How I use I-ORP, and who shouldn't

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LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE »

I hear you. So far, the tool seems to be saying “get into equities” as much as possible in order to get your spendable income as high as possible. Interestingly, the usual advice to put 100% fixed income in tax deferred results in I-ORP doing its best to get all those funds out of there as quickly as possible and into whatever account has the equities in it. So does that mean that the “fixed income in tax deferred” advice deserves another look?
Not exactly. I-ORP does not offer an opinion about your asset allocation. It is optimizing for taxes, IRMMA, and RMD. Since equities are presumed to generate higher returns, moving those assets to Roth early will save taxes. Nothing more is being suggested.
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LMK5
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

LeeMKE wrote: Sat Jan 22, 2022 4:48 am
I hear you. So far, the tool seems to be saying “get into equities” as much as possible in order to get your spendable income as high as possible. Interestingly, the usual advice to put 100% fixed income in tax deferred results in I-ORP doing its best to get all those funds out of there as quickly as possible and into whatever account has the equities in it. So does that mean that the “fixed income in tax deferred” advice deserves another look?
Not exactly. I-ORP does not offer an opinion about your asset allocation. It is optimizing for taxes, IRMMA, and RMD. Since equities are presumed to generate higher returns, moving those assets to Roth early will save taxes. Nothing more is being suggested.
But if it's optimizing for taxes, IRMMA, and RMDs, then why wouldn't it try to move money out of tax deferred early when it's predominantly equities?
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LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE »

But if it's optimizing for taxes, IRMMA, and RMDs, then why wouldn't it try to move money out of tax deferred early when it's predominantly equities?
Take another look at your own results. Early Roth conversion is better than later because the asset has not yet appreciated significantly and increased the taxes owed.
There are two questions:
(1) How to minimize life long taxes with Roth Conversions?
(2) How to distribute assets between tax deferred and Roth?
I-Orp answers 1. and once you have made whatever conversions you will make, optimizing for 2. becomes obvious.

Is the legacy you plan intended for charity? It sounds like it is, so I-Orp having you draw down your Roth is ideal. If your legacy is intended for people and you want to deliver a tax free legacy, you have a different question to answer.
The mightiest Oak is just a nut who stayed the course.
LMK5
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

LeeMKE wrote: Sat Jan 22, 2022 10:16 am
But if it's optimizing for taxes, IRMMA, and RMDs, then why wouldn't it try to move money out of tax deferred early when it's predominantly equities?
Take another look at your own results. Early Roth conversion is better than later because the asset has not yet appreciated significantly and increased the taxes owed.
There are two questions:
(1) How to minimize life long taxes with Roth Conversions?
(2) How to distribute assets between tax deferred and Roth?
I-Orp answers 1. and once you have made whatever conversions you will make, optimizing for 2. becomes obvious.

Is the legacy you plan intended for charity? It sounds like it is, so I-Orp having you draw down your Roth is ideal. If your legacy is intended for people and you want to deliver a tax free legacy, you have a different question to answer.
The legacy is not planned for charity. It would be for heirs. For some reason i-ORP always has me spending down my Roth, even after making huge conversions into it. Is there a way to tell i-ORP what the legacy is for? I haven't seen that feature.
Silk McCue
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Re: How I use I-ORP, and who shouldn't

Post by Silk McCue »

LMK5 wrote: Sat Jan 22, 2022 10:20 am
The legacy is not planned for charity. It would be for heirs. For some reason i-ORP always has me spending down my Roth, even after making huge conversions into it. Is there a way to tell i-ORP what the legacy is for? I haven't seen that feature.
If, when the time comes, don’t do that. That shortcoming in the tool should have very little impact on the utility you get from this exercise for a multi-decade future.

Cheers
randomguy
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Re: How I use I-ORP, and who shouldn't

Post by randomguy »

LMK5 wrote: Fri Jan 21, 2022 8:47 pm I hear you. So far, the tool seems to be saying “get into equities” as much as possible in order to get your spendable income as high as possible. Interestingly, the usual advice to put 100% fixed income in tax deferred results in I-ORP doing its best to get all those funds out of there as quickly as possible and into whatever account has the equities in it. So does that mean that the “fixed income in tax deferred” advice deserves another look?

But I do agree that in the end you need to be comfortable with whatever plan you execute.
No it is a limitation of i-orp not the advice. I-ORP is increasing your risk by holding more stocks (i.e. imagine you start 50/50 with all your bonds in tax deferred and then 3 years later you are 100/0). If instead of the normal simulator, you run the monte carlo one, you will notice a big divergence in results. There really isn't a great work around that I am aware of....
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FiveK
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Re: How I use I-ORP, and who shouldn't

Post by FiveK »

I-ORP's goal is not to minimize taxes, but rather to maximize what you can spend on yourself.

The amount of tax one pays certainly has a strong effect, but it is possible to have maximum spending not coincide with minimum taxes.
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

Silk McCue wrote: Sat Jan 22, 2022 10:32 am
LMK5 wrote: Sat Jan 22, 2022 10:20 am
The legacy is not planned for charity. It would be for heirs. For some reason i-ORP always has me spending down my Roth, even after making huge conversions into it. Is there a way to tell i-ORP what the legacy is for? I haven't seen that feature.
If, when the time comes, don’t do that. That shortcoming in the tool should have very little impact on the utility you get from this exercise for a multi-decade future.

Cheers
Can you clarify what you mean by "don't do that"? What I have found is that the tool always leaves the legacy amount in the taxable account, but spends down the other accounts, including the Roth. If I have my tax-deferred at 80% fixed income, it recommends depleting that account aggressively, whether I'm converting or not, and paying very high initial tax bills. If I set the tax deferred to 80% stock, it no longer recommends aggressive withdrawals from the account, and my tax bill is much, much lower, while maintaining the same level of spendable income. It seems the tool is 'advising" me to put a larger portion of tax deferred into equities, which is contrary to the usual advice of keeping the tax deferred account bond-heavy. Am I reading this right?
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Re: How I use I-ORP, and who shouldn't

Post by randomguy »

LeeMKE wrote: Sat Jan 22, 2022 4:48 am
I hear you. So far, the tool seems to be saying “get into equities” as much as possible in order to get your spendable income as high as possible. Interestingly, the usual advice to put 100% fixed income in tax deferred results in I-ORP doing its best to get all those funds out of there as quickly as possible and into whatever account has the equities in it. So does that mean that the “fixed income in tax deferred” advice deserves another look?
Not exactly. I-ORP does not offer an opinion about your asset allocation. It is optimizing for taxes, IRMMA, and RMD. Since equities are presumed to generate higher returns, moving those assets to Roth early will save taxes. Nothing more is being suggested.
I-orp isn't to save on taxes. It is trying to get money in accounts returning 8% instead of 2%. Change your numbers so that stocks are in tax deferred and bonds elsewhere, and I-Orp will work hard to not spend tax deferred as long as possible...
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

FiveK wrote: Sat Jan 22, 2022 11:00 am I-ORP's goal is not to minimize taxes, but rather to maximize what you can spend on yourself.

