RPM assumptions and results

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Locked
Topic Author
DebiT
Posts: 391
Joined: Sat Dec 28, 2013 1:45 pm

RPM assumptions and results

Post by DebiT »

I'm working with RPM and trying to understand the results I'm seeing, since I have to decide what my Roth conversion strategy is going to be for the next 8-9 years. I'm 63, widowed with SS survivors benefits until I take my own at age 70, and the bulk of my assets are in tax deferred, with a total portfolio allocation of 30/70 (really more like 35/65, but I typed in 30/70 to RPM to get the results below). Thankfully every tool I've used says I'm in good shape cash flow wise.

The metrics I'm looking at are portfolio at end of life, which I'm setting at 100 due to longevity in my family, total federal tax paid, and amount/duration of IRMAA surcharges. To make it simple, I set the AA in all accounts to 30/70. The 2 main models I'm testing are filling the 22% bracket vs an even conversion amount of about $58K . I don't understand the results I'm seeing.

Model #1, filling the 22% bracket until 72, leaves an end of life portfolio of $38K, with total fed taxes paid of $412K, and total IRMAA paid of $47500 over 19 years. Model #2 of $58K conversions yearly until 72 leaves an end of life portfolio of $61K, total fed taxes paid of $443K and IRMAA of $30200 over 10 years. In both cases, by my early to mid 80's I stop paying taxes, because there are no more RMDs.

So model #1 I pay $30K less tax, but $17K more IRMAA over a longer period, but end up with less money, than model #2. Is it likely just the timing of things? The difference end of life isn't that much, either. Without entering into a political discussion, in general am I better of paying less tax but more IRMAA, or vice versa. Again, all of that stops in mid-80's regardless.

Also, it's interesting to note that if I do no Roth conversions, my final portfolio is about the same as Model #1, but I would have paid $611K in fed tax, and $39000 IRMAA over 6 years. $200K difference in fed tax, paid later, portfolio looking the same at end of life based on my assumptions.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
User avatar
munemaker
Posts: 4186
Joined: Sat Jan 18, 2014 6:14 pm

Re: RPM assumptions and results

Post by munemaker »

Assuming you have everything set up properly, I don't see any point to doing Roth conversions under the first two models.

I suggest running an additional model, where the Roth conversions take you up to just below the IRMAA tax point, i.e. pay no IRMAA tax. This should give you a better result. If you are over the IRMAA threshold with zero conversions, then I don't see any point in doing the conversion.

But...I would check everything carefully to make sure the settings are all correct.
Topic Author
DebiT
Posts: 391
Joined: Sat Dec 28, 2013 1:45 pm

Re: RPM assumptions and results

Post by DebiT »

If I do no conversions, I am pay $200k more federal tax and lots more of IRMAA than with conversions. I think the only reason the portfolio ends up the same is that it grows in the next 7 years because of paying no taxes. But if the market had a bad 7 years during that time, then I think it would not be a pretty picture.

My gut reaction is that keeping AGI and taxes somewhat even is probably the most sensible. There are a lot of settings to RPM, though, and I’m hoping for some feedback as to whether my results make sense.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
Exchme
Posts: 447
Joined: Sun Sep 06, 2020 3:00 pm

Re: RPM assumptions and results

Post by Exchme »

If you have differing size balances left in your tax deferred at end of life, that is confusing the issue as $ in tax deferred still have taxes owed on them. To equalize things, go to the Results sheet and cell N179 in the Inherited Portfolio Impact section, (it is a blue shaded cell under the label Taxes Rate) and enter the tax rate of your heirs or if you are interested only in your lifetime, then your estimate of what the tax rate would have been if you had taken the money out. Then also on the Results sheet, in cell N181, enter 1.

Now on the Setup sheet, cell i337, the "Heir tax Benefit" will show the tax correction for the remaining balance in the tax deferred. You can add a formula to add that it to the portfolio ending balance if you like to get the total after adjusting for taxes.
scifilover
Posts: 392
Joined: Sun Apr 14, 2013 12:56 pm

Re: RPM assumptions and results

Post by scifilover »

Just one thing to remember about using models. There is virtually zero chance that what ever you see in any model which looks out for 5-10 years will bear any relation to what actually happens. Every separate assumption has a probability of being correct. Even if all the individual probabilities of being correct are above 95% the cumulative probability for the model being accurate will be zero. This is because the cumulative probability is derived by multiplying all the underlying probabilities as.... .95X.95SX.95 etc. The further into the future you look the less the chance of being correct or exact.

What models can give you is a sense of how the variables interact so that as life unfolds you can adjust your tactical moves to continue to fit them to your main strategy.

