March 18, 2021

Bogleheads® Chapter Series – Pralana Retirement Calculator

Retirement planning calculator demonstration. Presented by Stuart Matthews.

Hosted by the Chicago Bogleheads Chapter. Recorded on March 18, 2021.

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Transcript

Bogleheads® Chapter Series – Pralana Retirement Calculator

[Music] 

Welcome to the Bogleheads Chapter Series. This episode was hosted by the Chicago Virtual Chapter and recorded March 18, 2021. It features Stewart Matthews, the designer and developer of the Pralana Retirement Calculator. Bogleheads are investors who follow John Bogle's investing philosophy for attaining financial independence. This recording is for informational purposes only and should not be construed as investment advice.

Stuart Matthews: This is one of the user worksheets. This is part of the Pralana Gold Calculator and in it I've just entered a summary of this scenario that I've built. So let me quickly step through this so you'll have some idea what we're trying to--where I'm going--with this demonstration. This is just one example. It's not a trivial one but it can do far more complicated things than this. 

So just take it from the top  The demographics, we're talking about a married couple whose ages are 57 and 55. They currently live in Maryland and they plan to relocate to Texas whenever they retire in several years. The general inflation rate assumed is 3% with health care expenses inflating the 2% above that. As far as the federal--let's see the the calculator does detailed federal and state tax calculations-- so the federal tax law assumes  currently the Tax Cut and Job Acts of 2017 up until it's sunset year 2026, or which time it reverts back to the pre-TCJA of 2017 laws, with the tax tables corrected for that year 2026.

The initial balances of the accounts in question here are 525k in the husband's tax deferred accounts, 150k in the wife's tax deferred accounts, 225k in regular investment accounts with a cost basis of 170k. They have 10k in checking and savings accounts and 50k in a 529 plan for their children's education.

 As far as their portfolio is concerned, they have asset classes of money markets, stocks, and bonds with real rates of return of -2.0%, 2.5%. And 0.5% respectively. And then the allocations for these accounts are all the same. They're 60% stocks and 40% bonds until the retirement date, after which they get a little bit more conservative and go with 10% money market, 40% stocks and 50% bonds throughout their retirement years.

As far as income is concerned, he earns 150k, apparently increasing 3% a year, which is at the inflation rate until his retirement date, which will be May 1, 2024. During this time he'll be making personal contributions to his 401k of 12.5k with a company match of $6,250. She'll be earning 40k increasing 3% percent a year until her retirement date, which is the same as her husband's. She'll be making a $4,000 contribution to her 401k with no company match.

When he retires he'll have a part-time job until he turns 67, and he'll be self-employed in this job and he'll earn 10k a year, increasing 3% per year. Also at the time of his retirement he'll receive a $50,000 fixed pension, which is to say it doesn't have any cola associated with it. It begins on his retirement date, and he will have a 50% survivor option should he die before his wife.

In terms of Social Security benefits he'll earn $30,000 a year at his full retirement age of 67, and she will earn $22,000 dollars per year at her full retirement age which is also 67. However he'll be delaying his benefits until he reaches 70, but she'll go ahead and start hers at 67.

In 2030 they anticipated an inheritance of a 100k in a brokerage account from his parents, as well as his dad's $50,000 IRA. And then she'll do some part-time work. They'll hobby and earn $2,500 a year from age 55 to 60, which will be taxed as ordinary income.

In terms of expenses, they currently own a home which they're still paying for, and they'll be downsizing at the time of their retirement. So they purchased this home in  2010 for 300k. It's now appreciated up to 400k. Still have an outstanding mortgage at $79,500 at 4.5%,  a monthly payment $1,338. They do have property taxes, insurance, maintenance, and utilities which add up to about $15,100. They'll be selling that house when they retire and downsizing for a house. It is worth $300,000 in today's dollars and then they'll leave it in there after. And its operating costs will be 13.9k.

They have two cars currently. They generally plan to replace them every 10 years. They've got two children who are about to start a four-year tour duty in college which costs $25,000 per year each, and the first of those will be paid for by a 529 plan the other would be paid on the fly.

Health care costs are being modeled here and they will be varying substantially as they transition from their working years into their medicare years. They'll start at $3,000 a year while they're both still working through a group insurance plan. But they will peak up substantially higher when they retire. They'll go on to Obamacare and their premium will be $15,000 a year prior to any subsidy, and we'll talk about that a little bit more when we get to it. And then eventually this will taper off as they both go on to medicare. I'll show you how that works.

Their discretionary expenses will be $25,000 and in today's dollars during their working years and it'll go up to $35,000 in their early retirement years as they do a substantial amount of traveling. And then it'll drop off to $22,700 in late retirement. 

