Introduction
Pralana is a sophisticated high-fidelity financial model designed to model your financial future in as little or as much detail as you desire and then provide useful outputs that will provide insight into the range of possible outcomes to help you make decisions. This manual is intended to help you get to know Pralana and learn how to get the most out of its extensive capabilities. You can use the tool to create a base plan and then go through a process of iterative refinement to examine alternatives, explore what-ifs, and finally arrive at your working plan. Going forward from there, you can easily revisit, review, and continually refine your plan on a periodic basis. If you have a Platinum subscription to Pralana, you are restricted to a single plan that supports three independent scenarios. If you have a Platinum Pro subscription you can have multiple plans, presumably one per client.
Here is a sequence diagram to help familiarize you with this process for a given plan:
You begin by introducing yourself and your family, providing some basic assumptions, then entering the details of your financial assets, income and expenses to establish a Base Plan. Then, you can do an initial analysis of your Base Plan to gain insight into the viability of your plan based on the inputs you have provided, including the probability that you will not out-live your money. Depending on your analysis results, you might need to go back to the previous step and make some adjustments. Once that is accomplished, you can use Pralana to do various optimizations and refinements to arrive at your working plan. Thereafter, it is easy to come back at any time to revisit and refine your plan and do further analysis. So, Pralana is organized to facilitate the process of building your initial plan, doing the initial analysis, doing further analysis and optimizations to arrive at your working plan, and to revisit and modify your working plan as you gain more information or your goals change. The sections that follow will help you understand how to do this.
Key Features of Pralana
The following is a list of the key features of Pralana, most of which tend to set it apart from other tools.
Provides a high degree of user control over key modeling assumptions, including marital status, life expectancy and inflation.
Models income and expense streams in as much or as little detail as desired. Income streams can include employment, pensions, windfalls, Social Security, annuities and miscellaneous others, and Expense streams can include property and rental property, children and college educations, healthcare, charitable giving (including QCDs), and miscellaneous others. The modeling of these income and expense streams deals with the nuances typical of these streams rather than simple lists of income and expenses. Social Security benefits, including spousal benefits, are calculated as a function of your and your spouse’s claiming ages and benefits at Full Retirement Ages.
Enables you to differentiate essential from non-essential expenses and, during your retirement years, employs a variety of variable spending strategies to dynamically adjust your non-essential spending as a function of your portfolio’s performance.
Models cash, taxable, tax-deferred, and tax-free accounts while allowing you to specify and optimize withdrawal order and to plan scheduled withdrawals from any account. RMDs are modeled in accordance with SECURE 2.0.
Models your portfolio based on underlying asset classes and allocations using deterministic, Monte Carlo (randomized) and historical rates of return, multiple asset allocation algorithms and appropriate taxation of account growth.
Models inherited traditional and Roth IRAs and the associated RMDs.
Models Health Savings Accounts and qualified tuition (529) plans.
Models personal and investment loans.
Calculates federal, state, FICA and NIIT taxes and presents approximations of the relevant IRS forms for any selected year so you can see how the various results are derived.
Calculates Medicare Part B premiums and IRMAA surcharges and Medicare Part D IRMAA surcharges.
Calculates ACA subsidies as a function of your MAGI and Second Lowest Cost Silver Plan premiums.
Models custom or optimized Roth conversions over a specified period while limiting annual conversions based on user-specified marginal tax brackets, capital gains brackets, IRMAA brackets and FPL multiples (to maintain your ACA subsidies).
Calculates the effective buying power of your portfolio as a function of its distribution across accounts with differing taxation properties.
Presents its outputs in robust tabular and graphical forms so you can see for yourself exactly what is going on year by year. This includes detailed income, expenses, cash flow, and balance sheet statements, asset allocation, and the ability to click on many of the values in its tabular projections to see more details into how the value was derived.
Employs multiple analysis techniques to generate a range of possible outcomes based on your detailed inputs. Deterministic projections are useful for comparing alternatives and getting an idea of where you are headed based on fundamental assumptions; however, since deterministic projections fail to account for the effects of market volatility, Monte Carlo and historical analyses are incorporated to provide a range of likely outcomes based on a simulation of market volatility. All these techniques are integrated within the tool to present you with a comprehensive view of the future.
Enables you to examine the long-term effects of specific historical market return sequences so you can test your plan against the worst bear markets that have ever actually occurred.
Facilitates your decision-making process by making it easy for you to define and compare major alternatives as well as small variations.
Models survivor scenarios
Models term and cash value life insurance
Includes advanced capabilities such as consumption smoothing, Social Security start age optimization, and earliest safe retirement date calculations.
Metric ‘MRI’ provides a look inside the calculation logic for some tabular production metrics, such as Social Security income, account growth and balances, Healthcare and Medicare costs, Roth conversion amounts, etc.
Produces PDF outputs to enable printing and sharing of your plan.
Best Practice for Using Pralana
Pralana is a complex tool with many capabilities, and it can be a bit overwhelming for a newcomer. All the tool’s capabilities are explained in this manual, but this section is here to give you a roadmap to assist you in working your way through the complex array of capabilities to develop and refine your plan. In doing so, this paragraph uses some terminology that is yet to be explained, so we recommend that you just scan it now to get the big picture and then come back and re-read it as you gain a working knowledge of the tool.
Use Quick Start to model a basic plan before delving into a detailed plan. Do this by going to the Build > Get Started > Quick Start page and entering your basic information, but do not sweat the details at this point. Just get some approximate numbers in there and then visit the Build > Income, Build > Expenses, and Build > Financial Assets pages to see how the inputs you provided via the Quick Start page have been entered automatically by the tool. Then, examine the Review > Tabular Projections and ensure that you understand what they are telling you before adding more detail to your plan.
Then, go back to the various Build pages and elaborate the details of your financial assets, income, and expenses. If you have not yet started taking your Social Security (SS) benefits, use your judgment to select SS start ages for you and your spouse; you can refine this later. Go back to the Review > Tabular Projections and ensure that you understand what they are telling you. Get happy with deterministic analysis results before getting into more advanced analyses like Monte Carlo or Historical.
Use default values for standard deviation and then try a Monte Carlo analysis. Seek to understand what it is telling you about likely long-term outcomes. If you are seeing a success rate of less than, say, 90%, you should probably review your inputs and seek adjustments to raise your success rate to a level that seems acceptable to you. Some options to consider are delaying your retirement, adjusting your Social Security (SS) benefit start age(s), taking on some part-time work in retirement, reducing your spending before and/or after retirement, and modifying your investment strategy. You can iterate between Build and Review and Analyze as long as necessary to revise your plan until it is viable. If you want to evaluate different standard deviations for your asset classes, you can do it without leaving the Analyze > Monte Carlo Analysis page. So, just go over to the Standard Deviations tab to make that change and then go back to the Monte Carlo Analysis tab and re-run the analysis to see the distribution of results. If your standard deviations are larger than the default values, you can expect to see wider blue bands depicting a wider range of likely outcomes.
Then, maybe run a Historical analysis and see what it is telling you about likely long-term outcomes. You can also do a historical sequence analysis to see how your plan would perform if one or more actual historical returns and inflation sequences were to be repeated. As a good example, try a starting year of 1965, which is the start of a particularly bad sequence of returns.
If you do these things and are feeling good about your plan, then you are ready to move on to other forms of analysis. If you have not already started taking SS benefits, you might want to try SS Optimization to see what the tool says about optimum SS start ages for you and your spouse. It might be that you could take benefits earlier than you originally planned with only minimal long-term effects, or that you could substantially improve your long-term outlook by delaying a few years.
Before investigating alternate retirement spending strategies, you need to determine when you are going to retire. This does not necessarily mean ceasing to work altogether, but it could mean leaving your primary career and taking on some part-time work or switching to a lower-paying but more rewarding or less stressful line of work for several years. You can use Pralana to analyze the date on which this transition is going to occur by entering an “R” (for retirement) in the Stop field of your primary employment and entering another “R” in the Start field of a secondary line of work, and then request the tool to determine the earliest value of R that results in a 90% success rate. You do that via the Analyze > Earliest Safe Retirement Analysis page. When you get that date, go back to the Build > Get Started > Scenario Assumptions page and modify your retirement date and then run another Monte Carlo analysis to verify that your plan has roughly a 90% success rate. At this point, you can elect to stay with the computed retirement date or change it to any date of your choosing. In any case, with your retirement date(s) established, you could then move on to investigation of alternate (variable) spending strategies. These strategies are modeled such that your annual non-essential spending is adjusted as a function of the performance of your portfolio, just as you would undoubtedly do in real life. Starting on your retirement date, these strategies replace the non-essential expenses you have specified on the Build > Expenses pages with variable spending values. You can select the desired strategy from a pick list on the Analyze > Spending Strategies page, enter the associated parameters (such as spending rate), and then re-examine deterministic, Monte Carlo and historical analysis results. Pralana supports three simultaneous scenarios, so you could make all three scenarios identical except for the spending strategy. That way, you could do side-by-side comparisons of three different strategies via the Analyze > Scenario Comparison page. For the selected strategy, the tool will show you recommendations for non-essential spending for a 5-year window.
Optimizing Roth conversions is a function of your asset allocation, the amount of money in your tax-deferred accounts, your marginal tax rate, whether you are on ACA health insurance and getting subsidies, and your IRMAA bracket, so it probably makes sense to get most of the rest of your plan firmed up before starting to explore these. Then, you can evaluate and optimize Roth conversions by setting maximum IRMAA and LTCG bracket limits and FPL multiples for ACA insurance to maintain your subsidies and then let Pralana find the marginal tax brackets to otherwise limit the annual amount of Roth conversions to maximize your long-term effective savings balance. With that analysis done, you can revisit your variable spending strategy settings to reassess its spending calculations to maximize your annual non-essential spending amount.
At this point you will have established your working plan. All that remains is to fly your plan and come back and revisit it on a periodic basis. As your fundamental assumptions change, unexpected life events occur, and as actual market returns replace your estimates, you can easily revisit the Build pages to adjust your inputs and then return to the Review and Analyze pages to see the results.
Structure and Navigation
Pralana is organized into four or five major interrelated sections, depending upon whether you have a Platinum (for individuals) or Platinum Pro (for advisors) subscription: Advisors, Build, Review, Analyze, and More. The Advisor section enables advisors to create and manage plans for multiple clients. The Build section is what you use to create and modify your plans. The Review section is what you use to examine the tool’s detailed outputs, create PDF reports and to compare one plan to another. The Analyze section is what you use to do various forms of analysis and optimization on your plans. The More section provides access to miscellaneous information such as guidance on using the tool and release notes. A fixed navigation menu at the top of every page contains links to these major sections and when you hover over any of these links a submenu will appear that provides links to the related subsections, organized as follows you can see in this screenshot:
Advisors
The Advisors section contains two subsections:
Advisor Profile, where you can specify your name, certifications and contact information to be included in Reports produced for your clients
Client Plans, where you can add, manage and delete plans associated with multiple clients
The Advisor link and subsections will only be visible to Platinum Pro users.
Build
The Build section is where you provide the detailed inputs to establish your financial plan, and it contains these subsections:
Get Started, which is where you go to begin defining your financial plan
Quick Start, My Family, Scenario Assumptions, Manage My Data, Import PRC Excel Export File
Financial Assets, which is used to identify your accounts, characterize your portfolio, and identify any personal or investment loans you may have
Management, Accounts, Portfolios, Scheduled Withdrawals, SEPPs, Personal Loans and Investment Loans
Income, which is used to define your income streams in as much detail as you desire
Employment, Pensions, Social Security, Windfalls, Annuities and Other Income
Expenses, which is used to define your expense streams in as much detail as you desire
Personal Property, Rental Property, Children, Healthcare, Long-Term Care, Charity, Miscellaneous, Phased, Term Life Insurance and Cash Value Life Insurance
Review
The Review section contains these subsections that provide a detailed output of your financial plan:
Tabular Projections, showing detailed tabular results based on deterministic analysis
Graphical Projections, showing detailed graphical results based on deterministic analysis
Reports, showing Plan Inputs Report, Plan Results Report (both of which will create PDFs) as well as Tax Forms and related tax information.
Here is a screenshot of the Review pop-up menu:
Analyze
The Analyze section contains these subsections:
Monte Carlo Analysis, which enables you to perform and examine the results of a Monte Carlo analysis of your plan
Historical Analysis, which enables you to perform and examine the results of an Historical analysis of your plan
Spending Strategies, which enables you to explore various alternate spending strategies, including Consumption Smoothing
Roth Conversions, which enables you to explore and optimize Roth conversions
Optimize Social Security Start Age, which enables you to determine the optimum Social Security start age for yourself and your spouse
Optimize Withdrawal Order, which enables you to determine the optimum withdrawal order among your various accounts
Compute Earliest Safe Retirement Date, which enables you to compute the earliest retirement date that yields a 90% probability that you will not outlive your money
Here is a screenshot of the Analyze pop-up menu:
More
The More section contains links to other Pralana features which will evolve over time.
Manage My Data: provides access to features which allow you share your plan, backup, restore and delete your data from Pralana.
Alerts: shows various general site announcements and plan-specific messages generated by Pralana to make you aware of potential issues with your data. It may also contain information about known, unresolved bugs and site outages.
Feedback: shows feedback items you have submitted and any responses that have been provided by the Pralana team
Release Notes: Shows recent past and pending future site change.
Resources includes tabs for:
General Resources contains credits and acknowledgements as well as financial planning resources.
FAQ has answers to frequently asked questions.
How Do I… provides a brief explanation of how to do an assortment of things with Pralana that a typical user is likely to want to do and/or know more about.
PRC Excel vs Online summarizes differences between Pralana Gold (Excel) and Pralana Online.
Privacy Notice
Terms of Use
Other items such as site preferences and beta features.
Features in the More Menu
Manage My Data
Selecting Manage My Data from the More menu will take you to a page with six tabs, as shown here:
See the Data Security section for information about what data is provided to Pralana and how it is secured as well as best practices you can use to protect your data.
Backup This Plan
You may use this feature to extract and download your Pralana plan input data to your local computer. The downloaded file will be encrypted and may contain security measures to prevent unauthorized use by others or use in violation of the Pralana Terms of Use for your subscription level. The backup is intended for short term use. See notes on the Backup page and the limitations below in the Restore section, below.
Restore Plan from Backup
You may use this feature to restore your Pralana plan using a previously downloaded Pralana backup file. We will make reasonable, best efforts to maintain backward compatibility for restoring backup files as Pralana is updated over time. The financial projections made by Pralana using a recovered backup file may differ from the projections made at the time the backup was made to due changes in the calculation algorithms. You will be notified when restoring if the plan’s final year savings for each plan scenario match or differ from the corresponding amounts at the time the backup was created. There are validations, which may vary over time, to assure the backup and restore feature is being used within the Terms of Use. Currently, individual users may only restore a backup file if the Pralana plan code embedded in the backup file matches their current Pralana plan code.
Delete This Plan
At any time, you may use the Delete feature to immediately, permanently and irrevocably remove your plan data from the Pralana database. Your plan inputs will be deleted and replaced with a generic plan for a fictitious ‘Dick’ and ‘Jane’. See the Data Security section for more information. You may request the site administrators delete your Pralana username/account by emailing us at mail@pralanaconsulting.com.
Duplicate This Plan
Applicable only to Pralana Pro users, the Duplicate function creates a new plan identical to the currently selected plan. This enables you to establish a “template plan” as a starting point for creating new client plans.
Adopt a Plan from Someone Else
The Adopt function enables you to adopt a plan created by another user, transferring ownership of that plan. For example, a financial advisor may create a plan for a client and then allow the client to adopt the plan. Or a person may create their own plan, then allow their financial advisor to adopt the plan (rather than temporarily sharing the plan). In either case, both client and advisor must have a Pralana subscription.
To adopt a plan, the current plan owner provides the plan code and a secret word to the recipient who enters that info on the Adopt page and simply clicks the ‘Adopt Plan’ button. While there are well over 1 billion possible plan codes, the secret word requirement adds an extra layer of security. The adoption process effectively changes the ownership of the plan and only the owner of a plan can delete that plan. Advisors can never upown more than 25 plans at any given time.
Important:
If the person adopting the plan is an individual user, the adopted plan will irrevocably replace the person’s existing. If the recipient is an advisor, adopting a plan will simply add the newly adopted plan to the advisor’s list of plans.
The existing owner of the plan will no longer have access to the plan, after it is adopted. If the existing owner is an individual user (not an advisor), a new plan with default inputs will be created for the existing owner.
The existing owner may choose to create a Pralana backup of the plan before providing the adoption information to the recipient. This back up may be later restored (see Restore for important information).
Tools
Compare Scenario Inputs
If you have at least 2 scenarios, this feature lets you compare the inputs between 2 of your scenarios. It will show you the categories of inputs that are the same and, if different, which items are different. Optionally, you may choose to see differences only. This is useful if the 2 scenarios were identical and you subsequently made changes. It highlights the changes.
Change Log
The Change Log shows the most recent edits to your plan. Use this to look back to see old and new values for each edit. The log will periodically be pruned to contain only the most recent 100 edits. Certain actions, such as restoring a plan from backup or copying or deleting a scenario may delete log items prior to that action.
Search Metrics
This feature allows you to do a keyword search of the column names in all tabular projections. The results will show a list of matching columns, with the associated Page Name, Column Name, and other useful information along with a link to that tabular projection.
Alerts
Pralana generates user alerts to make you aware of announcements from
the develop, announcements regarding the completion of imports from
Pralana Gold and any related import errors, and error conditions that
have been detected while running the model on your data. Whenever one or
more alerts, other than ‘Success’ (green) are present with, you will see
one of these icons 
(‘Info’, ‘Warning’,
‘Error’) in the status bar. The color represents the highest alert
severity level, if there are multiple alerts. To access your alerts, you
can click that icon, or you can click “Alerts” in the More menu.
The Alerts page organizes alerts by category and within category by scenario, if applicable. As with the icon in the status bar, the color of the alert indicates the severity: green = success, blue=information, yellow/orange=warning, red=error. The categories are:
General alerts applicable to all users. Usually these announce new features or provide other important site news.
Plan alerts specific to your plan which may include:
Feedback alerts: Let you know one of your feedback items has been updated by the Pralana staff.
Import alerts: Give you information about an issue encountered when importing data from your PRC Gold export file.
Input alerts: Warn you about an issue with one of your inputs.
Calculation alerts: Warn you about an issue encountered when calculating your scenario projections.
Error alerts: Warn you about an error that has occurred.
Other alerts: Other types of alerts.
Most alerts first appear on either the applicable page or on all pages. You can dismiss alerts by clicking on the circled ‘x’ icon in the top right corner. Dismissed alerts will appear on the Alerts page where you can click the circled ‘x’ again to Delete Forever.
Some alerts will re-appear if the condition that created them occurs again. Other alerts will automatically disappear if the condition that created them no longer exists.
Many alerts that affect multiple scenarios and/or projection years will be listed once and the affected scenario(s) and/or year(s) will be listed in the body of the alert.
Feedback
Here you can see any feedback items you have created and the staff response. You may edit your feedback item to add an update or change the category or status. Currently, Pralana does not support adding pictures/screenshots to feedback items.
To create a new feedback item, use the Feedback link on the right side of the page header.
Release Notes
This page shows ‘pending’ and recent site changes.
Resources
This page contains userful information about Pralana for our subscribers. Content may be added or changed from time to time.
General Resources
Contains useful information and resources for Pralana subscribers as well as credits for third party data we may use.
FAQ
Contains the answers to frequently asked questions from our subscribers.
How Do I…
Contains user manual links to commonly discussed retirement topics and how to address them in Pralana.
PRC Excel vs Online
For subscribers of Pralana’s Excel-based products, this discusses some of the differences between PRC Excel and Pralana Online.
Feature Voting
Allows subscribers to cast up to 6 votes for a short list new features to help the Pralana team prioritize these features. There are many more feature and usability requests, not listed on this page, that may also be completed over time. Note: Feature Voting may be moved to the Tools page in an upcoming release.
Beta Features
This page may provide access to features for testing and feedback.
Other Things You Need to Understand
Icons and Scenario Selection Control
Icons in the Upper Right Corner of Every Page
The Scenario Summary icons. By hovering your cursor over these icons, a pop-up box will show you the final portfolio values at the end of the modeling period, as you can see in the screenshot below. If the portfolio is in positive territory, the scenario icons will be green; otherwise, they will be red.
An alert icon (‘Info’, ‘Warning’, ‘Error’)
appears whenever Pralana has detected one or more conditions to which
you should be alerted. Just click the icon to see a complete list of the
alerts.
The 
icon can be clicked to copy data from one scenario to
another. Once clicked, you will see a detailed selection box through
which you can specify exactly what data is to be copied.
The 
icon can be clicked to open the user manual in another
browser tab to enable you to switch back and forth between the manual
and Pralana.
The Feedback link can be clicked to provide feedback to the Pralana development team. Here is an example of the pop-up you get after clicking:
Please see that note at the bottom of the pop-up that says you are authorizing the Pralana staff to access your plan, if necessary, to investigate.
Chart Icons
The 
icon can
be clicked to enable the zoom mode to enable you to look at a portion of
a graphic in more detail. When the blue bar is visible on the right side
of the icon, zoom is enabled; if the blue bar is not visible, zoom is
not activated. The 
icon can be clicked to return to the normal
zoom level.
Other Icons
The 
icon can be clicked to bring up the corresponding section
of the user manual.
You can hover over the 
icon to see more information about the
related field(s).
The 
icon can be clicked to delete the associated row or column
of data.
Pralana models three scenarios simultaneously but in most cases the
inputs and outputs from only one of these scenarios will be visible at a
time. You can select the active scenario via radio buttons like these:
.
Dynamic Number of Entries for Most Inputs
In most cases, Pralana does not limit you to a set number of line items,
such as the number of accounts, other income streams, phased expense
items, properties, and so on. Instead, it shows you the items currently
entered and provides a “new” row or column through which you create
additional items. To create a new item, just populate the “new” row or
column, where the required inputs appear with a light blue background.
Once those fields have been populated, the new item will immediately be
added to the table where you can continue filling in the remaining
fields. To delete any line item, just click the at the bottom
of the column or the right of the row.
Pralana Supports a Single Browser Tab per User
Please be aware that Pralana supports only a single browser per user; if you create a duplicate tab in your browser and then attempt to access different views into Pralana simultaneously, you will encounter errors as it is not currently designed to support this mode of operation. Please refrain from this and restrict your usage to a single tab.
Future Dollars vs Today’s Dollars
Pralana enables you to view its tabular and graphical projections in terms of either future dollars or today’s dollars, as specified by radio buttons like this:
Pralana uses the term “today’s dollars”, but it is technically identical to the term “present value” of a future income, expense, or account balance.
Borrowing from Wikipedia:
“Present value is the concept that states that an amount of money today is worth more than that same amount in the future. In other words, money received in the future is not worth as much as an equal amount received today.
Inflation* is the rise in prices of goods and services over time. If you receive money today, you can buy goods at today’s prices. As inflation causes the price of goods to rise in the future, your purchasing power decreases. Consequently, money that you don’t spend today could be expected to lose value in the future by some implied annual rate (which could be the inflation rate or the rate of return if the money were invested).*
The present value formula discounts the future value to today’s dollars by factoring in the implied annual rate from either inflation or the investment rate of return.
Present value (PV) = FV / (1+r)n
Where FV = future value, r = rate of return, and n = number of periods.
Here is an example:
Let’s say you have the choice of being paid $2,000 today earning 3% annually or $2,200 one year from now. Which is the best option?
Using the present value formula, the calculation is $2,200 / (1 +. 03)1 = $2,135.92
PV = $2,135.92, or the minimum amount that you would need to be paid today to have $2,200 one year from now. In other words, if you were paid $2,000 today and it could earn a 3% interest rate, the amount would not be enough to give you $2,200 one year from now. Therefore, you would be better off to take the $2,200 one year from now.
A comparison of present value with *`future value`_* (FV) best illustrates the principle of the time value of money and the need for charging or paying additional risk-based interest rates. Simply put, the money today is worth more than the same money tomorrow because of the passage of time. Future value can relate to the future cash inflows from investing today’s money, or the future payment required to repay money borrowed today.
Future value is the value of a current *`asset`_* at a specified date in the future based on an assumed rate of growth. The FV equation assumes a constant rate of growth and a single upfront payment left untouched for the duration of the investment. The FV calculation allows investors to predict, with varying degrees of accuracy, the amount of profit that can be generated by different investments.
Present value is the *`current value of a future sum`_* of money or stream of cash flows given a specified rate of return. Present value takes the future value and applies a discount rate or the interest rate that could be earned if invested. Future value tells you what an investment is worth in the future while the present value tells you how much you’d need in today’s dollars to earn a specific amount in the future.
The Bottom Line: Present value is a way of representing the current value of future cash flows, based on the principle that money in the present is worth more than money in the future. Present value is used to value the income from loans, mortgages, and other assets that may take many years to realize their full value. Investors use these calculations to compare the value of assets with very different time horizons.”
Income Examples
Now, let’s look at some income-related examples in Pralana. In the shot below, inflation is 3%. Bob earns $125,000 with a 3% annual COLA and Kit earns $40,000 with a 3% annual COLA. The shot on the left shows this in terms of today’s dollars and the shot on the right shows it in terms of future dollars. They have expenses of $75,000 that they expect to increase at the rate of inflation, or 3%. In terms of today’s dollars, both Bob’s and Kit’s incomes are flat and so are their annual expenses. Meanwhile, note that their Total Savings is increasing each year, thus signifying that its present value and its buying power is increasing each year.
