Total Portfolio Allocation and Withdrawal (TPAW)

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Ben Mathew
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

Chief_Engineer wrote: Wed Jan 29, 2025 1:41 pm I could use my kids' age, retirement age of 18 and a max age of 22 to model the spend down during college.
Yes, you could use TPAW to plan how to contribute, allocate and spend down a 529. Here's an example for a 5 year old retiring (going to college) at age 18 and withdrawing (paying educational expenses) for 4 years:

https://tpawplanner.com/link?params=kFO ... 8dhUPClpoi

A default setting I'd recommend changing: set "Decrease Risk Tolerance with Age" (under Risk -> Advanced) to 0.

The disadvantage of planning separately for a 529 vs including it in the overall life plan is that you may miss some interconnected things, like the need to reduce contributions to a 529 when you're saving for a downpayment. Money may need to flow between buckets in some cases. But if you're sure that's not a big concern, then modeling an individual bucket like this can work.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

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idc wrote: Wed Jan 29, 2025 6:14 pm I think the framework of thinking about risk in terms of what is the floor spending one has to still live a comfortable life, as well as the probability of leaving something to legacy, is a more intuitive approach towards quantifying risk. I wonder if there is an opportunity to expose that in the tool more directly. So instead of playing with the risk score, ask the user to state what floor spending would make them comfortable and what legacy amount they desire and then show them a suggested AA and risk score. Realize this is easier said than done, but might be something to consider. Or at least make that very explicit in the documentation, if you haven't done so. Personally, I am totally comfortable with the way things are, I am thinking this approach might be easier to understand for others and attract more users.
Floors (guaranteed spending levels created by pensions, TIPS ladders or duration matching real bonds) can currently be modeled as an extra essential expense for all of retirement or, more accurately, as income during retirement (removing the cost of the floor from the portfolio balance.) After duration matching is implemented, floors will get their own input and it will be easier to model it.
idc wrote: Wed Jan 29, 2025 6:14 pm The second thing to potentially consider is to includes shades for P25/P75 in all the projections, rather than just P5/P50/P95. That might reduce sensitivity (I do not know), but will also probably give users a sense of where the outcomes might be with less extreme events.
We used to display the 25th and 75th percentiles earlier, but it makes the graph too busy. We now plan to surface other percentiles by allowing people to customize the percentiles displayed.
idc wrote: Wed Jan 29, 2025 6:14 pm Add to the documentation something about how often to re-balance. Right now the tool implies monthly, and especially as the granularity of the values are 1 percentage point. I think it would be great to introduce somehow the concept of bands, just to help folks grok this.
Help with rebalancing and asset allocation bands is on the to-do list. But it's complex and so is a long term goal.

Thanks for the feedback and suggestions!
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

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Solicitorious wrote: Thu Jan 30, 2025 9:29 am This study has shown that an AA "error" of up to 20% compared to perfect AA makes negligible difference to outcomes in any case, especially for "too many" stocks.
https://www.aacalc.com/docs/aa_sensitivity
Thanks.

A related point from this post:
  • An important feature of typical optimization problems—which Haghani and White talk about in their book—is that being close to optimal will be nearly as good as being optimal. This is because the top of the optimization curve is flat, not a sharp peak. The further you get from the optimal point (the top of the curve), the steeper the slope. So if the optimal asset allocation is 50%, the cost of being off by 10% and locating at 40% is relatively small. The additional cost of being off by another 10% and locating at 30% is larger. So roughly right is very good. Much better than precisely wrong!

    So while we can create models where the target asset allocation doesn't change much, the problem is that it's not telling you how far off you are from your optimal asset allocation, so you have no idea whether you're in the right vicinity or not. Having clarity on the optimal asset allocation, even if you're not exactly hitting it, is important to alert you when you are too far off.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

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WoodSpinner wrote: Thu Jan 30, 2025 9:59 am I have been retired for about 7 years now, so shifting AA can’t be done with new money.
In retirement, you could withdraw from the overweight asset.
WoodSpinner wrote: Thu Jan 30, 2025 9:59 am Based on your reply, it seems like the goal is to change AA in a more Strategic fashion rather than shorter term tactical changes.
To me "strategic" vs "tactical" doesn't describe this. It's just costs vs benefits at different frequencies. As the frequency of rebalancing increases, the costs start to outweigh the benefits. So you would use a wide enough rebalancing band—my guess is wide enough that you don't have to rebalance more than a few times a year. As noted in the posts above, the penalty of being a bit off from the target is likely small. So roughly right is fine. Precisely wrong is worse.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

ConstantChrysalis wrote: Thu Jan 30, 2025 10:12 am More generally, I'd love to see a TPAW Planner Next Gen (TPAWNG) where the user interface is declarative, so the user describes their ideal plan and the underlying existing engine optimally generates it, with associated sensitivities. A chat interface would be a great step after that (ChatTPAWNG).

A little research, a server upgrade, and a simple matter of programming. :happy
Not on the to-do list, unfortunately. But who can predict the future these days? :shock:
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by jjj_22 »

Ben Mathew wrote: Thu Jan 30, 2025 12:53 pm
idc wrote: Wed Jan 29, 2025 6:14 pm I think the framework of thinking about risk in terms of what is the floor spending one has to still live a comfortable life, as well as the probability of leaving something to legacy, is a more intuitive approach towards quantifying risk.
Floors (guaranteed spending levels created by pensions, TIPS ladders or duration matching real bonds) can currently be modeled as an extra essential expense for all of retirement or, more accurately, as income during retirement (removing the cost of the floor from the portfolio balance.) After duration matching is implemented, floors will get their own input and it will be easier to model it.
I want to echo the above sentiment around floors but from a different perspective. It's not so much that "I want to guarantee a floor spending level $X/month" but more like "I want to find a plan where with high likelihood the lowest monthly spending level is as high as possible across the length of the plan". So I did my best at this by tinkering with everything until I found a plan where (because I'm a pessimist 🙃) the 5th percentile outcome monthly spending line basically flattens out.

The tinkering to do that was tricky because the it seems sensitive to Risk Tolerance, Decrease Risk Tolerance with Age, Spending Tilt, and Preference for the Future in ways that I don't understand, so I'm not even sure if I've found the best such plan.

(I then had to tinker some more to do that while staying closer to my current asset allocation because the tax cost of swapping half my equities into bonds would be so high).