Now should one of them die early, these expenses will be cut by 40% upon that death. They also intend some one-off expenses to fund the marriage of their children. They're anticipating 15k today's dollars for their son in 2027, and 25k for their daughter in 2030. Finally they have a charitable contribution of $10,000 which will become a qualified charitable distribution when he reaches age 70.

So what I'm going to do here is just model, show you how this is modeled in Prolana Gold. Then do a baseline analysis of the probability of this couple reaching the end of their expected life spans without running out of money. Then we'll do some other things. We'll do a quick bear market analysis on their plan. We'll show a Roth conversion. At some point I will show you how they can optimize their Social Security starting dates. I tell you what ages they plan, but there might be better dates. We'll take a look at that. Then we'll look at the sensitivity of their plan to changes in key variables like rates of return, inflation, etcetera. Then we'll do a couple of what-if scenarios like an early death loss of the pension. And finally, we'll just look at how the tool can deal with alternate spending strategies.

What I did here was show you specifically what they plan to do. But there's other ways the tool can  do spending strategies as well. So that is the scenario that I want to show you how we model. I'm going to jump over to the calculator itself and I just took the shortcut and here it is.

This is the home page. So the calculator, again as I said, it does not take you by the hand and walk you through. You have to think your way through this thing, but it's organized logically and it's just broken down functionally and you navigate among those functions by this navigation bar at the top of the page.

So the home financial assets, income, and expenses functions are primarily input functions. And then the tabular projections, graphical projections, and reports are primarily output functions. And then the analysis function is a combination, it's got some inputs and it's got some outputs. And that's where we're going to find the monte carlo analysis, and the historical analysis, Social Security start age optimization, profit, Roth conversions, and other things.

So we're going to just start off. It's going to walk through this thing left to right, starting with the home page, and walk through these various functions to show you how the scenario that I just described is input here. So again, I said this is Excel. You can see the Excel menus at the top. And it's basically table oriented. But its design says we don't need any of these Excel menus at the top so I'm going to get rid of them by clicking this link right here, says hide those Excel menus. Boom! they're gone. Okay, we don't need them.

Okay. So we're talking about a married couple here. So this is a toggle button. If they were single, if Joe was single, we just clicked that and he would show he’s single it would dry out the boxes associated with his wife. Well right now we're going to bring Jane back. So you see the names are Joe and Jane. These are their birth dates. And this starts, then the tool calculates their age based on this birth date. This is their age on January 1, 2021, which is here.

We're going to begin this model. So basically this page is collecting some very fundamental assumptions, such as their life expectancies. And then their assumptions relative to inflation and taxes. And I didn't mention it up front, but the tool models three independent, at least large, mostly independent scenarios simultaneously. And you'll see most of the pages that we're going to walk through have those, and the inputs for that function, for that scenario, listed side by side.

So this part of the table here are the inputs for scenario one. These are the inputs for scenario two, and these are the inputs for scenario three. So for a given scenario the tool has to collect inputs across all of these functions. We need to give it these basic assumptions. We need to talk about the financial assets, the income, and the expenses. So each page contributes some part of a given scenario. Again, there are three, and you can name them down here at the bottom. So this is a short name, and whatever these short names are, it appears here and you'll see that repeated on most of the other pages. You can put a longer description of each scenario here just for your own reference.

Now I did say when I was defining the scenario, the tax law in effect is the Tax Cut and Job Act of 2017. And that is going to revert back to the prior law in the year listed here, so it's 2026. But if you think that's not going to happen, you can change that, whatever date you want it to be. You can delete it and then the TCJA of 2017 will go on forever.

Okay, so that is basically what we do on the home page. And so with that I'm going to move on to the next page which has to do with financial assets. And here you're going to see that there are some additional pages which fall under financial assets, initial balances, management, asset classes and so on.

So the first, and I'm just going to walk through them, I'm not going to do all of these, I'm going to hit the ones that are pertinent to our example here. These are the initial account balances. So the items in gray are the account types that Pralana Gold models. So there are the tax deferred accounts for Joe or his wife, and his joint Roth accounts, they're treated as joint by the calculator, regular investment accounts, inherited accounts, and they can be traditional, and for husband and wife, and then your cash accounts such as your checking and savings accounts. Qualified tuition plans, 529 plans, and then health savings accounts.

So these are the entities that are modeled by the tool, the ones that I'm selecting here. But each but each of them here contains additional sub accounts that you can enter here. And these are strictly here just to help you enter your initial balances. It does not actually model these sub-level accounts, it only models the total account here. 