Below is a similar example, except that in this case Kit has a fixed income with no annual adjustments. As you can see, in terms of today’s dollars her income is diminishing every year even though it is constant in terms of future dollars. This income stream is losing buying power every year. Meanwhile, Bob’s income is keeping up with inflation and maintaining its buying power.
Now, let’s take a look at a different example where Dick and Jane are retired and have no income. They do still have expenses, so they have a negative cash flow each year. The shot on the left shows their balance sheet in terms of today’s dollars, and the shot on the right shows their balance sheet in terms of future dollars. You can infer from this that the buying power of their savings is decreasing each year but that is not evident when looking only at the balance sheet on the right, thus illustrating the benefit of seeing the data in terms of today’s dollars, or its present value.
Expense Examples
Now let’s look at some expense-related examples. In the shot below, you can see that general inflation is 3% and there are no add-on increases for healthcare, long-term care, college, etc. We have specified phased expenses of $75,000 starting in 2024 and LTC expenses of $125,000 starting in 2031. Here is a shot showing those projected expenses in terms of today’s dollars.
Now let’s include 2% LTC-specific inflation on top of general inflation, as you can see here:
Now let’s see what effect this has on the projection of expenses:
In contrast to the case with no LTC add-on inflation, this case does have some LTC add-on inflation and, therefore, LTC expenses are increasing in terms of today’s dollars while Phased expenses remain constant as in the prior example. This is the expected result of an expense that increases faster than the general inflation rate since that rate is the basis for converting future dollars into today’s dollars.
Unscheduled Withdrawals and Iterative Tax Calculations
Pralana performs detailed income tax calculations and includes those taxes in annual expenses which are subsequently used to determine annual cash flow. When that cash flow is negative, it results in a subsequent unscheduled transfer (i.e., a withdrawal) from one or more of the taxable savings, tax-deferred savings or Roth savings accounts, depending upon the withdrawal priorities specified by the user on the Financial Assets/Management page and the balances of those accounts.
Any such unscheduled transfers from tax-deferred accounts are a taxable event; however, the taxes for the year in question will have already been calculated and iterative tax calculations are required to properly determine the total taxes for this case. Pralana is designed to do these iterative calculations but that capability is not enabled in the releases to date. The reason for this is to enable direct comparisons to PRC2023 and PRC2024 (Excel) which do not perform iterative tax calculations. Consequently, for now, those transfers are treated as ordinary income in the next year, and that will be reflected in the next year’s AGI just as they are in the Excel tool.
Any such unscheduled transfer from taxable savings that results in long term capital gains is a taxable event and is handled the same as unscheduled transfers from tax-deferred savings.
Long term effects of this design simplification on the accuracy of Pralana’s projections have been studied and they are minimal; however, this may affect the optimization of Roth conversions in the near term.
Getting Started
If you were a PRC2023 or PRC2024 Gold user, you can initialize Pralana by importing a PRC2023 or PRC2024 export file. To do that, go to the Build > Get Started > Import PRC Excel Export File page and click the button. That will bring up a dialog box where you can select that export file from one of the folders on your local computer. Click OK and the upload and import process will be initiated. A pop-up message will appear when it is finished. Once you dismiss that, you should be good to go. The Build pages and subpages are where you will find most of your imported data, so a good starting point would be to peruse those pages to see how your data is represented in Pralana. Once you become familiar with that, you can proceed to the Review pages to examine the tabular and graphical projections generated from your data with the deterministic analysis method. From there you can proceed to the Analyze pages to consider doing further analysis of your plan.
When you are ready to start working on your plan, you can just visit each of the links at the top of every page, moving from left to right, and enter your data. Start with your basic assumptions and then progress to the Build menu to specify your income, expenses, and financial assets. Once those have been entered, you can visit the Review pages to examine tabular and graphical projections generated with your data to see how your plan works going forward.
Quick Start
The Quick Start page is intended to minimize the intimidation factor for first-time Pralana users by making the entry of basic assumptions, financial assets, income, and expenses similar to those of a typical, free retirement calculator. Whatever you enter on the Quick Start page will be automatically populated into the normal Pralana input pages where you can elaborate them with additional detail when you are ready. This page just enables you to get started quickly and easily so you can see what Pralana does with your inputs and see the types of outputs it produces with your data.
So, if you are a first-time user of Pralana tools, we recommend making your initial data entry on this page, then perusing the various Build (Financial Assets, Income and Expenses) pages to see how your data appears, and then visit the Review pages. There, you can see the deterministic projections made with your data, including detailed breakdowns of your income, your expenses, the calculated taxes, and the account balances on a year-by-year basis, on both a tabular and a graphical basis.
As you are ready, you can then start adding more detail to elaborate your plan, and there will probably not be any further need for the Quick Start page, so you can just ignore it; however, its contents will automatically be updated to reflect your subsequent inputs via the normal Build pages.
Tips for Using Pralana
The icon can be clicked to bring up the corresponding section
of the user manual.
You can hover over the icon to see more information about the
related field(s).
The icon can be clicked to delete the associated row or column
of data.
The icon can be clicked to enable the zoom mode to enable you
to look at a portion of a graphic in more detail. When the blue bar is
visible on the right side of the icon, zoom is enabled; if the blue bar
is not visible, zoom is not activated. Click the icon again to
deactivate it.
The icon can be clicked to return to the normal zoom level.
Pralana models three scenarios simultaneously but in most cases the
inputs and outputs from only one of these scenarios will be visible at a
time. You can select the active scenario via radio buttons like these:
.
Basic Plan Information
Start by clicking the Basic Plan Information tab which will bring up a page with three simple sections, as shown below. In the About Me/Us tab, simply enter your marital status, your first name and your spouse’s first name (if applicable), your date(s) of birth. In the Retirement & Life Expectancy tab, enter the date you plan to retire from full-time employment and your life expectancy, and then do the same for your spouse, if applicable. In the Other Assumptions section, enter your state of residence and the expected inflation rate. Your inputs in this section will be replicated on the Build > Get Started > My Family and Scenario Assumptions pages.
Initial Account Balances
You can click on the Your Accounts tab to tell us about your accounts and their balances as of January 1 in the plan’s starting year. You can specify up to 10 accounts (cash, taxable investment, your tax-deferred, spouse tax-deferred, Roth, 529 college savings plan or health savings account) and for each of these you just need to give it a description and balance at the start of the plan. All the accounts within a given account type will be consolidated and modeled as one by Pralana and hereafter the term “account”refers to the consolidated accounts and not your actual accounts. Inherited accounts are modeled by Pralana, but they are not part of the Quick Start capability. Your inputs in this section will appear on the Build > Financial Assets > Account Initial Balances page. Here is an example:
Account Rates of Return
For each account type, you can then specify the expected average real rate of return (i.e., the return after inflation) in the fields to the right of the account balances fields. Your inputs in this section will appear on the Build > Financial Assets > Simple Portfolio Modeling page.
Your Income and Expenses
Finally, you can click on the Your Income and Expenses tab and define your employment, pension, and Social Security income streams, and your expenses. Windfall income, annuities, and Other sources of income are modeled by Pralana, but they are not part of the Quick Start capability. Likewise, property (personal and rental) expenses, Children’s expenses (including college educations and the associated funding), Healthcare expenses (including ACA and Medicare), are modeled by Pralana, but they are not part of the Quick Start capability. So, do not spend a lot of time trying to model these items accurately via the Quick Start page; maybe just enter some “placeholder” values. You will be able to model them in high fidelity when you are ready to move on to the primary Build pages (i.e., Financial Assets, Income, and Expenses).
Here is an example:
Quick Start Employment Income
You can specify multiple employment income streams for both you and your spouse. For each stream, you can specify the start/stop by either year or age. Then enter the annual amount in terms of today’s dollars and the annual increase amount. If you make contributions to a tax-deferred retirement plan, you can specify those here. Finally, if you receive company matching contributions to your tax-deferred retirement plan, you can also specify those here.
Your employment income inputs will appear on the Build > Income > Employment page. From there, you can add more detail regarding these income streams, if desired.
Quick Start Pension Income
You can specify multiple pension income streams for both you and your spouse. For each stream, you can specify the start by either year or age. Then enter the annual amount in terms of then-year (future year) dollars, along with the expected annual increase amount. Your pension income will appear on the Build > Income > Pension page. From there, you can add more detail regarding your pension income, if desired.
Quick Start Expenses
You can specify your expenses as line items in a simple table. Just enter the expense description, first year and last year (you can leave last year blank if the expense continues indefinitely), and amount in today’s dollars. Your expenses will appear on the Build > Expenses > Miscellaneous page.
My Family
This page contains two sections through which you introduce yourself and your family to the tool: About Me/Us and Children.
About Me/Us
The following items are global in nature and apply to all your scenarios.
Plan Start Year: Enter the year you wish the modeling to begin.
Marital Status: Specify your marital status via the pull-down menu.
Your First Name: Entering your name here will enable Pralana to include it in column headers to help you see the data that is unique to you.
Your Date of Birth: Enter your birthdate in the MM/DD/YYYY format.
Spouse’s First Name: This field will be hidden if a Marital Status of “Single” is selected. Entering your spouse’s name here will enable Pralana to include it in column headers to help you see the data that is unique to your spouse.
Spouse’s Date of Birth: This field will be hidden if a Marital Status of “Single” is selected. Enter spouse’s birthdate in the MM/DD/YYYY format.
Children and Other Dependents
This section allows you to enter your children and others for whom you provide support, their birth year (or the first year you will be providing support) and whether they are dependents for tax purposes.
For those you designate as a dependent for tax purposes, Pralana will, by default, assume tax dependent status for years in which the person is age 18 or younger -or- is in college and under age 24.
Children with gap year(s) between high school and college.
Children in college beyond age 23.
Disabled children or others who qualify as dependents for Federal tax purposes.
Notes:
The “Final Year as a Dependent” field is ignored if you do not check “Is this person a dependent for tax purposes?”
Persons who qualify as your dependents for Federal tax purposes will be assumed to also qualify as dependents for applicable state taxes.
Scenario Assumptions
The first section of this page allows you to specify your assumptions relative to inflation and how it will change over the modeling period.
Add/Delete Scenarios
On this page you can add up to a total of three independent scenarios, each of which has a complete set of assumptions, financial assets, income, and expenses. When you first start using Pralana it will only have one scenario and the active scenario will not be shown on the other input pages (because there’s only one scenario); however, as you add scenarios on this page, radio buttons will become visible on the other pages that enable you to select the scenario you wish to work on (i.e., the active scenario). When you first add a new scenario, it will be initialized to be identical to your first scenario (Scenario 1). You can also use this control to delete a scenario; however, Scenario 1 cannot ever be deleted.
Retirement & Life Expectancy
On this page you can identify the date(s) on which you and your spouse plan to cease full-time employment, or your retirement date. Additionally, you can identify the life expectancy for you and your spouse. Pralana will assume you and your spouse die on the birthday on which the specified Life Expectancy is reached.
The retirement dates you specify here are used by Pralana in four ways:
It identifies the point in time where you MAY lose access to group health insurance premiums. This is used by the healthcare expenses page to assist in determining which time periods are applicable in your case.
It identifies the point in time where withdrawals from tax-deferred and Roth accounts become fair game for maximizing your standard of living and, hence, is used by Pralana’s consumption smoothing algorithm.
It identifies the point in time where non-essential spending (as explicitly specified on the Non-essential and Miscellaneous Expenses pages) can be replaced by variable spending based on your inputs on the Analyze > Spending Strategies page.
It can be used to identify the date on which most income streams can be started or stopped. If you enter the “wild card” character “R” in the start or stop field of an income stream, Pralana will use the retirement date specified here to start or stop that income stream.
If you have already stopped working full time, just enter January 1 of the starting year.
General Inflation Rate and Add-ons
On this page you can identify your assumptions about various forms of inflation, with different values for multiple different periods. Here is a screenshot:
General Inflation Rates
General Inflation Rate for Period 1: This is the general inflation rate that Pralana will use for deterministic calculations and Monte Carlo analyses. This rate will be in effect in the model’s starting year and will continue until and unless a different rate is specified for a second period.
General Inflation Rate for subsequent periods: If you wish to vary the inflation rate over the modeling period, you can do so by clicking entering the rate and start year for subsequent periods in the field labeled “New”.
Inflation Add-ons/Adjustments
You can also add some modifications to the General Inflation Rate. Below each add on, Pralana shows the total of your general rate plus the add-on applicable for that item. We may add additional inflation adjusters in the future.
Healthcare Costs: Healthcare costs will be inflated by the general inflation rate plus any adjustment that you enter here. Leave blank if you think healthcare costs will increase at the same rate as general inflation.
Long-Term Care (LTC) Insurance Costs: Long-term care expenses may be inflated by the general inflation rate plus any adjustment that you enter here. Note that for each long-term care expense you enter, you may choose whether to apply this LTC inflation add-on, your healthcare inflation add-on, or no inflation add-on.
College Expenses: College expenses will be inflated by the general inflation rate plus any adjustment that you enter here. Leave blank if you think college costs will increase at the same rate as general inflation.
Medicare Premiums: Medicare premiums will be inflated by the general inflation rate plus any adjustment that you enter here. Leave blank if you think Medicare premiums will increase at the same rate as general inflation.
Medicare IRMAA Income Limits: IRMAA income bracket limits will be inflated by the general inflation rate plus any adjustment you enter here. Enter a negative percentage if you think IRMAA income brackets will be inflated less than the general inflation rate, thus causing bracket creep over time.
Residence/Relocation
On this page you can identify your current state of residence and future plans to relocate to another state.
Year: The first row in the table is, by definition, your current state of residence and the year field will always be set to the model’s starting year. If you plan to relocate to a different state in the future, specify the year you plan to move in this field.
State: Pralana performs detailed state tax calculations for your state of residence, as specified here. This field contains a pull-down menu of the 2-letter state abbreviations, and you can just enter a blank if you live in a no-tax state.
Alternate State Tax Rate: State income taxes are particularly difficult to model, with 51 sets of rules (50 states plus the District of Columbia), so it is possible that the model is not always accurate for your case. Pralana state tax calculations ALWAYS use the standard deduction for your state, so that is one potential source of deviation between the model’s tax calculation and your actual taxes. If this algorithm does not seem to be calculating state taxes correctly for your case, you can use the alternative method provided on the Build > Get Started > Scenario Assumptions > Residence/Relocation page. Simply specify a rate that Pralana will multiply by the federal AGI to arrive at an estimate of your state income taxes. If you enter a value in this field, this alternative method will replace the detailed calculations.
Please note: If you do discover that Pralana is producing inaccurate values for the taxes in your state we will always welcome an email to provide us with the details so that we can continue to improve the model.
Local Tax Rate: This is the effective local tax rate in your geographical area. It will be multiplied by your Federal AGI to estimate your annual local taxes.
Tax Assumptions
Future Tax Rate Increases
Do you want Pralana to model an increase in federal income tax rates at some point in the future? Pralana will apply a tax increase of the percentage and starting in the year you specify across all income levels. Just leave this blank if you do not want Pralana to model a tax increase at some point in the future. Pralana uses 2024 tax tables and deduction/exemption limits. Thus its “reference year” is 2024. If the “Starting Year” on the Build > Get Started > My Family page is set for any year other than the “reference year”, “Starting Year” calculated taxes are adjusted based on the user-specified general inflation rate. Calculated taxes for all years after the “Starting Year” are increased based on the general inflation rate. Calculated taxes for the current year are considered as expenses in that year (not paid in arrears on April 15th of the following year, as is the customary reconciliation process). If you specify a tax rate increase, Pralana will calculate the taxes as described, and then multiply the result by (1+ the tax rate increase specified). For example, if you specify a 10% increase, Pralana will multiply the calculated taxes by 1.1 in the year the increase is to take effect and beyond.
Tax Cuts and Jobs Act of 2017 Sunset Year
TCJA of 2017 Sunset Year: The provisions of TCJA are approved through the year 2025 (its “sunset year”); however, this control allows you to specify the TCJA sunset year used by Pralana to enable you to do what-ifs with other dates.
FICA Assumptions
Do you want Pralana to model an increase in FICA tax rates at some point in the future? Pralana will apply a tax increase of the percentage and starting in the year you specify. Just leave this blank if you do not want Pralana to model a FICA tax increase at some point in the future. Any specified increase will be handled mathematically the same as described for federal income tax increases.
Import PRC Excel Export File
If you are PRC2023 or PRC2024 Gold user, you can initialize your Pralana plan by importing an export file from PRC2023 or PRC2024. To do this, just click the “Select and import your Pralana export.xlsx file”.
How Do I …?
This section poses and then answers some questions that we expect a typical user might ask.
Model my income and FICA taxes?
Pralana does detailed calculations of your federal and state income taxes and your FICA taxes automatically, so it is virtually transparent to you. You do not need to specify any tax rates other than for any applicable local taxes. FICA tax calculations are a function of your employment and/or self-employment income, and Federal income tax calculations are a function of current tax tables, your AGI, marital status, itemized deductions and exemptions or your standard deduction, and your long-term capital gains. State income tax calculations are a function of current state tax tables, your Federal AGI, marital status, and state deductions and exemptions. If you would like to see the details for a particular year, you can visit the Review > Reports > Tax Forms page to see renderings of the relevant IRS forms, but please note that Pralana is not TurboTax; these are approximations.
Alternative Minimum Taxes and Net Investment Income Taxes are also calculated automatically.
Model contributions to my 401k? Roth account?
You can model contributions to your tax-deferred account (401k or IRA) and your spouse’s tax-deferred account (401k or IRA) via the Employment Income tab on the Build > Income page. The Employment Income tab is associated with a particular employment income stream and you can specify that contributions be made to your tax-deferred account and your Roth account from this income stream. Similarly, you can specify that your employer makes matching contributions to your accounts. There are specific input field for each of these for each income stream which you specify in terms of today’s dollars and these contributions will be increased annually at the same rate as the associated income stream.
These contributions go directly into the tax-deferred or Roth accounts and result in a corresponding reduction to this employment income stream. You can specify these contributions for an employment income stream that has no value if you want to model these contributions using some other form of income and, in this case, the contribution will be treated as an expense in the corresponding year.
Specify the amount I plan to save each month?
Annual contributions to your retirement accounts (tax-deferred and Roth accounts) are modeled based on your inputs on the Build > Income > Employment page, where you simply specify the annual dollar amount in today’s dollars. This can include your contributions as well as any company-matching contributions you may receive, and these annual amounts will be adjusted at the same rate as the corresponding employment income stream.
You cannot specify your annual contributions to either your cash account or your taxable investment account. Instead, the tool calculates those contributions so that every single dollar is fully accounted for in each year of the modeling period regardless of your cash flow. As we all know, your income and your expenses are not necessarily constant and, consequently, your cash flow varies from year to year. When it is positive, that excess money is modeled as a deposit to your cash account. When it is negative, the deficit is modeled as a withdrawal from your cash account. But the cash account has ceiling (i.e., upper) and floor (i.e., lower) limits, set by you, that govern the flow of money between the cash account and your other accounts. If deposits would tend to cause the cash account balance to exceed the ceiling level, the excess amount will be deposited in your taxable investment account. If withdrawals would tend to cause the cash account balance to go beneath the floor level, these withdrawals will be taken from other accounts in accordance with the withdrawal priorities you have specified on the Build > Financial Assets > Management page. Please refer to the section on Modeling Your Accounts for further information.
Model a pension?
Pensions are modeled via inputs provided on the Build > Income > Pensions page. You can model pensions as a lump sum or as an annuity simply based on the start/stop times. If those times are the same, the pension will be modeled as a lump sum; otherwise, the pension will be modeled as an annuity. Other input parameters (some of which only apply to annuities) are the pension amount and any COLA percentage, the percentage that will be rolled over to a traditional IRA or a Roth IRA and the percentage that is to be treated as non-taxable. You can also model survivor characteristics, such as the percentage your spouse will receive after your death or a Certain & Continuous period.
You can use a “wild card” to specify the start of your pension while using the same “wild card” to specify the end of your full-time employment income stream. Then, you can do what-if exercises to investigate the long-range effect of moving your retirement date forward or backward. This can be done in one or two ways: 1) By clicking up/down arrows to vary your retirement start age on the Analyze > Sensitivities page (sorry, this feature is coming soon but not available in the early releases of Pralana) or 2) by simply running an analysis on the Analyze > Earliest Safe Retirement Analysis page which will do a Monte Carlo analysis to determine the earliest retirement date that still allows you to not die broke with a 90% chance of success.
Model college educations for my kids?
You can model college educations for your kids via your inputs on the Build > Expenses > Children page. This page enables you to specify pre-college expenses for each of your children as well as their college educations. You can specify when you expect each child to start college, how many years he or she will be in college, total costs per year, and how this will be funded. The funding options modeled by the tool are pay-as-you-go, student loan, or 529 plan.
Model the downsizing of my home when I retire?
Pralana models your personal property, including homes, cars and recreational vehicles and all associated mortgages, purchase costs, taxes, insurance, maintenance and operating expenses, and sales costs. This is done on the Build > Expenses > Personal Property page. For each property, you simply specify when it was (or will be) purchased and sold, its cost basis and/or present value, details related to current or future mortgages, as well as all purchase, operating and sale expenses. Given that, the tool will model the purchasing and sale of all these properties along with their operating costs while you own them, as well as long-term capital gains as appropriate.
So, modeling the downsizing of your home is easy. Just enter the details of your current home and when you plan to sell it, and the details of your future home and when you plan to buy it and whether you plan to pay cash or get a new mortgage. The proceeds from the sale of your current home will be treated as income in the year it is sold, and the expenses associated with the purchase of your new home will be expenses in the year it is purchased. In effect, the tool will use the proceeds from the sale to purchase the new home and any money left over will be deposited in your Cash account. If that deposit pushes the Cash account balance over a specified ceiling, the residual will be deposited in your regular (taxable) investment account. The details of all these transactions can be found on the Review > Tabular Projections pages.
Model a reverse mortgage?
Pralana models your personal property, including homes, cars and recreational vehicles and all associated mortgages, purchase costs, taxes, insurance, maintenance and operating expenses, and sales costs. This is done on the Build > Expenses > Personal Property page. For each property, you simply specify when it was (or will be) purchased and sold, its cost basis and/or present value, details related to current or future mortgages, as well as all purchase, operating and sale expenses. Given that, the tool will model the purchasing and sale of all these properties along with their operating costs while you own them, as well as long-term capital gains as appropriate.
With that information in place, Pralana can model a reverse mortgage on a home. This is done via the Reverse Mortgage tab on the Build > Expenses > Personal Property page. Just select the property on which you want to model a reverse mortgage from a pull-down menu and enter the details of the reverse mortgage and the tool will put it in place. Visit the section in the manual on Modeling My Expenses for more information.
Model rental properties, including cash-out refinancing?
Pralana models your rental property, including all associated mortgages, purchase costs, taxes, insurance, maintenance and operating expenses, improvements, sales costs, depreciation, and rental income. It can also model cash-out refinancing. This is done on the Build > Expenses > Rental Property page. For each property, you simply specify when it was (or will be) purchased and sold, its cost basis and/or present value, details related to current or future mortgages, as well as all purchase, operating and sale expenses. Given that, the tool will model the purchasing and sale of all these properties, operating costs, improvement costs, depreciation, and rental income while you own them, as well as long-term capital gains as appropriate.
Model ACA health insurance?
Pralana models ACA health insurance using your inputs provided on the Build > Expenses > Healthcare page. The modeling period is broken down into up to five different time periods that correspond to life phases, such as 1) you and your spouse are both working full-time, 2) only you or your spouse are working full-time, 3) neither you nor your spouse are working full-time, 4) only one of you is eligible for Medicare and 5) both of you are eligible for Medicare. For the first four of these periods, you can specify whether you have ACA health insurance. Then, if you do, you can specify the premium you pay for your policy as well as the cost of the Second Lowest Cost Silver Plan in your area. Based on that, your healthcare MAGI, and your family size, Pralana will determine your Premium Tax Credit if you are eligible and will subtract that from your healthcare expenses, including your ACA premiums and any out-of-pocket costs you specify.
Model Medicare for my healthcare when I become eligible?
You and your spouse will become eligible for Medicare upon reaching age 65 and Pralana can compute your Medicare Part B premiums (including IRMAA) and your Medicare Part D surcharges and then include those with your other healthcare-related expenses. This is all controlled via your inputs on the Build > Expenses > Healthcare page, which contains two sections:
The section at the top is where you indicate whether you want the tool to automatically calculate your Medicare premiums and surcharges. If so, and if you or your spouse are already on Medicare at the start of the modeling period or will go on Medicare within the first two years, there are data entry fields through which you will need to specify your healthcare-related MAGI for the prior two years. This is necessary because Medicare premiums and surcharges are based on your MAGI from two years in the past, and the tool has no other way to know those numbers unless you simply tell it.
The section at the bottom deals with the variations in healthcare expenses as a person transitions from their working years, through their early-retirement years and on into their Medicare years. The tool defines up to five time periods to cover these transitions in which your costs can vary dramatically, and Periods 4 and 5 are the Medicare periods. In the fields on these rows of the table, you can specify any insurance premiums over-and-above the automatically-calculated premiums and your expected out-of-pocket costs.
Model a QCD?