That said, I really love this tool. I've tried every tool I could find for retirement investment planning and this is so much more helpful than anything else I've looked at.
Last edited by jjj_22 on Thu Jan 30, 2025 5:09 pm, edited 1 time in total.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by monkeydluffy »

Ben Mathew wrote: Tue Jan 28, 2025 10:27 am You can always pick an asset allocation and stick to it. The SPAW strategy in Advanced -> Strategy lets you do this. But the question to ask is, does it make sense to hold the same asset allocation regardless of how well the market does?
It does if you're only holding a single fund during retirement like AOR, VSMGX, or VTINX for simplicity's sake. It also makes sense if you're utilizing leverage during the accumulation phase to avoid the leveraged part from going off the rails, like, say, running 50% RSSB, 40% VT, and 10% GOVT for a 90/60 portfolio.

Other than that, this is a very nifty tool. Really hoping it sticks around when I actually retire, which is nearly 20 years out.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

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When my wife and I retire in a few years we will have Social Security plus pensions (from California state employment) plus withdrawals from our investment portfolio. One thing that worries me is that if a severe economic downturn hits our state pensions might be cut (not completely, but maybe by 10 to 40 percent, just a wild guess). Also Social Security payments might be cut in 2035 if no changes are made to current law.

How could I model these potential cuts in our pensions and Social Security in TPAW? Would I estimate the maximum cuts and use the reduced pension/SS numbers as our retirement income, and put the difference between the reduced pension/SS and our actual floor expenses as our modeled floor expenses?

In other words, let's say our floor expenses are $80k. Our non-cut SS/pensions total $75k, but we estimate a 33% cut at worst. Would we put $50k as our retirement income and $30k as a floor expense? And what about the $25k annual income that we would realize if no cuts to our pensions/SS actually happen -- is there a way for us to include that in the plan, or do we just have to model that as a completely different scenario?

Edit to add: I forgot that one us will delay SS to age 70, so this means 8 years after retirement our SS/pensions will go up from $75k to $115k, but again I would like to model this as if we might have to deal with a 33% haircut which would take that amount down to $77k. How would I model this in TPAW?
Last edited by stuper1 on Thu Jan 30, 2025 6:42 pm, edited 3 times in total.
A 10-20% allocation to gold has helped with the sequence of returns problem. Some gold held physically is also good insurance against the all-digital-assets problem.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Solicitorious »

stuper1 wrote: Thu Jan 30, 2025 4:05 pm When my wife and I retire in a few years we will have Social Security plus pensions (from California state employment) plus withdrawals from our investment portfolio. One thing that worries me is that if a severe economic downturn hits out state pensions might be cut (not completely, but maybe by 10 to 40 percent, just a wild guess). Also Social Security payments might be cut in 2035 if no changes are made to current law.

How could I model these potential cuts in our pensions and Social Security in TPAW? Would I estimate the maximum cuts and use the reduced pension/SS numbers as our retirement income, and put the difference between the reduced pension/SS and our actual floor expenses as our modeled floor expenses?

In other words, let's say our floor expenses are $80k. Our non-cut SS/pensions total $75k, but we estimate a 33% cut at worst. Would we put $50k as our retirement income and $30k as a floor expense? And what about the $25 annual income that we would realize if no cuts to our pensions/SS actually happen -- is there a way for us to include that in the plan, or do we just have to model that as a completely different scenario?
I suppose you would have to create different plans for different scenarios, and then compare and contrast.

TPAW Planner allows you to have many different plans.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

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jjj_22 wrote: Thu Jan 30, 2025 1:50 pm I want to echo the above sentiment around floors but from a different perspective. It's not so much that "I want to guarantee a floor spending level $X/month" but more like "I want to find a plan where with high likelihood the lowest monthly spending level is as high as possible across the length of the plan".
Thank you for stating so clearly what I expressed too clumsily in my original post. I did the same thing as you did, I tweaked the different parameters until the P5 curve was flat and comfortably above what I consider safe for my circumstances. I see what you are asking for, I doubt though that is easy to achieve, since there are too many variables involved. It wasn't that hard for me to find that level of comfort, but I can see it can be confusing for someone who's not as deep into the boglehead philosophy and terminology.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

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Ben Mathew wrote: Thu Jan 30, 2025 1:20 pm
WoodSpinner wrote: Thu Jan 30, 2025 9:59 am I have been retired for about 7 years now, so shifting AA can’t be done with new money.
In retirement, you could withdraw from the overweight asset.
WoodSpinner wrote: Thu Jan 30, 2025 9:59 am Based on your reply, it seems like the goal is to change AA in a more Strategic fashion rather than shorter term tactical changes.
To me "strategic" vs "tactical" doesn't describe this. It's just costs vs benefits at different frequencies. As the frequency of rebalancing increases, the costs start to outweigh the benefits. So you would use a wide enough rebalancing band—my guess is wide enough that you don't have to rebalance more than a few times a year. As noted in the posts above, the penalty of being a bit off from the target is likely small. So roughly right is fine. Precisely wrong is worse.
I may be missing something…

In my mind, rebalancing is very different than changing my target AA.

I rebalance on 5% bands, but so far haven’t changed my AA since Retirement. May do so at 70 once SS kicks in since my Cashflow needs shift dramatically.

Guess I am focused on the discussion of using the Merton share to tactical shift allocations based on expected returns. It’s not clear if TPAW supports or advocates this.

**This thread started as a discussion on the Merton Share and has morphed to TPAW …



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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by ConstantChrysalis »

WoodSpinner wrote: Thu Jan 30, 2025 9:23 pm
Ben Mathew wrote: Thu Jan 30, 2025 1:20 pm

In retirement, you could withdraw from the overweight asset.



To me "strategic" vs "tactical" doesn't describe this. It's just costs vs benefits at different frequencies. As the frequency of rebalancing increases, the costs start to outweigh the benefits. So you would use a wide enough rebalancing band—my guess is wide enough that you don't have to rebalance more than a few times a year. As noted in the posts above, the penalty of being a bit off from the target is likely small. So roughly right is fine. Precisely wrong is worse.
I may be missing something…

In my mind, rebalancing is very different than changing my target AA.

I rebalance on 5% bands, but so far haven’t changed my AA since Retirement. May do so at 70 once SS kicks in since my Cashflow needs shift dramatically.

Guess I am focused on the discussion of using the Merton share to tactical shift allocations based on expected returns. It’s not clear if TPAW supports or advocates this.