The amount of tax one pays certainly has a strong effect, but it is possible to have maximum spending not coincide with minimum taxes.
Agreed. The scary thing is that by paying very high taxes in the first few years you are making a very large bet up front. I can't see myself doing that unless I could be shown that the uncertainty of the plan is very low.
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Re: How I use I-ORP, and who shouldn't

Post by marcopolo »

randomguy wrote: Sat Jan 22, 2022 11:01 am
LeeMKE wrote: Sat Jan 22, 2022 4:48 am
I hear you. So far, the tool seems to be saying “get into equities” as much as possible in order to get your spendable income as high as possible. Interestingly, the usual advice to put 100% fixed income in tax deferred results in I-ORP doing its best to get all those funds out of there as quickly as possible and into whatever account has the equities in it. So does that mean that the “fixed income in tax deferred” advice deserves another look?
Not exactly. I-ORP does not offer an opinion about your asset allocation. It is optimizing for taxes, IRMMA, and RMD. Since equities are presumed to generate higher returns, moving those assets to Roth early will save taxes. Nothing more is being suggested.
I-orp isn't to save on taxes. It is trying to get money in accounts returning 8% instead of 2%. Change your numbers so that stocks are in tax deferred and bonds elsewhere, and I-Orp will work hard to not spend tax deferred as long as possible...
This is why it is essentially useless for evaluating Roth conversions. The only thing it does is push you to a 100% equity asset allocation very quickly. I really doubt anyone using this tool actually wants to do that.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: How I use I-ORP, and who shouldn't

Post by randomguy »

marcopolo wrote: Sat Jan 22, 2022 11:10 am
randomguy wrote: Sat Jan 22, 2022 11:01 am
LeeMKE wrote: Sat Jan 22, 2022 4:48 am
I hear you. So far, the tool seems to be saying “get into equities” as much as possible in order to get your spendable income as high as possible. Interestingly, the usual advice to put 100% fixed income in tax deferred results in I-ORP doing its best to get all those funds out of there as quickly as possible and into whatever account has the equities in it. So does that mean that the “fixed income in tax deferred” advice deserves another look?
Not exactly. I-ORP does not offer an opinion about your asset allocation. It is optimizing for taxes, IRMMA, and RMD. Since equities are presumed to generate higher returns, moving those assets to Roth early will save taxes. Nothing more is being suggested.
I-orp isn't to save on taxes. It is trying to get money in accounts returning 8% instead of 2%. Change your numbers so that stocks are in tax deferred and bonds elsewhere, and I-Orp will work hard to not spend tax deferred as long as possible...
This is why it is essentially useless for evaluating Roth conversions. The only thing it does is push you to a 100% equity asset allocation very quickly. I really doubt anyone using this tool actually wants to do that.
You need to keep the returns constant across the portfolio. There are some downsides of this but it prevents the program from hunting for returns.
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

randomguy wrote: Sat Jan 22, 2022 11:14 am
marcopolo wrote: Sat Jan 22, 2022 11:10 am
randomguy wrote: Sat Jan 22, 2022 11:01 am
LeeMKE wrote: Sat Jan 22, 2022 4:48 am
I hear you. So far, the tool seems to be saying “get into equities” as much as possible in order to get your spendable income as high as possible. Interestingly, the usual advice to put 100% fixed income in tax deferred results in I-ORP doing its best to get all those funds out of there as quickly as possible and into whatever account has the equities in it. So does that mean that the “fixed income in tax deferred” advice deserves another look?
Not exactly. I-ORP does not offer an opinion about your asset allocation. It is optimizing for taxes, IRMMA, and RMD. Since equities are presumed to generate higher returns, moving those assets to Roth early will save taxes. Nothing more is being suggested.
I-orp isn't to save on taxes. It is trying to get money in accounts returning 8% instead of 2%. Change your numbers so that stocks are in tax deferred and bonds elsewhere, and I-Orp will work hard to not spend tax deferred as long as possible...
This is why it is essentially useless for evaluating Roth conversions. The only thing it does is push you to a 100% equity asset allocation very quickly. I really doubt anyone using this tool actually wants to do that.
You need to keep the returns constant across the portfolio. There are some downsides of this but it prevents the program from hunting for returns.
Yes, but then can you use the results as guidance? How do you interpolate the results with regard to your actual asset allocation and glide path?
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neurosphere
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Re: How I use I-ORP, and who shouldn't

Post by neurosphere »

randomguy wrote: Sat Jan 22, 2022 10:58 am No it is a limitation of i-orp not the advice. I-ORP is increasing your risk by holding more stocks (i.e. imagine you start 50/50 with all your bonds in tax deferred and then 3 years later you are 100/0). If instead of the normal simulator, you run the monte carlo one, you will notice a big divergence in results. There really isn't a great work around that I am aware of....
I'm think I know the answer to this but asking the question will help me anyway...

I-orp does not currently have the ability to fix an asset allocation of the portfolio as a whole, but rather only for each type of account (Roth, pre-tax, taxable) individually, correct?

But it does not ever tell you to adopt any particular asset allocation. I mean, it doesn't CHANGE your asset allocation from the parameters set except indirectly by shifting balances from one account to the other. For example, I can set my Roth at 80/20 and pretax at 20/80 and suppose that's 50/50 overall because the accounts are the same size. But after a massive Roth conversion, now all the assets are in the 80/20 Roth, and thus my allocation changed from my desired 50/50 to 80/20.

