I'd like to start a thread for exploring ways that Pralana can be improved for those of us who value Lifetime Consumption in addition to Legacy. My sense is this is a large group. (And I'm thinking "low hanging fruit" changes rather than major overhauls.) The idea is that when evaluating scenario options, we value a mixture of how much we are able to spend (and when) in addition to how much we have left over for heirs or legacy.
Most of the Pralana optimizations are oriented toward the maximum end-of-plan portfolio value. Moreover, the monte carlo and historical tables and charts are also focused on portfolio value. (And portfolio value is important, not suggesting otherwise.) However, another major focus for retirement is Consumption: what we are able to spend year by year, and overall. This "Overall Spending" (aka Total expenses) can be broken down into Essential expenses and Discretionary spending. (Pralana sometimes labels discretionary expenses as "variable", depending on the withdrawal method.)
Thinking through the low-medium hanging fruit, here are some ideas on how Pralana might be modified to be more useful regarding consumption analysis:
- Monte carlo analyses consumption info: Add consumption information to the monte carlo and historical analyses pages. (a) Text tables: Currently the text tables next to the graphs list End of Plan value (overall and essential). Adding two rows to show Average Total Spending (or total spending), overall and effective, would be valuable in evaluating scenarios. And a second row for Lifetime Discretionary Spending, which many value even more. A scenario that allowed me to have $80k of discretionary spending over my retirement would on its face be better than a scenario that only allowed $50k.
(b) Similarly, the graphs currently show an Expenses line overtop. But this is difficult to read. A separate graph showing probability bands for (i) Total expenses, (ii) discretionary/non-essential expenses would be valuable, especially if it showed the essential and discretionary spending at the 10th, 25th, median, 75th and 90th percentiles. - Lifetime Balance Sheet: A common metric for consumption-focused analysis is what's known as an actuarial or lifetime balance sheet. This compares the lifetime of expenses to the lifetime of guaranteed income (most often Social Security and Pensions, but can include liability-matching-portfolio of bonds) + current value of the portfolio. In other words, guaranteed income you have compared to guaranteed expenses you have. The total expenses must equal the total income. The ratio of guaranteed income to guaranteed essential expenses is often expressed as the "funded ratio". Most frequently the Income and Expense side of the balance sheet are expressed in Net Present Values, since an expense or income coming later in life is less important than one now. The discount rate for the PV calculations is often the 20 year TIPs rate.
Two examples of a lifetime balance sheet (all values made-up): Example 1. , Example 2 - Adding 'adjustment factor' to Actuarial Withdrawal": Both consumption-smoothing and the actuarial withdrawal methods are consumption-oriented parts of Pralana. An easy but powerful tweak would be the user's ability to add an adjustment factor to the actuarial withdrawal that could be used to "fine tune" the results to favor more money sooner (and less later) or vice versa, or anything in between. For instance, a user entering a "+0.25%" adjustment factor would "front load" spending earlier when she is healthier; and it would automatically decrease actuarial spending later. Or another user might want to do the opposite, and be a bit more conservative with early spending ("-0.25%") in order to spend a little less earlier and more later, have a rising consumption path as they get older, to mitigate running out of money or to have more for heirs. The ability to fine-tune actuarial withdrawal would be powerful without much additional programming or clutter. (In theory the "consumption smoothed" withdrawal could also have an adjustment factor following the same logic and reasoning, but that would complicate its iterative process and might confuse users, so I'm not pressing it.)
These are just a few suggestions. Do others have any?
In general I'm quite conservative with my suggestions for improvement, since I feel any complexity requires a swath of user interest; and it also must fit Pralana's overall vision. So I start this thread with a little hesitation, but thought it worth exploring to see user interest.
I'm surprised this topic isn't getting any traction. Am I the only user of Pralana to use a Consumption framework (retirement is as much about total consumption--what I have to spend over my retirement--as it is the legacy leftover amount for heirs/charity)? There were several folks requesting a funded ratio, and the idea of consumption (lifecycle model) joins together several earlier Wishlist requests.
On your request #3, that would seem easy enough to do if you can define exactly how the term works. Is there a standard way this is done for Actuarial and Consumption smoothing, so that the developers are not creating some new twist that nobody's ever heard of or that would be pooh-poohed by retirement researchers?
On your #2, the funded ratio sounds like a whole new report that Charlie would need to create. You probably need quite a few requesters to get ahead of things like handling a bond ladder/TIPS ladder or trying to keep up with Congress as they change the laws. I doubt the program would look up the 20 year TIPS rate (or any other number) for a discount rate, that would be something else to maintain and changes in it would create more questions from users than it solves.
On your #1, for Consumption Smoothing it sounds like a lot of programming with nested loops. The smoothing method is iterative, guessing different amounts of discretionary spending to make the ending portfolio come out to zero. So the program would use the base case projected spend for year 1, spend that, then apply the historical returns to get the portfolio at the end of year 1, re-perform the iteration on spending get an allowable spending for year 2, ensuring the program understands there is now 1 less year in the plan, then apply the historical returns for year 2 and repeat. So a 30 year retirement would be 30 runs of the consumption smoother. That would be a heavy lift in programming, take a long time to run and probably increases the chance on non-convergence as the smoother can get stuck if the optimum answer is to stay below a threshold like an IRMAA tier, where even $0.01 more causes a multi-thousand $ shift in the outcome. That does not sound practical.
Monte Carlo Consumption Smoothing is worse as it has to repeat the iteration for every retirement year for all the hundreds of runs.
Actuarial is simpler in that it is a simple formula that has to be re-applied year after year, for each case, instead of the entire portfolio. But it occurs to me that I don't understand the formula as a $ in Roth is worth more lifetime spend than a $ in taxable, which is worth more than a $ in tax deferred, which is worth more than a $ an inherited IRA. So I'm not actually sure what the program does to tax correct or whether it even tries. In any event, it would still require lots of programming, so you need others to speak up if they are interested; while it might be cool, it's not relevant to the way we plan to manage our portfolio.
