Pralana Gold is a fully integrated, high fidelity financial model designed for personal use. Read on below to learn about some of the things it can do.
What makes Pralana Gold unique is its organized structure and the level of detail it is capable of working with to avoid large errors associated with simplifying approximations. Additionally, PRC never gives you a single answer because there is no such thing. Our financial future contains a number of unknowable variables which can have dramatic effects on the size of our savings over a period of many years. Consequently, PRC is designed to address the uncertainties and, as a result, provides a range of possible outcomes based on your inputs. Armed with this information, you will be in the best position possible to make financial decisions.
PRC/Gold is structured to lead you through the planning process step by step, allowing you to focus on one specific area at a time, save your inputs, and then move to the next area. It goes WAY BEYOND simply providing data input rows where you can enter income and expenses with corresponding start and stop dates. Rather, it leads you through the process of defining your income and expenses systematically and is capable of dealing with nuances associated with specific items. One result of this is more pieces of data for you to collect and input; however, this is YOUR information and you can probably collect it with minimal difficulty. The result, though, is a much higher fidelity model of your financial future than could be achieved by using just high level inputs, as is the case with most other calculators.
Models and compares three independent scenarios...
With its extensive modeling, analysis and presentation capabilities, PRC is a powerful decision-making assistant. In mere minutes or even just seconds, it enables you to model different sets of assumptions and examine the long term results. We refer to a set of income profiles, expenses profiles and assumptions as a “scenario”, and PRC allows you to define and model three independent scenarios simultaneously and then compare the results. What this is allowing you to do is define different values for the various components of each of the scenarios such as different life expectancies, inflation rate, asset allocations, income levels, housing options, and the list goes on and on.
Separate modeling of husband and wife financials...
PRC refers to each of you by the names entered on the Home page, and it bases many calculations (RMD’s and life insurance pay-outs, for two quick examples) on your separate ages and life expectancies.
It maintains separate tax-deferred account balances, starting from the initial balances entered on the Initial Account Balances page:
It enables you to define separate income streams on the Income page (not shown) and then observe your separate income projections with any corresponding contributions:
User control over basic assumptions...
You can tell PRC the basic assumptions on which to base its projections. This includes general inflation, health care and college expense inflation, and any expected increase or decrease in income tax rates and/or Social Security benefits.
Detailed Federal, state and FICA tax calculations...
You do not need to guess your tax rates with PRC; it performs detailed income tax and FICA tax calculations based on your filing status, number of dependents, ordinary income and capital gains, and state of residence. Here’s a typical output of its calculations that are fully integrated into PRC’s projections.
Notice that the numbers are not flat across the span of years shown. Taxable income drops way off when the couple retires in 2040 and then takes off again when Social Security and RMD’s begin several years later. Note also that the effective taxes and marginal tax rates changes over this period. Consequently, this eliminates a large source of error present in calculators that make you guess your tax rates.
Time-varying withdrawal priorities...
PRC allows you to specify withdrawal order among your savings categories (regular taxable, your tax-deferred, your spouse’s tax-deferred, Roth) whenever you have a negative cash flow. Here’s an example with two time periods specified:
From 2020 to 2040, the withdrawal order will be your tax-deferred until tax deductions are exhausted, them regular taxable, then Roth, then your tax-deferred and finally your spouse’s tax-deferred. Here’s an example of how this plays out in a tabular projection of future years:
The married couple in this example has just retired at age 60 with $1,000,000 spread across taxable savings and his and her tax-deferred savings. They have a large negative cash flow and will be living strictly off their savings until Social Security income kicks in at ages 70 and 62, respectively. Even then, they’ll still have a rather large negative cash flow. The right-most columns reflect PRC’s implementation of the withdrawal order specified in the prior screenshot. The “Withdrawals from Bob’s TD Account to Match Tax Deductions” is the maximum amount that can be withdrawn from tax-deferred savings without creating any taxable income by driving the AGI higher than the maximum tax deductions available. The remainder of the negative cash flow is covered via withdrawals from regular savings until those funds are depleted and then Bob’s tax-deferred account is again tapped for the spending deficit.
PRC gives you the flexibility to control the withdrawal order and the ability to vary that order over three different time periods. This, in turn, contributes significantly to high fidelity modeling of your account balances. The order selected for this particular example portrays the most tax-efficient possible under these circumstances because it maximizes the untaxed withdrawals from the tax-deferred account while reducing RMD’s later on.
Time-varying asset allocations for major account types...
