I have entered all my recent information and thoroughly reviewed my inputs and the outputs. This will be the first year of retirement (since 2022) we will be drawing on our retirement funds since my wife & I lived comfortably on part-time travel nursing & engineering consulting income. I don't believe that will be the case in 2025.
I want to take real action now based on the Account Statements report. See the attached screenshot.
A couple of questions:
1. To meet projected spending in 2025, we must take the following actions:
a) Transfer $4,689 in interest income from our taxable account to our cash account.
b) Transfer $10k from our HSA to cover medical expenses to our cash account (we already have enough documented medical expenses to empty our HSA accounts so we can do that anytime).
c) Withdraw $31,928 from my IRA to deposit in our cash account.
Is the interest earned in the taxable and growth shown for the tax-deferred based on the earnings for the entirety of 2025? I plan to transfer these funds over at the beginning of the year, reducing the account balances and associated earnings for the rest of the year. (albeit not a lot).
What should be the timing for these withdrawals to ensure the tool forecast is valid? I would have to take the taxable interest and IRA growth at the end of the year to maintain the validity of the tool results. This first year, it will have a negligible impact but, in subsequent years, the withdrawals will be more than $100k.
Can you provide some guidance for making these funding transfers in the real world?
2. I believe the Expense Statement shows the taxes on the IRA withdrawal as a 2026 expense. I have read several posts on this topic and know about the iterative issue concerning taxes and tax-deferred withdrawals. So I will be making estimated tax payments in 2025 to handle these (luckily it will not affect our plan in a significant way). Am I correct in my interpretation of the Expense Statement?
thanks!
I believe the program does year-by-year steps. It earns in each account based on the starting balance and then various income, expenses and money transfers take place and it arrives at the following year's starting balance.
A couple additional thoughts:
- It's generally more tax efficient to put your fixed income in tax deferred if there is room to do so. That way, the taxation of the investment (ordinary income) matches the taxation of growth that occurs in the account. When you need cash, you sell something and pay capital gains on the gains only. Note that you need to be using Advanced Portfolio Modeling and Mode 2 Asset Allocation/Location to model anything but the same asset allocation in all accounts.
-Unless you are trying to keep your AGI low to get some benefit like an ACA premium credit, you should test what Pralana thinks about keeping your HSA for later and not pulling it down now. We found holding the HSA to be far better than spending it. We put our receipts on a cloud storage and plan to hold on. The receipts can be cashed in up to a year after death, so if you have enough medical costs, it is like extra Roth space.
Thanks for your response. I don't believe my question has been answered, I wasn't clear, or I don't understand. I guess I'm seeking to determine the timing for our withdrawals based on the reports from Pralana. I am arranging a meeting with Bill Hines to ensure my model is correct and to get a second set of eyeballs on my assumptions.
I manage my own portfolios. I use Mode 1 with asset allocation and asset location optimized to mitigate tax implications. I use a risk parity portfolio consisting of 42-46% stocks (50/50 large-cap growth VUG & small-cap value VIOV), 26% long-term bonds (VGLT), 16% gold (GLDM), 10% managed futures (DBMF) and 2-6% cash in MMFs. Cash is highest are market tops (like now) and lowest during early bear recovery (when buying stocks at a discount). We have tax-deferred (TD) IRAs, tax-free (TF) Roths/HSAs, & a taxable (TX) account, roughly 50% TD, 25% TF, & 25% taxable. VUG & VGLT are in TF, with whatever won't fit in TX. VGLT is in TD, with excess in TX. GLDM & DBMF are in TD. Whatever won't fit in TD & TF (based on rules above) is in the TX account (obviously). I rebalance when any allocation varies from target by 20% and follow the allocation rules above. I have a very detailed IPS that outlines (in quantifiable terms) how to manage our portfolios.
WRT our HSAs, we have never spent a penny from them and they have been invested in stocks for years. We have electronic copies of every receipt since inception and already have enough receipts to cash out the HSAs in full today. I currently have scheduled withdrawals for our HSAs to pay for upcoming medical costs but have not yet tried to optimize by paying out of pocket. We have no legacy desires so trying to bounce the last check.
My friend - thanks for the HSA suggestion. I just modified a scenario to retain the HSA, rather than spending it for medical costs.
It increased the ending net worth value by $435k. I need to review the tax impact but I suspect it is negligible.
