My first result from the new RPM beta with overall asset allocation

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Exchme
Posts: 1335
Joined: Sun Sep 06, 2020 3:00 pm

My first result from the new RPM beta with overall asset allocation

Post by Exchme »

Great thanks to users DSBH and BigFoot48 for their hard work to add portfolio level asset allocation to the new beta of the Retiree Portfolio Model. I just ran my first comparison case and the latest beta worked great for me.

It works with stocks vs. bonds only and tries to put bonds in tax deferred first. Then once tax deferred is full of bonds, you have a choice whether to keep the stock in taxable and put the excess bonds in Roth or the other way around.

What I did to run the program:

I selected "c" for the Class method for return calculations in Setup!E76.

Then in Setup!E77, I selected whether to keep stocks in taxable first and then Roth "t-r" or the other way around "r-t", or ignore the new feature and enter "o". I had evaluated that previously and found "t-r" was better for my situation (excess bonds in Roth, minimizing tax drag in taxable).

Then I entered the overall portfolio allocation between stocks and bonds in Setup!E99 and Setup!F99.

You can change allocation targets once just below those inputs, perhaps as you get more conservative in your old age.

That's really all you need to do to take advantage of the new power at your fingertips. The program calculates the stocks vs. bonds in each account to meet your overall portfolio allocation and optimization rules. It then finds the returns for each account for each year.

A couple notes:
By itself, putting bonds in tax deferred and stocks elsewhere is a stealth increase in stock allocation (as explained in the BH Wiki). Remember the government owns a share of your tax deferred account, so when you load it with bonds and still keep your overall asset allocation the same, you've actually increased the government's allocation to bonds and your allocation to stocks without really meaning to do that. Your accounts grow faster, but it's really just an increase in stock allocation. So don't misuse the new found power of the tool. But when combined with Roth conversions, optimizing asset location is very important. You may get a slight amount of extra stocks in your high Roth conversion case, but it's not a lot of difference when compared to closely related cases with somewhat more or less Roth conversions.

For my results, I wanted a year by year simulation of the 10 year heir liquidation period and all those taxes taken into account, so I just created a new file, transferred end of life account balances over, made some guesses about heirs' finances. I liquidated the t-IRA by doing Roth conversions and equal sized Roth withdrawals each year in section 10, Optional Roth conversions.

When paying for Roth conversions out of taxable, remember that will mean extra capital gains taxes to sell appreciated assets in taxable. Because of the complexity of capital gains, RPM doesn't understand that, so I made some outside calculations to estimate the capital gains taxes due to asset sales and added those taxes as extra expenses on the Detail sheet. Since once RMDs start, I have no more withdrawals from taxable, that's an all too real cost associated with Roth conversions.

In this first quick look, I compared the benefit of my previously identified optimum amount of Roth conversions vs. no Roth conversions. Even after accounting for heirs' taxes, the Roth conversion benefit was trivial (and this was after 30 years in our lives + 10 years of heir liquidation to compound). So it's back to the drawing board to see if there is a lower amount of conversions that make sense.

This is why the new feature is so important, the optimum Roth conversion may be much less than derived by other methods.
PaulieLilly
Posts: 93
Joined: Sun May 31, 2020 12:06 pm

Re: My first result from the new RPM beta with overall asset allocation

Post by PaulieLilly »

Thanks for the Heads Up!
As a recent early retiree pondering future Roth conversions, I've been working extensively with the previous RPM version. As I honed in on my best options, I recognized the limitations of controlling my AA became a significant issue. My work-around was to trend & average my AA based off the year-by-year Summary Account Balances, calculate the necessary adjustments, then go back and manually override the Return Rates as-needed in rows 22-27 on the Details tab. I've been able to effectively maintain my overall 60/40 AA target in this manner and the results are enlightening.

As I'm good (not great) with Excel, I'm not sure of the efficacy of my work-around so I'm looking forward to trying the new AA Beta version.
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