I'm new to Pralana and digging into it completely. I am wondering how to setup 2 things -
I don't know how to estimate the Conversion Rate for Calculation of Effective Savings - I think the default was 20% and wonder what others are using? I have a fair bit of money in IRAs.
How do you setup the move to a continuing care community when that happens and how do you treat the buyin? that could be $400,000 to $1M depending on the community.
Is there a different community that I should ask these types of questions?
The Effective Tax Rate is either what you would pay if you took the remainder of the money out yourself during your lifetime or what your heirs would pay during the 10 years they have to get withdraw the residual balance. If your heirs are highly compensated and live in a high tax state, it could be quite high. If you plan to give the money to charities via QCDs and charitable bequests, the rate could be zero. In our case, I generally use about 24%, but you have to estimate your own number.
You can set up Long Term Care expenses in the Expenses - Long Term Care tab as those will be tax deductible, but I don't know what percentage, if any, of the buy-in to a CCRC would be tax deductible, you'd have to google the relevant IRS regulations.
@oldnomad60 @ricke gave you sage advice. One way to get a good number is to note the years you'll be taking withdrawals from your pretax accounts (via Roth conversions and scheduled (i.e. RMD) or unscheduled withdrawals. You can see this in the cash flow->withdrawals tabular projections. Once you have that list of years, go to the expenses->taxes tab and note the effective tax rates for those years. An average of those would be a good effective tax rate, at least as far as you're concerned. Anything left to heirs would be their blessing/problem 🙂
Thanks very much to you all. I'm new at this, and working to understand the interplay between IRMAA and Taxes on a decent portfolio. Pralana seems to want me to make a lot of big Roth conversions, and about double the amount in the first year. I managed to stay under IRMAA levels on income for the last 2 years, so I'm trying to understand it. Roth Conversions are me being nice to my kids only. Otherwise, they just will have to tough it out and pay the taxes.
@oldnomad60 Once you've established that the Roth conversions aren't really critical to your plan's success, I'd just do a normal take where each early December you assess your tax situation (since it's pretty well nailed down by then) and maybe just cap out any remaining space in your top marginal bracket if you feel like doing any.
Are you holding different assets in different accounts? Many folks put their bonds preferentially in their tax deferred accounts and in order to model that you must use Advanced Portfolio Modeling and select Mode 2. Using other calculation methods will greatly overstate the attractiveness of Roth Conversions as the program sees the low returns in tax deferred (due to bonds) and the high return in taxable/Roth (due to stocks). Naturally the optimizer seeks high returns so it will favor conversions, but what's really happening is your stock allocation is going up. Mode 2 keeps your asset allocation constant, making a fair comparison.
I also recommend looking at the return assumptions you are providing. Since we are not anywhere close to historic lows and the best historical return sequences happened when markets started from the bottom, I tune the return assumptions so that when I go to Analysis-Historical Analysis, the final estate values come out to about the 30% percentile, meaning 70% of historical cases were better. I do this because Roth Conversions are a one-way street. If markets turn out worse than you assume, they can cost you money. You can prove this to yourself by looking at a bad historical starting year like 1965 by clicking the Activate Historical Sequence Button near the top of the Historical Analysis tab and looking at how your portfolio would fare with Conversions and without.
After running the Roth Optimizer but before making conversions with real money, I also challenge myself to understand why it's doing what it's doing and whether I would really make all those conversions. In our case, some conversions are very powerful and then there is large zone where you can do lots and lots of conversions for smaller and smaller benefits. The optimizer will chase all of those, but it's worth it to use your human judgment of when risk & inconvenience outweigh reward.
Using other calculation methods will greatly overstate the attractiveness of Roth Conversions as the program sees the low returns in tax deferred (due to bonds) and the high return in taxable/Roth (due to stocks). Naturally the optimizer seeks high returns so it will favor conversions, but what's really happening is your stock allocation is going up. Mode 2 keeps your asset allocation constant, making a fair comparison.
A rising equity glide slope may be something you want, I like the idea (I realize it's not for everyone, but worth a look) and so does Michael Kitces:
Executive Summary
For the past 20 years, due both to the growing research on safe withdrawal rates, the adoption of Monte Carlo analysis, and just a difficult period of market returns, there has been an increasing awareness of the importance and impact that market volatility can have on a retiree's portfolio. Often dubbed the phenomenon of "sequence risk", retirees are cautioned that they must either spend conservatively, buy guarantees, or otherwise manage their investments to help mitigate the danger of a sharp downturn in the early years.
One popular way to manage the concern of sequence risk is through so-called "bucket strategies" that break parts of the portfolio into pools of money to handle specific goals or time horizons. For instance, a pool of cash might cover spending for the next 3 years, an account full of bonds could handle the next 5-7 years, and equities would only be needed for spending more than a decade away, "ensuring" that no withdrawals will need to occur from the portfolio if there is an early market decline.
Yet the reality is that strict implementation of a bucket strategy is more than just an exercise in mental accounting; it can actually distort the portfolio's asset allocation, leading to an increasing amount of equity exposure over time as fixed income assets are spent down while equities continue to grow. Yet recent research shows that despite the contrary nature of the strategy - allowing equity exposure to increase during retirement when conventional wisdom suggests it should decline as clients age - it turns out that a "rising equity glidepath" actually does improve retirement outcomes! If market returns are bad in the early years, a rising equity glidepath ensures that clients will dollar cost average into markets at cheaper and cheaper valuations; and if markets are good... well, clients won't have a lot to worry about in retirement anyway (except perhaps how much excess money will be left over at the end of their life).
Of course, the challenge to utilizing a rising equity glidepath strategy with clients is that many would obviously be concerned about having more equity exposure during their later retirement years. Yet the research shows that rising glidepaths can be so effective, they may actually lead to lower average equity exposure throughout retirement, even while obtaining more favorable outcomes. And ironically, it turns out that for those who do want to implement a rising equity glidepath, the best approach might actually be to explain it to clients as a bucket strategy in the first place!