**This thread started as a discussion on the Merton Share and has morphed to TPAW …



WoodSpinner
The main use case for the Planner assumes dynamic asset allocation over time, responding to the market ERP and calculated with the Merton share.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

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jjj_22 wrote: Thu Jan 30, 2025 1:50 pm It's not so much that "I want to guarantee a floor spending level $X/month" but more like "I want to find a plan where with high likelihood the lowest monthly spending level is as high as possible across the length of the plan". So I did my best at this by tinkering with everything until I found a plan where (because I'm a pessimist 🙃) the 5th percentile outcome monthly spending line basically flattens out.
idc wrote: Thu Jan 30, 2025 7:07 pm I tweaked the different parameters until the P5 curve was flat and comfortably above what I consider safe for my circumstances.
It's natural to pay close attention to the 5th percentile outcome, but the strategy the planner is using is based on the assumption that increased spending at all percentiles are valuable. To convince yourself that percentiles other than the 5th matter to you, consider the fact that if we pursued a strategy that aimed to maximize the 5th percentile outcomes and ignored all other percentiles, we'd end up with a very odd strategy—likely involving derivatives—that reduced all percentiles above 5th down to the 5th percentile, and pushed all percentiles below 5th to $0. The fact that we wouldn't choose this strategy means that we do care about other percentiles.
jjj_22 wrote: Thu Jan 30, 2025 1:50 pm That said, I really love this tool. I've tried every tool I could find for retirement investment planning and this is so much more helpful than anything else I've looked at.
That's great to hear. Thanks!
Last edited by Ben Mathew on Fri Jan 31, 2025 1:38 pm, edited 1 time in total.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

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monkeydluffy wrote: Thu Jan 30, 2025 4:02 pm Other than that, this is a very nifty tool. Really hoping it sticks around when I actually retire, which is nearly 20 years out.
Glad to hear that you're finding the planner useful. I think the odds are good that it will be around in 20 years!
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

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stuper1 wrote: Thu Jan 30, 2025 4:05 pm When my wife and I retire in a few years we will have Social Security plus pensions (from California state employment) plus withdrawals from our investment portfolio. One thing that worries me is that if a severe economic downturn hits our state pensions might be cut (not completely, but maybe by 10 to 40 percent, just a wild guess). Also Social Security payments might be cut in 2035 if no changes are made to current law.

How could I model these potential cuts in our pensions and Social Security in TPAW? Would I estimate the maximum cuts and use the reduced pension/SS numbers as our retirement income, and put the difference between the reduced pension/SS and our actual floor expenses as our modeled floor expenses?

In other words, let's say our floor expenses are $80k. Our non-cut SS/pensions total $75k, but we estimate a 33% cut at worst. Would we put $50k as our retirement income and $30k as a floor expense? And what about the $25k annual income that we would realize if no cuts to our pensions/SS actually happen -- is there a way for us to include that in the plan, or do we just have to model that as a completely different scenario?

Edit to add: I forgot that one us will delay SS to age 70, so this means 8 years after retirement our SS/pensions will go up from $75k to $115k, but again I would like to model this as if we might have to deal with a 33% haircut which would take that amount down to $77k. How would I model this in TPAW?
I would model this as 2 different scenarios: one with full pensions and the other with reduced pensions. You'd make a separate plan for each scenario. (You can go to the plan menu and click on "copy" to make a copy of the plan. So you don't have to re-enter all the inputs to create the second plan.)

Eventually we'll make it easier to model scenarios within the same plan where you can toggle between scenarios. That's on the to-do list.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

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WoodSpinner wrote: Thu Jan 30, 2025 9:23 pm Guess I am focused on the discussion of using the Merton share to tactical shift allocations based on expected returns. It’s not clear if TPAW supports or advocates this.
The TPAW strategy features an asset allocation target that changes to reflect current conditions, which includes current expected returns.

The online planner also offers the SPAW strategy (under Advanced -> Strategy) where you directly specify a glide path that does not change.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by GAAP »

stuper1 wrote: Thu Jan 30, 2025 4:05 pm When my wife and I retire in a few years we will have Social Security plus pensions (from California state employment) plus withdrawals from our investment portfolio. One thing that worries me is that if a severe economic downturn hits our state pensions might be cut (not completely, but maybe by 10 to 40 percent, just a wild guess). Also Social Security payments might be cut in 2035 if no changes are made to current law.
Pay very close attention to modeling the COLA in that CalPERS pension -- it's not truly inflation-linked, and what you actually get depends upon the agency you work for: https://www.calpers.ca.gov/page/retiree ... iving/cola. It does not keep up with inflation unless inflation is quite low.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Raspberry-503 »

Ben Mathew wrote: Fri Jan 31, 2025 1:35 pm
stuper1 wrote: Thu Jan 30, 2025 4:05 pm When my wife and I retire in a few years we will have Social Security plus pensions (from California state employment) plus withdrawals from our investment portfolio. One thing that worries me is that if a severe economic downturn hits our state pensions might be cut (not completely, but maybe by 10 to 40 percent, just a wild guess). Also Social Security payments might be cut in 2035 if no changes are made to current law.

How could I model these potential cuts in our pensions and Social Security in TPAW? Would I estimate the maximum cuts and use the reduced pension/SS numbers as our retirement income, and put the difference between the reduced pension/SS and our actual floor expenses as our modeled floor expenses?

In other words, let's say our floor expenses are $80k. Our non-cut SS/pensions total $75k, but we estimate a 33% cut at worst. Would we put $50k as our retirement income and $30k as a floor expense? And what about the $25k annual income that we would realize if no cuts to our pensions/SS actually happen -- is there a way for us to include that in the plan, or do we just have to model that as a completely different scenario?

Edit to add: I forgot that one us will delay SS to age 70, so this means 8 years after retirement our SS/pensions will go up from $75k to $115k, but again I would like to model this as if we might have to deal with a 33% haircut which would take that amount down to $77k. How would I model this in TPAW?
I would model this as 2 different scenarios: one with full pensions and the other with reduced pensions. You'd make a separate plan for each scenario. (You can go to the plan menu and click on "copy" to make a copy of the plan. So you don't have to re-enter all the inputs to create the second plan.)

Eventually we'll make it easier to model scenarios within the same plan where you can toggle between scenarios. That's on the to-do list.
That's what I do, you can even play with SS claiming dates (make sure to adjust the amount for claiming early) or one of us passing (adjust SS to single SS and because I use essential expenses, reduce them to account for only one survivor. Also think through what the before tax amount the planner shows might mean for single tax)
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by idc »

Ben Mathew wrote: Fri Jan 31, 2025 1:22 pm It's natural to pay close attention to the 5th percentile outcome, but the strategy the planner is using is based on the assumption that increased spending at all percentiles are valuable.
Oh, I did not try to optimize for P5. I just wanted to ensure in the worst case, P5 still keeps me comfortable. I also watched for the P50 to be relatively flat, and I set a ceiling about >3X what I've been spending recently, being semi-retired and with lots of travel.

With that I played around with some legacy and tweaked some of the spending to be earlier on. It is my way of dealing with risk.
I wanted to both ensure I would be comfortable in the worst case, but also give me the confidence to spend a lot more than I am spending now, while also giving me the confidence that I don't over spend, and still leave some legacy.