A Qualified Charitable Distribution, or QCD, can be specified via the Build > Expenses > Charity page. On this page, you can add as many rows as desired to model all your charitable donations. On any given row, the donation to a particular organization can be both a non-QCD and a QCD; if the donation begins prior to you turning age 59 ½, it will be treated as a non-QCD and when you reach age 59 ½, the donation will be treated as a QCD. A non-QCD is treated as an expense and is deductible as an itemized deduction. A QCD is not included in your expenses but, instead, results in a withdrawal from either your tax-deferred account or your spouse’s tax-deferred account and counts toward any RMDs that must be paid in the associated year. In other words, if you are making a QCD in the same year as an RMD, the calculated RMD amount will be reduced by the QCD amount. QCDs enable you to withdraw money from your tax-deferred account without a tax liability.
Define my current assets?
You define your current assets via the Build > Financial Assets > Account Initial Balances page. There, you will find four tabs for defining your accounts in these categories: Taxable Accounts, Retirement Accounts, Health Savings Accounts and 529 Plans, and Inherited Accounts. Just click on any tab to enter the associated details.
On the Taxable Accounts tab, you can list your Cash accounts (such as your bank accounts) and their current balances, and your taxable investment accoEarunts and their current balances, cost basis and any capital loss carryover.
On the Retirement Accounts tab, you can list your Roth Accounts and their current balances and traditional tax-deferred accounts for both you and your spouse and their current balances and any after-tax amounts that have been contributed.
On the HSA and 529 tab, you can list your HSA and 529 College Savings Plans and their current balances.
On the Inherited Accounts tab, you can identify one traditional inherited account for you and another for your spouse and one inherited Roth account for yourself and another for your spouse, along with the associated details.
Model my diversified portfolio and define the rate of return for each of my accounts?
Unlike most retirement calculators, Pralana does not ask you to specify the rate of return (ROR) for each of your accounts. To achieve its high-fidelity projections, Pralana utilizes asset classes, asset allocation and asset location processes and strategies to derive the ROR for each of your accounts. There are a variety of asset classes in which you could invest, each with different rates of return and levels of risk. Their returns can be correlated (move together), inversely correlated (tend to move in opposite directions) or uncorrelated. In taxable accounts, income from different asset classes may be taxed differently (as ordinary income, qualified dividends, or long-term capital gains). A diversified portfolio tends to have a mixture of asset classes with allocations that can vary over time in accordance with your risk tolerance. The challenge is to achieve your desired asset allocation while also optimizing long term wealth by holding asset classes in proper types of accounts. Pralana helps you achieve both goals.
To learn more about how this is done in Pralana, please refer to the section entitled Modeling Your Portfolio. It elaborates on the concepts of asset allocation and location and explains how to define your asset classes and specify the corresponding ROR, and how to select and specify one of two asset allocation modes that are then used to define the ROR for each of your accounts.
If you would prefer not to go to the level of detail associated with specifying asset classes and worrying about asset allocations, you can do that! Please see Simple Portfolio Modeling under Managing Your Portfolio for the details.
Model a Health Savings Account?
There are four elements to modeling a health savings account: entering the initial balance on the Build > Financial Assets > Account Initial Balances page, providing the investment details to enable the tool to derive the HSA’s rate of return on the Build > Financial Assets > Simple Portfolio Modeling page or Advanced Portfolio Modeling pages, entering future contributions via one of your employment streams on the Build > Income > Employment page, and then specifying pay-outs on the Build > Financial Assets > Scheduled Withdrawals page.
The tool does not make a direct connection between healthcare expenses and pay-outs; these are independent because you can allow your HSA to grow indefinitely and take withdrawals as you please. HSA withdrawals can be either qualified or unqualified and, either way, they will be deposited in your cash account. If the withdrawal is unqualified, it will be included in your AGI in the year the withdrawal occurs.
You can monitor the HSA contributions, withdrawals, and balance on the Review > Tabular Projections > Income and > Summary pages.
Model inherited IRAs and the associated RMDs?
Pralana can model one inherited traditional IRA for both you and your spouse and one inherited Roth IRA for both you and your spouse. These can be past or future inheritances and you have control over the way the RMDs are to be modeled. This is all controlled via your inputs on the Inherited IRAs tab of the Build > Financial Assets > Account Initial Balances page.
Model the taxes on the growth of my taxable account, particularly when it is invested in assets with different taxation properties?
The regular, taxable account can hold assets that are taxed in a variety of ways, including simple interest or unqualified dividends, qualified dividends, long-term capital gains (LTCG) that are taxed each year, tax-free, or as LTCG taxed only when withdrawn. To specify how the growth of the assets held in your regular taxable account are to be taxed, go to the Growth Taxation tab of the Build > Financial Assets > Portfolio page and specify that on an asset class basis. Pralana then apportions the growth of the taxable account based on these inputs and computes your taxes accordingly.
Model a loan to a family member?
If you have an outstanding personal loan, the pay-off of that loan can be modeled by Pralana. All you need to do is specify the current loan balance, APR and monthly payment, and the tool will model the amortization of that loan. All loan payments will be deposited in the cash account and the loan interest will be added to your AGI.
Tell Pralana how to deal with negative cash flows?
Your part in dealing with negative cash flows is to tell Pralana how to go about making withdrawals from your accounts to cover the deficit spending. You do this by specifying the withdrawal order via the table on the Withdrawal Priority subpage of the Build > Financial Assets > Management page. This table lists all your accounts in the order in which the tool will seek funds to cover a negative cash flow. The account at the top of the list is first priority and the other accounts are in descending priority order, with the lowest priority account at the bottom. To change the order, simply click on an account name and drag it to where you want it to be in the list and continue in this manner until the list is the way you want it.
When a negative cash flow occurs, the tool starts by trying to cover the deficit from the cash account; however, that withdrawal is only allowed to take the cash account balance down to the floor level and if more money is needed, then a withdrawal is made from the first account in the withdrawal priority list. When there is insufficient money in the first account, then the tool goes to the second account, and so on until the spending deficit is fully covered. Please refer to the section on Modeling Your Accounts for further information.
See what is causing my account balances to change each year?
The Review > Tabular Projections > Account Statements page provides a detailed breakdown of the contributions, growth and withdrawals that drive each of your account balances.
Know what goes into the AGI and itemized deductions that Pralana uses to calculate my income taxes?
There is a year-by-year detailed breakdown of both your Adjusted Gross Income and your Itemized Deductions on the Review > Tabular Projections > Expenses > Taxes page. There are separate tabs for these details.
Tell Pralana when to revert to pre-TCJA of 2017 tax laws?
The Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire at the end of the year 2025, after which U.S. tax law will revert to the pre-TCJA of 2017 laws. Pralana implements both sets of tax laws and defaults to sunsetting of TCJA in 2025, but you can override it and specify any year in the future when the reversion to the pre-TCJA law will occur. This is done via the Tax Assumptions tab on the Build > Get Started > Scenario Assumptions page.
Model a relocation to a new state?
Pralana calculates state income taxes, so it needs to know your state of residence. It can model changes to your state of residence, as well. To do this, go to the Build > Get Started > Scenario Assumptions page and click on the Residence/Relocation tab. On this tab you can define your current state of residence as well as multiple residence changes in the future.
Additionally, this tab allows you to specify two other state-related items:
local tax rates, if applicable; these are combined with your state income taxes in all the tool’s projections
alternate state income tax rates if you find the tool’s state tax calculations are inaccurate; Pralana’s state tax calculations do not implement all the details of state taxes for 50 states plus the District of Columbia and the calculations for your particular state may be inaccurate as a result.
Model LTCG on the appreciation of my taxable account?
The regular, taxable account can hold assets that are taxed in a variety of ways, including simple interest or unqualified dividends, qualified dividends, long-term capital gains (LTCG) that are taxed each year, tax-free or as LTCG taxed only when withdrawn. To specify how the growth of the assets held in your regular taxable account are to be taxed, you go to the Growth Taxation tab of the Build > Financial Assets > Portfolio page and specify that on an asset class basis. Pralana keeps track of the unrealized LTCG in your taxable account and calculates the amount of LTCG included in any withdrawals made from that account and then calculates the appropriate taxes in the year those withdrawals occur. Visit the section in the manual on Modeling My Portfolio for more information.
Model market volatility and sequence-of-returns risks?
A Monte Carlo or an historical analysis is a good tool to test the viability of a retirement plan against a range of market environments and investment outcomes, including market volatility, and Pralana can do both types of analysis. These analyses use all the Financial assets, income and expense inputs you provide via the tool’s Build pages, but they replace the average returns used for the tool’s deterministic projections with either randomized or historical market returns to simulate market volatility.
Pralana’s Monte Carlo analysis generates 1000 independent projections using randomized annual rates of return for each of your accounts to simulate market volatility and aggregates these into a graph that illustrates the range of likely outcomes. The Monte Carlo analysis is on the Analyze > Monte Carlo Analysis page, and you can visit the section of the manual on Monte Carlo analysis for more information.
Pralana’s historical analysis generates 86 independent deterministic projections using historical inflation and historical rates of return for each of your asset classes to simulate market volatility and aggregates these into a graph that illustrates the range of likely outcomes. Additionally, the best and worst three historical sequences are identified and you can then use Pralana’s Historical Sequence Analysis capability to see the year-by-year details of the best and worst historical sequences in tabular form. The Historical analysis is on the Analyze > Historical Analysis page, and you can visit the section of the manual on Historical analysis for more information.
Both Monte Carlo and historical analyses are modeling sequence of return risks, but the Historical Sequence Analysis enables you to investigate the effect of a specific sequence of returns. See the next paragraph for more information.
Test my plan against a specific sequence of historical market returns, such as the one beginning in 1929?
Pralana’s historical analysis generates 86 independent deterministic projections using historical inflation and historical rates of return for each of your asset classes to simulate market volatility and aggregates these into a graph that illustrates the range of likely outcomes. You can then use Pralana’s Historical Sequence Analysis capability to highlight any particular sequence based on its starting year (say, 1929) to see it overlaid with the aggregation of all sequences. Further, you can see the year-by-year details of any specific historical sequence in tabular form. Visit the section on Historical analysis for more information.
Model a significant drop in the value of my portfolio immediately after I retire?
It is always a big concern if you plan to make withdrawals from your portfolio to meet your essential expenses and then there is a significant drop in the value of your portfolio early in your retirement. There are two fundamental ways of modeling this in Pralana to see just how big a potential issue this is.
One way is to use the Historical Sequence Analysis and select an historical sequence with particularly poor returns in the early years, such as 1929 or 1973. You can do this on the Analyze > Historical Analysis page and then see the resulting projection overlaid as a yellow line on the Historical Analysis range of outcomes (the blue bands) and the deterministic projection (the red line) produced with average rates of return. With the Historical Sequence Analysis mode active, you can also see the detailed results on all the tabular projections pages.
Another way is to manually define and specify a sequence of returns for each of your asset classes via the Build > Financial Assets > Portfolio pages. These pages enable you to define different rates of return for all your asset classes for a specified number of different time periods, and you can do this on a per scenario basis. If you choose this option, the result will be reflected in the tool’s deterministic analysis outputs: all the tabular projections pages and the red line on the graphs on the Monte Carlo and Historical Analysis pages.
Model different spending strategies in my retirement years?
Pralana can model your spending exactly as you specify it on the Build > Expenses pages, but very importantly, it gives you the option of replacing your specified non-essential spending with variable spending in your retirement years. This capability uses several alternate spending strategy algorithms to dynamically vary your spending as a function of the performance of your portfolio. No doubt, you would not maintain your specified spending level while watching the value of your portfolio go to zero, so these algorithms give you some options to model what you would you likely do in real life depending upon how your portfolio performed.
A deterministic analysis of your plan with specific income, expenses, and portfolio performance is a great way to evaluate its fundamental viability. In the real world, though, if your portfolio was underperforming your expectations, you probably would not just continue spending at the same level as if everything was rosy while watching your net worth go to zero. Similarly, if it was outperforming your expectations, you might elect to live it up a bit. You would most likely adjust your spending over time as a function of your portfolio’s performance to avoid outliving your money, and Pralana enables you to model that behavior and gives you actionable near-term spending targets. If you want to do this, start by going to the Analyze > Spending Strategies page. There, you will find the controls for telling the tool that you wish to use one of eight (8) alternate spending strategies rather than the fixed spending specified on the Build > Expenses pages. Please refer to the section on Variable Spending Strategies for more information.
Determine when I can retire?
Pralana has various ways of exploring this question, and all are based on use of a “wild card retirement date” to define the end of your full-employment income stream and the start of your pension, if applicable. This effectively connects your income streams such that you can adjust the starts and stops by changing only one variable. Then, you can conduct studies based on variations in that “wild card retirement date” and you can optimize the “wild card retirement date” to a specific date that yields a 90% success rate of not dying broke based on Monte Carlo analyses.
Initially, you will specify your planned retirement date and your spouse’s planned retirement date on the Build > Get Started > Scenario Assumptions page. Next, you will need to associate the end and/or beginning of selected income streams with these retirement dates. You do this by entering the character “R” in the start or stop fields of any Employment, Pension, Annuities or Other Income streams on the Build > Income pages.
There are now two ways you can adjust the “wild card retirement date” to explore the “when can I retire” question.
The first is obvious: simply go back to the Build > Get Started > Scenario Assumptions page and manually modify the date, and then go to the Review > Tabular Projections > Balance Sheet page and examine the effect on the deterministic projection of your total savings over time. You can also go to the Analyze > Monte Carlo and > Historical Analysis pages and run analyses to check out the likely range of outcomes based on your retirement date(s).
You can also go to the Analyze > Earliest Safe Retirement Analysis page and simply click the “Run Earliest Safe Retirement Analysis” button and the tool will automatically determine the earliest value of the “wild card retirement date” that results in a success rate of 90% that you will not outlive your money. If you elect to use this information as a basis for selecting your retirement date(s), you will need to go back to the Build > Get Started > Scenario Assumptions page and make those changes.
Model various alternative retirement dates and explore the long-term viability of each alternative?
You can use a “wild card” to specify the start of your pension while using the same “wild card” to specify the end of your full-time employment income stream. Then, you can do what-if exercises to investigate the long-range effect of moving your retirement date forward or backward. This can be done in one or two ways: 1) By clicking up/down arrows to vary your retirement start age on the Analyze > Sensitivities page or 2) by simply running an analysis on the Analyze > Earliest Safe Retirement Analysis page which will do a Monte Carlo analysis to determine the earliest retirement date that still allows you to not die broke with a 90% chance of success.
Please see the paragraph entitled “Options for Defining the Start and Stop of Income Streams” under the Modeling Your Income section for more information.
Do consumption smoothing?
Consumption smoothing is an algorithm that helps you maximize your standard of living over the remainder of your life in such a way that you will not have to starve now to live in luxury during retirement, or vice versa. More specifically, this algorithm considers all the assumptions, income and expenses you have already entered into the tool and then calculates a “delta” expense value such that the whole of these parameters represents the maximum sustainable standard of living that can be supported over your entire lifetime.
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.
An alternative and equally important use of Pralana’s consumption smoothing capability is to gain insight into the amount of margin that exists in your plan. If you wish to explore consumption smoothing, it is selectable via the pull-down menu on the Analyze > Spending Strategies page.
Model survivor scenarios?
Pralana contains a variety of features that enable you to model and evaluate survivor scenarios. The first thing you need to do is be aware of the way the tool models the death of a marriage partner, as shown below, and ensure that your Build page settings are correct:
Employment income streams are terminated upon the death of the owner
Pension income streams with survivor benefits or that are still within the Certain & Continuous period will be converted to a pension for the survivor, as appropriate
Social Security benefits are terminated upon the death of the owner, but those benefits may replace the survivor’s prior benefits if it results in a higher benefit
Annuities with survivor benefits will become annuities for the survivor upon the death of the owner, as appropriate
If the decedent has term life or cash value life insurance, it will be paid to the survivor as a deposit to the cash account
ACA premiums will change as a function of the smaller family size and Medicare premiums will be cut in half. Finally, there is a control on the Build > Expenses > Healthcare page that allows you to specify a healthcare expense reduction percentage that goes into effect upon the death of a partner (but does not affect ACA and Medicare premiums which are handled independently).
There is a control on the Build > Expenses > Phased page that allows you to specify a phased expense reduction percentage that goes into effect upon the death of a partner.
With all the above settings in place, there are multiple ways to evaluate survivor scenarios:
You can easily change the life expectancy for either marriage partner on the Retirement & Life Expectancy tab of the Build > Get Started > Scenario Assumptions page, and you can do this independently for each scenario. So, you can simply make the desired change and then go look at the deterministic projection and examine the details to check on cash flow and how the account balances behave. You can then run a Monte Carlo analysis to look at long range outcomes and ensure they are still in positive territory.
You can set different life expectancies on the three scenarios, then run Monte Carlo analyses on each of them and then go to the Analyze > Scenario Analysis Comparisons page to see graphical overlays to see how the different scenarios compare in the long term.
Use Pralana to evaluate alternatives and make key financial decisions?
It is extremely easy to evaluate and compare alternatives that will facilitate key financial decisions. This is based on the concept of a “scenario”, which is defined to be the complete set of assumptions and parameters used to govern the tool’s projections. The key to evaluating alternatives is that Pralana models three independent scenarios simultaneously and allows you to overlay the projections of all three scenarios on the same graph to see how they compare.
Some of your inputs apply to all scenarios, such as your marital status,
birthdate(s), children, and initial account balances. Nearly all other
parameters are scenario-specific and on most pages you will see a set of
radio buttons that enable you to select the scenario to which the inputs
on that page apply. In a few cases, the inputs for all the scenarios are
visible at the same time. With this capability, you can define the
details of each alternative you wish to model. Presumably, all your
scenarios will be similar but with one or more key differences. To
facilitate the creation of these different scenarios, you can start by
defining a base scenario (say, scenario #1), then invoking the tool’s
global copy function (i.e., by clicking the 
icon) to create
an identical scenario (say, scenario #2) and then again to create
another identical scenario (say, scenario #3). Then you can go to the
Build pages and make whatever changes you wish to make to scenarios 2
and 3 to create the other alternatives to want to explore.
With the data input done, you can then go to the Analyze > Monte Carlo Analysis or > Historical Analysis and run those analyses on each of the three scenarios. Then you can go to the Analyze > Scenario Comparisons page to see the overlaid projections and use that information to help make your decisions. Additionally, you can go to the Review > Tabular Projections page and examine the details of each of your scenarios. You cannot see direct comparisons this way, but you can see the year-by-year details of a given scenario, selected via the radio buttons at the top of the page.
Model life insurance?
Pralana models term life insurance and cash value life insurance for both you and your spouse. This is all done via the Build > Expenses > Term Life Insurance and > Cash Value Life Insurance pages. Visit the section in the manual on modeling Life Insurance for more information.
Delete My Data?
If you decide you want to delete your data from Pralana, there is a mechanism to do it. Just go the More > Delete My Data page and click the “Delete my Plan data” button. This will delete your existing plan from the Pralana database and replace it with a sample plan for you and your spouse. Please be aware that there is no recovery from this process. Once your plan is deleted, there is no going back.
Get help in using Pralana if I need it, or if I would just like a knowledgeable third party to review my plan with me?
In addition to this user manual, you can get help via the Pralana Forum or by engaging one of the fee-only financial advisors listed on the Pralana website.
Modeling Your Income Streams
Introduction to Income Modeling
Pralana enables you to specify your family’s income streams in high fidelity and goes way beyond simply providing a table for you to laboriously enter each income stream along with start and stop dates. Income categories are partitioned into six (6) functionally coherent pages and, within each page, special formatting is provided to facilitate easy but thorough definition of the related income streams. The six income-related pages are associated with the six links that appear underneath the Income heading when you hover over the Build button. The paragraphs that follow describe each of the Income subpages in detail. Here is a screenshot of Pralana’s main navigation menu with the Build submenus shown, with Income in the third column:
Options for Defining the Start and Stop of Income Streams
Pralana allows you to start and stop most income streams using any combination of four different methods to improve the fidelity of its modeling of partial-year income streams:
Age: If you specify an age, the income stream will start (or end) on the date the owner reaches this age (i.e., on his or her birthday).
Year: If you specify a year, the income stream will start (or end) on January 1 of this year.
Specific date: The income stream will start (or end) on this specific date.
Your (or your spouse’s) retirement date: If you enter an “R”, the income stream will start (or end) on the date specified in the “Retirement Date” field on the Build > Scenario Assumptions > Retirement Date/Life Expectancy page. This gives you the option to end an employment income stream and begin a pension income stream and even a post-employment income stream on the same date without literally having to enter that date multiple times. This, then, enables you to do what-if studies with your retirement date without having to go back and change the date in multiple locations. Further, this feature enables sensitivity studies around your retirement date on the modified Analyze > Sensitivities page.
NOTE: Pralana will start and stop your income streams at the beginning of the specified dates. If you want one stream to end and then another to start without a short loss of income in between, then you should set the stop and start dates the same. If you stop one stream on March 31 and begin the next one on April 1, there will be a one-day period where your income goes to zero in between these two income streams.
How Birthdays Affect Income Streams
Pralana enables you to start and/or end income streams based on your age to model partial-year income streams, and the convention is that age-related income streams begin and end on the birthday of the owner. As a quick example, let’s say your birthday is on July 1 and you plan to stop working when you’re 62 and start your pension when you’re 62. You would set the stop age of your employment income stream to 62 and the start age of your pension to 62. When you examine your income profile, you will notice half a year of employment income and half a year of pension income in the year in which you turn 62.
Another example is that of a married couple where both you and your spouse have your own Social Security benefits but your benefits are the higher of the two. If you die before your spouse does, your spouse will (in effect) get your benefits rather than his/her own during the “survivor” years. In the year in which you die, Pralana will model the Social Security income stream to accurately reflect both your and your spouse’s benefits up to the point of your death and then only your spouse’s survivor benefits thereafter.
A final example relates to the final year of the last-surviving spouse. If that person dies sometime during the year (as opposed to January 1), then only a partial year of income will be modeled in that final year.
Annual Adjustments to Income Streams
You can specify whether each income stream is adjusted annually in either real or nominal terms. If you specify “real”, then inflation will be added to the value you enter and this enables you to do what-if studies of the effects of different inflation profiles without having to come back to the Build > Income pages to make adjustments to the way each income stream is adjusted annually. If you specify “nominal”, Pralana will use the exact value specified to make annual income adjustments and these will not vary as a function of inflation.
Employment Income
Inputs
You can define multiple employment income streams in this section and
they can be associated with either you or your spouse based on the radio
button at the top of the section. At any time, all streams associated
with the selected person will be visible. To create a new stream, just
populate the “new” column. When you do that, another “new” column will
appear to enable you to add the next stream if desired. To delete a
stream, just click the 
at the bottom of the column.
Start and Stop: These fields enable you to specify exactly when the income stream begins and ends. You can enter an age, a year, a date (mm/dd/yyyy) or an R (for Retirement date). You can specify the start and stop fields by different methods and if the stop field is left blank the income stream will continue to the end of the modeling period. The income stream will not be modeled if the start field is left blank.
$Annual Gross Income: The annual income in terms of today’s dollars.
Annual Percent Increase: The annual rate of increase, and it can be real or nominal. If real, the income stream will increase at the rate of inflation plus the specified real percentage increase; otherwise, the income stream will increase at the specified nominal rate.
Annual Increases are Nominal? Check this box if annual increases are specified in nominal amounts (i.e., the specified value includes inflation). If not checked, the annual increases are assumed to be Real and the income stream will increase annually at the rate specified + general inflation. An advantage of specifying annual increases in terms of real amounts is that it enables you to investigate the effects of different inflation profiles without having to come back here and modify the rate of change of your income.
$ Personal Contribution to Tax-Deferred Accounts (Pre-Tax): The dollar amount to be deducted from this income stream that you or your spouse plans to contribute to a tax-deferred retirement plan on a pre-tax basis. Taxes on this income and all associated growth will be deferred until withdrawn. It is possible to specify contributions to tax-deferred savings without the owner having any earned income. If it turns out that total contributions exceed total income, the spendable income will be a negative number.
$ Personal Contribution to Tax-Deferred Accounts (After Tax): The dollar amount to be deducted from this income stream that you or your spouse plans to contribute to a tax-deferred retirement plan on an after-tax basis. These contributions will grow tax-deferred until withdrawn and they can be rolled over to a Roth IRA after retirement.
$ Company Matching on Tax-Deferred Accounts: The dollar amount that your employer or your spouse’s employer will contribute to your tax-deferred retirement plan.
$ Personal Contribution to Roth Accounts: The dollar amount to be deducted from this income stream that you or your spouse plans to contribute to either a Roth IRA or a Roth 401k. Taxes on this amount of income will be due in the year the income is earned.
$ Company Matching on Roth Accounts: The dollar amount that your employer or your spouse’s employer will contribute to your Roth accounts.
$ Personal Contribution to Health Savings Accounts: The dollar amount to be deducted from this income stream that you or your spouse plans to contribute to an HSA. Taxes on this income and all associated growth will be deferred. You can go to the Scheduled Withdrawals Table on the Financial Management/Management page to model qualified withdrawals from the HSA and these will be excluded from your AGI.
$ Company Contribution to Health Savings Accounts: The dollar amount that your employer or your spouse’s employer plans to contribute to an HSA on your behalf. Taxes on this income and all associated growth will be deferred. You can go to the Scheduled Withdrawals Table on the Financial Management/Management page to model qualified withdrawals from the HSA and these will be excluded from your AGI.
$ Post-tax Income Contributed to a Defined Benefit Plan: You can use this field to specify the size of your contribution to a defined benefit pension plan with post-tax dollars. The funds will come from your after-tax income and will not be contributed to any savings. Rather, they are assumed to help fund your Defined Benefit Pension detailed in the pension section of the Income page.