So what we need is a mythical unicorn of a feature that does two things 1) rebalances across all accounts periodically such that the portfolio as a whole stays at a desired asset allocation but 2) adjusts asset location to place the highest yielding assets, e.g. stocks, preferentially in Roth accounts and if Roths are full to then put the remaining amount elsewhere.

If such a feature existed, everyone would be happy, right? :D

If I had a $20M portfolio and hired a wealth management team at Goldman Sachs or similar, what tool would THEY use to advise me about Roth conversions? :?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

neurosphere wrote: Sat Jan 22, 2022 11:24 am
randomguy wrote: Sat Jan 22, 2022 10:58 am No it is a limitation of i-orp not the advice. I-ORP is increasing your risk by holding more stocks (i.e. imagine you start 50/50 with all your bonds in tax deferred and then 3 years later you are 100/0). If instead of the normal simulator, you run the monte carlo one, you will notice a big divergence in results. There really isn't a great work around that I am aware of....
I'm think I know the answer to this but asking the question will help me anyway...

I-orp does not currently have the ability to fix an asset allocation of the portfolio as a whole, but rather only for each type of account (Roth, pre-tax, taxable) individually, correct?

But it does not ever tell you to adopt any particular asset allocation. I mean, it doesn't CHANGE your asset allocation from the parameters set except indirectly by shifting balances from one account to the other. For example, I can set my Roth at 80/20 and pretax at 20/80 and suppose that's 50/50 overall because the accounts are the same size. But after a massive Roth conversion, now all the assets are in the 80/20 Roth, and thus my allocation changed from my desired 50/50 to 80/20.

So what we need is a mythical unicorn of a feature that does two things 1) rebalances across all accounts periodically such that the portfolio as a whole stays at a desired asset allocation but 2) adjusts asset location to place the highest yielding assets, e.g. stocks, preferentially in Roth accounts and if Roths are full to then put the remaining amount elsewhere.

If such a feature existed, everyone would be happy, right? :D

If I had a $20M portfolio and hired a wealth management team at Goldman Sachs or similar, what tool would THEY use to advise me about Roth conversions? :?
Interesting take. i-ORP does let you decide a "Plan End" asset allocation for each account. I guess the question is, does it glide you smoothly towards your Plan End or does it make abrupt changes? The "asset location" table in the output would give guidance as to how it works because it shows you the ending account balances year by year.
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neurosphere
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Re: How I use I-ORP, and who shouldn't

Post by neurosphere »

LMK5 wrote: Sat Jan 22, 2022 11:30 am Interesting take. i-ORP does let you decide a "Plan End" asset allocation for each account. I guess the question is, does it glide you smoothly towards your Plan End or does it make abrupt changes? The "asset location" table in the output would give guidance as to how it works because it shows you the ending account balances year by year.
I believe it's a linear glide path.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
thor111
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Re: How I use I-ORP, and who shouldn't

Post by thor111 »

I thought you could use the "Plan Surplus" field to adjust the calculated "disposable income", but that field seems to be ignored today. Is that broken, or am I doing something wrong? Also, there doesn't seem to be an "Estate Summary" in the report. Any guidance would be appreciated.
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Re: How I use I-ORP, and who shouldn't

Post by randomguy »

neurosphere wrote: Sat Jan 22, 2022 11:24 am
randomguy wrote: Sat Jan 22, 2022 10:58 am No it is a limitation of i-orp not the advice. I-ORP is increasing your risk by holding more stocks (i.e. imagine you start 50/50 with all your bonds in tax deferred and then 3 years later you are 100/0). If instead of the normal simulator, you run the monte carlo one, you will notice a big divergence in results. There really isn't a great work around that I am aware of....
I'm think I know the answer to this but asking the question will help me anyway...

I-orp does not currently have the ability to fix an asset allocation of the portfolio as a whole, but rather only for each type of account (Roth, pre-tax, taxable) individually, correct?

But it does not ever tell you to adopt any particular asset allocation. I mean, it doesn't CHANGE your asset allocation from the parameters set except indirectly by shifting balances from one account to the other. For example, I can set my Roth at 80/20 and pretax at 20/80 and suppose that's 50/50 overall because the accounts are the same size. But after a massive Roth conversion, now all the assets are in the 80/20 Roth, and thus my allocation changed from my desired 50/50 to 80/20.

So what we need is a mythical unicorn of a feature that does two things 1) rebalances across all accounts periodically such that the portfolio as a whole stays at a desired asset allocation but 2) adjusts asset location to place the highest yielding assets, e.g. stocks, preferentially in Roth accounts and if Roths are full to then put the remaining amount elsewhere.

If such a feature existed, everyone would be happy, right? :D

If I had a $20M portfolio and hired a wealth management team at Goldman Sachs or similar, what tool would THEY use to advise me about Roth conversions? :?
You also need to discount the accounts (i.e. tax deferred is worth say 20% less than a Roth) but yes at a high level that is what everyone is wants.

I am guessing the Goldman Sachs teams suggests deferring taxes as long as possible and keeping your AUM as high as possible:)
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Re: How I use I-ORP, and who shouldn't

Post by Whakamole »

randomguy wrote: Sat Jan 22, 2022 10:58 am
LMK5 wrote: Fri Jan 21, 2022 8:47 pm I hear you. So far, the tool seems to be saying “get into equities” as much as possible in order to get your spendable income as high as possible. Interestingly, the usual advice to put 100% fixed income in tax deferred results in I-ORP doing its best to get all those funds out of there as quickly as possible and into whatever account has the equities in it. So does that mean that the “fixed income in tax deferred” advice deserves another look?

But I do agree that in the end you need to be comfortable with whatever plan you execute.
No it is a limitation of i-orp not the advice. I-ORP is increasing your risk by holding more stocks (i.e. imagine you start 50/50 with all your bonds in tax deferred and then 3 years later you are 100/0). If instead of the normal simulator, you run the monte carlo one, you will notice a big divergence in results. There really isn't a great work around that I am aware of....
I'd like support for a "tax-efficient investing" scenario, which can say "my portfolio is going to be 60/40, I prefer bonds held in tax-deferred and if not, tax-free."
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Re: How I use I-ORP, and who shouldn't

Post by randomguy »

LMK5 wrote: Sat Jan 22, 2022 11:17 am Yes, but then can you use the results as guidance? How do you interpolate the results with regard to your actual asset allocation and glide path?
To some extent the difference is likely to be pretty small for most cases especially for the first couple of years. Your TDA will likely grow slower than predicted and the Roth faster but for most people it just doesn't matter much. The difference will not be enough to suggest going to the top of the 32% bracket instead of the 24% in most cases.