No other tool gives me this level of comfort and precision. I still understand the limitations and I still plan to adjust on a yearly basis, but anything else I used felt it required a little to much blind trust for my comfort. The mathematical model in this tool, combined with the real time aspect of the regression prediction/CAPE simulations, plus inclusion of TIPS for bonds allowed me a lot more confidence in quantifying the unknowns.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

idc wrote: Fri Jan 31, 2025 5:49 pm Oh, I did not try to optimize for P5. I just wanted to ensure in the worst case, P5 still keeps me comfortable. I also watched for the P50 to be relatively flat, and I set a ceiling about >3X what I've been spending recently, being semi-retired and with lots of travel.
That makes sense. Thanks for clarifying.
idc wrote: Fri Jan 31, 2025 5:49 pm No other tool gives me this level of comfort and precision. I still understand the limitations and I still plan to adjust on a yearly basis, but anything else I used felt it required a little to much blind trust for my comfort. The mathematical model in this tool, combined with the real time aspect of the regression prediction/CAPE simulations, plus inclusion of TIPS for bonds allowed me a lot more confidence in quantifying the unknowns.
Glad to hear this!
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by jjj_22 »

Ben Mathew wrote: Fri Jan 31, 2025 1:22 pm It's natural to pay close attention to the 5th percentile outcome, but the strategy the planner is using is based on the assumption that increased spending at all percentiles are valuable.
Oh, it sounds like you're saying that you don't advocate for pass/fail grading of investment plans based on 5th percentile outcomes? 😉

I definitely care (and know I care) about the other percentiles too. Like, I felt happy that the median line trended upward! (ETA, Like idc, I was looking for a plan that would allow me to maintain a comfortable lifestyle even if things don't go well.)

What I found tricky was how to adjust the plan to express how much more I care about the bad cases than the good cases. (Doesn't it make sense to care somewhat more about the bad outcomes than the good ones because the marginal utility of more money at lower levels of consumption is higher?)

I think was trying to get the precautionary savings into a personal sweet spot, and having three knobs to tweak (time preference, spending tilt, and decrease risk with age) to express what feels to me like one tradeoff was not super intuitive. I realize there's a lot of math under the hood though so probably unavoidable to stay true to the method the planner uses.

Still, again, just a fabulous tool.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

jjj_22 wrote: Sat Feb 01, 2025 11:18 am I definitely care (and know I care) about the other percentiles too. Like, I felt happy that the median line trended upward! (ETA, Like idc, I was looking for a plan that would allow me to maintain a comfortable lifestyle even if things don't go well.)
Great.
jjj_22 wrote: Sat Feb 01, 2025 11:18 am Doesn't it make sense to care somewhat more about the bad outcomes than the good ones because the marginal utility of more money at lower levels of consumption is higher?)
Yes. An extra dollar is valuable at all percentiles. But because of the decreasing marginal utility of consumption, an extra dollar at the 5th percentile is more valuable than an extra dollar at the 50th or 95th percentiles.
jjj_22 wrote: Sat Feb 01, 2025 11:18 am I think was trying to get the precautionary savings into a personal sweet spot, and having three knobs to tweak (time preference, spending tilt, and decrease risk with age) to express what feels to me like one tradeoff was not super intuitive.
Time preference and the spending tilt are very similar. This post goes into the difference between the two: How to distinguish between the extra spending tilt and preference for the future.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by trueblue63 »

Have you considered a User's Guide, for the online planner, that doesn't re-explain the inputs, but rather gives some test cases, here's what was input, here's what the graph looks like, this is how you can interpret the different lines, different ideas being presented.

Assuming that your goal is that TPAW have the highest level of user understanding as opposed to trying to reach the subset that's already more conversant in the ideas you're presenting.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by ScubaHogg »

trueblue63 wrote: Sun Feb 02, 2025 8:52 am Have you considered a User's Guide, for the online planner, that doesn't re-explain the inputs, but rather gives some test cases, here's what was input, here's what the graph looks like, this is how you can interpret the different lines, different ideas being presented.

Assuming that your goal is that TPAW have the highest level of user understanding as opposed to trying to reach the subset that's already more conversant in the ideas you're presenting.
I’m assuming you are asking for something different than the comprehensive “learn” section?

https://tpawplanner.com/learn
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by stuper1 »

I have a question about paying the taxes on Roth conversions. I apologize if this has been asked and answered already. I tried searching, but I didn't find a previous discussion.

My understanding is that the annual spending level recommended by TPAW is to include income taxes that are due that year. Please let me know if I'm wrong about that. With that understanding, what about if I do Roth conversions? I'm hoping to not include the extra income taxes used to do Roth conversions in the annual spending level as recommended by TPAW. I look at the extra income taxes for Roth conversions as pre-paying the taxes on money that I will actually spend (tax-free) in a future year. Does this make sense, or am I missing something? Should I be reducing the balance in my pre-tax account by the average tax rate that will be paid on that money before I include that money in my TPAW total portfolio amount? If so, should I do the same with the balance in my taxable account?
A 10-20% allocation to gold has helped with the sequence of returns problem. Some gold held physically is also good insurance against the all-digital-assets problem.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

trueblue63 wrote: Sun Feb 02, 2025 8:52 am Have you considered a User's Guide, for the online planner, that doesn't re-explain the inputs, but rather gives some test cases, here's what was input, here's what the graph looks like, this is how you can interpret the different lines, different ideas being presented.

Assuming that your goal is that TPAW have the highest level of user understanding as opposed to trying to reach the subset that's already more conversant in the ideas you're presenting.
I'll eventually make some tutorial videos with some planning examples. I'm waiting till the UI is more settled so it doesn't become obsolete too soon.

For more on the theory behind the process, the learn section linked by ScubaHogg above would be a good start.