$ Pre-tax Income Contributed to a Defined Benefit Plan: You can use this field to specify the size of your contribution to a defined benefit pension plan with pre-tax dollars. This will be treated like a 401k contribution in that it reduces Adjusted Gross Income but has no effect on FICA; however, the funds on this line will not be contributed to any savings. Rather, they are assumed to help fund your Defined Benefit Pension detailed in the pension section of the Income page.
Disable SS contributions? This control enables you to specify that this income stream is not subject to Social Security taxes.
Self Employed? This control enables you to specify that this income is subject to self-employment taxes. If this field is checked Pralana assumes this is net income because it does not implement a full model for business income and business expenses and taxes. Pralana contains an option for reducing this net income (for tax purposes) by healthcare expenses specified as eligible for a business deduction on the Expenses > Healthcare page.
Eligible for QBI Deduction? This control enables you to specify whether this income stream qualifies for the QBI deduction under the TCJA of 2017. Typically, this only applies to self-employment income but Pralana does not verify that this is self-employment income when applying this deduction.
Specification of Contributions to Savings
In the paragraph above entitled “Employment Income Streams” you will see that the tool allows you to specify contributions to tax-deferred and tax-free savings but it does NOT provide any way for you to specify contributions to your regular investment account. Instead, contributions to regular/taxable accounts will always be calculated based on the difference between income and expenses. This is a major element of the Pralana design philosophy to ensure that all money is fully accounted for while accommodating ebbs and flows of both income and expenses. You can read more about this in the section on Modeling Your Accounts.
Income Projection
This tab shows the calculated Employment Income projection over your scenario years.
Pension Income
Inputs
This section of the Income page is designed to help you model pensions, including those that include roll-overs to a traditional IRA and/or a Roth IRA as well as reimbursing your contributions to the pension as specified in the employment income streams described above. You can also specify survivor benefits, if any, as well as a Certain and Continuous period of a specified duration.
You can define multiple pension income streams in this section and they
can be associated with either you or your spouse based on the radio
button at the top of the page. At any time, all streams associated with
the selected person will be visible. To create a new stream, just
populate the “new” column. When you do that, another “new” column will
appear to enable you to add the next stream if desired. To delete a
stream, just click the “ at the bottom of the column.
User Description: This is the field directly beneath the Pension# label that enables you to specify a textual description of the pensions. As always, create a blank by using the DELETE key.
Start and Stop: These fields enable you to specify exactly when the income stream begins and ends. You can enter an age, a year, a date (mm/dd/yyyy) or an R (for Retirement date). You can specify the start and stop fields by different methods and if the stop field is left blank the income stream will continue to the end of the modeling period. The income stream will not be modeled if the start field is left blank. If you want to model a lump sum pension, just set the start and stop to the same value.
Annual Taxable Amount: Enter this in future-year dollars. You can use the converter if your pension is specified in terms of today’s dollars. To do this, enter the amount in today’s dollars in the amount field to the right and ensure that field is selected, then click the yellow converter icon near the upper left corner of this screen, answer the pop-up questions, and your today’s $ value will be replaced with the equivalent value in future $.
Annual % Increase: The annual rate of increase, and it can be real or nominal. If real, the income stream will increase at the rate of inflation + the real percentage increase; otherwise, the income stream will increase at the specified nominal rate.
Annual Increases are Nominal? Check this box if annual increases are specified in Nominal amounts. If not checked, they’re assumed to be Real and the income stream will increase annually at the rate specified + general inflation.
% of Taxable Rolled Over to Traditional IRA: Taxes on this amount will be deferred until withdrawn from the IRA. For a given pension, this and the option to roll over funds to a Roth IRA are normally mutually exclusive (you can do one or the other).
% of Taxable Rolled Over to Roth IRA: Taxes on this amount will be paid in the year received. For a given pension, this and the option to roll over funds to a traditional IRA are normally mutually exclusive (i.e., you can do one or the other).
Annual Non-taxable Amount: This is the reimbursement of employee contributions to this pension, if any. Contributions are assumed to have been paid with after-tax dollars, so this portion of the pension is not taxed.
Survivor %: Under this pension option, this percentage of all components of this pension will continue after the death of the pension owner for the lifetime of the beneficiary spouse. This and the C&C Period are mutually exclusive (you can specify one or the other, but not both).
Certain & Continuous Period: Under this pension option, all components of this pension will continue for the owner’s lifetime or the specified period, whichever is greater. This and the Survivor % are mutually exclusive (you can specify one or the other, but not both).
Pension Type: This is a pull-down option field that allows you to specify whether this is a private, military or government pension and is relevant only to the calculation of state income tax (state tax codes vary on the deduction of pension income).
Today’s to Future Dollar Converter Tool
The pension amount fields should be entered in terms of future dollars; however, Pralana provides an easy-to-use converter to assist you in converting today’s dollars to future dollars for cases where you only have the requested data in terms of today’s dollars. The converter is in the special section at the bottom of the page. You use it by entering a value in today’s dollars and the future year for which you want it converted to future dollars, then clicking the Calculate button. Pralana will then convert the value you entered in today’s dollars to future dollars using the inflation rate profile associated with the selected scenario.
Income Projection
This tab shows the calculated Pension Income projection over your scenario years.
Your Social Security Benefits
Pralana goes way beyond simply asking you to specify benefit amounts and start ages. Based on the information you provide, Pralana will calculate:
Your and, if applicable, your spouse’s, Social Security benefit adjusted for early-filing reductions and delayed filing credits based on your start date (if not already started)
Spousal supplement (if not already started)
Survivor benefit, if applicable.
Deferred and make-up benefits due to excess employment income
Enter the age (year and month) at which you and your spouse, if applicable, did or will start taking benefits.
If your benefits have not yet started and:
you have not yet reached your Full Retirement Age (FRA), enter the monthly benefit shown on the SSA website for your FRA.
you are already past your FRA, enter the monthly benefit shown on the SSA website for age 70.
If your benefits have already started, enter the actual monthly benefit amount you receive, including any spousal supplement.
Pralana follows the SSA’s rules for ‘attained age’ and that benefits are paid one month in arrears (e.g. the benefit you earn in January is not received until early February. Performing these calculations provides these benefits:
Easy what-if exercises: by simply changing your and your spouse’s start ages, you can quickly observe long term effects on your net worth without having to figure out and then enter the corresponding changes to benefit amounts.
Enables Pralana to compute the optimum ages for you and your spouse to begin taking SS benefits (for more information, see the Analyze > SS Optimization page).
Spousal Benefits
If an eligible person has not yet started benefits and their spouse starts benefits before their own start date, Pralana will calculate their spousal benefit.
Survivor Benefits
Survivor benefits may start as early as age 60. In a two-person plan, when the first spouse is deceased, Pralana assumes the survivor will start survivor benefits immediately if their own benefit has not already started. In a one-person plan where the person’s spouse died prior to plan start, Pralana provides the option for the person to indicate that they are receiving survivor benefits at the start of the plan.
When a person receiving survivor benefits reaches their own start age, Pralana will give the person the greater of the survivor benefit of their own benefit (adjusted for any early or delayed start of benefits).
Excess Employment Income
If a person has started benefits prior to their full retirement age and receives employment income over the limits established by the Social Security Administration, Pralana will defer some or all of the Social Security benefit until the person reaches full retirement age. Thereafter, the accumulated deferred benefit will be paid out over some years. If applicable, the Social Security benefit projections will show the amounts of deferred and makeup benefits.
One-Time Benefit Reduction
If you want to model a one-time Social Security benefit reduction at some point in the future, you can do that on the Social Security Income page. There is a section on the lower right portion of the page through which you can specify the year in which this is to occur and the percentage by which your benefits are to be reduced. Just leave these fields blank if you do not want to model a benefits reduction. As an example as to how this works mathematically, if you specify a 10% reduction, Pralana will calculate your benefits and then multiply that by (100%-10%), or 0.9.
Cost of Living Adjustments
By default, Social Security benefits are modeled to increase at the general inflation rate. If you want to model a different COLA rate, you can do that on the Social Security Income page. There is a section on the lower left portion of the page through which you can specify the year your preferred rate is to begin and the addition or reduction percentage relative to your general inflation rate. For example, if the general inflation rate is 3% and you believe SS benefits will increase at 2%, enter a “-1%” in this field. Just leave these fields blank if you want Social Security benefits to be adjusted at the general inflation rate.
Benefit Projections
Based on the inputs you have provided, Pralana generates an output table to show you the resulting Social Security benefits on an annual basis, like the example shown below.
Note that spousal benefits are shown when appropriate and that the values in the Social Security Income column are underlined. This means that the Metric MRI is available and that if you click on that value you will get a pop-up display that shows you in detail how that value was derived. Here is an example for the year 2036:
Windfalls
Inputs
This section enables you to identify taxable and non-taxable windfalls for both you and your spouse. In the fields provided, simply enter the amount (in future year dollars), the associated year and whether the windfall is taxable or non-taxable. If you know the amount in terms of today’s dollars and need to convert it to future dollars, you can use Pralana’s built-in converter feature conveniently located on this page. Unlike income streams that enable starts and stops on specific dates, the windfall income is strictly identified by the year in which it occurs since, by definition, it is always a one-time event.
You can define multiple windfalls in this section and they can be
associated with either you or your spouse based on the radio button at
the top of the page. At any time, all streams associated with the
selected person will be visible. To create a new windfall, just populate
the “new” row. When you do that, another “new” row will appear to enable
you to add the next stream if desired. To delete a windfall just click
the on the right side of the column.
Today’s $ to Future $ Converter
The windfall amount fields should be entered in terms of future dollars; however, Pralana provides an easy-to-use converter to assist you in converting today’s dollars to future dollars for cases where you only have the requested data in terms of today’s dollars. The converter is in the special section at the bottom of the page. You use it by entering a value in today’s dollars and the future year for which you want it converted to future dollars, then clicking the Calculate button. Pralana will then convert the value you entered in today’s dollars to future dollars using the inflation rate profile associated with the selected scenario.
Income Projection
This tab shows the calculated Windfall Income cash flow projection over your scenario years.
Other Income Sources
Inputs
This section allows you to define other income streams of an unspecified
nature for you as well as for your spouse. Each of these is very
flexible such that you could use these streams to define such things as
distributions from trusts, alimony and child support. You can define
multiple other income streams in this section, and they can be
associated with either you or your spouse based on the radio button at
the top of the page. At any time, all streams associated with the
selected person will be visible. To create a new Other Income stream,
just populate the “new” row. When you do that, another “new” row will
appear to enable you to add the next stream if desired. To delete an
Other Income stream, just click the on the right side of the
column.
Description: Allows you to add two or three words of description to each income stream
Annual Amount: The annual amount of income in terms of today’s dollars.
Start and Stop: These fields enable you to specify exactly when the income stream begins and ends. You can enter an age, a year, a date (mm/dd/yyyy) or an R (for Retirement date). You can specify the start and stop fields by different methods and if the stop field is left blank the income stream will continue to the end of the modeling period. The income stream will not be modeled if the start field is left blank. If you want to model a one-time receipt, just set the start and stop to the same value.
Annual Growth %: The annual rate of increase, and it can be real or nominal. If real, the income stream will increase at the rate of inflation + the real percentage increase; otherwise, the income stream will increase at the specified nominal rate.
Annual Increases are Nominal? Check this box if annual increases are specified in Nominal amounts. If not checked, they’re assumed to be Real and the income stream will increase annually at the rate specified + general inflation.
Survivor %: This percentage of the annual amount will continue after the death of the owner.
Taxation: Click in this field and then use the pull-down menu to specify either Non-taxable, Ordinary Income, Capital Gains or Qualified Dividends. If the field is left blank, Pralana will assume it is taxed as ordinary income. If it is non-taxable, the income will be excluded from your AGI. If it is to be taxed as ordinary income, it will be included in your AGI in the year it is received and taxed as ordinary income. If it is to be taxed as capital gains or qualified dividends, it will be included in your AGI in the year it is received but taxed as long-term capital gains.
Income Projection
This tab shows the calculated Other Income cash flow projection over your scenario years.
Annuity Purchases and Income
Pralana models annuities generically; it does not attempt to model the nuances of any particular type of annuity or the investments associated with any annuity. With that said, it can model each of these types of annuities:
Fixed
Variable
Fixed-indexed
Immediate
Deferred
As a user, you have the following controls over the way Pralana models an annuity:
Investment amount, date, and the account from which the funds are to be withdrawn (this is irrelevant if the annuity was established prior to the start of the modeling period)
Pay-out start date
Pay-out end date
Pay-out annual amount and associated COLA
Duration of taxable payments (to enable payouts to be fully taxable for a while and then non-taxable thereafter)
Taxation percentage (to enable payouts to be partially taxable for the entire duration; mutually exclusive with the “duration of taxable payments” field
Survivor %
Certain and continuous period
In the real world, all payouts from annuities associated with or purchased with funds from tax-deferred accounts are fully taxable as ordinary income; however, Pralana does not model it this way UNLESS you specify that the payouts are 100% taxable.
Non-qualified deferred annuities are subject to the “earnings and interest first” rule which requires that all pay-outs are assumed to be the growth portion of the account until the account balance is equal to the principal amount, and thus fully taxable. Thereafter, all pay-outs are non-taxable. Pralana does not model it this way UNLESS you specify it this way.
Pay-outs from fixed and immediate annuities (and possibly other types) may include interest as well as the return of principal, and all pay-outs include the interest as well as the return of principal. Therefore, the pay-outs are partially taxable. Once again, Pralana does not model it this way UNLESS you specify it this way.
Inputs
You can define multiple annuities in this section, and they can be
associated with either you or your spouse based on the radio button at
the top of the page. At any time, all annuities associated with the
selected person will be visible. To create a new annuity, just populate
the “new” column. When you do that, another “new” column will appear to
enable you to add the next annuity if desired. To delete an annuity just
click the on the bottom of the column.
Purchase Timing: These fields enable you to specify exactly when the annuity is purchased. You can enter an age, a year, a date (mm/dd/yyyy) or an R (for Retirement date). You can specify the start and stop fields by different methods and if the stop field is left blank the income stream will continue to the end of the modeling period. The income stream will not be modeled if the start field is left blank. Purchase Price in Today’s $: This is the cost of the annuity in today’s dollars. You can leave this field blank if the annuity was purchased prior to the model’s starting year.
Source Account for the Purchase of this Annuity: This field contains a pull-down menu that allows you to select the account you want to use to purchase this annuity, and you can leave this field blank if the annuity was purchased prior to the model’s starting year. Options are Cash Account, Taxable Investment Account, your or your spouse’s Tax-Deferred Accounts, and the Roth Account. The purchase of an annuity will not be treated as an expense; it will be modeled as a direct transfer of funds from the designated account to the insurance company selling the annuity. If the source of funds is designated to be the Cash Account and the purchase would take the cash balance below the floor level, the floor level will be maintained and the excess amount will be transferred from the first account in the withdrawal priority list (specified on the Build > Financial Assets > Management page). If the source of funds is any other account and there are insufficient funds in the account at the time the annuity is to be purchased, the purchase will not be performed and you will be notified of that fact via an alert.
When Pay-out Begins: This field identifies when the payments should begin. You can enter an age, a year, a date (mm/dd/yyyy) or an R (for Retirement date: actually, any non-numeric, non-date value will be assumed to mean “retirement date”). You can specify the Begin and End fields by different methods and if the End field is left blank the income stream will continue to the end of the modeling period. The income stream will not be modeled if the Begin field is left blank.
When Pay-out Ends: This field identifies when the payments should end and has the same input options as the Pay-out Begins field. Leave this blank if the payments continue indefinitely.
Annual Annuity Payment in Today’s $: This is the annual income you expect to receive from this annuity, in today’s dollars.
Annual % Increase: The annual rate of increase, and it can be real or nominal. If real, the income stream will increase at the rate of inflation + the real percentage increase; otherwise, the income stream will increase at the specified nominal rate.
Annual Increases are Nominal? Check this box if annual increases are specified in Nominal amounts. If not checked, they’re assumed to be Real and the income stream will increase annually at the rate specified + general inflation.
Duration of Fully Taxable Payments: As stated above, non-qualified deferred annuities are subject to the “earnings and interest first” rule which requires that all pay-outs are assumed to be the growth portion of the account until the account balance is equal to the principal amount, and thus fully taxable. Thereafter, all pay-outs are non-taxable. You can model this in Pralana by entering into this field the number of years of that growth-only portion (while leaving the Taxable Percentage of Annuity Payment field blank).
Taxable Percentage of Annuity Payment: Some or all the income from the annuity may be taxed, depending upon the source of the funds used to purchase it. Pralana does not attempt to determine this automatically, so you will need to use this field to tell it the percentage of the income to be taxed as ordinary income. If your pay-outs are taxable for some period and then become non-taxable, enter the duration of the taxable period in the field above and leave this field blank.
Survivor %: If the annuity has a survivor percentage option, enter the percentage of the pay-out amount that will continue after the death of the owner. Leave it blank if the annuity has a Certain & Continuous option.
Certain & Continuous Period: If the annuity has a Certain & Continuous Period, enter the duration in this field. Note that this is mutually exclusive with the Survivor % field above, so leave it blank if the annuity has a survivor percentage option.
Income Projection
This tab shows the calculated Annuity Purchase and Income cash flow projection over your scenario years.
Modeling Your Expense Streams
Introduction to Expense Modeling
Pralana enables you to specify your family’s expense streams in high fidelity and goes way beyond simply providing a table for you to laboriously enter each expense along with start and stop dates. Expense categories are partitioned into 10 functionally coherent pages and, within each page, special formatting is provided to facilitate easy but thorough definition of the related expenses. The 10 expense-related pages are associated with the 10 links that appear underneath the Expenses heading when you hover over the Build button. The paragraphs that follow describe each of the Expenses subpages in detail. Rental Property is included in this section even though it could be viewed as INCOME because it has both income and expense components and is very similar to the Personal Property page which clearly falls into the expense category. Here is a screenshot of Pralana’s main navigation menu with the Build submenus shown, with Expenses on the right:
Options for Defining the Start and Stop of Expense Streams
With the exception of Healthcare, all expense streams start and stop based on a specified year.
Personal Property
The Property page is used to enter detailed information related to your property, such as homes and cars. You can include the properties you currently own as well as any you expect to purchase in the future. Pralana can model mortgages, taxes, insurance, operating and improvement expenses for each property as well as closing costs, sales commissions, lump sum payments and excess annual payments, and it creates an expense profile for each property such that the expenses are included only during the time you expect to own each property. It also calculates your capital gains for subsequent incorporation into your detailed income tax calculations. Further, Pralana enables you to specify your property information independently for each of three scenarios. To minimize your typing, you can use Pralana’s copy function to copy the property expense inputs from one scenario into that of another, after which you can then simply enter the specific changes you desire to make each scenario unique, if desired. The Property Expenses page contains eight (8) subpages which are accessed via the tabs near the top of the page. Here are the property subpages, which are described in more detail below: Property Info, Existing Loans, New Loans, Cost Categories, Operating Costs, Improvements, Reverse Mortgage and Cash Flow. Existing Loans refers to any loans in existence at the start of the modeling period, and New Loans refers to any loans expected to begin sometime during the modeling period. These are separated because of some unique fields which are a function of whether the loan already exists or will start in the future. Note that “future” loans will automatically be migrated to existing loans by Pralana if the starting year is advanced beyond the time at which a “new” loan is due to start.
Property Info
Property Description: A brief description of each property
Property Type: Use the pull-down menu to specify either “Primary Home”, “Vacation Home” or “Other”. This is used to determine whether the interest paid is tax deductible and whether some or all associated capital gains can be excluded from your income when the asset is sold. If you select either “Primary Home” or “Vacation Home”, Pralana will assume the interest paid is tax deductible.
Year of Acquisition: For assets you currently own, enter the year they were acquired. For assets you plan to buy in the future, enter the year you plan to make the purchase.
Current Market Value: Enter the current market value for assets you currently own as well as those you plan to buy in the future. For the latter, this will be the basis cost used in capital gains calculations. See the ‘Improvements’ section below for notes about improvements made in the past.
Cost Basis for Assets You Currently Own: This applies only to properties you already own and is the price you paid or the property’s value at the time you acquired it. This will be used by Pralana in computing capital gains. See the ‘Improvements’ section below for notes about improvements made in the past.
Real Appreciation Rate: This rate is relative to the inflation rate you specified on the Build > Get Started > Scenario Assumptions > Inflation page. Therefore, just leave this blank if you expect this asset to appreciate at the rate of inflation. Enter a negative number if you expect the asset to depreciate over time, such as most cars and boats. For Homes only, the Market Value will escalate at this rate from the Starting Year forward. All other property types will escalate in price at the inflation rate until they are purchased. Thereafter, they will appreciate or depreciate based on the rate specified here.
Year You Expect to Sell: By specifying a sale date, Pralana will terminate all expenses associated with this property on that date. You can leave this field blank if you do not plan to sell the property.
Sales Closing Costs: Enter a percentage of the sales price that will come out of your equity at the time this asset is sold. This can include sales commissions and other closing costs.
Loans
Pralana supports four types of loans on personal property: Purchase loans (first mortgages), Refinance loans (which may include cash out), Home Equity Loans and Home Equity Lines of Credit (HELOCs). For HELOC’s you may define the year(s) and amount(s) of draws. Additionally, there is a Loan Amortization tab where you can see loan annual amortization schedules.
Loan input fields vary depending on the type of loan and whether the loan was originated prior to the plan start year (existing loans) or in/after the plan start year (future loans). Fields with a blue background are required. Fields that are informational or not applicable will be greyed out and not editable.
Common Loan Fields
The various loan types may have these input fields. See additional information below for fields applicable to certain loan types.
Property: Select one of the properties defined on the Property Info tab.
Origination Year: Enter the loan’s origination year. For purchase loans, the origination year is assumed to the year the property was purchased and is not editable.
Interest Rate: Enter the annual interest rate of existing loans. (Pralana only supports fixed rate loans.)
Term: Enter the loan’s term in years. This is optional for loans originated in the past (unless the loan has an interest only period) because Pralana will calculate the amortization using the Interest Rate, Balance at Plan Start, and Monthly Payment.
Balance at Plan Start: For existing loans enter the outstanding loan balance as of the plan start date. This field is disabled for future loans.
Monthly Payment: For existing loans, enter the loan’s monthly principal and interest payment. Do not include any escrow amounts for taxes/insurance or extra principal payments you intend to make.
Loan Amount: For future loans, enter the anticipated loan amount in today’s dollars. The difference between the purchase price and this loan amount will be your downpayment. You may separately define a piggyback home equity loan.
Origination Fee: For future loans, enter assumed loan origination fees as a percentage of the loan amount.
% Tax Deductible: Enter the percentage of the loan interest that is deductible. The default value is 100% for homes and 0% for other types if property.
Notes: Enter a description or other notes about the loan (up to 255 characters).
Optional Loan Fields
All loans have these optional fields which are less commonly used. Click the Show Optional Fields checkbox to reveal these fields.
Interest-Only Period: You may specify an interest-only period, in years. The interest only period starts in the origination year. During the interest-only period, Pralana will calculate and apply the interest-only payment and the loan’s principal balance will remain unchanged (unless you also specify an additional principal payment). After the interest only period:
For existing loans, Pralana will use your entered monthly payment to amortize the loan until it is paid off.
For new loans, Pralana will calculate the monthly payment required to amortize the loan balance from the start of the repayment period until the end of the remaining loan term.
Early Pay-Off Year: If you specify an early pay-off, the loan balance (at the end of the prior year) will be paid-in-full at the start of this year. The lump-sum payoff amount will be shown on the amortization schedule and treated as a property expense in the pay-off year.
Extra Principal Payments (Annual $): You may specify additional principal payments by entering an annual amount. Pralana will apply these additional principal payments in the years specified (but not prior to plan start).
Extra Principal Payments Start: Enter the year you plan to start making the excess payments. For existing loans, Pralana assumes that any additional principal payments may in the past are reflected in the Balance at Plan Start field.
Extra Principal Payments Stop: Enter the year you plan to stop making excess payments (i.e., the last year of those payments). Leave this field blank if you intend to make the extra payments until the loan is paid-in-full.
Refinance
The loan amount field does not apply to refinance loans. If the loan was originated in the past, enter the Balance at Plan Start. If the loan is originated in the future, the loan amount will be the balance on any existing first mortgage on the property at the time of the refinance, plus any cash out amount you specify.
Cash Out % of Equity: You may specify that future refinance loans be ‘cash out’ refinance loans by entering a percentage in this field. Pralana will calculate the cash out amount based on your equity (property value minus the balance of the loan being paid off). The new loan amount will be the payoff on the old first mortgage (if any) plus the cash out amount.
Home Equity Loan
This is a 2nd mortgage loan with a fixed loan amount and monthly payment, though you may define an interest-only period. For future home equity loans, you will receive the loan proceeds, minus any origination fee, on January 1 of the origination year.
Loan Amount as % of Equity: For future home equity loans, specify the loan amount as a % of equity in the origination year. Pralana will calculate the loan dollar amount based on this percentage times your equity in the that year.
Home Equity Lines of Credit (HELOC)
You may define HELOCs on primary and vacation homes. HELOCs initially have a defined credit limit and $0 balance. HELOCs have a draw period during which you may ‘draw’ amounts on the HELOC Draws tab. During the draw period, Pralana will make monthly interest-only payments based on the balance, if any. At the end of the draw period, the repayment period begins. Pralana will calculate the monthly payment based on the balance at the start of the repayment period, interest rate, and the number of repayment years.
Draw Period: The duration of the draw period, in whole years. During this period, only interest payments will be made.