The future itself is unpredictable.
Escapevelocity
Posts: 586
Joined: Mon Feb 18, 2019 8:32 am

Re: RPM assumptions and results

Post by Escapevelocity »

What real rates of return are you modeling for tax deferred and Roth?
Topic Author
DebiT
Posts: 391
Joined: Sat Dec 28, 2013 1:45 pm

Re: RPM assumptions and results

Post by DebiT »

Exchme wrote: Thu Jun 10, 2021 8:20 am If you have differing size balances left in your tax deferred at end of life, that is confusing the issue as $ in tax deferred still have taxes owed on them. To equalize things, go to the Results sheet and cell N179 in the Inherited Portfolio Impact section, (it is a blue shaded cell under the label Taxes Rate) and enter the tax rate of your heirs or if you are interested only in your lifetime, then your estimate of what the tax rate would have been if you had taken the money out. Then also on the Results sheet, in cell N181, enter 1.

Now on the Setup sheet, cell i337, the "Heir tax Benefit" will show the tax correction for the remaining balance in the tax deferred. You can add a formula to add that it to the portfolio ending balance if you like to get the total after adjusting for taxes.
Both my models so far show the tax deferred drained by my age of 85 or so, so the above isn't relevant, correct?
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
Topic Author
DebiT
Posts: 391
Joined: Sat Dec 28, 2013 1:45 pm

Re: RPM assumptions and results

Post by DebiT »

Escapevelocity wrote: Thu Jun 10, 2021 9:10 am What real rates of return are you modeling for tax deferred and Roth?
I am using RPM's nominal return rates by class, in section 3 of setup, so 4/2/1/0.5 for stock/bond/tax exempt/money market.

However, examining that showed me that I need to look closer at my "real life vs model" situation of how to describe my current taxable account, and how I will truly feel / deal with conversions. Because my husband died, I received life insurance money. It took me a couple of years to realize this was still part of my portfolio, and I basically have, but at this moment, my taxable AA looks very different than my tax-deferred AA. I know that as I start Roth conversions that new account becomes part of my overall AA.

At this moment, in my life and in the RPM model, my taxable AA if 15/66/19 stock/bonds/MM and my tax deferred is 43/57/0, for an overall AA of 34/60/6. I'm very happy with the overall. In RPM, I put 35/60/5 for tax deferred and Roth AA, since that will be my overall, and left my taxable AA as described above. I don't know how else to model it, since every year the 2 types of account will be somewhat different if I'm trying to keep an overall 35/65 AA. I wonder if I should post this on the long RPM thread, or is that thread more for technical program issues.

So I guess this is now my main question, is how to do my model to determine a general Roth plan of either steady or maxing 22% for the next 8-9 years?

Starting to feel confused again, so going to step away for a bit, and let my brain catch up. It helps to think out loud here. Thank you.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
Barsoom
Posts: 471
Joined: Thu Dec 06, 2018 9:40 am

Re: RPM assumptions and results

Post by Barsoom »

DebiT wrote: Wed Jun 09, 2021 8:16 pm I'm working with RPM and trying to understand the results I'm seeing, since I have to decide what my Roth conversion strategy is going to be for the next 8-9 years.
If you're referring to the Retiree Portfolio Model, you should post this question in the RPM thread and the author will respond. He may not see it here.

Retiree Portfolio Model thread

-B
Topic Author
DebiT
Posts: 391
Joined: Sat Dec 28, 2013 1:45 pm

Re: RPM assumptions and results

Post by DebiT »

Barsoom wrote: Thu Jun 10, 2021 12:47 pm
DebiT wrote: Wed Jun 09, 2021 8:16 pm I'm working with RPM and trying to understand the results I'm seeing, since I have to decide what my Roth conversion strategy is going to be for the next 8-9 years.
If you're referring to the Retiree Portfolio Model, you should post this question in the RPM thread and the author will respond. He may not see it here.

Retiree Portfolio Model thread

-B
I agree, and have reformatted my question. I think maybe moderator should lock this thread now, just because it will get redundant. Should I somehow report myself, or will they find my lock request?
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
sycamore
Posts: 2241
Joined: Tue May 08, 2018 12:06 pm

Re: RPM assumptions and results

Post by sycamore »

DebiT wrote: Thu Jun 10, 2021 2:13 pm ...
I agree, and have reformatted my question. I think maybe moderator should lock this thread now, just because it will get redundant. Should I somehow report myself, or will they find my lock request?
To get a moderator's attention, view the thread and notice that each post has a "!" button.
Click the "!" for your last post (or whatever) to see a screen that lets you report the post.

First you select the reason why (in your case, pick "The reported message does not fit into any other category, please use the further information field.").

Next, in the "Further information" field, type something like "Please lock this thread as I've added my question to another thread."

Finally, click Submit!

The moderators will review your request and take care of it.
Topic Author
DebiT
Posts: 391
Joined: Sat Dec 28, 2013 1:45 pm

Re: RPM assumptions and results

Post by DebiT »

Done, thanks so much.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
User avatar
LadyGeek
Site Admin
Posts: 72836
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: RPM assumptions and results

Post by LadyGeek »

^^^ Attention received. :)

The OP has asked for help here: Re: Retiree Portfolio Model

This thread is locked to redirect the discussion.

FYI - If this is a better thread for general modeling, the OP can PM me and request the thread be unlocked.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Locked