But initially I said that 425k in Joe's account, there's 100k in his wife's account, 225k in the regular investment accounts, of which there is some cost basis here, so  there is currently $55,000 unrealized capital gains, as part of this 225k in these accounts. There are no inherited accounts as of the start of the model, and are $10,000 in checking in savings and $50,000  in the 529 for a total starting balance of $785,000.

Okay, I'm going to move now to the management page. There are a number of things that can be done on this page. The one that I'm going to just focus on briefly is the withdrawal priority table. Should we get into a situation where the couple being modeled has a negative cash flow, we need to talk about the withdrawal priority. Where do we go to get the money to cover that negative cash flow?

That's what's done with this table. There the choices are the regular investment accounts, the husband's tax deferred account, the wife's tax deferred account, and the Roth accounts. Those can be put in any order. So I think that there's 24 ways you can arrange that, and those are listed here in this pull down menu. You can pick whichever one you want. And I picked the first one. That's one that actually tends to be the best. And then you can pick a different withdrawal property for each of the scenarios. This table does other things you can see. There are a number of things down below, but at this point I don't think I want to go into those. I'm going to move on.

The next thing is asset classes. So one thing that that may separate the Pralana calculator from other calculators, it doesn't simply ask you what rate of return do you think you're going to get on a given account, it looks, it derives that from the underlying asset classes and from an asset allocation per account.

And on this page we're talking about the asset classes, and it can be as simple as a single asset. If you really just want to say I just want to specify my rate of return as 5% or 7%  or whatever I want it to be, I can just say I'm going to just use one asset, and I'm going to--just for the sake of this example--I said I'm going to show you how we do that with scenario three. And I'm just going to call it, we're going to keep it simple. The k-i-s, we’ll keep it simple asset with a real rate of return of 3.5% and a standard deviation of 5%.

But if you don't want to keep it quite that simple, you can do something else. There are up to 10 asset classes that you could enter. I personally keep it simple with maybe two or three. This is kind of what I use, these are not necessarily my numbers, but these are the asset classes that I tend to use. And if you want to go from something complicated to just default, you can click this button here and it will load this in as a default setting.

So for this example I've said the money market asset class for scenario one has a real rate of return of -2.0%, in other words it's falling behind inflation, but has very, very small standard deviation, so very consistent. For the stocks, I've set a real rate of return of 5% with a 20% standard deviation. And bonds, real rate of return of 2.5% with a 7.5% standard deviation.

So all of these of the three scenarios use the same assets with the same assumptions about their rate of return and standard deviations. The 529 plan, it's not as complicated as asset classes and asset allocation, for these you do simply specify what is the rate of return you think you're going to get on your 529 plan investments, and what rate and what the standard deviation. 

So I mentioned earlier that the tool does fixed rate. I think I mentioned it does three types of analysis. One is the fixed rate analysis, where this uses an average rate of return each year and these are those average rates of return. [Pointer] Distance of these.

But for monte carlo analysis these are the arithmetic means and these are the standard deviations which are used to generate the random rate of return for every year in that simulation. More on that later.

Okay. So I mentioned to get the rate of return for a given account type we need two things. We need the rate of return and we need the asset allocation. So I'm going to skip over to the asset allocation. Right here, this is a busy looking table but it's not really that bad. But it is organized, here again these are the allocations for scenario one, these are for scenario two, these are for scenario three, and then these are the various accounts.There's a regular investment account, the tax deferred account for the husband, for the wife, and there's the Roth accounts.

And then, so down below here, you can specify different allocations for up to five different periods in time. And in this example I've used two different time periods called period one, period two. Period one begins right now, 2021. Period two begins in 2027. You specify those years here, and then, zoom, you come down here and the asset classes that you input over here are replicated on this page. And they show up here. You cannot change them here. These are simply copied from the asset classes page.

But you go in here and you say these are my allocations of these asset classes for each of these accounts. And to make it simple in this example I've used the same allocation for every one of them. And as I said earlier, during the first period of time while the couple is still working it's a little bit more aggressive than it will be later. So it's 60% stocks/40% bonds. When they get retired they'll invest 10% percent of each account and in money markets, 40% stocks/50% bonds.

So now what the tool does is based on the rates of return you put over here on this page and this asset allocation here. It generates an aggregate rate of return, and that's a real rate of return. So for period one it's 4%. For period two it's 3.05%. It's a little bit more conservative, it gets a little bit lower rate of return. And then here, these are the rates of return associated with the cash accounts, which would be your checking and savings accounts. So there are no assets associated with them. You just specify the rate of return directly.

So I've done the same thing, scenario one, scenario two are identical and one. And I will show you. We'll deal with it a little bit later. You just want to keep it simple. I don't want to deal with all these asset classes. I just want to tell you what my rate of return is going to be. Therefore we use the keep it simple asset which had a rate of return of 3.50%.