Repayment Period: The duration of the repayment period, in whole years. During this period, no draws may occur. Pralana will apply the calculated monthly payment until the loan is paid off.
Line Limit (pre-existing HELOCs): Enter the line limit for HELOCs originated in the past.
HELOC Draws
On this page you may specify HELOC draws. The data entry fields are:
Select HELOC: Select a HELOC from the dropdown list.
Origination Year: Shows the origination year for the selected HELOC. This field is informational and not editable.
Draw Period: Shows the draw period in years for the selected HELOC. This field is informational and not editable.
Draw Amount: Enter the draw amount in today’s $. Pralana will inflate the draw amount from plan start year until the draw year.
First Draw Year: Enter the year of the first draw.
# of Annual Draws: You may specify that the draw occurs for up to 10 consecutive years.
Notes: Enter a description or other notes about the draw (up to 255 characters).
Loan Amortization
On this tab, you may select a loan and see the loan cash flow and amortization schedule.
Operating Costs
Pralana allows you to define custom operating cost categories and amounts for your properties, such as maintenance and real estate taxes.
Categories
Use this tab to define operating cost categories. These categories are available in all scenarios. Please note that you do not need to specify the following cost categories, as they are always assumed to exist: Property Taxes, Change in Property Tax Rates After Age 65, and Insurance. When you go to the Operating Costs tab, it will be pre-populated with the categories defined on this tab.
Amounts
Use this page to enter the annual expenses for each of your properties. The amounts are scenario-specific. Each of the properties you have defined on the Property Info tab will appear as rows in this table and the expense categories you have defined on the Operating Cost Categories tab will appear as columns in this table. When Pralana does its projections, these expenses will only be included in your expense profile during the period in which you own the associated property.
Actual or Expected Property Taxes: This MAY be included in your monthly payments to the loan company which holds it in escrow until the taxes are due. Regardless, they should be separated from principal and interest in this table because they are affected differently by inflation and are always deductible if you itemize.
Change in Property Tax Rates After Age 65: Pralana allows you to specify a separate inflation rate for your property taxes after reaching age 65. The intent here is to allow you to model a freeze or a partial freeze of your property taxes when you reach age 65. This rate is relative to the inflation rate you specified on the Build > Get Started > Scenario Assumptions > Inflation page. So, if your taxes are frozen and general inflation is 3%, enter a -3% here. Just leave this blank if you expect your property taxes to increase at the rate of inflation.
Actual or Expected Insurance: Like property taxes, this MAY be included in your monthly payments to the loan company which holds it in escrow until the insurance premium is due. Regardless, this should be separated from principal and interest in this table because it is affected differently by inflation and is not tax deductible.
Operating & Maintenance Costs: This column of the table is highlighted with a gray background because the values are calculated by Pralana and are write-protected. They are simply the sum of the values entered in the columns which appear to the right.
Category-by-category Expenses: This is where you enter the annual amount in today’s dollars for each of the cost categories you specified on the Cost Categories tab.
Improvements
On this tab, you can specify capital improvements you plan to make to a home in the future. Select the property and enter the year and cost of the improvement, in today’s dollars. Each improvement will become an expense in the associated year and will increase the value of the property by the same amount.
For improvements made in the past, you may enter them on either the:
Improvements tab: Pralana will inflate the amount you enter and add it to the property’s value as the value changes with inflation over the years. Pralana will also back-into the original cost at the time of the improvement and add that amount to the property’s cost basis.
Property Info tab: You may include the value added by the improvement in the amount you enter for the ‘Current Market Value’. You will need to separately include the original cost of the improvement, in the year it was made, in the amount you enter in the ‘Cost Basis for Assets You Currently Own’ field.
Do not include the improvement cost and value on both tabs, to avoid double-counting.
Reverse Mortgage
Pralana supports a reverse mortgage on your Primary Home as specified on the Property Info page and the details of this mortgage are specified on this tab. The projection of the reverse mortgage, including the annual income stream, the balance of the mortgage and the accrued interest can be found on the Review > Tabular Projection > Reverse Mortgage page. The outstanding mortgage balance will become an expense if the associated property is sold during the modeling period and the accrued interest in the final year will be included in the itemized deductions for the sale year. Reverse mortgage balance will be included as a negative value in calculating your net worth. In actual practice, reverse mortgages cannot “go upside down”, where the mortgage balance exceeds the value of the home; however, Pralana does not implement this restriction and it is therefore possible for you to set up the case where the reverse mortgage balance exceeds the value of the home.
Inputs
Property Description: Use this pull-down menu to select from the list of properties defined on the Property Expenses page.
First Year: This defines the year the reverse mortgage began or is to begin. You can enter a year in the past for reverse mortgages already in effect at the start of the modeling period.
Principal Amount: This is the current balance on a reverse mortgage established prior to the start of the modeling period. Leave blank if your loan is to be established in the future.
APR: This is the annual percentage rate you will be paying on the mortgage.
Initial Fees: This is the initial fee to be paid when the mortgage is established, as a percentage of the value of the associated property.
Annual Fees: This is the annual fee as a percentage of the outstanding balance of the reverse mortgage.
Pay-out Option, with the choices being:
Lump sum
Tenure (which is paid for the life of the mortgage)
Term (which is paid for a specified number of years)
Annual Pay-out Amount: This is the annual dollar amount of the income stream to be paid by this reverse mortgage.
Term: This is the duration (in years) of the pay-out and it is only applicable if a pay-out option of “term” is selected.
Cash Flow Projection
This tab shows the cash flow and related metrics for the reverse mortgage.
Cash Flow
Cash Flow Summary
On this tab, you will find a summary spanning all your properties with the following data: expenses, loans, valuation, purchase details, sale details, equity loans, and tax information. Click on underlined amounts for the pop-up Metric MRI showing supporting details for that metric.
Cash Flow by Property
On this tab, you will find the information presented on the Cash Flow Summary tab broken down by property. Click on underlined amounts for the pop-up Metric MRI showing supporting details for that metric.
Rental Property
The Rental Property page is used to enter detailed information related to your rental property. You can include the properties you currently own as well as any you expect to purchase in the future. Pralana can model mortgages, taxes, insurance, depreciation, operating and improvement expenses for each property as well as closing costs, sales commissions, lump sum payments and excess annual payments, and it creates an expense profile for each property such that the expenses are included only during the time you expect to own each property. It also calculates your capital gains for subsequent incorporation into your detailed income tax calculations. Further, Pralana enables you to specify your property information independently for each of three scenarios. The Property Expenses page contains eight (8) subpages which are accessed via the tabs near the top of the page. Here are the property subpages, which are described in more detail below: Rental Property Info, Loans, Operating Cost Categories, Operating Costs, Improvements, Cash Flow and QBI Eligibility. The Cash Flow tab has sub-tabs for Cash Flow Summary, Cash Flow Detail and Loan Amortization.
Please note that you should generally avoid entering any income related to rental property on Pralana’s Income page; the Rental Expense page accounts for all expenses and income associated with rental property, including tax-related items.
Rental Property Info
Asset Description: Simply a brief description of each property
Year of Acquisition: For assets you currently own, enter the year they were acquired. For assets you plan to buy in the future, enter the year you plan to make the purchase.
Cost Basis for Assets You Currently Own: This applies only to properties you already own and is the price you paid or the property’s value at the time you acquired it. This will be used by Pralana in computing capital gains.
Current Market Value: Enter the current market value for assets you currently own as well as those you plan to buy in the future. For the latter, this will be the basis cost used in capital gains calculations.
Real Appreciation Rate: This rate is relative to the inflation rate you specified on the Build > Get Started > Scenario Assumptions > Inflation page. Therefore, just leave this blank if you expect this asset to appreciate at the rate of inflation. Enter a negative number if you expect the asset to depreciate over time, such as most cars and boats. For Homes only, the Market Value will escalate at this rate from the Starting Year forward. All other property types will escalate in price at the inflation rate until they are purchased. Thereafter, they will appreciate or depreciate based on the rate specified here.
Year You Expect to Sell: By specifying a sale date, Pralana will terminate all expenses associated with this property on that date. You can leave this field blank if you do not plan to sell the property.
Sales Closing Costs: Enter a percentage of the sales price that will come out of your equity at the time this asset is sold. This can include sales commissions and other closing costs.
Depreciation Period: Enter the number of years over which this property will be depreciated.
Improvement Percentage: This identifies the percentage of the value of the property associated with improvements rather than land. The improvements will be depreciated over the period specified in the Depreciation Period field.
Rental Income: Enter the annual rental income from the property.
Rent Inflation Rate: Enter the percentage by which the rent on the property is increased annually. Note: your general inflation rate is not applied to rental income. If your Rent Inflation Rate is blank or 0%, rental income will not increase over time.
Loans
Pralana currently supports three types of loans on rental property: Purchase loans (first mortgages), Refinance loans (which may include cash out) and Equity Loans. In the future, we may add support for Lines of Credit which would be similar to HELOCs on a primary residence. There is a Loan Amortization tab where you can see loan annual amortization schedules.
Loan input fields vary depending on the type of loan and whether the loan was originated prior to the plan start year (existing loans) or in/after the plan start year (future loans). Fields with a blue background are required. Fields that are informational or not applicable will be greyed out and not editable.
Common Loan Fields
The various loan types may have these input fields. See additional information below for fields applicable to certain loan types.
Property: Select one of the properties defined on the Property Info tab.
Origination Year: Enter the loan’s origination year. For purchase loans, the origination year is assumed to the year the property was purchased and is not editable.
Interest Rate: Enter the annual interest rate of existing loans. (Pralana only supports fixed rate loans.)
Term: Enter the loan’s term in years. This is optional for loans originated in the past (unless the loan has an interest only period) because Pralana will calculate the amortization using the Interest Rate, Balance at Plan Start, and Monthly Payment.
Balance at Plan Start: For existing loans enter the loan balance as of the plan start date. This field is disabled for future loans.
Monthly Payment: For existing loans, enter the loan’s monthly principal and interest payment. Do not include any escrow amounts for taxes/insurance or extra principal payments you intend to make.
Loan Amount: For future loans, enter the anticipated loan amount in today’s dollars. The difference between the purchase price and this loan amount will be your downpayment. You may separately define a piggyback home equity loan.
Origination Fee: For future loans, enter assumed loan origination fees as a percentage of the loan amount.
% Tax Deductible: Enter the percentage of the loan interest that is deductible. The default value is 100%.
Notes: Enter a description or other notes about the loan (up to 255 characters).
Optional Loan Fields
All loans have these optional fields which are less commonly used. Click the Show Optional Fields checkbox to reveal these fields.
Interest-Only Period: You may specify an interest-only period, in years. The interest only period starts in the origination year. During the interest-only period, Pralana will calculate and apply the interest-only payment and the loan’s principal balance will remain unchanged (unless you also specify an additional principal payment). After the interest only period:
For existing loans, Pralana will use your entered monthly payment to amortize the loan until it is paid off.
For new loans, Pralana will calculate the monthly payment required to amortize the loan balance from the start of the repayment period until the end of the remaining loan term.
Early Pay-Off Year: If you specify an early pay-off, the loan balance (at the end of the prior year) will be paid-in-full at the start of this year. The lump-sum payoff amount will be shown on the amortization schedule and treated as a property expense in the pay-off year.
Extra Principal Payments (Annual $): You may specify additional principal payments by entering an annual amount. Pralana will apply these additional principal payments in the years specified (but not prior to plan start).
Extra Principal Payments Start: Enter the year you plan to start making the excess payments. For existing loans, Pralana assumes that any additional principal payments may in the past are reflected in the Balance at Plan Start field.
Extra Principal Payments Stop: Enter the year you plan to stop making excess payments (i.e., the last year of those payments). Leave this field blank if you intend to make the extra payments until the loan is paid-in-full.
Refinance
The loan amount field does not apply to refinance loans. If the loan was originated in the past, enter the Balance at Plan Start. If the loan is originated in the future, the loan amount will be the balance on any existing first mortgage on the property at the time of the refinance, plus any cash out amount you specify.
Cash Out % of Equity: You may specify that future refinance loans be ‘cash out’ refinance loans by entering a percentage in this field. Pralana will calculate the cash out amount based on your equity (property value minus the balance of the loan being paid off). The new loan amount will be the payoff on the old first mortgage (if any) plus the cash out amount.
Equity Loan
This is a 2nd mortgage loan with a fixed loan amount and monthly payment, though you may define an interest-only period. For future equity loans, you will receive the loan proceeds, minus any origination fee, on January 1 of the origination year.
Loan Amount as % of Equity: For future equity loans, specify the loan amount as a % of equity in the origination year. Pralana will calculate the loan dollar amount based on this percentage times your equity in the that year.
Loan Amortization
On this tab, you may select a loan and see the loan cash flow and amortization schedule.
Operating Costs
Pralana allows you to define custom operating cost categories and amounts for your properties, such as maintenance and real estate taxes.
Categories
Use this tab to define operating cost categories. These categories are available in all scenarios.
Amounts
Use this tab to enter the annual operating expense amounts for each of your rental properties. The amounts are scenario-specific. Each of the properties you have defined on the Rental Property Info tab will appear as rows in this table and the expense categories you have defined on the Expense Categories tab will appear as columns in this table. If you wish to add additional columns, you need to go back to the Operating Cost Categories tab and add the additional cost categories there, and that will result in the addition of corresponding columns on the Operating Costs tab. When Pralana does its projections, these expenses will only be included in your expense profile during the period in which you own the associated property.
The column on the far left side of the page is entitled “Summary of Annual Operating Costs” and contains read-only fields which are a summation of the data you manually enter in the columns to the right for each of your properties.
Improvements
This tab enables you to model improvements to your rental property. If you have made improvements in the past which are still in the depreciation period, you should enter these improvements here and *not* include the cost of the improvement in the property’s Current Market Value and Cost Basis. Pralana will apply the correct amount of depreciation for the improvement based on the improvement year, cost and depreciation period.
Year: Enter the year the improvement was or will be made.
Cost: Enter the cost of the improvement, in Today’s $. For future improvements, the cost will be inflated until the year of the improvement and will be treated as an expense in that year. The cost will also increase the property value and basis.
Depreciation Period: Specify the number of years over which this improvement will be depreciated.
Cash Flow
Cash Flow Summary
On this tab, you will find a summary spanning all your properties with the following data: valuation, expenses, income, and tax information. This includes Schedule E Income/Loss, Adjusted Basic and Depreciation. Click on underlined amounts for the pop-up Metric MRI showing supporting details for that metric.
Cash Flow Details
On this tab, you will find property valuation, expenses, income and tax information for one specific property which you can specify through the pull-down menu in the field entitled “Property”. Click on underlined amounts for the pop-up Metric MRI showing supporting details for that metric.
QBI Eligibility
Eligible for QBI Deduction?: You’ll need to check the box if the expenses on this property are eligible for the Section 199A QBI deduction. If checked, Pralana will deduct up to 20% of the net income from your rental property business (as reflected in the Schedule E income/loss column) from your taxable income.
Children
The Children Expenses page is used to enter detailed information related to raising and educating your children. This page includes child-rearing costs through high school, but its primary focus is on the costs associated with each child’s college years.
The Children page contains three tabs: Pre-College Expense Categories, Pre-College Expenses and College Expenses. Two of these tabs will contain child-unique rows for the children defined on the Build > Get Started > Demographics page. Please note that your children are specified via the Build > Get Started > Basic Plan Information page.
Pre-College Expense Categories
The table on this page enables you to specify the expense categories in which you will enter expenses on the Pre-College Expenses page, and these categories will apply to all scenarios.
Pre-College Expenses
You can use the table on this page to define child-specific costs for the time from the beginning of the modeling period to the year in which each child begins college, and these costs can be scenario-specific. The table will contain one row for each of your dependent children and one column for each of the expense categories defined on the Pre-College Expense Categories tab.
College Expenses
You can use the table on this page to define child-specific college costs, and these costs can be scenario-specific. Pralana allows you to specify overall costs for college and the percentage of that cost you plan to pay. It then allows you to specify whether those costs will be paid as they are incurred, through student loans or through a 529 plan. If a 529 plan is selected, Pralana will calculate your annual payments into the plan.
College Start Year: Enter the year the child will begin college. Alternatively, enter the high school graduation year (or the last year you plan to provide support) for dependent children not planning to attend college.
Annual College Costs in Today’s $: Enter the entire annual cost, based on your research at collegeboard.com or elsewhere. Include all costs unique to this child and do not duplicate on the Other Expenses tab. For dependent children not attending college, enter your annual cost of supporting them. Pralana assumes you will include all costs associated with your support for this child in this field, which is separate and independent from the costs captured in the worksheet below this table which are unique to the period prior to the child starting college.
# of Years This Child is Expected to be in College: Enter the number of years you expect each child to be in college, in whole years. For dependent children not planning to attend college, enter the number of years you will be providing support after high school graduation. If none, just leave blank.
% of the Cost You Plan to Fund: Enter the % of the cost YOU expect to cover (use this option if you are expecting the child to bear some of the cost or to get a scholarship).
Your Share of the Cost in Future $: This column is calculated by Pralana and write-protected. This is YOUR share of the cost. The portion to be paid by the child is excluded from the calculation.
How Do You Intend to Fund Each Education? Pralana allows you to model the funding of college educations in one of three ways:
Pay as you go, in which the annual costs will simply be treated as another expense in the years the associated child is in college
529 Plan, in which case Pralana will consider your initial 529 Plan balance as specified on the Initial Balances page and then calculate your annual contributions to the plan to exactly cover the specified costs. Unless the initial balance of the 529 Plan is sufficiently high, Pralana will start your contributions in the Starting Year and continuing until all children whose college education are being funded with this method are due to graduate. Pralana assumes that 100% of that child’s college costs are qualified costs and withdrawals from the 529 Plan account are used to cover all those costs. Your contributions to a 529 Plan are treated as expenses in the year they are paid. The interest earned on the account is not included in your taxable income.
Student loan, in which case Pralana will model a loan beginning in the year the child begins college for the total amount of the college education that YOU are paying, for the duration and at the interest rate you specify on the right side of the table.
Student Loan Amortization
If you have specified that the college expenses for one or more children are to be covered via a student loan, this page will show you the amortization of those loans on a child-by-child basis. Just select the desired child via the pull-down menu and the page will be populated with the corresponding details.
Healthcare
Healthcare costs can vary dramatically as you transition from your working years to your retirement years and then again following the death of a spouse. The Build > Expenses > Healthcare page is designed to capture those changing annual costs in today’s dollars while allowing you to specify which of those costs are to be paid with pre-tax dollars. Instead of simply giving you fields in which you specify the amount along with start and stop dates, Pralana provides a specially formatted table consisting of several different time periods. This approach is intended to help you think through the transition process and the associated healthcare cost variations without having to enter specific start and stop dates. Pralana can determine these dates based on other information you have already entered, thereby saving you the trouble of having to enter unnecessary information.
Healthcare Expense Periods
To accomplish this, Pralana lays out the five time periods defined as follows and hides the ones not applicable to you based on your marital status, full retirement age, etc.:
Period 1: You are married and both you and your spouse are still working full time and probably have access to group insurance. This period is not applicable if you are single.
Period 2: You are either single, or you or your spouse, but not both, are still working full time. This period has the potential for a significant increase in the cost of healthcare premiums if you are married due to possible loss of access to group insurance. If healthcare coverage was being provided (in Period 1) by the employer of the partner who retires first, be advised that retiree healthcare premiums tend to be much higher than those for active employees and this gives you the mechanism to specify those increased costs.
Period 3: You are married and both you and your spouse are retired but neither is eligible for Medicare, or you are single and not yet eligible for Medicare. If you are married, this period could be characterized by further changes in healthcare costs relative to periods 1 and 2 because employer healthcare will be replaced by some form of retiree healthcare by this point. If you are single, you could be moving from employer benefits to retiree benefits and you can plan on higher costs.
Period 4: You are married, but only one of you is eligible for Medicare. As you move from retiree healthcare to Medicare you’ll likely see a decrease in costs and if you and your spouse become eligible for Medicare at different times, you’ll see your costs step down when the first one reaches 65 and then again when the second one reaches 65. This period is not applicable if you are single.
Period 5: You and your spouse are eligible for Medicare, or you are single and eligible for Medicare. When you fully transition from retiree healthcare to Medicare, you will likely see your final reduction in costs.
Healthcare Expenses
For each of the healthcare expense periods, the following information is requested. Enter amounts in today’s dollars. Pralana will inflate the amounts using your general inflation rate, plus any healthcare costs inflation adjustment you provide.
Insurance premiums: This is the annual amount of your health insurance premiums. If you have specified that Pralana is to automatically calculate your Medicare Part B premiums/IRMAA and Part D IRMAA, be sure to exclude those costs from this field. If you check the box to “Assume ACA insurance if eligible” and provide the ACA second lowest cost silver premium, Pralana will calculate the ACA premium tax credit (subsidy) for marketplace insurance. Do not reduce your insurance premiums by the ACA subsidy amount. You can see how the subsidy is calculated in the Tax Forms > 8962 ACA Premium Tax Credit for the applicable years.
Out-of-pockets expenses: Enter your anticipated out-of-pocket healthcare expense. Do not include expenses you included as insurance premiums.
% insurance premiums paid with pre-tax $: Because no tax was paid on these amounts, they are excluded from Schedule A deductible healthcare expense calculations.
% out-of-pocket expenses paid with pre-tax $: Because no tax was paid on these amounts, they are excluded from Schedule A deductible healthcare expense calculations.
% considered business deduction: Your taxable self-employment income (as specified via one of the employment income streams on the Income page which is treated as net income) will be reduced by this amount and your QBI deduction will also be reduced by 20% of this amount while the TCJA of 2017 tax law remains in effect. Caution: Be sure not to double-dip here by claiming these expenses as both paid with pre-tax dollars and eligible for a business deduction.
Assume ACA insurance if eligible?: Simply check the box to indicate “yes”, and that will tell Pralana to model ACA insurance for the applicable period and to apply Premium Tax Credits (subsidies) as appropriate.
ACA Second Lowest Cost Silver Plan Premium: When you have indicated to assume ACA insurance in this period, Pralana will use this amount in conjunction with your annual insurance premium and your MAGI to determine your annual ACA subsidy.
Notes: You can use this field to capture notes to yourself about the numbers you have entered in the other healthcare expense fields.
All the costs specified in the healthcare table will be escalated over time at a rate equal to the sum of the General Inflation Rate and Real Healthcare Inflation Rate specified on the Inflation tab of the Build > Get Started > Scenario Assumptions page.
The expenses defined on this page will be reduced by the same percentage as the Phased Expenses upon your death or your spouse’s death, whichever occurs first. You can specify this percentage on the Build > Phased Expenses page. This feature enables Pralana’s life insurance recommendations and allows you to explore what-ifs related to life expectancies without having to come back to this table and make any adjustments.
Modeling the Affordable Care Act
Pralana models the provisions of the Affordable Care Act (ACA) on the Healthcare expenses page. If your Modified Adjusted Gross Income, or MAGI (your Federal AGI + the untaxed portion of Social Security benefits + any tax-exempt interest), falls between 100% and 400% of the Federal Poverty Level (FPL) in any given year (where FPL is a function of family size), you are eligible for a Premium Tax Credit (subsidy) on your ACA health insurance plan premiums. ACA rules define your expected contribution to a benchmark insurance policy premium, and that varies from about 2% to about 10% of your MAGI. As you can see in the notional illustration below, your expected contribution is a function of your MAGI, but it is not linear. That benchmark policy is defined to be the second lowest cost Silver Plan (SLCSP) available in your geographical area. The subsidy is intended to level the playing field such that everyone pays the same for the benchmark insurance policy regardless of the area of the country in which they live. So, in practice, if the cost of the benchmark policy exceeds your expected contribution you will receive a subsidy to effectively compensate for the higher cost of insurance in your area; you will not receive a subsidy if the cost of the benchmark policy is less than your expected contribution. Therefore, the subsidy equals the cost of the benchmark policy minus your expected contribution, never to go below zero. Consequently, your actual premium is a function of your MAGI, the insurance plan you select and your subsidy, and this can also never go below zero. In other words, if your subsidy exceeds the cost of your health insurance premium (for example, if you buy a bronze plan) then you will effectively pay nothing for your insurance but neither will you receive a credit. There are numerous sources of detailed information on ACA so we will not elaborate further in this manual.
To model the ACA, Pralana contains an internal table of the inflation-adjusted Federal Poverty Level and uses it to determine the MAGI limits for eligibility. It also enables you to specify whether you plan to purchase an ACA health insurance policy and to specify the annual premium of the benchmark Silver Plan (i.e., the SLCSP) in your area. Please note that the SLCSP premium is the premium for your entire family. It then uses this information to compute your annual subsidy, when applicable, and subtracts that from your annual healthcare expenses. In doing this, Pralana also models the so-called “cliff” where the subsidy immediately drops to zero whenever your MAGI exceeds the 400% FPL number by even $1. Two caveats on that, though:
The American Recovery Act of 2021 eliminated this cliff for the years 2021 and 2022, and
The Inflation Reduction Act extends the elimination of the cliff through 2025 and that is implemented in Pralana.
You can see the MAGI and your ACA subsidies on the Review > Tabular Projections pages.
% Reduction for Survivor
Your healthcare expenses will likely decrease upon the death of one marriage partner, so Pralana allows you to specify that reduction as a percentage of the expenses you have identified above; however, this will not affect automatically calculated Medicare premiums because those are calculated on a per-person basis.