PRC allows you to specify and characterize up to 10 investment assets (such as money market, stocks and bonds) and the asset allocation and management expenses for taxable, tax-deferred and Roth accounts. PRC uses this to generate the aggregate rate of return for each account. The screenshot below shows a portion of the asset allocation page:
The average ROR’s for each asset are user-specified but they aren’t shown on this page; however, you can see that PRC has used them along with the management expenses (entered at the top of the table) and the time period-specific asset allocations to produce the aggregate real ROR’s , as indicated by the arrow in the diagram above. These ROR’s are then used by PRC to generate projections of these savings accounts over time.
Here’s another screenshot that shows the annual nominal ROR’s and the associated account growth. Note that the ROR for the tax-deferred and Roth accounts change in 2030 (as the projection moves into what the user has defined as Period 2. Inflation is 4% in this example, so the real ROR of 4.0% becomes a nominal ROR of 8.00%, the 3.75% real ROR becomes a nominal ROR of 7.75%, and so on. Here again, PRC’s attention to detail results in higher fidelity projections.
Consistent accumulation phase and distribution phase modeling...
Unlike most retirement calculators, PRC does not ask you how much you plan to save each month prior to retirement. Instead, it models your accumulation phase the same way it models your distribution phase: it develops high-fidelity income and expense streams and always calculates your cash flow based on the difference between annual income and expenses. When you have a positive cash flow, it models new contributions to your appropriate savings; when you have a negative cash flow, it models withdrawals from your savings accounts in accordance with your specified withdrawal order. In real life, it’s a great thing to “pay yourself first” and plan to save a fixed amount of your income. But that’s not a particularly good way to do financial modeling because, in reality, it’s very common to have very large year-to-year variations in cash flows and, therefore, savings contributions. And significant modeling errors can result from differences between an assumed average contribution to savings and the time-varying contributions that are most people’s reality.
Check out the screenshot below. The orange line is where this couple plans to retire and you can see their annual income, expenses and cash flow in the years preceding that. Although the income is very consistent from year to year, there are lots of significant variations in expenses and, in turn, cash flow. This is due to a variety of very normal factors including elimination of their mortgage at some point, college expenses for about six years, and the purchase of new cars once in a while. So, with PRC, you don’t have to guess at a long-term savings contribution; you simply model your expected income and expenses and it will handle the details and most likely produce a considerably more accurate long term result.
High-fidelity income modeling...
If you want the best prognosis of your financial future then you need to give serious consideration to high-fidelity income definition, and PRC Gold’s high-fidelity income modeling is as good as it gets. It can handle all of the following for both husband and wife: three employment income streams, two pension streams with all typical pension options, Social Security benefits, taxable and non-taxable windfalls, five other income streams, inherited IRA’s and Roth IRA’s and the purchase and pay-out of two annuities. Further, for each of these various income streams, PRC can model virtually all of the related nuances such as personal and employer contributions to retirement plans, COLA (or not), pension survivor benefits and rollovers to tax-deferred and Roth accounts, Social Security early retirement reductions and delayed retirement credits plus File & Suspend and restricted applications, and much more.
Even further, it can also model the income from a reverse mortgage.
Here are just two examples of PRC’s income inputs, one for employment income and the other for pension income:
And here is a representative income projection, where YOU can select exactly which data is included and YOU can specify the summary header names and the spanning columns:
High-fidelity expense modeling, with multiple spending strategies...
If you want the best prognosis of your financial future then you need to give serious consideration to high-fidelity expense definition, and PRC Gold’s high-fidelity expense modeling is as good as it gets. It can handle all of the following: acquisition and ownership expenses for up to 10 private properties plus acquisition and ownership expenses for up to 10 rental properties, children’s expenses with modeling of student loans and 529 plans, healthcare expenses with modeling of ACA healthcare policies, Medicare Part B premiums, Health Savings Accounts, pre- and post-tax expenses, and Long Term Care expenses, period-specific discretionary expenses, one-time miscellaneous expenses and charitable giving including Qualified Charitable Donations. Further, for each of these various expense streams, PRC can model virtually all of the related nuances such as loan amortization and early loan pay-off, tax deductions, fixed expenses and inflation-adjusted expenses, expense adjustment after the death of a spouse, and it can also model the expenses associated with a reverse mortgage.
Even further, it can model various alternative spending strategies in your retirement years if you’d prefer to plan at the macro level rather than at the specific level. This includes fixed rate, fixed rate with floor and ceiling, constant spending, target percent adjustment and Guyton-Klinger methods.