So you come over here. And say I'm allocating 100% of this account to that asset and therefore the aggregate rate of return is 3.50%  just like you specified on the asset classes page. So that's how the tool derives the rate of return to apply to each of these accounts and  uses that in the fixed rate and the money following projections.

Okay one other thing we need to talk about before we leave  the financial assets area is the asset class taxation. And this pertains only to the regular investment accounts. We know tax deferred accounts and Roth accounts are simple. Everything that comes out of a tax deferred account is taxed as ordinary income.Everything that comes out of a Roth is tax-free. So we don't have to deal with that. But we do have to deal with a regular investment account. And so you have four choices of how each of the assets are taxed within the regular investment account. Could be just taxed as simple interest. Could be taxed like a qualified long-term capital gain. It could be taxed as a long-term capital gain when it's withdrawn, otherwise it's not taxed,  or it could be tax-free such as a municipal bond.

Okay so I've set it up this way to make it simple. Money markets I am assuming our tax is simple interest. Stocks, I'm going to assume we get a little bit of just simple dividends, unqualified dividends taxed at 5%, but 95%  the assets associated with stocks are taxed only when they're withdrawn, otherwise they continue to grow. And to keep it simple I've said it's 50% simple interest, 50% when it's withdrawn, and they're all the same. So with that I am through talking about financial assets.

And then we'll move on to the income page. Again it's organized just like the others. These sets of fields are associated with scenario one. This is scenario two. This is scenario three. Again you can see that the name we gave with each of those scenarios is listed up here. And then here are the items that we can enter data for. This is a very long table. There's three, and for that reason there are some links up here, so little hidden buttons, that allow you to scroll from one major function to the next.

So at the top of the page there's the employment income stream. There's three of them beneath that. There's pension income. I'm going to click this button here. It will scroll down to bring the pension streams up to the top of the page. So there are two, so you can see, you can identify two pensions for husband and wife for each of the three scenarios.

Now we're going to scroll to Social Security. The Social Security inputs for each of three scenarios. And then there's windfalls. It could be detachable.There's non-taxable windfalls, then if  you still get other streams of income you need to specify, you can do that down here. There's five of these. Other income streams can be defined  for each of the husband and wife, for each of the scenarios. 

Going down further you can define two annuities for husband and wife, for each of the scenarios. And then if you anticipate  inheriting an IRA, a traditional IRA or a Roth IRA, at some point in the future, you can do that. And then finally, you can specify, you can define, a reverse mortgage.

Now with that, I'm going to quickly show you how I entered the data that I described for this scenario. At the top are the retirement dates. I said this couple is going to retire the same day. That's going to be May 1, 2024. And they're both currently working so I'm going to put that under employment income stream number one, which starts when he's 55 and it ends when he's retired. Now you can define these start and stop dates for any of these blocks of income stream. You can define them either by an age, by a year, by a specific date or by the retirement date, which is here. So if you want to tie this income stream to that date, what you do is just type in an “r” right there. So this income stream is going to begin immediately and it's going to end on May 1, 2024.

So in the meantime it's going to be $150,000 increasing to 3% a year, $12,500 going into his 401k and the company is going to kick in $6,250. Meanwhile the wife starts these two years younger. She's starting, now her income  stream of $40,000 is going to end when she retires on May 1, 2024. That will also increase the 3% a year, and she'll be contributing $4,000 a year into her 401k.

And so now I'm going to go down to the pension streams, where Joe is going to have a pension income stream that starts when he retires on his retirement date of May 1, 2024. At the end it goes indefinitely. It's an amount of $25,000 and that's fixed and it does not increase, but it does have a 50% survivor benefit should he die before his wife.

I want to go down to Social Security and here I said that Joe will have a $30,00 benefit if he were at his full retirement age of 67.  His wife would have 22k and her retirement age was 67. However Joe actually intends to work until he's 70. So this amount will be increased at I think 8% a year until he reaches age 70, and it will begin. And hers will begin at the full retirement age so it will be 22k dollars from the start.

Okay. I said that Joe will be inheriting from his parents. It'll be $50,000 in a brokerage account in 2030. And his wife will be doing some part-time work earning $2,500 a year between 55 to 60. It goes up at the inflation rate and will be taxed as regular income. But you do have the option if you could bottle something that's not taxable, or taxable as capital gains. Those are options as well.

Just scrolling on down. No annuities but there is an inherited IRA coming at some point. They anticipate that being $50,000 a year in the year 2030, and they will have a distribution period of 10 years. So all three of these scenarios are the same. I don't think I put any differences in them. So that's how you define income.

