Thanks, Exchme. This advice was really helpful. My initial look at this used pralana's "simple portfolio model," which did not get into asset allocations but allowed me to specify the expected rate of return in each account type. I had put Roth higher than tax-deferred, which biased the model into chasing the higher returns, just as you said. That was why it was suggesting Roth conversions filling up the 32% tax bracket, which was more than my intuition.One thing new users commonly miss - if you are holding bonds in tax deferred and stocks in Roth/taxable, in Pralana Online, you should use Build-Advanced Portfolio Modeling-Asset Allocation/Location and select Mode 2, then under Mode 2 account Prioritization, put accounts in the order of preference for holding stocks. That will hold your portfolio asset allocation constant over time while loading your bonds into tax deferred and stocks into Roth/taxable. You should only use Mode 1 if you hold the same allocation in all accounts. If you try using Mode 1 with different allocation in different accounts (and therefore different returns in different accounts), the program (any program) will unfairly favor Roth Conversions as it is chasing the higher returns. The math is done as if Conversions create higher stock allocations.
Pralana and RPM are the only tools I'm aware of that give you a way to model different asset allocations properly.
Using the advanced portfolio modeling, mode 2, I can now specify an overall portfolio asset allocation to keep to. And now pralana is not so aggressive in suggesting Roth conversions. The optimization now suggests filling up to the 24% tax bracket in some years, and in some years just the 10% or 22% bracket. This makes intuitive sense to me. And the end-of-plan numbers overall are larger than before, as a result. This has the pleasant result that my contributions to the tax-deferred accounts were deferred from the 32% tax bracket and and are withdrawn at the 24% bracket or lower, in every year. That's a win. It does come at the expense of a lot of years of high-tier IRMAA - 19 years of $11K IRMAA expenses. Ouch. But over all it is a win.
I also modeled what would happen if I died at 75 instead of 95. That produces a hit of $1.5M in the portfolio by the end of the plan, due to the single-filer status of the surviving spouse and loss of SS income. But happily, converting up through the 24% tax bracket remains a near-optimal approach, so the conversion strategy is not that sensitive to life expectancy.
Statistics: Posted by MoreTaxes — Sat Oct 12, 2024 11:01 pm — Replies 84 — Views 11126