You have to realize that i-orp plans aren't telling you what to do years out. They are sketching out a rough plan that will need to be adjusted as reality happens. If you plan on getting 8% returns for the first 5 years and get 12% or 4%, you will need to modify what you are doing to adapt. You are aiming to get to the good enough category instead of perfect...
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Re: How I use I-ORP, and who shouldn't

Post by randomguy »

Whakamole wrote: Sat Jan 22, 2022 12:04 pm
randomguy wrote: Sat Jan 22, 2022 10:58 am
LMK5 wrote: Fri Jan 21, 2022 8:47 pm I hear you. So far, the tool seems to be saying “get into equities” as much as possible in order to get your spendable income as high as possible. Interestingly, the usual advice to put 100% fixed income in tax deferred results in I-ORP doing its best to get all those funds out of there as quickly as possible and into whatever account has the equities in it. So does that mean that the “fixed income in tax deferred” advice deserves another look?

But I do agree that in the end you need to be comfortable with whatever plan you execute.
No it is a limitation of i-orp not the advice. I-ORP is increasing your risk by holding more stocks (i.e. imagine you start 50/50 with all your bonds in tax deferred and then 3 years later you are 100/0). If instead of the normal simulator, you run the monte carlo one, you will notice a big divergence in results. There really isn't a great work around that I am aware of....
I'd like support for a "tax-efficient investing" scenario, which can say "my portfolio is going to be 60/40, I prefer bonds held in tax-deferred and if not, tax-free."
Yes and it has been suggested several times and the author of the program doesn't feel like it is worth it. Even without tax discounting it would be nice to at least be able too explore what difference asset placement is likely to make.
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Re: How I use I-ORP, and who shouldn't

Post by Whakamole »

randomguy wrote: Sat Jan 22, 2022 12:07 pm
Whakamole wrote: Sat Jan 22, 2022 12:04 pm
randomguy wrote: Sat Jan 22, 2022 10:58 am
LMK5 wrote: Fri Jan 21, 2022 8:47 pm I hear you. So far, the tool seems to be saying “get into equities” as much as possible in order to get your spendable income as high as possible. Interestingly, the usual advice to put 100% fixed income in tax deferred results in I-ORP doing its best to get all those funds out of there as quickly as possible and into whatever account has the equities in it. So does that mean that the “fixed income in tax deferred” advice deserves another look?

But I do agree that in the end you need to be comfortable with whatever plan you execute.
No it is a limitation of i-orp not the advice. I-ORP is increasing your risk by holding more stocks (i.e. imagine you start 50/50 with all your bonds in tax deferred and then 3 years later you are 100/0). If instead of the normal simulator, you run the monte carlo one, you will notice a big divergence in results. There really isn't a great work around that I am aware of....
I'd like support for a "tax-efficient investing" scenario, which can say "my portfolio is going to be 60/40, I prefer bonds held in tax-deferred and if not, tax-free."
Yes and it has been suggested several times and the author of the program doesn't feel like it is worth it. Even without tax discounting it would be nice to at least be able too explore what difference asset placement is likely to make.
It's too bad - it means i-ORP isn't going to give me good advice. Either it is overly aggressive in getting everything out of tax-deferred, or it underestimates/overestimates what the expected return of my accounts are and uses that in its calculations.
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Re: How I use I-ORP, and who shouldn't

Post by Exchme »

LMK5 wrote: Sat Jan 22, 2022 11:30 am I guess the question is, does it glide you smoothly towards your Plan End or does it make abrupt changes? The "asset location" table in the output would give guidance as to how it works because it shows you the ending account balances year by year.
Yes, it's linear, but the previous posts just underscore that the results are not actionable unless you use the same allocation in each account.
neurosphere wrote: Sat Jan 22, 2022 11:24 am So what we need is a mythical unicorn of a feature that does two things 1) rebalances across all accounts periodically such that the portfolio as a whole stays at a desired asset allocation but 2) adjusts asset location to place the highest yielding assets, e.g. stocks, preferentially in Roth accounts and if Roths are full to then put the remaining amount elsewhere.

If such a feature existed, everyone would be happy, right?

If I had a $20M portfolio and hired a wealth management team at Goldman Sachs or similar, what tool would THEY use to advise me about Roth conversions?
When there were no year by year modeling tools that handled the case of tax efficient asset location (bonds preferentially in tax deferred, stock preferentially in taxable or Roth) while holding the portfolio level asset allocation constant, then we were all stuck without a tool that really handled our situation. For 2022, both RPM and Pralana Gold handle the tax efficient asset allocation case, so I would use I-orp with equal allocation in all accounts to quickly get interesting ideas (say using Roth to keep income low to get an ACA credit in the early years or continuing to do Roth conversions after RMDs start up to the tax bracket/IRMAA tier the RMD put you in) and then use one of the other tools to confirm. Often I-orp's findings are applicable and are things I might not think of on my own.
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LeeMKE
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Re: How I use I-ORP, and who shouldn't

Post by LeeMKE »

When there were no year by year modeling tools that handled the case of tax efficient asset location (bonds preferentially in tax deferred, stock preferentially in taxable or Roth) while holding the portfolio level asset allocation constant, then we were all stuck without a tool that really handled our situation. For 2022, both RPM and Pralana Gold handle the tax efficient asset allocation case, so I would use I-orp with equal allocation in all accounts to quickly get interesting ideas (say using Roth to keep income low to get an ACA credit in the early years or continuing to do Roth conversions after RMDs start up to the tax bracket/IRMAA tier the RMD put you in) and then use one of the other tools to confirm. Often I-orp's findings are applicable and are things I might not think of on my own.
+1 Exchme

Use the tool, learn what it is telling you, confirm with other tools, act or don't act. Your choice. For most folks, the end results will not be life altering. And for those of us that are in a sweet spot, this tool is important to improve our outcomes.
The mightiest Oak is just a nut who stayed the course.
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

Exchme wrote: Sat Jan 22, 2022 12:53 pm
LMK5 wrote: Sat Jan 22, 2022 11:30 am I guess the question is, does it glide you smoothly towards your Plan End or does it make abrupt changes? The "asset location" table in the output would give guidance as to how it works because it shows you the ending account balances year by year.
Yes, it's linear, but the previous posts just underscore that the results are not actionable unless you use the same allocation in each account.
neurosphere wrote: Sat Jan 22, 2022 11:24 am So what we need is a mythical unicorn of a feature that does two things 1) rebalances across all accounts periodically such that the portfolio as a whole stays at a desired asset allocation but 2) adjusts asset location to place the highest yielding assets, e.g. stocks, preferentially in Roth accounts and if Roths are full to then put the remaining amount elsewhere.