Now we're going to move to expenses. Again, there are a number of sub-tables here. Different categories of expenses, which have nuances into how they're modeled. So the tool does not simply say  here's an expense, here's a start date, here's a stop date, and here's how much it increases per year. This still goes way way beyond that. So on this page it can involve properties such as homes and cars.

So what I'm saying is I said this couple currently owns a home. They bought it in 2010. They paid $300,000 as a cost basis for this home. It's currently valued for $400,000. It has a mortgage on it at $75,900 and 4.50%. The monthly payment is $1338. They expect to sell it in the year 2027 and they will have a realtor fee of 6% when they do that.

You can see it. So when they sell this home they'll be buying another retirement home in that same year. They'll be paying $300,000 for it. They will be paying cash. There will be no mortgage and they don't ever intend to sell it. And I said they had a couple of cars. They bought one in 2012, another in 2017. You see this is what they paid, this is what they're worth. They have a mortgage on one of them. These are depreciating some every year and when he sells this one, he expects to buy this one to replace it. When they sell this one, they're going to buy another one here to replace it, and when they sell that one they're going to replace it with this one. So that's the purchase and the sale of each. And there's 10 rows. You can model 10 different properties on this table.

So this is the top table, the acquisition and the loan and sale information. The table below applies to the same properties, so that whatever name you type in here is replicated here. but these get other costs. These are some costs of ownership, such as property taxes, insurance, and annual operating costs, gasoline for cars, maintenance for the homes and the cars, then utilities.

This is the one page where the three scenarios don't line up side by side, because as you can see, this table is very wide. It just wouldn't work to have them side by side. So they're stacked on top of each other. And so these  links here help you scroll from one to that. Right now we're looking at scenario one. We can look at scenario two by clicking that. That now brings up scenario two. There's some click to bring up scenario three. In this case they're all identical, and at the bottom of the page there's some summary information that is calculated based on the inputs and the tables above.

Now we're only looking at one scenario at a time in this case. This is probably the first time we've seen this little gizmo here which says you can click this button to specify which scenario you want: one, two, or three. The one that's active is listed here. So right now we're looking at scenario one. But I want to go with scenario two. I'll just click that and this will change the scenario.

Okay. So this is the left part of the table,  a summary across all of the ten assets. And this is just one of them. This table, this page, potentially goes to the right about five or six feet. But that's very cumbersome to try to scroll. So what this capability here just lets you look at, whichever one you want, you click up or down to look at a particular property. 

And this is the property on the current home. And so here's the loan they're paying. That obviously, it's going now towards zero. There's a monthly payment. There's a value. You see the value of the house is going up, equity is going up. These are the taxes, the insurance and so on. Then here's the  second  property. It kicks in when they sell the first one in 2027, and it continues on to the end of the modeling period.

So you see these are the annual expenses. When the property is sold there's a windfall. The net expense is the difference between the expense and any windfall. Otherwise it's just the annual expense. These are the tax deductions, and then here's the total equity. So that's basically how you specify property. This tool also does rental property, very similar to personal property but it's more complicated. But that probably only applies to very few people so we're definitely going to skip over that in this demonstration.

Okay. One thing, let me go back. I failed to mention for any of these community spotlights. You can do home equity loans as well. You pick the one property you want to do a home equity loan, fill out the details here. And you can do a home equity loan, or a home equity line of credit, whichever you choose. We're not going to do that in this example.

Okay. Now moving on to children, which is the second expense category, which is different from all others. Basically the table at the top deals with college education expenses for the children, for up to four children. And the table below deals with the expenses for those children prior to their college years.

So in this example, we've got two kids, John and Sue. John's going to start college this year. Sue is going to start in a couple of years. Therefore Sue's expenses--and then in the next couple of years--are listed here. They're $8,000 a year. So the annual cost of college is $25,000, that will be going for four years. The parents are only going to pick up 25% of that though. And for John, they dissipate funding  with the 529 plan, which had an initial balance which we already specified-- I think it was $50,000--already there. But for Sue we're just going to pay as we go. So the details of how all that lays out is not shown here, but we'll get to it a little bit later when we get to the tabular projection.

Okay healthcare expenses is yet a different way of modeling an expense. As I mentioned when I was briefing the scenario, their health care expenses vary quite a bit from during their working years, as they go into their  early retired years, and ultimately on to their medicare years.

So there are fundamentally five periods of time that the tool deals with.The first of those applies--and all of these applied to married couples. In general ,period one is when both partners of the marriage are working. Period two all is that, and that's when only one of them is working. Period three is when neither of them is working yet neither of them has reached medicare age yet. Period four is when only one of them has reached age 65 and go on medicare. And then finally period five is when both of them are 65 and on medicare.

