Charlie is working on a way to enter a bond ladder or TIPS ladder, where it is assumed that the bonds come available at maturity and do not fluctuate in value other than the planned amount when purchased. My understanding is the focus is on doing this in taxable.
It's an interesting point that many people hold their bond ladders in tax deferred. The question then is what would have to be added/changed to incorporate that. For instance, the program would need rules on what to do when the ladder is the remaining source of funding or the remaining source of RMD money due to poor market returns, high spending or a withdrawal strategy that requires spending assets down. Also, as you suggest, some may want it walled off from doing Roth Conversions. Beginning to sound complicated to me, but stay engaged here as Charlie and Stuart want to solicit feedback on implementing bond ladders to meet customer needs.
My thoughts are that for practical reasons the ladder bonds in IRA would count toward RMD as they mature, but the ladder as a whole would be off limits for unscheduled withdrawals of any kind. The whole point of a ladder is you don't want to touch it, or you might as well have used a fund. (In real life you might need to break a ladder as last resort, but we wouldn't want to model that I don't think.) In my mind we'd get a warning when the ladder would need to be broken, similar to what happens now with HSAs that run out for scheduled withdrawals. (And for practical reasons it is not likely the ladder would be included in roth optimization.)
@jason-blattyprotonmail-com Thank you.
I can submit a suggestion via Feedback 'Feature Enhancements’, but first we should define the proposal. Here are two options:
- Allow each asset to be % or $. $ has priority. Example for 3 assets: US equity (60%), international equity (40%) and Bonds ($1,000,000). The tool will first allocate $1,000,000 to bonds and the rest 60/40 to US/International equities. There is a big problem with this option as @ricke wrote: “If you maintain the # of years in the fixed income bucket, then if we get a 2022 when both stocks and bonds are down, you would have to sell stocks while they are down to buy bonds, so your % bonds would be going up and % stocks would be going down while stocks are down.”
- Use % only but allow increase or decrease of the %. Example for 3 assets: US equity (30% -0.5%), international equity (20% -0.5%) and Bonds (50% +1%). For ten-year period, first year allocation: 30%, 20%, 50%. 2nd year: 29.5%, 19.5%, 51%. 3rd year: 29%, 19%, 52%. 10th year: 25%, 15%, 60%. There are few potential benefits to this option:
- It allows smoothing the allocation changes, avoiding potential large capital gain tax.
- The user may set the delta % (grow or shrink) in a way that certain asset (such as bonds) will remain almost constant in $ value.
- Users that want simplicity can set the delta % to 0% so the allocation will behave as it does today in mode-2.
It seems that this proposal is not ready yet. We need more discussion and ideas before submitting a suggestion.
With the proviso that there are other modifications pending that have higher priority for me, especially the ability to have multiple assets pools within taxable, each with their own realized gains, along with the ability to specify which pools to prioritize for withdrawals (ideally, including the ability to put one pool, such as appreciated with high unrealized gains, at the very lowest withdrawal priority)
For the present question, one problem I see with specifying a fixed balance is that as one approaches end of life, that balance should ideally be lowered, but of course one never knows how many years one has left. Perhaps there is a way to utilize the RMD calculation table in reverse, and let the user specify a notional annual withdrawal amount, for example 50 K (to be adjusted for inflation), and have the system use the RMD calculation table to gross that up to a corresponding balance, and then maintain that balance in the asset (eg bonds) or account (eg tIRA) in question. The actual restoral could still be calculated as it is now, based on RMD, withdrawal priorities, and cash flow needs.
Come to think of it, allowing the user to specify a minimum, maximum, or target annual withdrawal amount for a specific tIRA can perhaps also help with Roth optimization by removing the rather arbitrary dependence on the longevity assumption input from the user: currently, Roth optimization seeks to draw down the tIRA by that precise age, but it’s doesn’t seem to me that that is optimal.
Pralana has all of the data needed to provide the Cashflow estimate through End of Life.
If I expect to live to 90 and currently 89 it would be fine for it to hold only 1 year in Fixed Income. Max would be the parameter entered when choosing this approach.
Its really not that complicated and is much closer to a LifeCycle investing approach which has had a great deal of Academic scrutiny.
For the present question, one problem I see with specifying a fixed balance is that as one approaches end of life, that balance should ideally be lowered, but of course one never knows how many years one has left. Perhaps there is a way to utilize the RMD calculation table in reverse, and let the user specify a notional annual withdrawal amount, for example 50 K (to be adjusted for inflation), and have the system use the RMD calculation table to gross that up to a corresponding balance, and then maintain that balance in the asset (eg bonds) or account (eg tIRA) in question. The actual restoral could still be calculated as it is now, based on RMD, withdrawal priorities, and cash flow needs
This us what i meant earlier when i noted a level with the proposal that there’s added different models of lifecycle withdrawal, and which does pralana pick? The rmd method of withdrawal has actually been explored by wase pfau, and is pretty good concerning its simplicity. (The rmd method is similar to the pralana Actuarial method if one had a zero discount rate, ie the return of the portfolio was conservatively taken as zero.)
I think I got lost as to what feature you are hoping for? Is it being able to enter more asset allocation changes so you can roll-our-own allocation plan changes as you age?
Then you could ramp bonds up near retirement, spend them down while deferring SS benefits, and do whatever after that. I don't think there is enough consensus in the literature for the Pralana developers to pick a specific plan. For instance, Wade Pfau's recommendations wouldn't fit me, he would probably go to 30% stocks at retirement, then slowly build stocks back up and buy an annuity too.
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?