Thanks for the suggestion.
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

stuper1 wrote: Sun Feb 02, 2025 4:50 pm what about if I do Roth conversions? I'm hoping to not include the extra income taxes used to do Roth conversions in the annual spending level as recommended by TPAW. I look at the extra income taxes for Roth conversions as pre-paying the taxes on money that I will actually spend (tax-free) in a future year. Does this make sense, or am I missing something? Should I be reducing the balance in my pre-tax account by the average tax rate that will be paid on that money before I include that money in my TPAW total portfolio amount? If so, should I do the same with the balance in my taxable account?
Roth vs traditional vs taxable can't be accurately modeled till we implement taxes in the planner. But in the meantime, you can use the following approach to get a rough picture:
  • If most of your savings is in traditional accounts, enter pre-tax income and consider the monthly spending and savings shown in the graph to be pre-tax
  • If most of your savings is in Roth accounts, enter post-tax income and consider the monthly spending and savings shown in the graph to be post-tax
  • If most of your savings is in taxable accounts, enter post-tax income, reduce the expected return to account for the tax drag, and consider the monthly spending and savings shown in the graph to be post-tax
Total Portfolio Allocation and Withdrawal (TPAW)
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by stuper1 »

Ben Mathew wrote: Sun Feb 02, 2025 8:20 pm
stuper1 wrote: Sun Feb 02, 2025 4:50 pm what about if I do Roth conversions? I'm hoping to not include the extra income taxes used to do Roth conversions in the annual spending level as recommended by TPAW. I look at the extra income taxes for Roth conversions as pre-paying the taxes on money that I will actually spend (tax-free) in a future year. Does this make sense, or am I missing something? Should I be reducing the balance in my pre-tax account by the average tax rate that will be paid on that money before I include that money in my TPAW total portfolio amount? If so, should I do the same with the balance in my taxable account?
Roth vs traditional vs taxable can't be accurately modeled till we implement taxes in the planner. But in the meantime, you can use the following approach to get a rough picture:
  • If most of your savings is in traditional accounts, enter pre-tax income and consider the monthly spending and savings shown in the graph to be pre-tax
  • If most of your savings is in Roth accounts, enter post-tax income and consider the monthly spending and savings shown in the graph to be post-tax
  • If most of your savings is in taxable accounts, enter post-tax income, reduce the expected return to account for the tax drag, and consider the monthly spending and savings shown in the graph to be post-tax
Ok, that makes sense. Let me give you an example. Most of my savings is in a traditional pre-tax IRA, so I will consider monthly spending to be pre-tax. Let's say TPAW tells me that I can safely spend $130k in my first year of retirement. I have to pay $12k in income taxes (this is a married-filing-jointly situation), so that leaves us with $118k to spend on us. Now, let's say that we decide to do $100k of Roth conversions, which will result in another $22k of income taxes due, which we will pay from our taxable account. I'm trying to figure out whether we need to subtract the $22k from our $118k, meaning we can only spend $96k safely? I would argue that we shouldn't look at it like that. We should consider the $22k of additional taxes as pre-paying the taxes on the $100k Roth conversion, but we shouldn't reduce our annual spend due to this voluntary Roth conversion. Is there a right answer here or a consensus?
A 10-20% allocation to gold has helped with the sequence of returns problem. Some gold held physically is also good insurance against the all-digital-assets problem.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by trueblue63 »

Ben Mathew wrote: Sun Feb 02, 2025 8:14 pm
trueblue63 wrote: Sun Feb 02, 2025 8:52 am Have you considered a User's Guide, for the online planner, that doesn't re-explain the inputs, but rather gives some test cases, here's what was input, here's what the graph looks like, this is how you can interpret the different lines, different ideas being presented.

Assuming that your goal is that TPAW have the highest level of user understanding as opposed to trying to reach the subset that's already more conversant in the ideas you're presenting.
I'll eventually make some tutorial videos with some planning examples. I'm waiting till the UI is more settled so it doesn't become obsolete too soon.

For more on the theory behind the process, the learn section linked by ScubaHogg above would be a good start.

Thanks for the suggestion.
Great, I have a degree in math and I'm nearly positive I know how to use the tool and interpret the results. But it's more sophisticated than most approaches and I'm not 100% certain that something hasn't slipped by. It took me a while to decide how to include a likely inheritance (to happen in the future) and how it might change things. I would have thought that there would be a way to include it as an addition to your portfolio as a one time action at a future date. I didn't see that.

I read the learn section online, it's good, but it doesn't provide an example of each of the 4 graphs, with a here is what they each mean. So for me, I was pleased that the 5 percentile line was fairly stable, telling me that the worst case scenarios are still acceptable and can be weathered.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Raspberry-503 »

You can add a.one-time income for a specific month to model the inheritance.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by WoodSpinner »

stuper1 wrote: Sun Feb 02, 2025 9:39 pm
Ben Mathew wrote: Sun Feb 02, 2025 8:20 pm

Roth vs traditional vs taxable can't be accurately modeled till we implement taxes in the planner. But in the meantime, you can use the following approach to get a rough picture:
  • If most of your savings is in traditional accounts, enter pre-tax income and consider the monthly spending and savings shown in the graph to be pre-tax
  • If most of your savings is in Roth accounts, enter post-tax income and consider the monthly spending and savings shown in the graph to be post-tax
  • If most of your savings is in taxable accounts, enter post-tax income, reduce the expected return to account for the tax drag, and consider the monthly spending and savings shown in the graph to be post-tax
Ok, that makes sense. Let me give you an example. Most of my savings is in a traditional pre-tax IRA, so I will consider monthly spending to be pre-tax. Let's say TPAW tells me that I can safely spend $130k in my first year of retirement. I have to pay $12k in income taxes (this is a married-filing-jointly situation), so that leaves us with $118k to spend on us. Now, let's say that we decide to do $100k of Roth conversions, which will result in another $22k of income taxes due, which we will pay from our taxable account. I'm trying to figure out whether we need to subtract the $22k from our $118k, meaning we can only spend $96k safely? I would argue that we shouldn't look at it like that. We should consider the $22k of additional taxes as pre-paying the taxes on the $100k Roth conversion, but we shouldn't reduce our annual spend due to this voluntary Roth conversion. Is there a right answer here or a consensus?
My take is you have to subtract the Roth Conversion Tax since it is part of your Cashflow spending requirements for the year. If you ignore, it you are pulling more funds out than the Amortization Schedule suggests is prudent and increasing your SORR.

That said, I often spend more than the Amortization schedule suggests but I keep an eye on my future Cashflow needs (my withdrawal rate decreases significantly after SS) and my Funded Ratio.

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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by idc »

stuper1 wrote: Sun Feb 02, 2025 9:39 pm We should consider the $22k of additional taxes as pre-paying the taxes on the $100k Roth conversion, but we shouldn't reduce our annual spend due to this voluntary Roth conversion. Is there a right answer here or a consensus?
I don't pretend to have a good answer, Roth conversions are a highly debated topic, although the only consensus they seem to have is that any Roth conversion strategy will not influence the success probability, but rather impact to legacy at most.

Here is what I would do from a practical perspective. Don't include the expense in your annual expense, since this is not something you are absolutely needing. This is an expense you can chose to make as a one off and not do at all if other considerations come into play (NIIT, IRMAA, etc) and won't affect your outcome. Rather simply reduce your portfolio size by the amount of the expense, if and when you decide to make it or as part of your planning.