I appreciate your feedback!
I believe the tool simply takes the Starting Balance and multiplies by the rate of Growth that you have specified. For example, it seems you entered 2% as the rate of Growth for your Cash Accounts since the Growth amount is equal to 2% of the Starting Balance for each year. It appears this would imply an assumption that the Starting Balance is not changed throughout the year (or at least averages out to the same Balance) in order to produce the expected Growth, or in other words that all Deposits and Withdrawals occur on the last day of the year.
I'm skeptical that keeping the HSA could have help THAT much in a truly fair comparison - keeping the HSA forces you to pay expenses from taxable, reducing the taxable balance, reducing future tax drag due to dividends. That is a tiny effect each year that becomes interesting over time. In our case, using the HSA was the same impact as if we had incinerated about 10% of it today - so it was definitely worth keeping the HSA (which is essentially a Roth), but it wasn't a mid-six figure change. The amount of savings varies with the capital gains taxes you have to pay from taxable if you use taxable, the annual tax drag and the number of years in the model. Maybe check to ensure that your assumed HSA returns are in line vs. other accounts.
You said you use Mode 1, but that is only suitable if you have the same asset allocation in all accounts. Since you use tax efficient asset location, you should use Mode 2. If you use Mode 1, your overall asset allocation will not be kept constant over time. The growth mostly happens in the high stock accounts, so your portfolio asset allocation keeps moving toward more stocks and that really messes up comparison studies.
While you didn't ask about Roth Conversions, that's a great place to illustrate the pathological effect of trying to use Mode 1 while using a tax-efficient asset allocation. If you convert from a tax deferred account that is, say, all bonds to a Roth account that is, say, all stocks, then in Mode 1 (and competitor programs) you will find a huge benefit for doing the conversion because you snuck in a switch from bonds to stocks as the money moved from a bond-heavy account to a stock-heavy one. The actual tax advantages/disadvantages of a Roth Conversion are completely overwhelmed by the unintended asset allocation change and the program may tell you to empty tax deferred in one giant conversion. Note that the other programs on the market don't have the equivalent of Mode 2 so can really mess you up with that kind of bad answer.
I'm glad you've asked a pro like Bill to look at things, getting things set up in a way that reasonably matches your intentions and allows comparison studies can require experience.
We consider our HSA's as just another Roth. We use Roth/HSA withdraws to keep our income low enough to qualify for enhanced ACA (Obama Care) and enhanced energy efficiency through the green energy part of the IRA Act that gives states a lot of money (if your state applied for it) for rebates for things like insulation, air sealing, electric heat pumps, etc. In 2024 we saved over $10,000 with the enhanced ACA and IRA green rebate programs. This is way more money saved versus what keeping the money invested in our HSA would have earned. We will continue with the ACA rebates in 2025. We also plan on getting an electric heat pump HVAC unit for our house which we will qualify for an $8,000 rebate (deducted directly off the bill - not an income tax rebate).
As far as the HSA, if you have a lot of money in one and your are in good health, you can pull money from it after age 65 for any non-medical reason, but you will have to pay taxes on it just like a regular IRA: https://hsastore.com/articles/learn-future-healthy-hsa-age-65.html
Your HSA as a retirement account
This is where some seniors really begin to enjoy their money. By using your HSA funds after age 65 for medical expenses, Medicare premiums, or long-term care expenses/insurance, you can continue to avoid taxes altogether. Once you turn 65, you can also choose to treat your HSA like a retirement account!
If you withdraw money from your HSA for something other than qualified medical expenses before you turn 65, you have to pay income tax plus a 20% penalty. But after you turn 65, that 20% penalty no longer applies and you only pay income tax!
Once you're 65, your HSA is treated like a traditional IRA if you withdraw money for non-medical expenses. A traditional IRA is a retirement account in which the contributions and gains are tax-free, but withdrawals are subject to income tax. And that's exactly how it works with an HSA if you're 65+ and use the money for non-medical expenses.
For me the introduction of Mode-2 several years ago was the most significant improvement of the tool. Suddenly I realized that Roth conversion is not so attractive. Continuing promoting both modes like they are equivalent is somehow misleading. Mode-2 should be the default for most people and should not be called “mode-2”; it is the real Asset Allocation. Future releases should consider removing or demoting Mode-1 since it is not a real Asset Allocation.