If such a feature existed, everyone would be happy, right?

If I had a $20M portfolio and hired a wealth management team at Goldman Sachs or similar, what tool would THEY use to advise me about Roth conversions?
When there were no year by year modeling tools that handled the case of tax efficient asset location (bonds preferentially in tax deferred, stock preferentially in taxable or Roth) while holding the portfolio level asset allocation constant, then we were all stuck without a tool that really handled our situation. For 2022, both RPM and Pralana Gold handle the tax efficient asset allocation case, so I would use I-orp with equal allocation in all accounts to quickly get interesting ideas (say using Roth to keep income low to get an ACA credit in the early years or continuing to do Roth conversions after RMDs start up to the tax bracket/IRMAA tier the RMD put you in) and then use one of the other tools to confirm. Often I-orp's findings are applicable and are things I might not think of on my own.
"Equal allocations in all accounts" and equal allocation for "Plan End" allocations or do you use some thing else for Plan End?

Question: When running the Monte Carlo simulation, the median amount available for spending is about 35% less than the spendable income I get when running the regular simulation. Is that common?
Exchme
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Joined: Sun Sep 06, 2020 3:00 pm

Re: How I use I-ORP, and who shouldn't

Post by Exchme »

LMK5 wrote: Sun Jan 23, 2022 8:20 am
Exchme wrote: Sat Jan 22, 2022 12:53 pm
LMK5 wrote: Sat Jan 22, 2022 11:30 am I guess the question is, does it glide you smoothly towards your Plan End or does it make abrupt changes? The "asset location" table in the output would give guidance as to how it works because it shows you the ending account balances year by year.
Yes, it's linear, but the previous posts just underscore that the results are not actionable unless you use the same allocation in each account.
neurosphere wrote: Sat Jan 22, 2022 11:24 am So what we need is a mythical unicorn of a feature that does two things 1) rebalances across all accounts periodically such that the portfolio as a whole stays at a desired asset allocation but 2) adjusts asset location to place the highest yielding assets, e.g. stocks, preferentially in Roth accounts and if Roths are full to then put the remaining amount elsewhere.

If such a feature existed, everyone would be happy, right?

If I had a $20M portfolio and hired a wealth management team at Goldman Sachs or similar, what tool would THEY use to advise me about Roth conversions?
When there were no year by year modeling tools that handled the case of tax efficient asset location (bonds preferentially in tax deferred, stock preferentially in taxable or Roth) while holding the portfolio level asset allocation constant, then we were all stuck without a tool that really handled our situation. For 2022, both RPM and Pralana Gold handle the tax efficient asset allocation case, so I would use I-orp with equal allocation in all accounts to quickly get interesting ideas (say using Roth to keep income low to get an ACA credit in the early years or continuing to do Roth conversions after RMDs start up to the tax bracket/IRMAA tier the RMD put you in) and then use one of the other tools to confirm. Often I-orp's findings are applicable and are things I might not think of on my own.
"Equal allocations in all accounts" and equal allocation for "Plan End" allocations or do you use some thing else for Plan End?

Question: When running the Monte Carlo simulation, the median amount available for spending is about 35% less than the spendable income I get when running the regular simulation. Is that common?
Yes, as long as the starting values equal each other and the ending values equal each other, the starting values can differ from the ending values.

As for Monte Carlo in I-orp, I have never tried that feature, so I have no insight other than I would expect the median to be below the arithmetic average as the average is going to be much more affected than the median by some spectacular return cases. But I agree that 35% deviation between the two is surprising.
LMK5
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

Exchme wrote: Sun Jan 23, 2022 12:11 pm
LMK5 wrote: Sun Jan 23, 2022 8:20 am
Exchme wrote: Sat Jan 22, 2022 12:53 pm
LMK5 wrote: Sat Jan 22, 2022 11:30 am I guess the question is, does it glide you smoothly towards your Plan End or does it make abrupt changes? The "asset location" table in the output would give guidance as to how it works because it shows you the ending account balances year by year.
Yes, it's linear, but the previous posts just underscore that the results are not actionable unless you use the same allocation in each account.
neurosphere wrote: Sat Jan 22, 2022 11:24 am So what we need is a mythical unicorn of a feature that does two things 1) rebalances across all accounts periodically such that the portfolio as a whole stays at a desired asset allocation but 2) adjusts asset location to place the highest yielding assets, e.g. stocks, preferentially in Roth accounts and if Roths are full to then put the remaining amount elsewhere.

If such a feature existed, everyone would be happy, right?

If I had a $20M portfolio and hired a wealth management team at Goldman Sachs or similar, what tool would THEY use to advise me about Roth conversions?
When there were no year by year modeling tools that handled the case of tax efficient asset location (bonds preferentially in tax deferred, stock preferentially in taxable or Roth) while holding the portfolio level asset allocation constant, then we were all stuck without a tool that really handled our situation. For 2022, both RPM and Pralana Gold handle the tax efficient asset allocation case, so I would use I-orp with equal allocation in all accounts to quickly get interesting ideas (say using Roth to keep income low to get an ACA credit in the early years or continuing to do Roth conversions after RMDs start up to the tax bracket/IRMAA tier the RMD put you in) and then use one of the other tools to confirm. Often I-orp's findings are applicable and are things I might not think of on my own.
"Equal allocations in all accounts" and equal allocation for "Plan End" allocations or do you use some thing else for Plan End?