So for each of those periods of time there's two rows. The first row deals with insurance premiums, the other deals with out-of-pocket expenses. So here's the numbers that I've chosen  for there. And then you can see when there is no period two because they both retire, they both stop working on the same day. So they immediately go from period one to period three, and they just consequently blacked out. At this point in time they go on Obamacare and the premiums go up substantially, but this is actual premium they pay and prior to any subsidy being applied. Then these are out-of-pocket expenses. And then as the husband goes on to medicare the expenses will start coming down a little bit. And then ultimately, it'll go down further when they both get on medicare.

And so the tool will either automatically calculate medicare Part B premiums for you if you check this box. If you don't check it you have to do it manually. In this example I'm assuming the tool is calculating the medicare Part B premiums. You would still, if you have supplemental insurance or Part D insurance, you would need to enter those premiums here, or here. Now if any of these expenses are paid with pre-tax dollars, you can enter what portion of it is paid with pre-tax dollars in these fields.

Moving down below, now this part of the table deals with Obamacare Affordable Care Act health insurance. You just check if  you want to use it. You just check the box for period three. These pairs are the same as these, so if you're going to use Obamacare in period three, you check that box. For period four you check that box, and then assuming you are going to use ACA  insurance, this is where you put in the key number which goes into the calculation of the subsidy. The cost of the--I think what's it called, the second lowest, the second least expensive silver plan premium--so in this case it's $12,000. So the subsidy for this couple will be based on this number and their modified adjusted gross income. So those two factors go into calculation of the subsidy, and there's some tables behind the scenes here which are used to calculate those values.

Another thing that you can enter on this table is what happens after one of the spouses dies. Because these are expenses for both members of the marriage, if one of them dies what's going to happen. In this case we're assuming that these costs will be cut by 50% upon the death of the first spouse. 

And then finally, at the bottom, if there's long-term care costs that you anticipate you can specify that down here. The annual cost, what year it begins, and how long it goes. If you didn't leave that blank it begins at that age and lasts forever, for the lifetime of this person. So that is how health care is done.

Now moving to discretionary expenses. This is another big table. It's got three segments too, scenario one, two, and three. And then each of the scenarios is further divided into three time periods, with the idea being your expenses are probably going to be different in your working years, than they are during your early early retired years, and then may change again further in your late retirement years.

So in this example all the costs are--I think they're the same--except I put in a bigger number here from period two which will be the early retired years, anticipating that the couple anticipates doing some travel. So that number may peak up for during this period two, but ultimately they get a little bit older. From 2037 they're slowing down again, and the number comes back down. So the discretionary expenses are 27.5k for period one, 45k for period two, and then dropping back down to 25k during period three. And should again--what happens if one of the partners of the marriage passes away--these expenses are probably going to reduce, and you can specify about how much, down here. In this example I'm assuming they dropped by 40% after the death of the first spouse.

Now then, I'll go to another table, miscellaneous expenses. This is generally for capturing one-off costs like these weddings. It doesn't have to be one-off, but in this case it is. John, the son's wedding, $15,000 in the year 2027. Just one time. Start here in the baseline, and the second year to stop. Here is the same for Sue's wedding, there's the cost, it occurs in  2030. These are today's dollars but they will be increased up to that point in time, and then both scenarios use the same data here.

Now the tool also allows you to model term life insurance, a whole life insurance program. I'm going to skip over that for this example. And then finally, the following final piece of expense inputs. Here is charitable contributions. In this case I just picked one charity, the amount is $10,000. It starts this year, increases at the inflation rate and it is to be treated as a qualified charitable distribution, my donation at age 70. So again, this is from their scenario one, scenario two, scenario three.

Okay. So that completes the input. I have now defined the scenario. Now we can see what the outputs are. Now I'm going to skip over analysis for the moment. I’m going to show you some of the tabular projections produced by the tool. There are eight separate customizable views. You can define  what these views are and what data goes into these views. But I've got them set up. And so it's income ,contributions, expenses and so forth, over to summary. And then additionally you can look at the details of the adjusted gross income and your itemized deductions, but let's just start over here with the income.

So you can see these are the fixed rate analysis results. All these are based on the fixed rate returns that we defined on the asset classes, asset allocation pages. And so Joe's income is, as you can see, it starts at 150k and drops down when he retires in 2024. He'll only have worked a partial year, so you can see it's starting to step down. Then he took that part-time job earning $10,000 a year for several years. His wife earned $40,000 a year after her retirement date, I think May of 2024. And then Joe has a pension that kicks in on his retirement day here. So he has a partial  year here, and then in full years here thereafter. But remember I told you this is a fixed pension, it does not increase over time, and we're currently looking at this data in terms of today's dollars. If I switch it to future year dollars you'll see it comes back to $25,000. And then I think I also mentioned it has a 50% survivor option so in his death out here at age 85, so he goes away, but now his wife is still going for several more years, and this pension drops to 50% of the $25,000.