And here is a representative expense projection, where YOU can select exactly which data is included and YOU can specify the summary header names and the spanning columns:
Term and cash value life insurance recommendations and modeling...
PRC is able to model survivor scenarios and a key part of this is an on-demand capability to calculate the amount of term life insurance you'll need based on the expected reduction in income and expenses after the loss of each spouse. Additionally, PRC models cash value life insurance with the ability to use the cash value to pay the premium on paid-up policies, to model one-time cash withdrawals and to model the payment of death benefits.
Here’s a screenshot that illustrates the table where you can specify the parameters to control PRC’s modeling of your cash value life insurance policy:
These inputs are used to produce a projection that looks like this:
Roth conversions, with sensitivity to tax brackets and ACA cliff...
PRC can model the conversion of pre-tax and after-tax funds from your tax-deferred accounts to your Roth account and these conversions will be incorporated into its detailed income tax calculations. The conversions can be done separately for husband and wife, and in accordance with user-specified rules. These rules can include conversion amounts and either durations or a maximum marginal tax bracket to be filled, and whether the husband or the wife is to take priority when the conversions are to be limited by the tax bracket. Additionally, the conversions will be optimized to prevent you from going over the ACA cliff if and when you have ACA health insurance in effect.
PRC enables you to experiment with different conversion rules and immediately see the long-term effect on your savings. Here’s a screenshot to illustrate:
PRC manages three scenarios simultaneously but in this example we’re dealing only with Scenario 1, and you can see that Joe wants to explore a fixed-duration conversion of 75% of his account over a period of 9 years starting in 2037. At the same time, he wants to explore a fixed-duration conversion for his wife Jane of 60% of her account over a period of 10 years starting in 2035. The graph below the control inputs immediately reflects the long-term effect of his inputs. The blue line on the graph is the baseline plan established the last time he ran an analysis and the red line shows the projection based on the current Roth conversion rules at the top of the page. PRC also shows the exact long-term difference in savings: in this case, the Roth conversion will result in an improvement of $24,677.
The tabular view shown below is the resulting projection based on this Roth conversion. You can confirm that Jane’s conversion begins in 2035 and Joe’s begins in 2037, and you can see that the Roth account is quickly growing. You can also see where their respective RMD’s begin at age 70.
Integration and analysis using fixed rate, Monte Carlo and historical methods...
PRC integrates your demographics and your current financial position with your basic assumptions about inflation, rates of return, asset allocation, and detailed income and expense profiles to create three complementary views into the future.
One view is based on fixed rate projections which use an average rate of return to project the annual growth of your accounts. Another view is based on Monte Carlo analysis to simulate market volatility in projecting the annual growth of your accounts. The final view is based on Historical analysis to simulate market volatility in projecting the annual growth of your accounts.
Fixed rate results are presented both in graphical and in tabular form which enable you to see in great detail what PRC is doing with your data. Monte Carlo and Historical analysis results are presented in graphical form and show you the range and distribution of likely outcomes, with the fixed rate projection superimposed for comparison.
These separate views are important because none of them is perfect. They all have strengths and weaknesses that are inherent in the analysis methods employed (and that is true regardless of the tool you’re using). That’s why using all three methods to analyze your data gives you the best possible insight into the future and the best possible information on which to base important life decisions.
Here’s one view based on fixed rate projections that puts income, expenses, account balances and your net worth over time into a single diagram:
Here’s another view showing Monte Carlo results decomposed into percentile bands superimposed with the fixed rate projection of savings (solid red line) and spending (dashed red line). On the lower right you also get the success rate over the last 10 years of your life. Historical analysis results are presented in a similar manner.
PRC’s Monte Carlo analysis is based on the generation of annually-varying rates of return at the asset class level, using user-provided mean rates of return and standard deviation and a normal distribution.
PRC’s Historical analysis is also based on the generation of annually-varying rates of return at the asset class level, but uses historical rates of return for each asset class and historical inflation rates.
Consumption smoothing and overall margin calculation...
PRC contains a consumption smoothing algorithm that can provide some incredibly valuable insights about your plan! First, it can help you maximize your standard of living over the remainder of your life. Second, it can quantify the amount of margin in your plan.
If you’re still in the accumulation phase of your life with many years yet to go, the consumption smoothing algorithm can help you understand how much you can raise your discretionary spending every year while still being able to meet your non-discretionary obligations and still achieve your long-term goals. If you’re quickly approaching retirement or already there, the consumption smoothing algorithm may be able to give you more peace of mind by quantifying the amount of margin in your plan.