Question: When running the Monte Carlo simulation, the median amount available for spending is about 35% less than the spendable income I get when running the regular simulation. Is that common?
Yes, as long as the starting values equal each other and the ending values equal each other, the starting values can differ from the ending values.

As for Monte Carlo in I-orp, I have never tried that feature, so I have no insight other than I would expect the median to be below the arithmetic average as the average is going to be much more affected than the median by some spectacular return cases. But I agree that 35% deviation between the two is surprising.
Just so I'm clear are you saying that:
1) Allocation percentages in all account types should be equal, such as 50/50 or 60/40 for all accounts?
2) When you say "starting values," are you saying that even though 70% of total assets may be in tax deferred, in i-ORP it's best to split the total account values equally among tax deferred, Roth, and taxable? In other words, each account type has 33.33% of total assets?
3) Should "Plan End" percentages be the same as starting values or should they be something else?
Exchme
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Re: How I use I-ORP, and who shouldn't

Post by Exchme »

LMK5 wrote: Sun Jan 23, 2022 1:30 pm Just so I'm clear are you saying that:
1) Allocation percentages in all account types should be equal, such as 50/50 or 60/40 for all accounts?
2) When you say "starting values," are you saying that even though 70% of total assets may be in tax deferred, in i-ORP it's best to split the total account values equally among tax deferred, Roth, and taxable? In other words, each account type has 33.33% of total assets?
3) Should "Plan End" percentages be the same as starting values or should they be something else?
Sorry, I didn't communicate. I didn't mean to refer to asset values, those are what they are. I was just referring to the stock/bond allocations. Regardless of where you actually hold your bonds vs. stocks, always use the average at the plan start or plan end for the allocation in all of the accounts (Taxable, Roth, Tax Deferred).

To keep me from miscommunicating further, a simple example may help. If your average allocation at the start is 60/40 stock/bond, then use that same value for each account type at the start. If your target was, say, 50/50 at Plan End, then use that for each account type for Plan End. That will give you a reasonable answer.
retire2022
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Re: How I use I-ORP, and who shouldn't

Post by retire2022 »

Op

I have not read the entire thread, but I found FICalc to be a better product because I did not need to figure out the decimals, or thousands

check out my analysis

https://calculator.ficalc.app?additiona ... lioPercent
LMK5
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Re: How I use I-ORP, and who shouldn't

Post by LMK5 »

Exchme wrote: Sun Jan 23, 2022 7:11 pm
LMK5 wrote: Sun Jan 23, 2022 1:30 pm Just so I'm clear are you saying that:
1) Allocation percentages in all account types should be equal, such as 50/50 or 60/40 for all accounts?
2) When you say "starting values," are you saying that even though 70% of total assets may be in tax deferred, in i-ORP it's best to split the total account values equally among tax deferred, Roth, and taxable? In other words, each account type has 33.33% of total assets?
3) Should "Plan End" percentages be the same as starting values or should they be something else?
Sorry, I didn't communicate. I didn't mean to refer to asset values, those are what they are. I was just referring to the stock/bond allocations. Regardless of where you actually hold your bonds vs. stocks, always use the average at the plan start or plan end for the allocation in all of the accounts (Taxable, Roth, Tax Deferred).

To keep me from miscommunicating further, a simple example may help. If your average allocation at the start is 60/40 stock/bond, then use that same value for each account type at the start. If your target was, say, 50/50 at Plan End, then use that for each account type for Plan End. That will give you a reasonable answer.
Got it. Thanks.
Silk McCue
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Re: How I use I-ORP, and who shouldn't

Post by Silk McCue »

retire2022 wrote: Sun Jan 23, 2022 7:22 pm Op

I have not read the entire thread, but I found FICalc to be a better product because I did not need to figure out the decimals, or thousands

check out my analysis

https://calculator.ficalc.app?additiona ... lioPercent
FiCalc and I-ORP are very different tools. I don’t think that you can even compare the two as they have very different purposes. You claim it is “ better product because I did not need to figure out the decimals, or thousands”. Really?

Cheers
buckeye7983
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Re: How I use I-ORP, and who shouldn't

Post by buckeye7983 »

Exchme wrote: Sun Jan 23, 2022 7:11 pm
LMK5 wrote: Sun Jan 23, 2022 1:30 pm Just so I'm clear are you saying that:
1) Allocation percentages in all account types should be equal, such as 50/50 or 60/40 for all accounts?
2) When you say "starting values," are you saying that even though 70% of total assets may be in tax deferred, in i-ORP it's best to split the total account values equally among tax deferred, Roth, and taxable? In other words, each account type has 33.33% of total assets?
3) Should "Plan End" percentages be the same as starting values or should they be something else?
Sorry, I didn't communicate. I didn't mean to refer to asset values, those are what they are. I was just referring to the stock/bond allocations. Regardless of where you actually hold your bonds vs. stocks, always use the average at the plan start or plan end for the allocation in all of the accounts (Taxable, Roth, Tax Deferred).

To keep me from miscommunicating further, a simple example may help. If your average allocation at the start is 60/40 stock/bond, then use that same value for each account type at the start. If your target was, say, 50/50 at Plan End, then use that for each account type for Plan End. That will give you a reasonable answer.
Hi Exchme-

Just for further clarification- When using i-ORP or 2022 Pralana Gold asset allocation mode 1, are you saying Taxable, Tax Deferred, and Roth should all have the same stock/bond allocation? It seems to me it is only necessary to have the same stock/bond allocation in Tax Deferred and Roth to avoid distortions in Roth conversion planning (that is, actual stock/bond allocation can be used for Taxable account without causing distorted results). Thanks for your thoughts!
Exchme
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Re: How I use I-ORP, and who shouldn't

Post by Exchme »

buckeye7983 wrote: Sun Jan 23, 2022 8:36 pm Hi Exchme-

Just for further clarification- When using i-ORP or 2022 Pralana Gold asset allocation mode 1, are you saying Taxable, Tax Deferred, and Roth should all have the same stock/bond allocation? It seems to me it is only necessary to have the same stock/bond allocation in Tax Deferred and Roth to avoid distortions in Roth conversion planning (that is, actual stock/bond allocation can be used for Taxable account without causing distorted results). Thanks for your thoughts!
Correct, for two reasons. If the allocations differ, the portfolio's total asset allocation will wander away from whatever you set for a target as the stocks will grow faster than bonds. Also, Roth conversions will be incorrectly favored if you do the common thing of holding your bonds in tax deferred. That is, the programs will see the Roth conversion as moving money from slow growth in tax deferred to fast growth in Roth and will unfairly report a huge benefit to doing Roth conversions.