Okay, I'm going to switch back to today's dollars. You can say Social Security kicks in here and this is the portion of it that is taxed, based on the modified adjusted gross or the taxable amount based on their AGI that determines how much the Social Security income is taxable. And that's presented to you here.

Here's another page that shows just a few contributions. These are Joe's contributions, here's 401k. These are James contributions. And these are the company’s, this is Joe's company.

Then here's a page that shows the expenses. This came off the expenses page,  I mean the net property page. These came off the children's page. We initially had $50,000 in the 529 plan but that wasn't enough to fund the first kid’s education. We had to kick in some more money, so that contribution is here.

These are the health care expenses. We talked about it. It starts low with $3,000 a year. But then it goes up higher and then comes back down again once we get onto Obamacare. So there are some subsidies that are created. You can see those are listed here and they serve to reduce the health care expenses here. So this takes into account the application of that subsidy.

We have miscellaneous expenses to pay for those two weddings. That's what these are. And then these are the specific discretionary expenses which included the increased spending for the travel during the early retirement years, a 10-year band there I believe, and then it drops back down to about $25,000. And then upon the death of the husband it drops by 40% down to this level.

Then I think that the final expense that we specified was the charitable donations. They start off as a non-QCD prior to age 70 but in 2035 they become qualified charitable donations and basically these then come out of Joe's tax deferred accounts as RMDs but they're not taxable. So that is the expenses page.

Now here's a page that shows the detailed tax information. I told you this still does detailed federal and state tax calculations, and these are some of the information associated with that. Here's the AGI column, and if you want if you see this, you want to say, “What the hell did that actually get at that, what are the details?” You come over here, and there are the details, this page.So there's the sum, and here are all the components of it. And it's actually wider than this page. You can scroll over to see some more of it there. And these are the itemized deductions, should you be able to itemize. These are the details of that.

Now we're going to go back. This is the tax page again. Here's reportable capital gains. These are the deductions and exemptions. So there's the AGI minus this, get you federal taxable. 

There's a state tax. Well here's the federal income tax. State income tax, which goes away, by the way, when this couple relocates from Maryland to Texas in 2027, which we specified on the home page.

While they're still working they’ve got Social Security taxes to pay,that's this. And then the overall effective tax rate is shown in this column. This is their marginal tax rate. It starts off in the 22% range, drops down to 10%, finally gets up into the 15% range when the RMDs kick in, and that is that.

Now here is a page that shows what the various accounts are doing. We talked about those accounts. Initially there's a 529 plan. There's a cash account. There's  regular investment accounts, both tax deferred accounts for husband and wife, an inherited IRA account, the health savings account. And then this is the total of these savings accounts. This is the equity in the property. And this is the total net worth, which is the net savings plus the equity in the property.

And so the growth over time you see, these are the rates of return based on what we defined over here on the financial assets asset allocations page. But over here we said these are the real rates of return. Over here these are the nominal rates of return which is basically the real rate of return plus inflation. So you see they started 7.0%. They dropped down to 6.1%  and that's where they remain to the end. And then these are the actual growth amounts. These are actual dollar amounts of that growth. These are in terms of today's dollars.You're going to look in terms of future year dollars, you click this button and then you get that.

Okay. What about withdrawals? One of the withdrawals we know we're going to have is we're going to be taking money of that 529 plan to pay for the first kid’s college. And then RMDs are going to start. They start at 72, and that begins. So the age shown here is the age of the husband at the beginning of the year. But we know his birthday was sometime during the year. So that RMD. So he reaches 72 sometime during this year.  So then, when his wife begins two years later and those are their RMDs. And even though Joe passes away at this point in time, that RMD continues and goes to his life. She inherits that.

But we do have a negative cash flow situation going so there's unscheduled withdrawals from the regular investment account. I believe we must have negative cash flow. And so yes indeed we do. So here's a summary page, and this is a total of the income, total expenses. This is the difference between them. This is the cash, it's positive while they're working but when they reach their retirement age in 2024, and they could have a negative cash flow situation, and this is the overall withdrawal rate, total property. They have a loan for a while, there's the property loan balance, there's the equity again, net savings,the total net worth.

So going back to withdrawals we do have a negative cash flow going. Therefore there's got to be withdrawals taken to cover that from somewhere. And because of the the withdrawal priority that we specified back here, regular first, and then your and then the husband's tax deferred account, it starts taking those covering, those negative cash flows from the regular investment. And that's what these are.