Here is Wikipedia definition:
"Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time frame. The focus is on the characteristics of the overall portfolio. Such a strategy contrasts with an approach that focuses on individual assets."
The focus is on the overall portfolio.
For me the introduction of Mode-2 several years ago was the most significant improvement of the tool. Suddenly I realized that Roth conversion is not so attractive. Continuing promoting both modes like they are equivalent is somehow misleading. Mode-2 should be the default for most people and should not be called “mode-2”; it is the real Asset Allocation. Future releases should consider removing or demoting Mode-1 since it is not a real Asset Allocation.
Here is Wikipedia definition:
"Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time frame. The focus is on the characteristics of the overall portfolio. Such a strategy contrasts with an approach that focuses on individual assets."
The focus is on the overall portfolio.
For me the introduction of Mode-2 several years ago was the most significant improvement of the tool. Suddenly I realized that Roth conversion is not so attractive. Continuing promoting both modes like they are equivalent is somehow misleading. Mode-2 should be the default for most people and should not be called “mode-2”; it is the real Asset Allocation. Future releases should consider removing or demoting Mode-1 since it is not a real Asset Allocation.
Here is Wikipedia definition:
"Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time frame. The focus is on the characteristics of the overall portfolio. Such a strategy contrasts with an approach that focuses on individual assets."
The focus is on the overall portfolio.
Yes, both tax efficient asset allocation and Roth Conversions are a bite from the same tax optimization apple. The earlier you implement a tax efficient allocation to get your bonds in tax deferred, the lower the eventual need for Roth Conversions. In our case tax efficient asset location wouldn't have enough, but if we had started earlier, it would have been much less painful than writing checks. Mode 2 is also a competitive advantage of Pralana, so it would be in their interest to highlight its importance and make it easy to implement.
My guess is that when Mode 2 was new, that Stuart wanted continuity with the old approach.
When I first picked up Pralana years ago, it didn't have Mode 2 and I would use Mode 1 and then use the allowed reallocations to try to approximate Mode 2. So to get my desired 80/20, I would start at say, 76/24 and watch for which year the projected stock growth would take the portfolio up to, say, 84/16, then I would play with the bonds in tax deferred to bring the portfolio back to about 76/24 and repeat. I would do that for every single thing I wanted to examine - talk about slow and tedious, but the only way at that time to even approximately make comparisons. I asked and asked Stuart to come up with a way to make that automatic and he said something along the lines of "No, it's impossi..., oh, wait, I think I see how to do it." Because of the flexibility he built in to the method to select which accounts to prioritize, it's a gem.
Well, I'm pleased to get so many responses yet befuddled as to why I still don't have an answer (or am too dense to see it) as to when I should initiate those withdrawals/transfers outlined in the Account Statements attachment above. Now to respond to all the additional comments.
The additional growth due to retaining our HSAs: I only reported what the tool told me. My model assumes both my wife & I will live to 100 and the current simulation success % is about 70% - we may run out of money when I'm 95 if nothing changes ... oh, well, no biggie. We have a guaranteed income floor (from SS & annuities) large enough to cover all our non-discretionary spending, even in the event SS is reduced by 25% in 2035 (that is in my scenarios in addition to the repeal of the TJCA next year). I always plan with minimum inputs and maximum output so I'm always presently surprised.
Therefore, we have many (34) years for our HSA accounts to grow. In addition, we have significant HSAs and those are fully invested in VUG & VIOV. My "back of the envelope" calculations assuming 6% growth & using the rule of 72 would result in our HSA accounts doubling in 12y, doubling again in 12y, and almost doubling again by the end of the model - so effectively 2^3 or 8 times our current balance. Therefore, a $435k increase is not implausible.
WRT to mode 1 versus mode 2 & Roth planning. I manually calculate our Roth conversions each year in late November, based on the year's financial performance. I prefer to use mode 1 because I use a tax-efficient asset allocation as I outlined above and I rebalance whenever it exceeds my IPS's specified deadband of 20%.
@ricke , you said, "You said you use Mode 1, but that is only suitable if you have the same asset allocation in all accounts." I believe you are confused - "
@hecht790 , there is a place for Mode 1 and, quite frankly, I would not be using Pralana if it did not have that feature. It is one of the big differentiators between this tool and other tools out there (like Money Guide Pro & Fidelity's retirement tool). I adjust my account holdings every year to reflect the current situation and, as I said, I use a simple spreadsheet to determine whether to do Roth conversions. And, yes, I take into account ALL the impacts of the Roth conversions that apply to my situation.