Again, that's what I would do if I were you, don't take that as gospel.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by stuper1 »

idc wrote: Mon Feb 03, 2025 10:56 am
stuper1 wrote: Sun Feb 02, 2025 9:39 pm We should consider the $22k of additional taxes as pre-paying the taxes on the $100k Roth conversion, but we shouldn't reduce our annual spend due to this voluntary Roth conversion. Is there a right answer here or a consensus?
I don't pretend to have a good answer, Roth conversions are a highly debated topic, although the only consensus they seem to have is that any Roth conversion strategy will not influence the success probability, but rather impact to legacy at most.

Here is what I would do from a practical perspective. Don't include the expense in your annual expense, since this is not something you are absolutely needing. This is an expense you can chose to make as a one off and not do at all if other considerations come into play (NIIT, IRMAA, etc) and won't affect your outcome. Rather simply reduce your portfolio size by the amount of the expense, if and when you decide to make it or as part of your planning.

Again, that's what I would do if I were you, don't take that as gospel.
Haha, okay, I won't take it as gospel, but you stated the way that I am inclined to look at it. I don't want to have less money this year to spend just because I chose to do a Roth conversion. It will reduce our portfolio so next year's spend will be a little lower (unless the stock market does really well this year), but then again, more of our money is now in the Roth account, so if we were to start withdrawing from the Roth account we wouldn't have to pull as much out in order to have as much to spend, because we have already paid the taxes on it.
A 10-20% allocation to gold has helped with the sequence of returns problem. Some gold held physically is also good insurance against the all-digital-assets problem.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by GAAP »

stuper1 wrote: Mon Feb 03, 2025 11:34 am
idc wrote: Mon Feb 03, 2025 10:56 am

I don't pretend to have a good answer, Roth conversions are a highly debated topic, although the only consensus they seem to have is that any Roth conversion strategy will not influence the success probability, but rather impact to legacy at most.

Here is what I would do from a practical perspective. Don't include the expense in your annual expense, since this is not something you are absolutely needing. This is an expense you can chose to make as a one off and not do at all if other considerations come into play (NIIT, IRMAA, etc) and won't affect your outcome. Rather simply reduce your portfolio size by the amount of the expense, if and when you decide to make it or as part of your planning.

Again, that's what I would do if I were you, don't take that as gospel.
Haha, okay, I won't take it as gospel, but you stated the way that I am inclined to look at it. I don't want to have less money this year to spend just because I chose to do a Roth conversion. It will reduce our portfolio so next year's spend will be a little lower (unless the stock market does really well this year), but then again, more of our money is now in the Roth account, so if we were to start withdrawing from the Roth account we wouldn't have to pull as much out in order to have as much to spend, because we have already paid the taxes on it.
My approach is similar, treating the conversion taxes as a future stream of real expenses that can then be matched by a future stream of real income via TIPS. This requires reducing risk portfolio accordingly, moving those funds to an LMP portfolio.

I don't use TPAW, but the concept is independent of the tool.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

stuper1 wrote: Sun Feb 02, 2025 9:39 pm Most of my savings is in a traditional pre-tax IRA, so I will consider monthly spending to be pre-tax. Let's say TPAW tells me that I can safely spend $130k in my first year of retirement. I have to pay $12k in income taxes (this is a married-filing-jointly situation), so that leaves us with $118k to spend on us. Now, let's say that we decide to do $100k of Roth conversions, which will result in another $22k of income taxes due, which we will pay from our taxable account. I'm trying to figure out whether we need to subtract the $22k from our $118k, meaning we can only spend $96k safely? I would argue that we shouldn't look at it like that. We should consider the $22k of additional taxes as pre-paying the taxes on the $100k Roth conversion, but we shouldn't reduce our annual spend due to this voluntary Roth conversion. Is there a right answer here or a consensus?
I agree that you can spend the $118K. The $22K tax paid on the Roth conversion this year is prepaying your future taxes and should not be subtracted from this year's spending. You'll get the $22K back in future years as lower tax bills. It shouldn't negatively impact current spending.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

trueblue63 wrote: Mon Feb 03, 2025 7:12 am It took me a while to decide how to include a likely inheritance (to happen in the future) and how it might change things. I would have thought that there would be a way to include it as an addition to your portfolio as a one time action at a future date. I didn't see that.
Lump sum inputs are on the to-do list. In the meantime, as Raspberry-503 said, you can enter it as income lasting 1 month.

Waiting to build a few of these things before putting out the tutorial. :D
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by WoodSpinner »

Ben Mathew wrote: Tue Feb 04, 2025 12:48 am
stuper1 wrote: Sun Feb 02, 2025 9:39 pm Most of my savings is in a traditional pre-tax IRA, so I will consider monthly spending to be pre-tax. Let's say TPAW tells me that I can safely spend $130k in my first year of retirement. I have to pay $12k in income taxes (this is a married-filing-jointly situation), so that leaves us with $118k to spend on us. Now, let's say that we decide to do $100k of Roth conversions, which will result in another $22k of income taxes due, which we will pay from our taxable account. I'm trying to figure out whether we need to subtract the $22k from our $118k, meaning we can only spend $96k safely? I would argue that we shouldn't look at it like that. We should consider the $22k of additional taxes as pre-paying the taxes on the $100k Roth conversion, but we shouldn't reduce our annual spend due to this voluntary Roth conversion. Is there a right answer here or a consensus?
I agree that you can spend the $118K. The $22K tax paid on the Roth conversion this year is prepaying your future taxes and should not be subtracted from this year's spending. You'll get the $22K back in future years as lower tax bills. It shouldn't negatively impact current spending.
I am puzzled by your response….

Why do you feel this is a viable offset? It certainly is not assured in any sense of the meaning. Much can change, Conversions always involve some element of risk. Plus Roth Conversions are done for many reasons, for instance future Inheritance. There will not be a tax savings to balance against (or at least not one I could take advantage of given I am dead). Or perhaps you would simply adjust your charitable giving in the future and reduce your taxes that way.

It seems cleaner and more straightforward to consider the Tax as part of your expenses (just like any other tax) and think of it as a Cashflow (Income -Expenses). This helps highlight some of the risk you are taking by paying the Conversion taxes now vs. later.

That said, I don’t consider the spending suggestion from TPAW, ABW, or VPW as an absolute ceiling . If I choose to spend more (2024 was a whopper of a year for us) it’s important to understand the increase risk to future income.

Just my $.02.

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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by stuper1 »

I'm not Ben of course, and I will be interested to hear his response to your question. For me, I think you might be over-estimating the risk involved with a Roth conversion. True, you are locking in a tax rate (in my case at 22%), but you are very unlikely to be off by more than 10% in either direction. For me, for example, there is actually almost zero chance that my wife or I would ever be able to access that money at a less than 22% tax rate due to our pension and Social Security income. And when one of us dies, then there is a good chance the survivor will have to pay higher than 22% to access the money. There is a chance that our children might eventually inherit the money and be able to access it at a lower tax rate, but even the chances of that happening are relatively low because they are likely to make as much or more income as we do. We will do some charitable giving through QCDs, but not enough to exhaust the 401k.