Long-Term Care
The table on the Build > Expenses > Long-Term Care page enables you to specify any expected long-term care (LTC) expenses. There are separate columns for you and your spouse, and you can specify the amount in today’s dollars, the start age and duration of the care period. For each expense you enter, you may specify whether to apply your long-term care inflation add on, your healthcare inflation add-on, or no add-on to the general inflation rate.
Pralana assumes that all LTC expenses are tax-deductible.
Term Life Insurance
Pralana’s implementation of term life insurance is located on the Build > Expenses > Term Life Insurance page and has these features:
You can specify separate policies for you and your spouse
A fixed face value is assumed for the term of the policy and neither the death benefit nor the annual premium is adjusted for inflation
You can add multiple updates to the policy with a specified term, death benefit, and annual premium
Here is a screenshot:
Cash Value Life Insurance
Cash value life insurance is a type of insurance that includes an investment-like component that gains value over the life of the policy, can be borrowed against like a loan and is paid out upon the policy holder’s death. We will not elaborate much further on this type of insurance in this manual; however, there is a large amount of related information on the Internet, and here’s a link to one such example: https://www.policygenius.com/life-insurance/cash-value-life-insurance/. Cash value life insurance is available in a variety of forms, including whole life, variable life and universal life, and each insurance company has its own variations within these major categories. Consequently, the Pralana design does not attempt to model all possible variations of this type of insurance. Rather, it models the major features of cash value life insurance and strives to provide you with the necessary controls to enable you to approximate the desired characteristics of your specific policy or policies.
Pralana’s implementation of cash value life insurance is located on the Build > Expenses > Cash Value Life Insurance page and has these features:
A fixed face value is assumed for the life of the policy and it is not adjusted for inflation
The cash value of the policy starts with a user-specified initial value, and contributions to and growth of the cash value is modeled based on a user-specified rate of return
A fixed annual premium is assumed for the life of the policy, but once the policy is “paid up” you can use your cash value to pay that premium
The death benefit can be some combination of face value and cash value and it will be treated as non-taxable income in the year of the policyholder’s death; the policy will terminate at that point and its cash value will go to zero
A one-time withdrawal of some or all the cash value is supported (loans are not supported)
Here are two merged screenshots that illustrate the Policy Information tab where you can specify the parameters to control Pralana’s modeling of cash value life insurance policies for yourself and your spouse:
Dick has a policy established in 2024 with a face value of $100,000, an annual premium of $1178 and no cash value in the model’s starting year of 2024. As the cash value accumulates, it will have a real rate of return of 2% (and a nominal return of 5% if inflation is assumed to be 3%). 83% of the $1178 premium will be contributed to the cash value of this policy and the remaining 17% will pay for the death benefit. This policy will be considered “paid up” when the cash value builds to such a level that the annual dividend is greater than the premium, and subsequent premium payments will cease. Upon Joe’s death, this policy will pay a death benefit equal to the $100,000 face value plus 50% of the accumulated cash value. Jane plans to have a $75,000 face value policy of her own that starts in the year 2025 with an annual premium of $900. Her cash value will also have a real ROR of 2% with 83% of the premium going toward the cash value. The cash value of her policy will never be used to pay the premium and her death benefit will be the face value plus 50% of the cash value. These inputs are used to produce a projections on the Cash Value and Death Benefit Projections tab which looks like this merged screenshot:
Notice that Joe’s premium ceases in 2036 when his dividend (5% of the $25,265) exceeds the $1178 premium.
Let’s now take a quick look at another example involving a withdrawal of some of the cash value.
In this case, Dick plans to withdraw 50% of his cash value in the year 2042. You can see the withdrawal occur in 2042 which then causes the premium payments to resume for several years because of the associated drop in cash value and dividends. When the cash value is built back up, the premium payments are again covered by dividends.
When the withdrawal occurs, those funds are deposited into the cash account. If that causes the ceiling value to be exceeded, then the excess funds will be withdrawn from the cash account and deposited into the regular savings account.
Charity
The table on the Build > Expenses > Charity page enables you to identify charitable giving expenses for each of the three scenarios. For each expense, you can enter a brief description, the amount in today’s dollars (adjusted annually for inflation), the first and last year of the expense, whether it should be treated as a Qualified Charitable Distribution (QCD) after you reach age 70 ½ and, if so, whose tax-deferred account the donation is to come from. Non-QCD expenses will be included in your annual expenses and in your itemized deductions. QCD expenses will NOT be included in your annual expenses but will, instead, be deducted directly from the specified tax-deferred account and be treated as adjustments to your income. In that manner, QCDs can reduce your taxable income even if you are using the standard deduction. Further, RMDs will be reduced by an amount equivalent to the QCD.
There are two cases where donations specified as QCDs will be treated as regular charitable donations:
During the period between the start of the donation and the time the owner reaches age 70 ½.
Anytime the specified tax-deferred account has an insufficient balance to fund the QCD.
Pralana’s tabular projections accurately reflect the treatment of your donations as QCDs or regular charitable donations based on the conditions above rather than the way they are specified on the Charity input page.
Handling of Line Items Specified as QCDs
On a single line you can specify a donation to be treated as a QCD to the extent that QCDs are allowable adjustments to your income but otherwise to be treated as a regular charitable donation (a non-QCD). For example, let’s say you indicate that you want to donate $5,000 per year to charity 1, you want it to begin in the year 2021 when you are only 60 years of age, and you designate it as a QCD. Since QCDs are not allowable until you reach age 70 ½, this donation will initially be treated as a tax-deductible charitable donation and will be included as an annual expense. When you reach age 70 ½ it will automatically become a QCD. At that time it will no longer be included in your expenses but, rather, will simply be deducted directly from the specified tax-deferred account and that deduction will be excluded from income tax calculations.
In the example below, you can see this $5,000 contribution to charity 1 which is to be treated as a QCD whenever they become allowable. You can see a similar contribution to charity 2 by the spouse.
In the screenshot below you can see how these donations are reflected on expense projections. The big blue arrow points to the place where the donations switch from being regular donations to being QCDs. In this example you are one year older than your spouse, so your QCD begins one year earlier.
Phased Expenses
The Build > Expenses > Phased page enables you to identify and quantify your current annual phased expenses (i.e., miscellaneous type expenses that tend to be constant for a particular phase of your life) and those you will incur during your retirement years on a per scenario basis, all in today’s dollars. Here is a screenshot:
Phased Expense Time Periods
This page is designed such that you do not have to enter start and stop dates for each expense. Instead, you have the option of defining up to five time periods in which your expenses are fixed except for annual inflation adjustments. These periods are scenario-specific and could correspond to your pre-retirement years, early retirement years and late retirement years, or to any other periods/phases which you believe are likely to have substantially unique expense levels.
Phased Expense Categories
You can identify up to 25 categories of phased expenses such as groceries, eating out, cell phones, and gifts, but the categories you specify will apply across all your scenarios. Consequently, category specification is on a different tab than the actual expense amounts, which can be scenario specific.
Phased Expense Amounts
For each of the time periods specified on the Time Periods tab and each of the expense categories defined on the Categories tab, you can specify the expense amount in today’s dollars on a scenario basis. These expenses will be escalated at the inflation rate.
Line items on this page can be identified as either essential or non-essential. This enables Pralana to model variable spending in your retirement years, wherein non-essential spending is dynamically adjusted year by year as a function of the performance of your portfolio. Please read the section on Variable Spending Strategies for more information.
Caution: Be sure not to duplicate any expenses you have already entered on the Property or Children pages. All expenses entered on this page will be escalated over time at the General Inflation Rate entered on the Build > Get Started > Scenario Assumptions page.
% Reduction for Survivor
Additionally, this page also provides a field where you can specify the percentage by which these expenses, as a whole, will be reduced after your death or your spouse’s death, whichever occurs first. This feature enables Pralana’s life insurance recommendations and allows you to explore what-ifs related to life expectancies without having to come back to this table and make any adjustments.
Projected Totals by Year
This tab displays a year-by-year projection of your Phased Expenses in either future or today’s dollars.
Miscellaneous Expenses
The Build > Expenses > Miscellaneous page enables you to identify one-time or specific-duration expenses for each of the three scenarios. For each of these expenses, you can enter a brief description, the amount in today’s dollars, whether the amount is to be adjusted for inflation, the first year and last year of the expense, and whether the expense is tax deductible or is to be considered an adjustment to income. If the last year is left blank, Pralana will assume the expense continues indefinitely. For one-time expenses, the first and last years should be set to the same year.
As with Phased Expenses, line items on this page can be identified as either essential or non-essential. This enables Pralana to model variable spending in your retirement years, wherein non-essential spending is dynamically adjusted year by year as a function of the performance of your portfolio. You can read more about this in the section on Variable Spending Strategies.
Projected Totals by Year
This tab displays a year-by-year projection of your Miscellaneous Expenses in either future or today’s dollars.
Modeling Your Accounts
Pralana models the following accounts: a cash account (which is fundamentally an amalgamation of your checking and savings accounts), a taxable investment account, tax-deferred accounts for both you and your spouse, a Roth account, inherited IRA accounts for both you and your spouse, inherited Roth IRA accounts for both you and your spouse, a Health Savings Account (HSA) and a 529 Plan account. All accounts are treated as joint (i.e., you and your spouse) except for the various tax-deferred and inherited IRA accounts. In the real world you may have multiple accounts within these categories, but Pralana models them as one.
You can specify the initial balance of these accounts and the pages that collect these inputs allow you to specify several individual accounts that fall into Pralana’s account categories; however, Pralana will simply sum these initial balances and will not attempt to model any future balances of the individual accounts within any of its account categories. Henceforth, the term “account” refers to Pralana’s account categories (i.e., those listed in the first paragraph of this section) and not your actual accounts.
Pralana will model future balances on each account based on user inputs and its internal algorithms. These future balances will be a function of the initial balance, the rates of return (RORs) and contributions to and withdrawals from each account. Initial balances are specified via the Build > Financial Assets > Account Initial Balances page, and RORs are either specified directly on the Build > Financial Assets > Simple Portfolio Modeling page or derived based on the inputs provided on the Build > Financial Assets > Advanced Portfolio Modeling pages.
Since the initial balances of your accounts are specified via multiple pages, based on account category, Pralana provides you with a grand total of your account balances across all categories adjacent to the page header, as shown in the screenshot below:
Modeling of Account Balances
Pralana recalculates year-ending account balances for every year in the modeling period as follows: Account Balance (year n) = Account Balance (year n-1) + annual growth + annual deposits – annual withdrawals. Annual growth is calculated by one of two methods which you control via the Account Growth Timing tab of the Build > Financial Assets > Management page.
In the Start-of-Year growth mode, Annual Growth = Account Balance (at the end of the prior year) x ROR.
In the Mid-Year growth mode, Annual Growth = [Account Balance (at the end of the prior year) + annual deposits/2 - annual withdrawals/2] x ROR.
Depending upon the setting you select on the Account Growth Settings tab of the Build > Financial Assets > Management page, the ROR referenced above is either entered directly by you on an account basis or is derived based on your inputs on the Build > Financial Assets > Asset Classes and Allocations pages. Either way, you can view the resulting RORs, annual growth amounts and account balances on the Review > Tabular Projections > Accounts & Portfolio pages.
Taxable Accounts
The Build > Financial Assets > Account Initial Balances > Taxable Accounts tab is where you specify your taxable accounts, including the cash account and your taxable investment accounts. [Note for Pralana Excel users: In PRC Gold, the Taxable Investment Account was referred to as the Regular Account.] In each of these categories, you can specify as many subaccounts as you wish along with the respective initial balances. The initial balances you specify will be summed, applied to all scenarios, and thereafter managed as one account (i.e., one cash account and one taxable investment account).
In addition to initial balance, Pralana asks for two other pieces of information to enable accurate modeling of taxation on the account growth:
Unrealized Capital Gains as of the start of the modeling period: This is the account balance minus the account’s cost basis and indicates the amount of untaxed growth in the account.
Capital Loss Carryover: Losses you may have experienced prior to the model’s starting year that were not fully tax-deductible due to the annual $3000 limit on capital losses.
Contributions to Taxable Accounts
Pralana never asks you how much you plan to contribute to your cash or regular investment accounts. Rather, it calculates how much you can contribute based on your net cash flow, which is your spendable income plus other cash inflows minus your expenses. If you have a positive cash flow, Pralana will contribute it to your cash account. This way, every single dollar is accounted for. You may specify a ‘ceiling’ or maximum amount you want to hold in your cash account. When that limit is exceeded, the excess funds will be rolled into your taxable investment account.
The Cash Account is Central to Cash Flow Modeling
The cash account is central to all cash flow in Pralana. All positive cash flows are treated as deposits to the cash account and all negative cash flows are treated as withdrawals from the cash account; however, it has user-specified minimum (floor) and maximum (ceiling) levels, identified on the Build > Financial Assets > Management > Cash Floor & Ceiling page. An overflow condition occurs when those deposits would cause the balance to exceed the ceiling. When that happens, the excess money is transferred from the cash account to the Taxable Investment Account. An underflow condition occurs when negative cash flows would cause the balance to go beneath the floor. When that happens, Pralana will seek another source of funds to cover the spending deficit and will refer to the user-specified settings in the Withdrawal Priority Table on the Build > Financial Assets > Management > Account Withdrawal Priority page to make subsequent transfers to the cash account. This process will continue while negative cash flows exist and if one account becomes depleted, Pralana will move on to the next account in the prioritized list to find the necessary funds to cover the deficit spending. If all accounts become depleted, it will take the cash account below the specified floor level.
NOTE: Withdrawal Priority is of no consequence if you do not have negative cash flows that would take the cash account below the floor level.
Retirement Accounts
The Build > Financial Assets > Account Initial Balances > Retirement Accounts tab is where you specify your Roth and tax-deferred accounts. In each of these categories, you can specify as many subaccounts as you wish along with the respective initial balances. These initial balances will be applied to all scenarios and even though the table on this page allows you to enter initial balances for multiple accounts within each category, Pralana will add these together and model them as one (one Roth account, one tax-deferred account for you and one tax-deferred account for your spouse). For the tax-deferred accounts, there is a column for entering the portion of the account balance associated with any after-tax contributions. Starting with the initial after-tax balance entered here, Pralana will model the after-tax balance going forward and will include the after-tax component in all Roth conversions.
Contributions to tax-deferred accounts can be done in the following ways:
User-specified contributions in conjunction with earned income streams (on the Build > Income > Employment page)
Pension rollovers as specified in conjunction with pension income streams (on the Build > Income > Pensions page).
Contributions to Roth accounts can be done in the following ways:
User-specified contributions in conjunction with earned income streams (on the Build > Income > Employment page),
Pension rollovers as specified in conjunction with pension income streams (on the Build > Income > Pensions page),
Roth conversions (which move money directly from a tax-deferred account to the Roth account).
Withdrawals from tax-deferred accounts can be done in the following ways:
Required Minimum Distributions (RMDs), which are calculated automatically
Scheduled withdrawals, which can be specified on the Build > Financial Assets > Scheduled Withdrawals page
Purchase of an annuity as specified on the Build > Income > Annuities page
Roth Conversions, which move money directly from tax-deferred accounts to Roth accounts. You can manage your Roth Conversions on the Analyze > Roth Conversions page
Unscheduled withdrawals to cover negative cash flows that would cause the cash account to go below the floor level; however, please note that this will only occur if all other accounts higher in the Withdrawal Priority list have been depleted.
Withdrawals from Roth accounts can be done in the following ways:
Scheduled withdrawals, which can be specified on the Build > Financial Assets > Scheduled Withdrawals page
Purchase of an annuity as specified on the Build > Income > Annuities page
Unscheduled withdrawals to cover negative cash flows that would cause the Cash Account to go below the floor level; however, please note that this will only occur if all other accounts higher in the Withdrawal Priority list have been depleted.
Inherited IRAs
Pralana models one Inherited IRA for you and another for your spouse, and it models one Inherited Roth IRA for you and another for your spouse. The inheritance timing, initial values, and distribution rules are specified on the Build > Financial Assets > Account Initial Balances > Inherited IRAs tab.
The sections on this page enable you to define the traditional and Roth IRAs that you have already inherited or expect to inherit in the future. The SECURE Act, signed into law in December 2019, eliminated the ability to stretch the distribution of an IRA inherited in 2020 or later over the lifetime of the beneficiary. Under the SECURE Act, inherited IRAs must now be distributed within 10 years; however, IRAs inherited prior to January 1, 2020 still operate under the old rules which require that distributions from an inherited traditional or Roth IRA must begin by the end of the year following the owner’s death and can be spread over a 5-year period or the beneficiary’s life. A potential complication under the old rules is that an IRA inherited by multiple beneficiaries that is not split into separate accounts will be distributed over the life expectancy of the oldest beneficiary. Regardless, the Pralana design does not implement all these details and it is incumbent on you to specify the correct distribution period. Pralana allows you to specify the distribution period with the following choices: lifetime (i.e., your lifetime) or 1-50 years (to accommodate the case of a shared inheritance distributed over someone else’s lifetime.
Inherited Accounts > Inherited Amount
If the account was inherited prior to the starting year, this is the balance of that account on January 1 of the model’s starting year. Otherwise, it is the amount you expect to inherit in future year dollars (i.e., if you expect to inherit $50,000 in the year 2040, just enter 50,000).
Inherited Accounts > Year of Inheritance
If the inheritance occurred prior to the model’s starting year, you can enter that year and Pralana will model RMDs according to that year. If you leave it blank, Pralana will assume the inheritance occurred in the year prior to the start of the modeling period. For future inheritances, just enter the year the inheritance is expected to occur (i.e., if you expect to inherit $50,000 in the year 2040, just enter 2040).
Inherited Accounts > Distribution Period
This field contains a pull-down menu through which you can specify the distribution period. The choices are “Lifetime” or a specific number of years between 1 and 50, inclusive. Pralana will assume “Lifetime” if you leave this field blank. Pralana does not enforce IRS rules regarding distribution periods, so it is up to you to enter the correct period.
Inherited Roth IRA Accounts > RMD Start Year
The IRS allows you to delay the distribution of inherited IRAs for up to 10 years in some cases, so this field (in combination with the Distribution Period field) enables you to delay the distribution until some specified year in the future and then it have it occur over some number of years. This field must contain a specific value; Pralana will not model any RMDs if it is left blank. RMDs generally begin the year after the inheritance occurs, so Pralana’s input validation mechanism will prevent you from entering the same year as the inheritance year. If you do enter a year that is later than the inheritance year and subsequently change the inheritance year, the RMD start year field will be highlighted but no error will occur; Pralana will simply start the RMD the year after the inheritance occurs.
HSA and 529 Accounts
The Build > Financial Assets > Account Initial Balances > HSA and 529 Accounts tab is where you specify your Health Savings Accounts (HSAs) and 529 Plan accounts. In each of these categories, you can specify as many subaccounts as you wish along with the respective initial balances. These initial balances will be applied to all scenarios and even though the table on this page allows you to enter initial balances for multiple accounts within each category, Pralana will add these together and model them as one.
Health Savings Accounts
Contributions to HSAs are tax deductible, account growth is tax-free, and withdrawals to pay qualified medical expenses are also tax-free (but see note below about New Jersey and California.) Withdrawals for other reasons are subject to penalties.
New Jersey and California: These states include contributions to, and annual growth in, HSAs as income. Pralana assumes annual growth in an HSA is ordinary income.
The initial balance of your HSA is entered on the Build > Financial Assets > Account Initial Balances > HSA page.
In Pralana, you may specify contributions to your HSA two ways:
As employment payroll contributions made by you and/or your employer
By defining a Scheduled Withdrawal from another account into your HSA. Pralana assumes you have determined that this is a qualified contribution.
If using Simple Portfolio Modeling, you specify the annual rate of return on your HSA. If you use Advanced Portfolio Modeling, you define the asset allocation of your HSA account.
Healthcare expenses are entered on the Build > Healthcare Expenses page. If you plan to use the HSA to pay for, or reimburse yourself for, some or all healthcare expenses, then those expenses should be designated as being paid with post-tax dollars (because later they will be reimbursed with pre-tax dollars). Withdrawals are scheduled via entries in the table on the Build > Financial Assets > Scheduled Withdrawals page. Pralana maintains the HSA balance and you can see that on the Review > Tabular Projections > Accounts & Portfolios page.
A Few Comments Regarding Health Reimbursement Arrangements
Healthcare Reimbursement Arrangements (HRAs), or Section 105 plans, are not explicitly modeled by Pralana. They are a nice mechanism in the real world but an unnecessary complexity in the modeling world. Basically what they do is provide an IRS-approved way for an employer to reimburse an employee for eligible expenses. You can effectively model an HRA by simply reducing the insurance premiums and out-of-pocket expenses entered into Pralana by the amount you expect to have reimbursed by your employer. Further, you can document this calculation via the Notes fields on the healthcare expenses page.
529 Plan Accounts
Annual contributions to 529 plans are made with after-tax dollars, the account funds can be invested and grow over time, and you can make withdrawals to cover qualified education expenses with no taxes on the account growth.
There are several integrated components to Pralana’s 529 Plan implementation. The initial balance of your 529 account is entered on the Build > Financial Assets > Account Initial Balances > 529 Plan page and the rate of return on your 529 plan funds is derived based on the associated portfolio specified on the Build > Financial Assets > Portfolios > Asset Classes and > Asset Allocations pages. Contributions to and withdrawals from your 529 account are a function of Pralana’s algorithm for the modeling of college educations and based on the inputs you provide on the College Educations tab of the Expenses > Children page. Pralana maintains the 529 account balance and you can see that on the Review > Tabular Projections > Accounts & Portfolios pages.
Management
There are several important management variables that need to be specified to enable Pralana to model your accounts. Account management is controlled by the Build > Financial Assets > Management page which has seven subpages:
Cash Floor and Ceiling
Withdrawal Priority
LTCG Withdrawal Strategy
Account Fees
Deferred RMDs
Effective Tax Rate
Account Growth Settings
Cash Floor and Ceiling
As explained in the section entitled The Cash Account is Central to Cash Flow Modeling, the cash account has user-specified minimum (floor) and maximum (ceiling) levels, which are defined on this tab. The balance of the cash account will always remain in the range established by these floor and ceiling levels (unless you run out of money in all other accounts). If for whatever reason you do not wish to model a cash account, just set floor and ceiling levels to zero by entering blanks in these fields.
Key Points to Understand:
All positive cash flows cause contributions to your cash account and all negative cash flows cause withdrawals from your cash account
You can specify upper and lower limits of your cash account
Cash account contributions that would tend to take its balance above the upper are, instead, transferred to your taxable investment account
Cash account withdrawals that would tend to take its balance below the lower limit result in transfers from one or more of your other accounts, in accordance with your withdrawal priorities
Account Withdrawal Priority
When an underflow situation occurs in the cash account (as described in the paragraph above on Cash Management), Pralana will seek another source of funds to cover the spending deficit and will refer to the settings you specify on this tab to make subsequent account withdrawals. This process will continue while negative cash flows exist and if one account becomes depleted, Pralana will move on to the next account in the prioritized list to find the necessary funds to cover the deficit spending. If all accounts become depleted, it will take the cash account below the specified floor level if necessary. Important note: Withdrawal priority is moot if there is no negative cash flow in your plan because it only comes into play whenever you have negative cash flows that would take the cash account balance below its floor level.
The table on this page contains one row for each of your accounts, with the top priority account at the top and the other accounts listed in order of descending priority for covering negative cash flows. To adjust the order of the list simply drag and drop any account into the desired position and continue that process with the other accounts until the list is organized as you wish. When negative cash flows occur, Pralana will seek to cover that negative spending by making a withdrawal from the first account in the list. When that account does not have sufficient funds to cover the negative cash flow, Pralana will go to the next account listed for the funds. That process will continue until the negative cash flow is completely covered by withdrawals from some combination of your accounts. All such withdrawals are referred to as unscheduled withdrawals and Pralana will model the taxes on those withdrawals in the same year and in accordance with the account type. You can view these unscheduled withdrawals on the Review > Tabular Projections pages.
LTCG Withdrawal Strategy
Pralana allows you to specify whether to withdraw unrealized long-term capital gains first, last, or evenly (proportionately based on the percentage of the account or asset balance that is unrealized LTCG) when most withdrawals are made from the Taxable Investment account.
Withdrawal of unrealized usually LTCG triggers ‘realized’ LTCG which are taxed in the year of withdrawal (except for realized LTCG on unscheduled withdrawals which are currently taxed in the following year).
There are two types of withdrawals that never trigger realized LTCG:
withdrawals of non-reinvested interest and dividends which are transferred to the Cash account, and
Scheduled Withdrawals from the Taxable Investment account to an External designation are assumed to be transfers of assets that do not trigger a sale. The unrealized LTCG balance is reduced by its pro-rata share of the asset or account balance.
The LTGC withdrawal strategy options are:
Distribute withdrawals evenly: LTCG will be realized in proportion to the % of account balance that is unrealized LTCG.
Withdraw capital gains first: withdrawals will be funded by the unrealized LTCG balance (triggering realized LTCG) until depleted and then from non-appreciated assets.
Withdraw capital gains last: withdrawals will be funded by unappreciated assets (triggering no realized LTCG) until only unrealized LTCG remains.
For example, assume the Taxable Investment account has a balance of $100K of which $30K or 30% is unrealized LTCG. If a $10K scheduled or unscheduled withdrawal is made and the withdrawal strategy for unrealized LTCG is:
Evenly: $10K will be withdrawn, 30% or $3K will be taxed as realized LTCG that year, the remaining balance will be $90K total / $27K unrealized LTCG.
First: $10K will be withdrawn, all of which will be taxed as realized LTCG that year, the remaining balance will be $90K total / $20K unrealized LTCG.