This algorithm takes into account all of the assumptions, income and expenses you’ve already entered into the tool and then calculates the amount of additional spending that can be supported every year over your expected lifetime. As a risk mitigation measure, PRC again uses three different analysis methods to arrive at its outputs: fixed rate, Monte Carlo and Historical. Monte Carlo and Historical methods will produce a consumption smoothing calculation with a 90% success rate while the fixed rate method might have a considerably lower success rate. This is still useful, though, because you may feel like the average rates of return you’ve specified for fixed rate analysis is very conservative. Regardless, you can have it your way because the analysis method that PRC uses is up to you!
You can read more about this concept and its real-life application in the book entitled "Spend 'til the End" by Laurence Kotlikoff and Scott Burns.
Optimization of Social Security start ages in the context of your overall plan...
PRC will calculate the optimum ages for you and your spouse to begin taking Social Security benefits in the context of your overall plan rather than just determining the start ages that result in the largest long term income. It examines the long-term effects of this income on the growth of your savings, taxes, and survivor scenarios to provide you with the best overall solution which, in turn, will enable you to maximize your standard of living. Further, since the mathematically best solution may be only marginally better than some number of other solutions, PRC examines the set of possible solutions associated with earlier start dates and identifies the subset of these that are almost as good as the best one. Here’s a screenshot:
The dark green square indicates the optimum ages for you and your spouse to begin taking benefits. The lighter green squares indicate the start ages that will result in long-term savings that are at least 97% as good as the optimum ages, and the sub-optimum selection threshold is user-selectable.
Calculation of your earliest achievable retirement date with 90% confidence level...
PRC contains an algorithm that can help you select a retirement date! If you associate the end of your primary employment income stream and the start of any post-retirement income streams with “retirement”, PRC’s optimization algorithm will calculate the date on which both you and your spouse can retire with a 90% confidence level that your money will outlast you. You can then plug in the calculated date as your planned retirement date and run PRC’s fixed rate, Monte Carlo and Historical analyses to see for yourself how the future might appear based on the selected date. You can then go to PRC’s Sensitivity Analysis page and make small changes to this date and immediately observe the long-term impact on your savings.
Analysis of your particular scenario against historic bear markets...
PRC contains a “Bear Market Analysis” feature which may be of particular interest to folks with concerns of a looming bear market. Unlike PRC’s Monte Carlo and historical analyses, this analysis allows you to temporarily replace the average ROR values specified on Financial Analysis/Asset Classes page with specific ROR profiles for each of your asset classes and then interactively examine the long term results. This analysis uses the asset classes and allocations and the income and expense details you’ve already established, but lets you load the sequence of returns associated with any of three historic bear market histories (1929, 1973 and 2000 were their starting years). As you do so, you’ll immediately observe the way this projection compares to your baseline. Here’s a screenshot of this page, with a pretty sobering prognosis for the 1929 scenario:
Flexible tabular outputs...
PRC provides unprecedented user control over the content and presentation of its data in tabular form. There are 132 calculated data elements available for each year in its projections but you are not forced to look at and sift through all of them to examine your plan outputs. Instead, you can define up to eight views into this massive set of data, and each view can contain from one to 30 of these data elements ordered in any way you desire. Further, you can define headers that span one or more data elements. Further yet, you can control whether the projections are presented with years in rows and data in columns or with years in columns and data in rows. None of these views is a “canned” view; all of them are under your control. PRC contains three default views to get you started but you can change them in any way you choose.
Take a look. Here’s a screenshot of one of PRC’s default views. In particular, this is the Summary view:
This is one of its Tabular Projections as indicated by the red navigation link at the top of the page. Beneath that, there’s a row containing the eight user-defined views and the active view is highlighted in red as you can see. Now, notice that three of the columns contain no data so you probably wouldn’t want to look at those empty columns, but maybe there is some other data you’d like to see in this particular view. So, you just navigate to the View Mgmt page, make a few clicks to redefine this view and come back to take a look. Here’s the new page:
Now the view contains the data I want to see as a group but I prefer a different order, so with a few clicks of those left/right arrows toward the upper left side of the page I can make the necessary changes. I can also create some headers to span the columns by using the “add header” button near the top of the page. So, just by doing these simply steps I can convert the above page to this:
PRC produces PDF reports as well, and the same capability used for designing the customized interactive views is used for defining the contents of its PDF reports.
Pralana Consulting LLC, Plano, TX
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