@ricke Thanks for update. I think my request is actually considerably simpler than being able to enter a bond ladder with precision. I don’t have a problem with entering a 10 year ladder of $100k/year as $1 million with whatever assumed bond ROR is. I think that Pralana already handles TIPS fine bc it lets you specify everything in real terms.
I’m just asking for a TIRA that has the same parameters as HSAs and 529s when it comes to asset allocation and blocking off from Roth conversions.
@ricke Glad to hear bond ladder is in the works. But I agree that limiting it to taxable is not the way to go. If anything, most will be making the ladder in IRA or even Roth accounts, though taxable with treasuries is also plausible due to the state-tax-free element.
@pdxcess One workaround available now may be to enter your ladder as a pension. I did this with my IBonds. I calculated the expected payout value (using the same inflation assumption as my Pralana scenario) and divided it over the years IBonds mature. This keeps the IBonds out of the Roth conversion calculations. The only downside I have is that my state taxes all pensions--so I can't change any setting to make the IBonds state tax exempt. It's not a huge deal, though, until a bond ladder capability is added.
@pdxcess One workaround available now may be to enter your ladder as a pension. I did this with my IBonds. I calculated the expected payout value (using the same inflation assumption as my Pralana scenario) and divided it over the years IBonds mature.
If I may ask, @jlee, how doesn't this mess up your federal taxation too, since you only get taxed on the _gain_ (interest) with ibonds not the principal when you withdraw? I ended up using two lines for each year under "Miscellaneous income" (one for the principal/one for the interest) but am intrigued by the simplicity of your solution.
In a spreadsheet using the FV function, I used the same interest rate assumption as in my Pralana plan to estimate total IBond payouts at year 30 (or whatever duration you want the funds). I entered the average as a multi-year pension. The basis being paid back to me each year is in the non-taxable field of the pension setup to avoid double taxation. I ignored the impact of the IBond's fixed rate due to laziness, and the imprecision of all this anyway.
The main flaw for me is that my state taxes all pensions, so I can't rid myself of that slight inaccuracy. I haven't found downsides to this, but if anyone can poke holes in this, please do.
I am looking forward to forthcoming functionality re: bond ladders and such.
Back to the original topic.
In a separate discussion Pizza Man presented the idea of “rising equity glidepath" from Michael Kitces:
Instead of the conventional wisdom that retirees should reduce their equity exposure throughout retirement as their time horizon shortens, this research suggests that in reality, the ideal may actually be the exact opposite.
I propose adding a Mode-3 Asset-Allocation option (or enhancement to Mode-2) that periodically increases (or decreases) equity exposure (ratio between stocks and bonds), for example by 1% per year. This mechanism may also be used to enhance Mode-2 to smooth the big jump when changing Asset Allocation ratio.
@hecht790 I recognized your original post in this thread as a the same as Kitces idea a while back, increasing equities as we age instead of the conventional wisdom of seeking more security. You have to ask yourself "What are my goals?" If the plan shows that you must maximize every dollar in order for it to be successful, you have to pull every lever, deploy every tactic to get yourself there (and hope your projections/assumptions hold true). Put your bonds in pretax, stocks in taxable, etc. That also means more work, more room for mistakes, especially as we age, more of a Rube Goldberg complicated thing to leave behind to a grieving spouse who is then forced to the wolves to maintain it.
After doing this for a long time, I rarely come across clients who are in that position. Sometimes, but not often. Most aren't even coming close to spending down their money, even after accounting for what they plan to leave to heirs. It's just a mindset of more, more more. Keep chasing returns, building wealth. If that's your goal and you have the time and enjoy the gymnastics, that's all good (but consider that grieving spouse...do they understand this enough to take the wheel?).
I have these "Psychology of Money" talks with clients. Is this more important to you than setting up a simple plan and process to put this stuff on autopilot as much as possible and just freaking enjoy the years you have remaining? Why take more risk than necessary, and continue chasing returns if you're never even planning to spend what you have? More returns equals higher risk.
That said, the associated concept in this thread of 'bucketing' (ensuring the fixed income piece covers a long enough period of time to ride out any market downturns) does have an adverse side effect in that folks with pretty solid assets can find themselves in an aggressive asset allocation (90/10, 80/20) if strictly following that simple method. I often suggest padding that equity bucket 3 with aggregate bond funds like BND and BNDX to get some better returns while not taking as much risk. I'm a fan of taking risks/chasing returns in bucket 3, and choosing safety (US Treasuries, TIPS) in bucket 2. Sleep well.
The goal of Kitces idea is not more dollars but more security with the plan and reducing retirement risk. It helps mitigate the danger of a sharp downturn in the early years of retirement.
My original proposal was different, sorry for the confusion, this should be in a new topic.
I would like to go back to the Original Idea since I believe it has been dismissed prematurely.
Rather than a Static AA, I would like to hold 10 years of Cashflow (Income - Expenses) in Bonds and the Rest in Stocks.
That said, Cashflow is variable and Pralana has all of the information required to calculate this.
Many of us have well funded plans and I see no reason why this is not a viable option. Given current projections I will have MORE money in Real Terms than I do today and have no need to spend more.
Thoughts?
I would like to go back to the Original Idea since I believe it has been dismissed prematurely.
Rather than a Static AA, I would like to hold 10 years of Cashflow (Income - Expenses) in Bonds and the Rest in Stocks.
That said, Cashflow is variable and Pralana has all of the information required to calculate this.
Many of us have well funded plans and I see no reason why this is not a viable option. Given current projections I will have MORE money in Real Terms than I do today and have no need to spend more.
Thoughts?
One problem with the proposal is why 10 years and not 11 or 12 or a lifetime? And why 100% stocks for the rest, and not 50/50 or 75/25?
I think you might be able to model this now by using a pension to simulate your ongoing bond payments (your LMP), with 100% stock AA for your remaining "portfolio" (which would represent the extra above your ten years.) Your 10 years of bonds would be ongoing, so would be the equivalent of a rolling ladder covering your essential expenses of next ten years. If constructed well it would generate a known about of income each year. Do you think the Bond ladder routine they will eventually program could be used to cover the ten years?
You can model this by adding periods that continually reduce the fixed % and increase the equity %. If you play with the % you can get to constant amount of fixed assets and growing equities (that what I am doing). But enhancing mode-2 to allow mix of assets with % and $ is better.
@jkandell Fine with making it a parameter. I chose 10 years because there have not been many downturns that lasted longer than 10 years, plus it's a nice number.
@jkandell Fine with making it a parameter. I chose 10 years because there have not been many downturns that lasted longer than 10 years, plus it's a nice number.
FWIW, my own system for this (that I don't do in Pralana) is: at all times keep 10% stock/90% safe bonds for the entire NPV of future essential expenses through wife's 95th year; the remainder of portfolio--whatever it may be--is kept at 50stocks/50bonds. I considered keeping only 15 years in bonds at one point for same reason as you, but then thought about Japan 1990-2023, and the fact I have no generational wealth as back up, so decided not to fool around with essential spending.
I am still not convinced Pralana should support this, if only because I'm not sure how many users approach things like us. In the broader sense this is a Lifecycle "Safety First" approach; but the rub is there are different methods of implementing it, from glide paths to number of years (your favorite), to buckets, to actuarial methods, to the "merton share".