But ultimately I think that--let's see,the regular investment account runs out of money here--so now we've got to go somewhere else to cover the negative cash flow in 2030. So in 2030 or 2031 we have to start taking  from Joe's tax deferred account, and that's what these are.

Okay, so that's the tabular projections. And again, one other thing. If you don't like the way this-- there's a lot of flexibility here--first of all, if you don't like the way this is organized, you want it to be organized in some other way, you can just take that click on that column that you want to move and go over here and move it to the left, move it back to the right, move it over there, move it to the end. Put it wherever you want it. If you don't like the title that I have given it, you can delete that header and call it something else. I just have to remember how to do it. You click add header.

Come down here, something else. So you have flexibility. You can change these things any order you want. You can change these headers and span those columns. Additionally I told you you can define these eight views however you want them to be. You do that from this category projections major page. You come over to the view management sub-page, and then here are all the columns of data that are available. I think there's 130 some columns of data so it's far more than one page. Wiser you do have to scroll to see a lot, but here are the eight views. You can define, call them whatever you want to call them. You don't want to call it income, you type in something, change it to whatever you want to call it, and then you check--which you just put checks--these are the columns of data I want to include on that page. You just go through, you check whichever block, whichever columns, you want, and it will appear on that page.

This row right here tells you whether there's actually any data in that column or not. So you can see if it has a no. I didn't check it, for the most part, so you can just go through there and pick whichever views you want. So that's it. I don't dwell on it anymore. That's just some questions.

So now I'm going to move to the graphical projections. I said it, this thing produces outputs in terms of--so here's a graphical view of the savings and network--there's quite a bit of data on here. The bar chart portion of this thing is the savings related things and these are stacked bar charts. So the top is the overall net worth and so at the top segment there is the total equity in property. The bars beneath that are the various components of your savings, and then the line graph is income. The blue line is income, and this line is the expenses and they are calibrated against the scale on the right. These bars are calibrated against the scale on the left. And you can show this in terms of today's dollars or future dollars as well.

Okay with all that said, one other thing. One of these is reports. The tool is designed to be an interactive tool.Yyou make your input, you see the outputs and you can flip back and forth. You can see all the outputs. But if you want to produce a report, a pdf, you can produce a pdf file from this page and you can arrange that in the landscape orientation or portrait orientation. It creates an input report, an output report. I'm not going to do it, but it generates a pdf file, and you can print it, share it with someone else, whatever you want to do.

Okay with all that said, now let's do some analysis. So based on all these inputs, how's this couple going to fare? So I’m going to start off by doing a monte carlo analysis on scenario one. And to do that I select this. But the analysis type that I'm going to do is shown in red. Right now it's monte carlo, it's selected. If you want to do historical, you click that, and see, it changes to red. I'm going to go back to monte carlo and click update the active analysis. And it's going to take several seconds. It's going to do that analysis--there it is.

And so there are two primary things shown here. The red line sneaking through the middle there is the fixed rate analysis based on average rates of return of each account. And then the blue band, or the monte carlo analysis--Prolana Gold  uses 500 different test cases in its monte carlo analysis--and the blue bands are trying to show you the distribution of those results across all 500 test cases and they're arranged by a percentile. There are 10 bands. The lowest band is not shown and neither is the highest band. So the first band down at the bottom are the results that show up in the 10th to the 20th percentile. This is the 20th through the 30th and so on because this is the 80th to the 90th percentile.

But the cursor won't show them. It shows you what the percentile range we're talking about. So you can see, based on the standard distribution, the standard deviation that I specified earlier, we get quite a bit of a range in these results over time. But in this particular case, the 98% success rate at the end of their life. So I'd say that's pretty good.

Jim: Stuart this is Jim. I have a question.

Stuart Matthews: Yes.

Jim: Yeah. I noticed when you set up the original  assets, you put the stock market, I think at 5% with the 20% standard deviation. Is that reflected here?

Stuart Matthews: Right. That's what you see. Some of what you're seeing here.

Jim: My question is I'm not used to thinking about it within the standard deviation world. Is that typical, or what would you say about the way you set this up with the 5 and 20.

Stuart Matthews: Well the monte carlo analysis is based on--you use it--random rates of return. I mean what it's trying to do is simulate market volatility. And it does that by using random rates of return using a normal distribution. And to do that it needs to generate random numbers. And those random numbers are based on two things. One is the mean,the mean which we define over here.

Jim: Yeah. I guess my question is more how would you describe a 5% return, 20% standard deviation. Is that like the ‘80s or is it like the market is now. Or how would you give people a feel for how you put that input in.


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