That's why the Mode 2 for Pralana Gold was a big step up in sophistication, allowing the allocation to be reset in each account year by year to keep the portfolio allocation on track with the priority for which account keeps stocks vs. bonds set by the user. If you use Mode 1 in Pralana, then to approximate Mode 2, you would need to manually reallocate each account every few years yourself - that's what I did last year and it's a ridiculous amount of work. I and others whined to the author to make it easier, so he added Mode 2. RPM also has the ability to keep the portfolio allocation on track while putting bonds in tax deferred.
HansT
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Re: How I use I-ORP, and who shouldn't

Post by HansT »

Exchme wrote: Sun Jan 23, 2022 12:11 pm
LMK5 wrote: Sun Jan 23, 2022 8:20 am
Question: When running the Monte Carlo simulation, the median amount available for spending is about 35% less than the spendable income I get when running the regular simulation. Is that common?
As for Monte Carlo in I-orp, I have never tried that feature, so I have no insight other than I would expect the median to be below the arithmetic average as the average is going to be much more affected than the median by some spectacular return cases. But I agree that 35% deviation between the two is surprising.
This is a great question. Let's answer it.

Monte Carlo simulation is one way to understand and quantify Sequence of Returns risk. On the spectrum of lies/damned lies/statistics, MC lives toward the right end, and the skeptical reader is encouraged to question the parameters that generated the MC simulation's paths. Welsh gives some good detail here, and rightly reminds us that ...
  1. The generated values should be historically reasonable.
  2. Values generated for annual asset returns need to take into account the fact that the sequential annual asset return values are not independent of each other in that down years tend to follow preceding down years and likewise for up years.
I am not going to critique his algorithm in detail. Instead I'll validate it.

Testing SOR Risk with Backtesting

Bogleheads provides all we need to assess SOR risk ourselves: https://www.bogleheads.org/wiki/Simba%2 ... preadsheet

I started with "Dilbert's Portfolio" (simple stock/bond blend) and tweaked to allow setting the start year and stock %. End year is 30y later. Let's compare the mean annual return vs. the maximum safe withdrawal rate(MWR). (The latter is an analogue for what i-ORP provides for MC simulation runs.)

Here is one simple back test for a 60/40 portfolio:

Code: Select all

INPUTS
	start year	1991
	stock %		60%

OUTPUTS
	end year	2021
	mean return	9.91%
	MWR		8.07%
	MWR/mean	81.4%
What this means:
  • From 1991-2021, a 60% stock portfolio returned an average of 9.91% each year.
  • However the MWR was only 8.07%. Thus the MWR was 81.4% of the mean return.
So now let's try this more generally: for starting years 1927 - 1991, and for stock percentages from 0% to 100%. The results:

Image

How to read this table:
  • We are stress-testing our decumulation strategy by replaying it through actual historical returns sequences.
  • We don't know what the future will hold, so let's try lots of different historical replays.
  • As the bulk of the table indicates, most of the time our MWR is meaningfully less than the average annual return. This is why simple, deterministic draw-down testing is optimistic, essentially assuming no returns risk.
  • The bottom row of "average" MWR/mean-return ratios gives a way to answer the question "In general, how much lower should my withdrawal rate be with Monte Carlo simulation compared to deterministic?"
How to interpret the results: Lots to unpack here.
  1. Look at average MWR/mean_return (last row) for 60% stock: 65%% I.e. exactly the 35% reduction that LMK5 found with MC simulation! I have to believe that's coincidence, but it gives an excellent example validation of Welch's MC simulation.
  2. We see stark evidence of bad years to retire with a stock-heavy portfolio; e.g. 1929, the 1960s, etc. And these are in fact the most severe demonstrations of SOR risk. E.g. starting 1969, a 100% stock portfolio returned 14.03% on average each year (yay!) but MWR is only 3.92% (see: 4% rule), for a MWR/mean ratio of 28%. The several early years of terrible returns destroyed the retirements of those people.
  3. The 40y bull market in fixed income drives in the bottom-left green area, where bond-heavy portfolios' MWR is ~90% of the mean return: almost no SOR risk here!
  4. The other averages suggest that it's "safer" to carry bonds than stocks. That would be an inaccurate takeaway for several reasons, most notably that this table shows the MWR/mean_return which is very different from mean_return. (To quote McClung, page 27: "It's notable in the historical data that a poor sequence of returns coupled with high volatility doesn't overpower the advantages of high returns, but it comes close.")
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FiveK
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Re: How I use I-ORP, and who shouldn't

Post by FiveK »

HansT wrote: Sun Jan 30, 2022 10:14 am This is a great question. Let's answer it. ...
HansT, nice work!
hvaclorax
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Re: How I use I-ORP, and who shouldn't

Post by hvaclorax »

OP,
Great post. I’ve been using iORP for about 8 years. Very helpful in many ways.
Life is what happens while you are making other plans.
I think the aggressive Roth strategy yields not enough benefits for the risk. Risk is lower stock returns, heirs not needing $5million when we die and they are in their 50s or later at that point. Divorce, lower tax rate for heirs, early death, not wanting to work for health reasons mental or physical. Tax rate isn’t knowable 15 or more years on. For them or me. So if the plan is to reach for the 1-2% extra terminal estate value have at it. My family including heirs want DW and I to enjoy the fruits of our labor. Not to lock Roth away for some distant and unknown future.
Yes I’ve drunk the cool-aid and I have plenty of Roth but recently realized I need $100k plus SS to live as I’ve planned before retirement. So stop I will stop Roth conversion at $2.5 million.
Yes, the average return with conversion is better but confidence intervals should allow for what life throws at my family and myself. If I am building a new house, I would tell the architect what I want and not let him tell me how nice my costlier mansion could be if left behind.
Respectfully HVAC
smitcat
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Re: How I use I-ORP, and who shouldn't

