with them. I use there debit card to withdraw from ATMs (they reimburse any ATM fees). I use there money market fund FZDXX which as of 12/26/2024 had a 7-day yield of 4.23% ($100,000 to open but you can go below that amount once set up). I buy US Treasuries through them. I buy Brokered CDs through them. What's the cost to me for all these services? Since I don't use them to manage my accounts - $0. Free, easy and simple ????.