Last: $10K will be withdrawn, none of which will be taxed as realized LTCG that year, the remaining balance will be $90K total / $30K unrealized LTCG.
An upcoming Q3 2025 release will add support for realized LTCG from asset sales due to annual rebalancing of the Taxable Investment account. When implemented, your LTCG withdrawal strategy will be used to determine how much LTCG will be realized due to rebalancing.
Account Management Fees
This page contains a simple list of your accounts where you can specify the annual management fee percentage for each of your accounts.
Deferred RMDs
Required Minimum Distributions (RMDs) must be taken from your tax-deferred accounts when you reach the age specified by SECURE 2.0; however, if you are still employed by the company sponsoring your 401k, you can delay your RMD from that 401k until you retire. This control gives you the ability to tell Pralana that some percentage of your (and/or your spouse’s) tax-deferred account is not subject to RMDs at the age specified by SECURE 2.0. When you stop working (as specified by the retirement date milestone), Pralana will thereafter calculate RMDs based on 100% of the funds in your tax-deferred account.
Conversion Rate for Calculation of Effective Savings
You should be cautious when comparing the value of a portfolio where investments are held mostly in taxable or tax-free accounts with one where investments are held mostly in tax-deferred accounts because the funds in tax-deferred accounts are not all yours. Some of that money belongs to Uncle Sam; he just has not collected it from you, yet. To help you with this, Pralana calculates the effective buying power of your portfolio as a function of its distribution across accounts with differing taxation properties. Money held in cash, taxable and Roth accounts is counted at full value; money held in the tax-deferred accounts is derated based on the Effective Tax Rate you expect to apply to those funds when withdrawn. If you plan to leave some or all your tax-deferred accounts to your heirs, the withdrawals are likely to be different than your own tax rates. Therefore, Pralana asks you to specify the effective tax rate to be used when determining the effective buying power of those accounts, and that is done via the setting on this page.
This setting is used to create the projections on the Analyze> Scenario Analysis Comparisons and Analyze > Roth Conversion pages, where you have the option to see the results graphed in terms of absolute or effective dollars.
Account Growth Settings
The controls on the Account Growth Settings tab do two very important things within Pralana: they specify HOW the annual rate of return (ROR) for each account is to be determined and WHEN the annual ROR for each account is to be applied to model account growth. Here is a screenshot of this simple tab:
Simple or Advanced Portfolio Modeling
Pralana provides two fundamental ways of determining the ROR for each account. The simplest and most straightforward way is for you to specify it directly and the more advanced way is to derive it based on asset classes and allocations. You make your selection via the pull-down menu associated with the field called Select Simple or Advanced Portfolio Modeling. If you select Simple Portfolio Modeling, then your account RORs will be as specified on the Rates of Return tab on the Build > Financial Assets > Simple Portfolio Modeling page. If you select Advanced Portfolio Modeling, then your account RORs will be derived from your inputs on the Rates of Return and Asset Allocation/Location tabs on the Build > Financial Assets > Advanced Portfolio Modeling page. Please refer to the user manual sections corresponding to those pages for more information on this subject.
Timing of Account Growth
The common approach to calculating growth of an account in any given year is to multiply the previous year-ending balance by the rate of return. This is a reasonable approximation, but it has these flaws:
When the account is generally increasing in value due to new contributions, the common approach will tend to understate the amount of growth in each of these years. In reality, growth of an account occurs throughout the year. For example, simple interest may be earned on daily balances and applied monthly; if you purchase new shares of stock, you will realize appreciation and possibly dividends from those new shares. The common approach fails to account for this element of growth because it relies strictly on the closing balance at the end of the prior year.
When the account is generally decreasing in value due to withdrawals, including negative cash flows from any account and RMDs from tax-deferred accounts, the common approach will tend to overstate the amount of growth of those accounts in each of these years. Since simple interest is applied based on decreasing daily or monthly balances, use of the previous year’s ending balance will again fail to account for this element of reduced growth. Similarly, if stocks are being sold throughout the year to cover a negative cash flow or to pay RMDs and the associated taxes, use of the previous year’s ending balance will again fail to account for it.
Pralana contains an alternative algorithm for calculating growth which seeks to account for both positive and negative cash flow scenarios. This algorithm assumes that contributions and withdrawals from each account are evenly distributed over the year and uses an estimated account balance at the middle of the year (rather than at the end of the previous year) as the value to multiply by the rate of return to arrive at the annual account growth.
Let’s consider two examples and make this assumption for both: The balance of Account A at the end of the prior year was $100,000 and the annual rate of return is 5%. Using the common (original) approach for calculating growth we would get growth = $100,000 x .05 = $5000. Now, let’s take a look at two alternatives:
Example 1: In this example, let’s assume that income exceeds expenses by $10,000 and that these excess funds are going into Account A. By the middle of the year the balance of Account A will have increased by half of the $10,000 (i.e., $5000) not counting any interest/growth. Using the alternate algorithm, we would get growth = $105,000 x .05 = $5250, or $250 more than with the baseline approach.
Example 2: In this example, let’s assume that expenses exceed income by $10,000 and that this negative cash flow is being covered by withdrawals from Account A. By the middle of the year the balance of Account A will have decreased by half of the $10,000 (i.e., $5000) not counting any interest/growth. Using the alternate algorithm, we would get growth = $95,000 x .05 = $4750, or $250 less than with the baseline approach.
So, you can choose which of these alternative growth models you wish to have Pralana use in doing your projections. Pralana provides a simple pull-down menu that allows you to specify whether annual account growth is to be based on the Start of Year (same as the year-ending balance of the prior year) or the Mid-Year balance which takes into consideration contributions to and withdrawals from the account. If you select this latter option, Pralana will figure the growth based on the prior year’s ending balance plus half of the current year’s contributions minus half of the current year’s withdrawals.
Modeling Your Portfolio
Your portfolio is the collection of all the investments you hold, in all accounts. Pralana gives you the option to model your portfolio in one of two ways as specified on the Account Growth Settings tab of the Build > Financial Assets > Management page:
Simple portfolio modeling, in which you simply specify the rate of return (ROR) for each account and do not get into the details of any specific investments, or
Advanced portfolio modeling, in which the ROR for each account is derived based on asset classes and asset allocations.
Simple Portfolio Modeling
The RORs for simple portfolio modeling are specified via the Build > Financial Assets > Simple Portfolio Modeling page. On that page, you simply enter the real ROR for each of your accounts, and you can enter different values for each scenario. If you are just getting started and only have one scenario, the data entry fields for scenarios 2 and 3 will not be shown. Pralana will add the inflation rate specified on the Build > Get Started > Scenario Assumptions page to convert these real RORs to nominal RORs while generating its projections.
Pralana can do Monte Carlo analysis in conjunction with simple portfolio modeling, but it always uses Pralana’s default algorithm to establish the standard deviation (which characterizes the amount of variation in the ROR each year) for each of your accounts based on the specified ROR.
Pralana can also do historical analysis in conjunction with simple portfolio modeling, but it maps a default historical asset class to each of your accounts to establish the ROR profile during those analyses. Please refer to the section on Historical Analysis for more information, including how you can change the mapping of historical asset class to each of your accounts.
Advanced Portfolio Modeling
There are a variety of asset classes in which you could invest, each with different rates of return and levels of risk. Their returns can be correlated (move together), inversely correlated (tend to move in opposite directions) or uncorrelated. In taxable accounts, income from different asset classes may be taxed differently (as ordinary income, qualified dividends, or long-term capital gains). A diversified portfolio (i.e., your investments across all accounts) tends to have a mixture of asset classes with allocations (i.e., how much money is invested in each asset class) that can vary over time in accordance with your risk tolerance. The challenge is to achieve your desired asset allocation while also optimizing long term wealth by holding asset classes in proper types of accounts. Pralana helps you achieve both goals.
Asset allocation is the process of dividing the investments in your portfolio among various asset classes. Asset location is the strategy of holding those asset classes in different types of accounts to minimize taxes and maximize returns. With its Advanced Portfolio Modeling, Pralana uses both asset allocation and asset location in modeling your portfolio rather than simply asking you to specify the expected rate of return on your accounts.
Pralana provides two options, or ‘modes’, for defining your asset allocation and location as explained below. For both modes, you first define your asset classes (such as money market, stocks and bonds) and their rates of return.
Mode 1: Specify Asset Location by Account
In this mode, you specify the asset location as a percentage of each account’s balance. For example, you might specify that your taxable investment account is 75% stocks and 25% bonds, and that your tax-deferred account is 75% bonds and 25% stocks. The total allocation of your portfolio to each asset class then depends on the relative balances of your accounts. So, the tool calculates and reports your portfolio’s overall asset allocation for each asset class as follows: Allocation for each asset class = (sum of the money in each of your accounts assigned to that asset class) / (sum of all account balances).
Mode 2: Specify Portfolio Allocation
In this mode, you specify your asset allocation at the portfolio level (i.e., spanning all your accounts). For example, you might specify that you want your portfolio to contain 60% stocks and 40% bonds. The tool then calculates and reports the asset locations by account; however, it uses some key supplemental information that gives you some control over the determination of those asset locations. It asks for two things: 1) your desired (or, target) asset location on an account level and 2) the prioritization of your accounts. Your asset location input is necessarily a target rather than a hard specification because it may not be possible to achieve both your portfolio asset allocation and your account-level asset locations. The tool will assign assets to accounts, from highest to lowest priority accounts, using the account targets when possible. Once an asset class is fully assigned, it becomes unavailable for subsequent accounts and other asset classes are substituted. This account prioritization mechanism assures you achieve the desired overall asset allocation while also fulfilling your desired asset location for your most critical account(s). As your account balances vary over time, the asset locations will be dynamically adjusted to maintain your portfolio asset allocation.
Derivation of the ROR for Each Account
Each year, the ROR for each account is calculated based on the assets it contains and the geometric ROR for each asset class, where geometric RORs are the compounded annual growth rates. The ROR for each asset class is then used to calculate the annual growth within each account. Your portfolio’s annual growth is the sum of the growth of all your accounts, and your portfolio’s balance is the sum of all your account balances.
Asset Allocation and Location Affects the Evaluation of Roth Conversions
Be aware that asset allocations and locations have a potentially large effect on the evaluation of Roth conversions. Please see the section on Roth Conversion Planning for more information.
Defining Your Asset Classes
The Build > Financial Assets > Advanced Portfolio Modeling page is where you define your asset classes, the corresponding rates of return, and the way these asset classes are to be taxed in your regular taxable account. This page provides several tabs along the top that enable you to select the specific data to be entered.
Portfolio Time Periods
Pralana can model varying RORs over the modeling period. This is done by defining multiple time periods using the controls on this tab, to which you can assign potentially different RORs for each asset class and different allocations. This will cause different account-level RORs to be derived for each of the time periods you have defined.
Asset Class Names
Use this tab to enter the names of your asset classes, such as stocks and bonds. The first entry in this table is a cash asset class that is fixed and cannot be changed because it is the only asset class that can be held in the cash account and is, therefore, required by the tool. Beyond this, you are free to add and name up to 12 other asset classes of your choice.
Special Asset Class Names: Cash, HSA Assets and 529 Assets
If you import data from a Pralana Gold export file, you will notice three unexpected asset class names in the asset class table. You can change these, but here is an explanation of why they are there:
A quick history lesson: Pralana Gold is Excel-based and is the predecessor of Pralana. Gold only modeled the derivation of ROR via asset classes and asset allocations for the taxable, tax-deferred and Roth accounts; the ROR on the cash, HSA and 529 plan accounts was specified directly by the user.
In contrast to Gold, Pralana models all accounts the same way, using asset classes and allocations. Since Pralana imports user data from PRC2023 and PRC2024, there must be some mechanism to convert the Cash, HSA and 529 plan RORs from the Excel versions to the Pralana way of doing things. During an import, it does this by creating three special asset classes: Cash, HSA assets and 529 assets. The ROR for these asset classes is then set to the ROR associated with the Cash account, the HSA and the 529 Plan account, respectively, from PRC Gold. Then, Pralana sets the allocation of these asset classes to 100% as follows: cash account is allocated 100% to the Cash assets, the HSA is allocated 100% to the HSA assets and the 529 Plan is allocated 100% to 529 assets. This results in account-level RORs in Pralana matching those from PRC2023 and PRC2024.
Once the import process is complete, you can then edit these initial settings for your HSA and 529 account as you wish. For example, you can delete the HSA Assets class and the 529 Asset class and then allocate HSA and 529 Plan funds to your other asset classes, such as stocks and bonds. The cash account asset cannot be changed, and it is the only account whose allocation is always 100% to the Cash assets class. Consequently, you will notice that the cash account is absent from the pages in which you can modify your asset allocations.
Rates of Return
Use this tab to specify the real (after inflation is removed) or nominal (including inflation) ROR for each of your asset classes for each of the chosen time periods. It will always be set to real after an import from Pralana Gold. The asset classes entered on the Asset Class Names page will be pre-populated for your convenience and ROR data entry fields will be shown for each of the time periods defined on the Periods page. If you enter a real ROR, the inflation rate will be added to the specified ROR to arrive at the nominal ROR that is used in the tool’s deterministic projections. If you enter a nominal ROR, the value you enter will be used directl and will be naffected by inflation in the tool’s deterministic projections. During Monte Carlo analyses, the RORs you specify on this page will be used in the generation of randomized RORs to simulate market volatility. During Historical Analyses, the RORs you specify on this page will be replaced by Historical RORs for the related asset classes. To learn more about this, please see the sections on Deterministic, Monte Carlo and Historical Analyses.
Asset Allocation & Location
Your asset allocation is done via the Asset Allocation & Location subpage of the Build > Financial Assets > Advanced Portfolio Modeling page. There are four tabs by which you do this: Asset Allocation Method Selection, Mode 1 Asset Location, Mode 2 Asset Allocation, and Account Prioritization for Mode 2; however, only the relevant tabs will be visible. If Mode 1 is active, neither of the Mode 2 tabs will be visible; if Mode 2 is active, the Mode 1 tab will not be visible.
Active Asset Allocation Mode
Pralana does asset allocation by either of two modes as described above. You can specify your asset allocation mode preference via the radio buttons on this tab and that selection applies to all scenarios.
Mode 1: Asset Location by Account
This tab pertains uniquely to the Specification of Asset Location by Account mode and the associated information is used only when that mode is selected. Pralana will present one row for each of your asset classes and one column through which you specify the percentage of the account’s balance assigned to that asset class. The total assignment for each account must be 100%.
Note there is no column for the Cash account because it is always 100% allocated to the cash asset class. A recent enhancement is that you may allocate the cash asset class to other accounts as well, since many people hold either cash or a cash-equivalent asset in investment accounts.
Pralana can model variations in your asset location over time. To enable this, for each time period identified on the Portfolio Time Periods tab of the Build > Financial Assets > Advanced Portfolio Modeling page, Pralana replicates the table containing a row for each asset class and a column for each account, along with an indication of the related start year. To model different asset locations over time, just modify the values in the asset location columns as desired.
Here is an example of the set-up of this tab:
NOTE: Pralana rebalances your portfolio every year in seeking to maintain the asset locations specified in this table.
When using Mode 1, you should be aware that your overall asset allocation can change as your account balances change, but it can be viewed on the Review > Tabular Projections > Portfolio > Allocations tab. To maintain a consistent overall allocation, you would need to use the same asset location settings on all accounts. If you want to vary your overall asset allocation over time, you can simply specify different asset locations in multiple periods.
Mode 2: Portfolio Allocation
This tab pertains uniquely to the Specification of Portfolio Asset Allocation mode and the associated information is used only when that mode is selected. On the Mode 2 Portfolio Allocation tab of the Build > Financial Assets > Advanced Portfolio Modeling page, Pralana will present one row for each asset class, one column for the overall allocation for each asset class (which must total 100%) and one column for the target asset location for each account (each of which must total 100%). Simply enter the overall allocation you wish to achieve for each asset class and the target asset location for each of your accounts, ensuring that all the column totals are 100%.
Pralana can model variations in your global asset allocations and asset locations over time. To enable this, for each time period identified on the Portfolio Time Periods subpage of the Build > Financial Assets > Advanced Portfolio Modeling page, Pralana replicates the table containing a row for each asset class and a column for each account, along with an indication of the related start year. To model different allocations over time, just modify the values in the allocation and location columns as desired.
Here is an example of the set-up of this tab:
You should be aware that asset locations will likely vary every year to maintain the specified portfolio asset allocation. You can view the resulting allocations on the Review > Tabular Projections > Portfolio> Allocations tab.
Mode 2: Account Prioritization
This tab enables the prioritization of your accounts for the Mode 2 asset allocation process. The table on this tab shows all your accounts arranged from top to bottom in priority order. To change the priority, simply left click (i.e., click and hold) on an account, drag it to the desired position and then unclick. Repeat this process with other accounts until the table is in the desired order. Be aware that this order applies to all time periods.
Here is an example of the set-up of this tab:
Overall allocation vs. What-If Savings Projection Graph
On the Review > Graphical Projections > Asset Allocation page, Pralana presents a graph that enables you to see the calculated overall allocations immediately (based on a deterministic projection), juxtaposed with the corresponding savings projection for the selected scenario.
Growth Taxation
Annual growth in tax-deferred and Roth IRA’s is tax-free, though withdrawals from tax-deferred accounts are generally taxed as ordinary income.
In Pralana, the Cash account is presumed to hold only cash-equivalent assets that generate only interest subject to Federal and state (for most states) taxation as ordinary income.
Growth in the Taxable Investment account may be taxed in a variety of ways, including:
tax-exempt growth,
interest, non-qualified dividends or short-term capital gains, all of which are taxed as ordinary income in the year earned. Pralana collectively refers to these as ‘interest’ and supports 3 variations:
interest subject to federal and state taxation.
interest subject to federal, but no state taxation, such as Treasury bonds.
interest subject to state (for most states) taxation, but not federal, such as municipal bonds.
qualified dividends which are taxable at long-term capital gains rates in the year earned,
asset appreciation. Pralana supports two ways to tax annual account/asset appreciation:
long-term capital gains realized in the year of appreciation. This presumes some portion of the annual appreciation is sold, generating realized long-term capital gains (or losses).
unrealized capital gains. This presumes some portion of the assets are not sold and no gain is realized, unless and until assets are sold to fund account withdrawals. Unrealized capital gains may accumulate over several years.
The Taxable Investment account may generate any of the types of income listed above. The Growth Taxation tab allows you to specify the taxation for annual growth and income in the Taxable Investment account. The input options are as follows:
% of growth taxed as interest/ordinary income (this should include non-qualified dividends and short-term capital gains)
% of growth taxed as interest: Federal only (example: Treasury bonds)
% of growth taxed as interest: state only (example: municipal bonds)
% of growth taxed as qualified dividends
% of growth taxed as realized LTCG
% of growth taxed as LTCG when withdrawn
% of growth that is tax-free
For the account (using Simple Portfolio Modeling) or each asset class (using Advanced Portfolio Modeling), Pralana first calculates the growth amount for the year. It then uses your growth taxation percentages to calculate the amounts subject to each type of taxation. See “Upcoming changes to Growth Taxation”.
Pralana assumes the taxation characteristics of asset classes do not change over the duration of your scenario. However, if you need to model a change in taxation for an asset class, you may create a variation of the asset class on the Asset Class Names tab, specify its growth taxation characteristics, and allocate it to the Taxable Investment account when appropriate.
Upcoming changes to Growth Taxation
In an upcoming release, Pralana will modify how Growth Taxation is entered and calculated. Growth from asset appreciation will be calculated based on the asset/account rates of return. But the various interest and qualified dividend amounts will be calculated as a % of the account’s balance, not the annual growth amount. More information will follow when this feature is implemented.
Unrealized and Realized Long-Term Capital Gains
Your taxable investment accounts may contain unrealized capital gains at the beginning of the modeling period. For this reason, Pralana provides a column for you to define the unrealized LTCG amount on the Taxable Accounts tab of the Account Initial Balances page.
Beginning with this amount, Pralana will project the year-to-year unrealized capital gains balance based on annual appreciation (realized or unrealized LTCG) and asset sales to fund account withdrawals. See the section on LTCG Withdrawal Strategy for more information.
When Pralana makes withdrawals from the regular investment account that are determined to be UCG, that dollar amount will appear in the Reportable Capital Gains column of the Review > Tabular Projections > Expenses > Taxes tab (which also includes income treated as capital gains and capital gains from the sale of property) and it will be an input into the Federal Income tax calculations.
Interest and Dividend Reinvestment
For the Taxable Investment account, at the bottom of the Growth Taxation page Pralana allows you to specify whether the interest and qualified dividends are to be reinvested or not. If not checked, the interest and dividends will be deposited in the cash account.
Taxable Account Rebalancing (coming Q3 2025)
When using Advanced Portfolio Modeling, accounts are rebalanced at the beginning of each year based on the asset allocation for that year. Generally, accounts become out-of-balance due to:
Differing asset class rates of return: asset classes with higher-than-average rates of return will grow relatively faster than average, causing them to be over-allocated. Similarly, asset classes with lower-than-average rates of return will become under-allocated.
Change in asset allocation: a change in allocation from one year to the next will also cause a re-balancing to achieve the new allocation.
For the Taxable Account, annual rebalancing will lead to the sale of over-allocated asset classes and the purchase of under-allocated asset classes. Such sales may trigger realized long-term capital gains (LTCG) for assets that have accumulated unrealized LTCG.
Notes about rebalancing the Taxable Account:
- If there is an end-of-year (Dec 31) transfer of cash from the Cash account due to a positive cash flow and cash ‘overage’ in the Cash account, the amount transferred into the Taxable Account is assumed to be invested using the next year’s (Jan 31) asset allocation.Example: In 2030 the Taxable account has an asset allocation of 70% stocks and 30% bonds. In 2031 you change the Taxable accounts allocation to 50% stocks and 50% bonds. If there is a $10,000 cash overage transferred into the Taxable account at the end of 2030, the amount is assumed to be invested using the 2031 50/50 stock/bond allocation. There is little point in investing it at 70/30 and immediately reallocating it to 50/50 stocks/bonds.
When using Advanced Portfolio Modeling, at the start of the first plan year Pralana will allocate the aggregated total initial unrealized LTCG to the various asset classes based on their allocation. In a subsequent release, Pralana will add a feature to allow you to specify the initial unrealized LTCG by asset class.
Tabular Display of Asset Allocation
To view your asset allocation and locations, go to the Allocations tab on the Review > Tabular Projections > Portfolio page. Regardless of whether you are using Simple Portfolio Modeling or Advanced Portfolio Modeling with its Mode 1 and Mode 2 options, this page will display the relevant information. Here is an example:
Calculation of Account ROR during Monte Carlo Analysis
Like the process described above for deterministic analysis, Pralana’s Monte Carlo analysis process also uses either 1) the (geometric mean) ROR specified on the Build > Financial Assets > Simple Portfolio Modeling page or 2) the (geometric mean) ROR specified on the Build > Financial Assets > Advanced Portfolio Modeling > Rates of Return page and the asset allocations defined on the > Asset Allocation/Location page to simulate market volatility (i.e., annual variations in ROR). More specifically, it uses standard deviation (which is defined on the Analyze > Monte Carlo Analysis page and which you can read more about in the related section of this manual) to translate the specified geometric mean to the arithmetic mean. Then, on either an account or an asset class basis (depending upon whether you have selected Simple or Advanced Portfolio Modeling), Pralana uses that arithmetic mean ROR and the associated standard deviation to calculate a random ROR for each year of a projection for each of 1000 test cases (see the Monte Carlo Analysis section for the details), assuming a normal distribution. Depending on the whether your asset classes are correlated or uncorrelated, Pralana will use the same or a different random number for each asset class. It then uses the asset locations as described above to translate this information into year-by-year aggregate RORs for each of your accounts. This information is not presented as an output.
Calculation of Account ROR during Historical Analysis
To simulate market volatility, Pralana’s historical analysis process uses historical RORs instead of average RORs to establish the annual ROR of each account. When using Simple Portfolio Modeling, the ROR profile for each of your accounts is based on associations between your accounts and the historical RORs in its database. When using Advanced Portfolio Modeling, the ROR profile for each of your accounts is based on associations between your asset classes and the historical RORs in its database, while maintaining either the Mode 1 or Mode 2 process to derive the annual ROR for each account. Please refer to the section on Historical Analysis for more information.
The Effective Buying Power of Your Portfolio
You should be cautious when comparing the value of a portfolio where investments are held mostly in taxable or tax-free accounts with one where investments are held mostly in tax-deferred accounts because the funds in tax-deferred accounts are not all yours. Some of that money belongs to Uncle Sam; he just has not collected it from you, yet. To help you with this, Pralana calculates the effective buying power of your portfolio as a function of its distribution across accounts with differing taxation properties. Money held in Cash, Taxable and Roth accounts is counted at full value; money held in the Tax-Deferred accounts is derated based on the Effective Tax Rate you expect to apply to those funds when withdrawn. If you plan to leave some or all your tax-deferred accounts to your heirs, the withdrawals are likely to be different than your own tax rates. Therefore, Pralana asks you to specify the effective tax rate to be used when determining the effective buying power of those accounts. To do this, go to the Build > Financial Assets > Management > Effective Tax Rate page and enter the desired rate to be used for this conversion process.
The Roth conversion optimization algorithm uses your effective total savings in the determination of the optimum Roth conversion parameters and the graphical display on the Analyze > Roth Conversions page presents a comparison of your baseline plan and your “what-if” plan in terms of either effective dollars or absolute dollars. Just click the button beneath the graph to switch between these options.