Post by smitcat »

hvaclorax wrote: Sat Feb 12, 2022 9:29 pm OP,
Great post. I’ve been using iORP for about 8 years. Very helpful in many ways.
Life is what happens while you are making other plans.
I think the aggressive Roth strategy yields not enough benefits for the risk. Risk is lower stock returns, heirs not needing $5million when we die and they are in their 50s or later at that point. Divorce, lower tax rate for heirs, early death, not wanting to work for health reasons mental or physical. Tax rate isn’t knowable 15 or more years on. For them or me. So if the plan is to reach for the 1-2% extra terminal estate value have at it. My family including heirs want DW and I to enjoy the fruits of our labor. Not to lock Roth away for some distant and unknown future.
Yes I’ve drunk the cool-aid and I have plenty of Roth but recently realized I need $100k plus SS to live as I’ve planned before retirement. So stop I will stop Roth conversion at $2.5 million.
Yes, the average return with conversion is better but confidence intervals should allow for what life throws at my family and myself. If I am building a new house, I would tell the architect what I want and not let him tell me how nice my costlier mansion could be if left behind.
Respectfully HVAC
"So stop I will stop Roth conversion at $2.5 million."
Certainly, a very significant amount to convert.
hvaclorax
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Re: How I use I-ORP, and who shouldn't

Post by hvaclorax »

smitcat wrote: Sun Feb 13, 2022 9:49 am
hvaclorax wrote: Sat Feb 12, 2022 9:29 pm OP,
Great post. I’ve been using iORP for about 8 years. Very helpful in many ways.
Life is what happens while you are making other plans.
I think the aggressive Roth strategy yields not enough benefits for the risk. Risk is lower stock returns, heirs not needing $5million when we die and they are in their 50s or later at that point. Divorce, lower tax rate for heirs, early death, not wanting to work for health reasons mental or physical. Tax rate isn’t knowable 15 or more years on. For them or me. So if the plan is to reach for the 1-2% extra terminal estate value have at it. My family including heirs want DW and I to enjoy the fruits of our labor. Not to lock Roth away for some distant and unknown future.
Yes I’ve drunk the cool-aid and I have plenty of Roth but recently realized I need $100k plus SS to live as I’ve planned before retirement. So stop I will stop Roth conversion at $2.5 million.
Yes, the average return with conversion is better but confidence intervals should allow for what life throws at my family and myself. If I am building a new house, I would tell the architect what I want and not let him tell me how nice my costlier mansion could be if left behind.
Respectfully HVAC
"So stop I will stop Roth conversion at $2.5 million."
Certainly, a very significant amount to convert.
hvaclorax
Posts: 598
Joined: Mon Nov 21, 2016 5:01 pm

Re: How I use I-ORP, and who shouldn't

Post by hvaclorax »

hvaclorax wrote: Sun Feb 13, 2022 2:15 pm
smitcat wrote: Sun Feb 13, 2022 9:49 am
hvaclorax wrote: Sat Feb 12, 2022 9:29 pm OP,
Great post. I’ve been using iORP for about 8 years. Very helpful in many ways.
Life is what happens while you are making other plans.
I think the aggressive Roth strategy yields not enough benefits for the risk. Risk is lower stock returns, heirs not needing $5million when we die and they are in their 50s or later at that point. Divorce, lower tax rate for heirs, early death, not wanting to work for health reasons mental or physical. Tax rate isn’t knowable 15 or more years on. For them or me. So if the plan is to reach for the 1-2% extra terminal estate value have at it. My family including heirs want DW and I to enjoy the fruits of our labor. Not to lock Roth away for some distant and unknown future.
Yes I’ve drunk the cool-aid and I have plenty of Roth but recently realized I need $100k plus SS to live as I’ve planned before retirement. So stop I will stop Roth conversion at $2.5 million.
Yes, the average return with conversion is better but confidence intervals should allow for what life throws at my family and myself. If I am building a new house, I would tell the architect what I want and not let him tell me how nice my costlier mansion could be if left behind.
Respectfully HVAC
"So stop I will stop Roth conversion at $2.5 million."
Certainly, a very significant amount to convert.
So I will stop when tIRA reaches 2.5 which will allow 100k withdrawal. Sorry thought that was clear Hvac
Exchme
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Re: How I use I-ORP, and who shouldn't

Post by Exchme »

If you have that kind of money, I would spend a few $ to look at the strategy in something besides I-orp. I-orp is a starter tool and gives interesting ideas, but it has several shortcuts on taxes, so I wouldn't use it for making final plans. The tool I use most is Pralana Gold, I've seen others talk about Max-Fi, there are others.
ebot
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Re: How I use I-ORP, and who shouldn't

Post by ebot »

Is I-ORP working? For me it has been showing "The Optimal Retirement Planner is offline" for the last week or so
tibbitts
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Re: How I use I-ORP, and who shouldn't

Post by tibbitts »

ebot wrote: Sun Nov 20, 2022 4:48 pm Is I-ORP working? For me it has been showing "The Optimal Retirement Planner is offline" for the last week or so
I believe there have been discussions here for months about it being offline and the author no longer maintaining it.
Silk McCue
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Re: How I use I-ORP, and who shouldn't

Post by Silk McCue »

tibbitts wrote: Sun Nov 20, 2022 5:07 pm
ebot wrote: Sun Nov 20, 2022 4:48 pm Is I-ORP working? For me it has been showing "The Optimal Retirement Planner is offline" for the last week or so
I believe there have been discussions here for months about it being offline and the author no longer maintaining it.
Correct. Here’s the thread started in June.

viewtopic.php?p=6725983#p6725983

Cheers
Panamapat
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Re: How I use I-ORP, and who shouldn't

Post by Panamapat »

i-orp.com seems to be back and running as of today 12/5/2022

:happy
Silk McCue
Posts: 8954
Joined: Thu Feb 25, 2016 6:11 pm

Re: How I use I-ORP, and who shouldn't

Post by Silk McCue »

Panamapat wrote: Mon Dec 05, 2022 10:38 am i-orp.com seems to be back and running as of today 12/5/2022

:happy
Thanks. It’s been up since at least 11/23.

Cheers
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