So, basically, I'm just pre-paying taxes that I would have to pay in a future year anyway. Once the money is moved into Roth, I can access it tax free and have all that spending power without paying any more tax. In that scenario, I can't see why I need to penalize myself this year by reducing my current-year spending just because I am pre-paying taxes for a later year.

Those are my thoughts, but hopefully Ben or others will have more to add. And if you or anyone else has more reasons to look at it the opposite way, I am all ears.
Last edited by stuper1 on Tue Feb 04, 2025 7:05 pm, edited 1 time in total.
A 10-20% allocation to gold has helped with the sequence of returns problem. Some gold held physically is also good insurance against the all-digital-assets problem.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by ConstantChrysalis »

I'd suggest viewing Mike Piper's excellent 2024 Bogleheads Conference presentation on Roth conversions. It is a highly personal decision based on a whole host of factors in favor and against, most of which are based on fuzzy predictions about the future.

https://www.youtube.com/watch?v=Wjbf9KVSG7s
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Horton »

Ben Mathew wrote: Fri Jan 31, 2025 1:24 pm I think the odds are good that it will be around in 20 years!
Hi Ben -

I’m loving the tool. What plans do you have to monetize the planner? At minimum, I’m sure many of us would gladly “buy you a coffee”.

Take care,
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by idc »

Horton wrote: Tue Feb 04, 2025 7:45 pm I’m loving the tool. What plans do you have to monetize the planner? At minimum, I’m sure many of us would gladly “buy you a coffee”.
I second that.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

WoodSpinner wrote: Tue Feb 04, 2025 1:52 pm Why do you feel this is a viable offset? It certainly is not assured in any sense of the meaning. Much can change, Conversions always involve some element of risk.
Broadly speaking, Roth conversions should not be seen as creating risk, but rather eliminating risk. You've removed uncertainty about the tax rate. $X invested today will become $X(1 + cumulative return)(1 - marginal tax rate). With a traditional account there's uncertainty about both the cumulative return and the future marginal tax rate you will face. If you pre-pay your taxes via a Roth conversion, there is only uncertainty about the cumulative return, so there is less risk. (There's a caveat here relating to the fact that the income tax rate is progressive, and so low returns will be hedged by a low marginal tax rate. But let's ignore that.)

And even if there were risk, you should still try to smooth spending across time. The timing of when you pay the cost and when you receive the benefits should not unduly affect your spending. if you find out that the costs are higher than expected or benefits are lower than expected, you would then reduce spending in all remaining years, not unlike what you would do if you find out that portfolio returns are lower than expected. If the portfolio lost $100,000 one year, we wouldn't take the full hit on spending that year, but translate that to a smaller hit per year for all remaining years.

It's easy to see the intuition behind this if we use a bigger number than the $22K in the example. Suppose the cost of the risky project had been $118K instead of $22K. Then it would be obvious that we should not reduce our spending to $118K - $118K = $0 in the year the cost is paid. Just like we should not reduce our spending in years where college tuition or mortgage repayments or any other extra expenses are scheduled.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

Horton wrote: Tue Feb 04, 2025 7:45 pm Hi Ben -

I’m loving the tool. What plans do you have to monetize the planner? At minimum, I’m sure many of us would gladly “buy you a coffee”.

Take care,
Horton
idc wrote: Tue Feb 04, 2025 8:55 pm I second that.
Glad you’re loving the tool. We haven’t made any plans for monetization and aren’t accepting donations, but thanks for the kind offer!
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by ConstantChrysalis »

Ben Mathew wrote: Wed Feb 05, 2025 12:54 am
WoodSpinner wrote: Tue Feb 04, 2025 1:52 pm Why do you feel this is a viable offset? It certainly is not assured in any sense of the meaning. Much can change, Conversions always involve some element of risk.
Broadly speaking, Roth conversions should not be seen as creating risk, but rather eliminating risk.
I'd call some of of the potential negatives of a Roth conversion risks, or maybe better called opportunity costs. For example:

- I convert and the Roth ends up going to charity and I've prepaid the tax but the charity wouldn't have paid it anyway.

- I convert and the increased current income eliminates or reduces an ACA premium tax credit or puts me in an IRMMA bracket so my spouse's Medicare costs are higher. The interplay of all these factors is tough to model and optimize.

- I convert and later in life and unexpectedly find myself in the same tax bracket (or lower).

Of course, I could also drop dead next year and have been better off spending all my money this year too.

I'm not against Roth conversions, and don't want to turn this thread into yet another near-infinite discussion on them, but I do want to point out that it isn't just a simple current/future tax bracket arbitrage decision. I don't look to the Planner as the tool to help make this decision, but it can be helpful in analyzing parts of the many, often very fuzzy, considerations going into that decision. Again, I highly recommend Mike Piper's video I referenced above if someone wants to deeply explore the pros/cons.
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by WoodSpinner »

Ben Mathew wrote: Wed Feb 05, 2025 12:54 am
WoodSpinner wrote: Tue Feb 04, 2025 1:52 pm Why do you feel this is a viable offset? It certainly is not assured in any sense of the meaning. Much can change, Conversions always involve some element of risk.
Broadly speaking, Roth conversions should not be seen as creating risk, but rather eliminating risk. You've removed uncertainty about the tax rate. $X invested today will become $X(1 + cumulative return)(1 - marginal tax rate). With a traditional account there's uncertainty about both the cumulative return and the future marginal tax rate you will face. If you pre-pay your taxes via a Roth conversion, there is only uncertainty about the cumulative return, so there is less risk. (There's a caveat here relating to the fact that the income tax rate is progressive, and so low returns will be hedged by a low marginal tax rate. But let's ignore that.)

And even if there were risk, you should still try to smooth spending across time. The timing of when you pay the cost and when you receive the benefits should not unduly affect your spending. if you find out that the costs are higher than expected or benefits are lower than expected, you would then reduce spending in all remaining years, not unlike what you would do if you find out that portfolio returns are lower than expected. If the portfolio lost $100,000 one year, we wouldn't take the full hit on spending that year, but translate that to a smaller hit per year for all remaining years.

It's easy to see the intuition behind this if we use a bigger number than the $22K in the example. Suppose the cost of the risky project had been $118K instead of $22K. Then it would be obvious that we should not reduce our spending to $118K - $118K = $0 in the year the cost is paid. Just like we should not reduce our spending in years where college tuition or mortgage repayments or any other extra expenses are scheduled.
I think you are glossing over the risks around Roth Conversions.