Pralana is the tool I trust, I use the other tools to confirm the end result (can I spend what I want to spend) using those different (and quite sufficient) tools. It is only a forecasting tool and the forecast is only valid for the starting values and assumptions I enter plus the inherent variability from the real world.
Pizza Man, we also treat our HSA as another Roth because have already amassed enough receipts to cash them out today fully. We will use them as you currently do, to manage our taxable income in retirement. They have been growing enough to offset all our new medical costs (we are pretty healthy) as we incur them so it is a nice cash pool we can access.
In closing, it would be nice if someone could answer my original question - how to use the Account Statements & Cash Flow reports to determine when to conduct the withdrawals and/or transfers.
@thompson795
The italics are what I see as your questions.
Q1.Is the interest earned in the taxable and growth shown for the tax-deferred based on the earnings for the entirety of 2025?
A1.As I said in my first post, Pralana uses your start of year balance to determine growth. It doesn't know anything about transaction dates during the year. The spreadsheet had a mid-year growth option, that's not in Online yet.
Q2.What should be the timing for these withdrawals to ensure the tool forecast is valid? I would have to take the taxable interest and IRA growth at the end of the year to maintain the validity of the tool results. This first year, it will have a negligible impact but, in subsequent years, the withdrawals will be more than $100k.
A2. Not really about the program, but I recommend you leave your money in the original investments as long as possible. If you take it out of a tax protected account and put it in taxable at the start of the year, it is earning taxable dividends or interest all year. That increases your tax bill, so it's most tax efficient to take it out when you need it.
Q3.Can you provide some guidance for making these funding transfers in the real world?
A3. I presume a cash account earns less than the other investments, so ideally you keep the cash account balance low and only transfer money in when needed. The degree of accuracy depends on how much you are willing to fuss with it vs. how important the extra interest/investment gains are.
Q4.So I will be making estimated tax payments in 2025 to handle these (luckily it will not affect our plan in a significant way). Am I correct in my interpretation of the Expense Statement?
If you sell taxable assets and incur capital gains, the program will eventually have the ability to estimate those taxes in the year when assets are sold, but right now that type of tax goes into the following year's taxes. The reason is that the calculation is iterative. If you need cash and sell something that generates capital gains, those cause taxes, which creates a need for more cash, meaning more has to be sold, meaning more taxes... In any case, even with the full iterative calculation in Pralana someday, the program doesn't know the exact capital gain of your particular shares of stock, so its tax calculation on that will deviate from your specific tax liability. There are free tax calculators that you can use to verify that you are on track. One I like is:
https://www.mortgagecalculator.org/calcs/1040-calculator.php, which comes from dinkytown.net.
To pay taxes, you can do a withdrawal from your traditional IRA near the end of the year and have your brokerage withhold up to 99% of it for taxes (the big brokerages max out at 99%). Since it is done via withholding, it is considered timely by the IRS, so if you are always doing an IRA withdrawal big enough to cover your taxes, you can pay that way and never have to fool with quarterly tax payments and you get to keep earning on the money until near the end of the year. I wouldn't wait until the last week of the year, occasionally I read stories from folks that waited until the very last minute and then something went wrong and they had no time to fix it.
@ricke Thanks for the detailed answers, Rick!
I already use many dinkytown.net calculators - it is a great toolset!
I think (for now) I'm going to approach it as follows:
1) Note the amounts Pralana shows for withdrawals/transfers.
2) Transfer what is needed to my cash account as it is needed.
3) Subtract the transfer amount from the Pralana targets.
4) Rinse and repeat.
I have been an optimizer my entire life and am now really trying to simplify my financial management tasks. We have enough assets where we don't have to squeeze every penny out at the cost of me spending my head buried in spreadsheets and tools all the time. I will be happier and my wife may continue to like me a little bit ;).
Thanks for your response! After looking over things again, I believe your response is correct. If I take the withdrawals at the beginning of the year, I will not realize the gains calculated by the tool. It is probably not a big deal in the big picture since the withdrawals are relatively small compared to the account totals and our margins are pretty good.