That said using your example, I would have no trouble spending $236,000 ($118,000 + $118,000) — I don’t disagree with that. My point is that you are increasing risks for future spending adjustments which should be acknowledged and examined.

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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

ConstantChrysalis wrote: Wed Feb 05, 2025 9:18 am
Ben Mathew wrote: Wed Feb 05, 2025 12:54 am
Broadly speaking, Roth conversions should not be seen as creating risk, but rather eliminating risk.
I'd call some of of the potential negatives of a Roth conversion risks, or maybe better called opportunity costs. For example:

- I convert and the Roth ends up going to charity and I've prepaid the tax but the charity wouldn't have paid it anyway.

- I convert and the increased current income eliminates or reduces an ACA premium tax credit or puts me in an IRMMA bracket so my spouse's Medicare costs are higher. The interplay of all these factors is tough to model and optimize.

- I convert and later in life and unexpectedly find myself in the same tax bracket (or lower).
These are situations where a Roth conversion is suboptimal. That's common. But it's still the case that Roth reduces risk because there's no uncertainty about what tax rate you'll be getting. Even if the current tax rate is high compared to the expected future tax rate, you eliminate risk by taking that high rate. It just wouldn't be a good idea to do so—the cost of eliminating the tax risk would be too high.
Total Portfolio Allocation and Withdrawal (TPAW)
jmk
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by jmk »

"Pick the expected annual real returns for stocks and bonds. All the options other than "fixed" are automatically updated based on new data."

Does TPAW use geometric or arithmetic figures? I noticed some of the online Merton share calculators ask for the geometric expected returns and then convert behind the scenes to arithmetic averages to run the equation. But I don't see anything indicating this is being done with tpaw?
Last edited by jmk on Fri Feb 07, 2025 3:09 pm, edited 1 time in total.
jmk
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by jmk »

Ben Mathew wrote: Mon Dec 16, 2024 1:11 pm
jmk wrote: Sun Dec 15, 2024 11:19 pm Mathew, I've wondered why you've advised people to focus on the overall spending graph ("monthly spending during retirement") in setting risk levels, rather than the "general spending" graph of discretionary spending. In a system where the essential spending is covered in the most conservative way (by employment, pensions, safe bonds), isn't the real issue at hand on how much discretionary spending you can take with various risk levels etc?
Categorizing a particular expense or level of expenses as essential rather than discretionary is a choice. We can get the same expected spending by creating

(a) a low spending floor (few expenses categorized as essential) and a more conservative risk portfolio, or
(b) a high spending floor (more expenses categorized as essential) and a more aggressive risk portfolio

The difference is the shape of the spending distribution. To see and evaluate the difference between these two sets of outcomes, it's useful to see the overall spending graph. The discretionary spending graph hides the fact that we have a floor, and so does not tell the full story. Looking at the discretionary spending graphs helps to better understand the different pieces of spending, but I think it's best to start with the bigger picture and then drill down from there. There can also be cases where essential spending is insufficiently funded and so runs out of money, and the overall graph will show that as well.
I see your point about the overall graph being crucial to convey all the information, especially ensuring things are sufficiently funded. However, I still feel that the current options don't allow the full story from the spending part of the balance sheet. Yes, I can drill down to 'general" and "essential" graphs; but I also sometimes want want to see these spendings in the context of the "big picture".

May I suggest the additional option on the main Monthly Spending During Retirement card?
The landing card with its median spending line and bands would stay exactly as it is, of course. The sliding knob would now be Left-Off-Right.
Sliding the knob to the right would show the Income focus, just as it does now, with its colored income bars and ability to filter/highlight percentiles.
But sliding the knob to the left would now show a graph focusing on a Spending. The overall blue shapes would be identical at each percentile of course (the beauty of the model!). But instead of funding sources, we'd see colored bars for Essential Spending liabilities (or perhaps just a single congregate for all the "essential" spending). The "gap" between the overall bars and the essential spending(s) would represent the discretionary spending.
This would bring a certain symmetry to things suiting the actuarial model, which at any time focuses on either the income or spending lens of the balance sheet, depending on the context.
Last edited by jmk on Sun Feb 09, 2025 4:41 pm, edited 1 time in total.
trueblue63
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by trueblue63 »

Ben Mathew wrote: Tue Feb 04, 2025 12:54 am
trueblue63 wrote: Mon Feb 03, 2025 7:12 am It took me a while to decide how to include a likely inheritance (to happen in the future) and how it might change things. I would have thought that there would be a way to include it as an addition to your portfolio as a one time action at a future date. I didn't see that.
Lump sum inputs are on the to-do list. In the meantime, as Raspberry-503 said, you can enter it as income lasting 1 month.

Waiting to build a few of these things before putting out the tutorial. :D
Precisely what I did.

After using it for a bit, I like the power of your model. It requires a high level of self knowledge, because you better understand your risk tolerance. But it's more logical, more the way people behave, people do change their spend when they see their portfolio balance change.
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Ben Mathew
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Re: Total Portfolio Allocation and Withdrawal (TPAW)

Post by Ben Mathew »

jmk wrote: Fri Feb 07, 2025 2:22 pm "Pick the expected annual real returns for stocks and bonds. All the options other than "fixed" are automatically updated based on new data."

Does TPAW use geometric or arithmetic figures? I noticed some of the online Merton share calculators ask for the geometric expected returns and then convert behind the scenes to arithmetic averages to run the equation. But I don't see anything indicating this is being done with tpaw?
The TPAW input is arithmetic returns. Clarifying this is on the to-do list.
jmk wrote: Fri Feb 07, 2025 3:08 pm May I suggest the additional option on the main Monthly Spending During Retirement card?
The landing card with its median spending line and bands would stay exactly the same, of course. The sliding knob would now be Left-Off-Right.
Sliding the knob to the right would show the Income focus, just as it does now, with its colored income bars and ability to filter/highlight percentiles.
But sliding the knob to the left would now show a graph focusing on a Spending. The overall blue shapes would be identical at each percentile of course (the beauty of the model!). But instead of funding sources, we'd see colored bars for Essential Spending liabilities (or perhaps just a single congregate for all the "essential" spending). The "gap" between the overall bars and the essential spending(s) would represent the discretionary spending.
This would bring a certain symmetry to things suiting the actuarial model, which at any time focuses on either the income or spending lens of the balance sheet, depending on the context.
An option to break down the main "Monthly Spending During Retirement" graph into essential vs discretionary spending would be great. I've added it to the to-do list.

Thanks for the suggestion!
Total Portfolio Allocation and Withdrawal (TPAW)
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