Modeling Scheduled Withdrawals
The Build > Financial Assets > Scheduled Withdrawals page allows you to define withdrawals/transfers from any account to any other account (except inherited IRAs) or to an external (out of plan) destination. Transfers from an IRA to the Roth account should be done on the Roth Conversions page and not as a Scheduled Withdrawal.
Scheduled withdrawals provide a mechanism for:
funding certain expenses out of specific accounts,
modeling HSA reimbursements
closing out or transferring excess 529 college savings plan funds
gifting appreciated assets without triggering an asset sale and capital gains taxes
Notes:
Withdrawals will be reduced or eliminated if the source account has insufficient funds in the withdrawal year. If this occurs, an alert will be created.
Transfers into HSAs and pre-tax transfers into IRA’s are Federal and state tax-deductible (except NJ and CA). These transfers are shown on Form 1040 Schedule 1 Part II ‘Adjustments to Income’: line 13 ‘Health savings account deduction’ and line 20 ‘IRA deduction’.
Input fields:
Source Account: Select the source account. For some accounts you will have the option to indicate whether the withdrawal is subject to penalty and for IRA’s whether the withdrawal is tax-exempt. It is your responsibility to determine whether you are eligible to make the withdrawal/transfer in the specified year and amount.
Destination Account: Select the destination account. For IRA’s you may specify whether the amount transferred is pre-tax or after-tax dollars. If you need to transfer both, set up two transfers. If the destination is “External (out of plan)” Pralana will transfer the amount without triggering an asset sale. If the source is the Taxable Investment account, unrealized long-term capital gains will be reduced by a pro-rated amount of the withdrawal amount and the account’s % unrealized LTCG in that year.
Amount: Enter the withdrawal amount in today’s dollars. Pralana will inflate the amount from the plan start year to the withdrawal year using your inflation rate.
Start Year: Enter the year the withdrawal(s) are to begin.
End Year: This is the last year of the withdrawals. For one-time withdrawals, set this equal to the Start Year. For indefinite withdrawals, leave this field blank.
Description: a brief description of the planned withdrawal for your use only.
Using Scheduled Withdrawals to Minimize the Effects of Unscheduled Withdrawals
As discussed in the section of Unscheduled Withdrawals and Iterative Tax Calculations, any negative cash flows that result in unscheduled withdrawals from tax-deferred accounts are included in the AGI for the subsequent tax year. The same is true for LTCG on unscheduled withdrawals from the taxable account. If this situation occurs in your scenarios for relatively few years, you may consider setting up scheduled withdrawals to offset and eliminate those negative cash flows. That will eliminate the unscheduled withdrawal and the deferral of the associated taxes to the next year, thereby improving the accuracy of the model in the near term. Please note: when same-year taxation of unscheduled withdrawals is implemented this issue will cease to exist.
Modeling Substantially Equal Periodic Payments (SEPPs)
The Build > Financial Assets > SEPPs page implements Internal Revenue Code (IRC) section 72t, which allows early withdrawals from tax-deferred (TD) accounts without the normal 10% penalty. SEPP payments are computed by one of three methods (amortization, annuity or minimum distribution) and run for five years or until the owner reaches age 59, whichever occurs latest. The IRS does not allow SEPP payments from qualified retirement plans while you are still employed by the associated plan sponsor, but Pralana does not enforce any such rules. You should research IRC section 72t yourself to ensure your understanding of all the rules. Pralana allows you to specify one SEPP period for your TD account and another for your spouse’s. It also allows you to specify one of two payment calculation methods: fixed or RMD. The amortization and annuity methods both result in fixed payments, so Pralana simplifies the process by just asking you to specify the amount in terms of today’s dollars. The minimum distribution method calculates the amount based on account balance and the owner’s life expectancy according to IRS mortality tables. Withdrawal amounts are treated like RMDs: they are taxed as ordinary income and deposited in your cash account and if this causes that account to exceed its ceiling level the balance will be deposited in the regular investment account.
Modeling Charitable Trusts
The Build > Financial Assets > Charitable Trusts page allows you to set up the modeling of the funding and payouts from a charitable trust. Pralana does not attempt to model the details of specific types of trusts but, rather, provides the basic controls through which you can tailor its capabilities to a variety of trust types and details. Pralana does not maintain the balance of the trust but it does model the establishment of a trust in the past or future, along with subsequent tax deductions and annuities (i.e., payouts). The contribution amount will always be withdrawn from the regular investment account. The deductions and payouts can vary every year, so Pralana simply provides you with a table through which you can manually specify the annual amounts. The deductions will be included in your itemized deduction calculations and the payouts will be taxed as ordinary income.
Modeling Your Personal and Investment Loans
Personal Loans
On this page, you can define personal loans you have made in the past or will make in the future. The outstanding loan balance of personal loans is included in your Net Worth.
Loan input fields vary depending on whether the loan was originated prior to the plan start year (existing loans) or in/after the plan start year (future loans). Fields with a blue background are required. Fields that are informational or not applicable will be greyed out and not editable.
Inputs
Description: Enter a description or other notes about the loan (up to 255 characters).
Origination Year: Enter the loan’s origination year. This year, along with your plan start year, determines whether the loan is a past or future loan.
Interest Rate: Enter the annual interest rate.
Term: Enter the loan’s term in years. This is optional for loans originated in the past (unless the loan has an interest only period) because Pralana will calculate the amortization using the Interest Rate, Balance at Plan Start, and Monthly Payment.
Balance at Plan Start: For existing loans enter the outstanding loan balance as of the plan start date. This field is disabled for future loans.
Monthly Payment: For existing loans, enter the loan’s monthly principal and interest payment.
Loan Amount: For future loans, enter the anticipated loan amount in today’s dollars.
% of Interest Received Taxable: Enter the percentage of the loan interest received that is taxable. The default is 100%.
% of Principal Received Taxed as LTCG: Enter the percentage of the loan principal received that is taxable as a long-term capital gain. The default is 0%. This field may be applicable if, for example, you sold a business and provided financing to the buyer.
Optional Loan Fields
All loans have these optional fields which are less commonly used. Click the Show Optional Fields checkbox to reveal these fields.
Interest-Only Period: You may specify an interest-only period, in years. The interest only period starts in the origination year. During the interest-only period, Pralana will calculate and apply the interest-only payment and the loan’s principal balance will remain unchanged (unless you also specify an additional principal payment). After the interest only period:
For existing loans, Pralana will use your entered monthly payment to amortize the loan until it is paid off.
For new loans, Pralana will calculate the monthly payment required to amortize the loan balance from the start of the repayment period until the end of the remaining loan term.
Early Pay-Off Year: If you specify an early pay-off, the loan balance (at the end of the prior year) will be paid-in-full at the start of this year. The lump-sum payoff amount will be shown on the amortization schedule and treated as income in the pay-off year.
Extra Principal Payments (Annual $): You may specify additional principal payments by entering an annual amount. Pralana will apply these additional principal payments in the years specified (but not prior to plan start).
Extra Principal Payments Start: Enter the year you plan to start making the excess payments. For existing loans, Pralana assumes that any additional principal payments may in the past are reflected in the Balance at Plan Start field.
Extra Principal Payments Stop: Enter the year you plan to stop making excess payments (i.e., the last year of those payments). Leave this field blank if you intend to make the extra payments until the loan is paid-in-full.
Amortization
This tab shows the amortization of your personal loans. The total balance of the loans modeled on this page will included as “Balance on Personal Loans Made By You” in the Other Assets section of the Balance Sheet and add to your net worth.
Investment Loans
On this page you can model loans that are not specifically associated with the purchase of physical property, such as investment or margin loans.
Loan input fields vary depending on whether the loan was originated prior to the plan start year (existing loans) or in/after the plan start year (future loans). Fields with a blue background are required. Fields that are informational or not applicable will be greyed out and not editable.
Inputs
Description: Enter a description or other notes about the loan (up to 255 characters).
Origination Year: Enter the loan’s origination year. This year, along with your plan start year, determines whether the loan is a past or future loan.
Interest Rate: Enter the annual interest rate.
Term: Enter the loan’s term in years. This is optional for loans originated in the past (unless the loan has an interest only period) because Pralana will calculate the amortization using the Interest Rate, Balance at Plan Start, and Monthly Payment.
Balance at Plan Start: For existing loans enter the outstanding loan balance as of the plan start date. This field is disabled for future loans.
Monthly Payment: For existing loans, enter the loan’s monthly principal and interest payment.
Loan Amount: For future loans, enter the anticipated loan amount in today’s dollars.
% of Tax Deductible: Enter the percentage of the loan interest received that is tax-deductible. The default is 100%.
Optional Loan Fields
All loans have these optional fields which are less commonly used. Click the Show Optional Fields checkbox to reveal these fields.
Interest-Only Period: You may specify an interest-only period, in years. The interest only period starts in the origination year. During the interest-only period, Pralana will calculate and apply the interest-only payment and the loan’s principal balance will remain unchanged (unless you also specify an additional principal payment). After the interest only period:
For existing loans, Pralana will use your entered monthly payment to amortize the loan until it is paid off.
For new loans, Pralana will calculate the monthly payment required to amortize the loan balance from the start of the repayment period until the end of the remaining loan term.
Early Pay-Off Year: If you specify an early pay-off, the loan balance (at the end of the prior year) will be paid-in-full at the start of this year. The lump-sum payoff amount will be shown on the amortization schedule and treated as an expense in the pay-off year.
Extra Principal Payments (Annual $): You may specify additional principal payments by entering an annual amount. Pralana will apply these additional principal payments in the years specified (but not prior to plan start).
Extra Principal Payments Start: Enter the year you plan to start making the excess payments. For existing loans, Pralana assumes that any additional principal payments may in the past are reflected in the Balance at Plan Start field.
Extra Principal Payments Stop: Enter the year you plan to stop making excess payments (i.e., the last year of those payments). Leave this field blank if you intend to make the extra payments until the loan is paid-in-full.
In the year the loan is originated, the loan amount will be added to your Taxable Investment Account and all loan expenses will be shown in the corresponding column on the Review > Tabular Projections > Expenses page. If the term of the loan is the same as the interest-only period, a balloon payment will be generated in the last year of the loan. If the Tax Deduction box is checked, the interest on the associated loan will be included in the Deductions and Exemptions column on the Review > Tabular Projections > Expenses > Taxes > Itemized Deductions page.
Amortization
This tab shows the amortization of your investment loans. The total balance of the loans modeled on this page will be included as “Investment Loan Balance” in the Liabilities section of the Balance Sheet and reduce your net worth.
Modeling Your Taxes
Pralana performs detailed tax calculations, though it does not implement the entire Federal tax code nor the entire tax codes of any State. These are detailed approximations only, but the tool does give you the ability to view some of the key tax forms to help you understand how its numbers are derived. Please visit the Review > Reports > Tax Forms page and you can then scroll through the forms for any selected year.
Federal Income Tax and Alternative Minimum Tax
Federal income taxes, including the Alternative Minimum Tax (AMT), are calculated automatically by Pralana and are based on the following:
Adjusted Gross Income (AGI), the details of which are shown on the AGI Details tab of the Review > Tabular Projections > Taxes page
Long term capital gains or losses
Capital loss carryover
Marital status and number of dependents
Tax law in effect (either TCJA of 2017 or pre-TCJA of 2017)
Standard deduction or itemized deduction, whichever is larger (itemized deduction details are shown on the Itemized Deductions tab of the Review > Tabular Projections > Expenses > Taxes page
Exemptions
Current federal tax tables (indexed for inflation in future years)
Child tax credits
You can see the details on the Taxes tabs of the Review > Tabular Projections > Expenses page and the Review > Reports > Tax Forms page.
State Income Tax
State income tax is calculated automatically by Pralana and is based on the following:
Marital status and number of dependents
State of residence
Federal AGI
Standard deductions
Whether or not the following items are deductible in your state of residence and any individual or family limits on these:
Social Security income
Distributions from retirement accounts
Pensions, with differentiation between private, military and government pensions
Interest and dividends
Earned income
Federal income taxes
2023 tax tables (indexed for inflation in future years)
You can see the details on the Taxes tabs of the Review > Tabular Projections > Expenses page and the Review > Reports > Tax Forms page.
State income taxes are particularly difficult to model, with 51 sets of rules (50 states plus the District of Columbia), so it is possible that the model is not always accurate for your case. If this algorithm does not seem to be calculating state taxes correctly for your case, you can use the alternative method provided here: On the Residence/Relocation tab of the Build > Get Started > Scenario Assumptions page, simply specify a rate that Pralana will multiply by the federal AGI to arrive at an estimate of your state income taxes. This alternative method will replace the detailed calculations if this field contains any data.
Please note: If you do discover that Pralana is producing inaccurate values for the taxes in your state we will always welcome an email to provide us with the details so that we can continue to improve the model.
Local Income Tax
Pralana can estimate local income tax each year based on inputs provided by you on the Scenario Assumptions > Residence/Relocation page:
Local Tax Rate: Enter a percentage representing the locality’s tax rate to be applied to the Local Taxable Income choice you make.
Local Taxable Income: Select from these 3 choices. For each state, Pralana will indicate which taxable income is the default (most commonly used).
Federal Taxable Wages (for localities that tax only earned income)
Federal Adjusted Gross Income
State Taxable Income
Payroll Taxes
Pralana calculates FICA taxes separately for both marital partners based on their respective income streams. Self-employment income is treated appropriately and applicable annual maximums are used in these calculations. In Pralana, payroll taxes are considered adjustment to spendable income. See “Payroll Taxes” column at Review > Tabular Projections > Income > Income Statement (click for Metric MRI) as well as Review > Tabular Projections > Taxes > Summary (Payroll Taxes section).
Net Investment Income Taxes
Pralana calculates Net Investment Income Taxes (NIIT) automatically based on your AGI and investment income. See how NIIT is calculated on Form 8960 in the Tax Forms.
Performing Deterministic, Monte Carlo and Historical Analysis on Your Plan
Remember this diagram from one of the early pages of this manual? In this section, we will discuss the Basic Analysis of your plan. Your basic assumptions, income, expenses and financial assets have already been entered to establish a Base Plan and now it is time to take a look at the prognosis. Based on the results of those analyses, you can go back and adjust your initial inputs or proceed on to more detailed analyses.
Since some variables are unknowable (most notably: life expectancy, inflation, and rates of return (ROR) on investments), no calculator can produce a single “right answer” regardless of the amount of detail you put into it. Further, the long-term growth of investments is a function of market volatility and the sequence of returns. In other words, year to year variations in ROR can make a big difference in the size of your savings accounts over time. Here is one simple example to illustrate the point: A 10% loss one year followed by a 10% gain the following year is really a 1% loss over that two-year period. A $100,000 portfolio would be reduced to $90,000 after the first year and would rise to $99,000 after the second year for a loss of $1000, or 1%. Even though the average return in this example is 0%, if this portfolio experienced a constant 0% return over that same period, it would still be worth $100,000 and, thus, ahead of the same portfolio that experienced the volatility.
To address these uncertainties, Pralana analyzes your data using three different analysis methods (deterministic, Monte Carlo and historical) to provide you with a range of likely outcomes.
Deterministic Analysis
Pralana’s deterministic analysis generates a single projection using an average inflation rate and average rates of return each year, as specified on the Build pages. This is the most basic form of financial analysis and is particularly useful for getting a general understanding of where you stand relative to long term objectives, for making trade-offs between major choices and for exploring the sensitivity of your plan to certain parameters, such as inflation, rates of return, life expectancy, and so on. Its primary weakness is that it does not model year-to-year fluctuations in rates of return and inflation, which are facts of life in the real world. Consequently, the probability that your actual long-term results will be better than those predicted by fixed rate projections are (very roughly) 50%, but the probability that you will do worse are also (very roughly) 50%. The screenshot below was taken from the Analyze > Historical Analysis page; the red line shows the deterministic projection juxtaposed with historical analysis results, and you can see the same red line juxtaposed with Monte Carlo analysis results on the Analyze > Monte Carlo Analysis page.
To view the results of Pralana’s deterministic analysis results in tabular form, go to the Review > Tabular Projections pages. To see a detailed graphical breakdown, go to the Review > Graphical Projections pages. All the data presented on those pages is based on a deterministic analysis UNLESS the Historical Sequence Analysis has been activated on the Analyze > Historical Analysis page. There are a variety of pages available designed to give you functionally coherent insights into Pralana’s deterministic projections.
Tabular Projections
Pralana presents a robust set of tabular deterministic analysis outputs accessible via the Review > Tabular Projections pages. These pages show year-by-year deterministic projections for the scenario selected via the radio buttons at the top of the page. All data can be viewed in either future dollars or today’s dollars based on radio buttons located directly above the tabular data, and data columns containing only zeroes can be hidden as a function of the setting of a check box just above the tabular data.
If the Historical Sequence Analysis is active (which is controlled via a checkbox on the Analyze > Historical Analysis page), you can examine the year-by-year projection details via the Tabular Projections pages, and a banner will be displayed in the upper right corner of each page as shown in the screenshot below:
Tabular projections are presented in functionally coherent data groups, as follows:
Income, with different tabs for income statement, income details, and payroll contributions
Expenses, with different tabs for expense statement, specified expense details, and taxes
Cash Flow, with different tabs for Cash Flow Statement, Withdrawals, and Annuity Purchases
Balance Sheet
Portfolio, with different tabs for Rates of Return, Growth, Allocations, and Roth Conversions
Account Statements
Scenario Assumptions
On all these pages, the first column contains three numbers separated by a “/”. The 4-digit value is the year, the first 2-digit value is your age as of January 1 in that year and the second 2-digit value is your spouse’s age as of January 1 in that year. That column will remain fixed as you scroll left and right.
The data presented on the tabular projection pages will be updated anytime you make a change to your plan via one of the Build pages.
Today’s Dollars vs. Future Dollars
Tabular projections can be calibrated in terms of future dollars or today’s dollars. When the projections are presented in terms of today’s dollars, the data will be adjusted for inflation. Consequently, outputs that increase at the rate of inflation will appear as constant values. For example, if you have an income of $100,000 per year that increases at the same rate as inflation, it will appear as $100,000 every year. Conversely, if inflation is 3%, that same income stream presented in terms of future dollars will begin at $100,000, and then increase to $103,000 in the second year, to $106,090 in the third year, and so on.
Metric MRI
For some complex metrics, Pralana includes a feature called Metric MRI which, like medical magnetic resonance imaging, provides a look ‘inside’ the metric to see how it was calculated.
Click underlined metrics in some tabular projections to open the Metric MRI, a pop-up audit of the metric. Metric MRI is currently available for Social Security income, account growth and balances, Healthcare and Medicare costs, Roth conversion amounts, etc. Additional metrics will be supported in the future based, in part, on user interest.
The pop-up Metric MRI box may be moved and resized with your mouse or touchpad. Close it by clicking the X at the top right.
Income
This page includes three tabs: Income Statement, Income Details, and Payroll Contributions. The income statement shows a summary of all your income sources and any adjustments to your income (such as payroll taxes and contributions) in one view, and ultimately getting to your spendable income each year. The income details tab shows an elaboration of the income sources shown on the income statement tab, and the payroll contributions tab shows an elaboration of the payroll contributions shown on the income statement tab. Please note that this does NOT include everything the IRS taxes as income: RMDs, for example, are taxed as ordinary income but they are not true income and are shown as a “cash inflow” in the Cash Flow statement.
Expense
This page includes three tabs: Expense Statement, Specified Expense Details, and Taxes. The Expense Statement tab includes a column for each type of expense as specified on the Build > Expenses pages as well as columns for taxes, and ultimately getting to your total expenses. When you select the Specified Expense Details tab, you will then see separate tabs for each type of expense that you can specify on one of the Build > Expenses pages, and these tabs will present your expenses in detail. When you select the Taxes tab, you will then see separate tabs for your taxes, a detailed breakdown of your Adjusted Gross Income (AGI), and a detailed breakdown of your itemized deductions.
Cash Flow
The Cash Flow page includes three tabs to show you the movement of money within your portfolio: Cash Flow Statement, Withdrawals and Annuity Purchases. The cash flow statement shows all the cash flowing into the cash account (referred to as Cash Inflows), your Total Expenses as elaborated on the Expense Statement, your net cash flow, the starting and ending cash account balance, and the money transferred out of the cash account to your taxable investment account and the money transferred into the cash account from your other accounts to cover periods of deficit spending.
All positive and negative cash flows will be applied to your cash account, in turn driving that account’s balance up or down; however, as explained in the Financial Assets > Management section above, you can specify floor and ceiling amounts for your cash account, and these levels are adjusted annually for inflation. All negative cash flows are taken from the cash account until the floor is reached, and thereafter the withdrawal priority order is used to determine the account to be used to cover the remaining portion of the negative cash flow; all positive cash flows as well as withdrawals and distributions from tax-favored accounts are deposited in the cash account until the ceiling is exceeded, after which the excess is transferred to the taxable investment account.
The Withdrawals tab shows the details of all scheduled and unscheduled withdrawals from each of your accounts. The Annuity Purchases tab shows the purchase of annuities and the account from which the purchase was made.
Balance Sheet
This page presents a year-by-year summary of all your account balances, your other assets, your liabilities and your net worth. All account balances can be clicked to bring up the Metric MRI window to show you how the balance in any year has been computed. Here is an example:
Portfolio
This page includes four tabs: Rates of Return, Growth, Allocations, and Roth Conversions. The Rates of Return tab shows the ROR for each of your accounts and the Growth tab shows the corresponding annual growth of each account as the result of applying the ROR. The Allocations tab shows your overall asset allocation and the allocation of each asset class to each of your accounts. If you are using the Simply Portfolio Modeling option and are specifying account RORs directly, then the Allocations tab will simply show what portion of your portfolio is associated with each account, along with each of your account balances. If you are using the Advanced Portfolio Modeling option, the Allocations tab will show the annual allocation to each of your asset classes as well as the portion of each account assigned to each asset class and the corresponding dollar amounts.
Account Statements
For each of your accounts, this page shows the year-starting balance, all the deposits and withdrawals, and the year-ending balance. This should make clear what is driving the account balances from year to year. When viewing the data in terms of today’s dollars, inflation adjustments are applied on the first tick of the clock in the year. Consequently, the Ending Balances are not discounted for the duration of the year and will not match the Starting Balance shown for the next year or the corresponding ending balance on the Balance Sheet.
Unused accounts are not shown. The Starting Balance and Ending Balance rows cannot be hidden.
Scenario Assumptions
This page shows you the general inflation rate, the cumulative inflation, your tax filing status and your state of residence for each year in the modeling period.
Graphical Projections
Pralana generates two different forms of detailed graphical projections of deterministic analysis results which are naturally consistent with the data in the tabular projections described in the previous section:
Savings and Net Worth
Sources of Income
Taxes
Asset Allocation
Key Metrics by Scenario
Savings & Net Worth
This page presents a graph of your savings and net worth juxtaposed to your income and expenses for the active scenario. The bar graphs show the distribution of your savings and net worth across your various accounts and properties, while your income and expenses are shown via line graphs. The bar graphs are calibrated against the vertical axis on the left and the line graphs are calibrated against the vertical axis on the right.
Sources of Income
This page presents a stacked bar graph showing a detailed breakdown of the components of your income for the active scenario.
Tax Projections
This page presents two graphs for the active scenario. The one on top shows a stacked bar graph of each major category of taxes and the one on bottom is a line graph showing the key inputs to the tax calculations.
Portfolio Asset Allocation
This page shows a graphical projection of the allocation of your portfolio to your asset classes over the modeling period. If you are using Simple Portfolio Modeling, this graph will show the percentage of your portfolio associated with each of your accounts. If you are using Advanced Portfolio Modeling, this graph will show the percentage of your portfolio associated with each of your asset classes.
Compare Key Plan Metrics by Scenario
This page shows a line graph with your savings balances and expenses from all three scenarios overlaid for easy comparison. You can hide or show any of the lines to focus on any specific comparison of your choice. Here is an example:
Monte Carlo Analysis
Pralana’s Monte Carlo analysis generates 1000 projections using the same inflation rate as used in the deterministic analysis and randomly varying ROR to simulate market volatility. Income and expense profiles (other than taxes which can vary with changing RORs) are the same as in the deterministic analysis. The random RORs are based on a normal cumulative distribution and a mean ROR and standard deviation calculated from your inputs on the Build > Financial Assets > Simple Portfolio Modeling and > Advanced Portfolio Modeling pages. The Pralana Monte Carlo analysis uses arithmetic returns and either correlated or uncorrelated asset classes, as you specify. Since each one of the 1000 projections produces a different result (i.e., a long-term projection equivalent to the deterministic projection described above), some form of additional analysis must be done to translate this into useful information and avoid overwhelming you with data. Consequently, Pralana presents Monte Carlo analysis results in terms of percentile bands representing an aggregation of all 1000 test projections and thus giving you a sense of the distribution of its results across all those test cases. Each time you repeat the analysis, the Monte Carlo results will change by some amount because of the randomly varying ROR used in the analysis. By attempting to simulate market volatility (i.e., year-to-year fluctuations in rates of return), Monte Carlo analyses are an attempt to address the weakness of the deterministic analysis method described above. On the other hand, this is a poor tool for trying to make trade-offs between major choices or to study the sensitivity of your plan to certain parameters.
Here is a screenshot of Monte Carlo analysis results:
In this case, none of the 1000 test cases ran out of money and that resulted in the 100% success rate as indicated by both the gauge in the upper left corner and in the final row of the success rate table to the far right of the graph. To the right of the success rate gauge, there is a small table that shows you the final savings based on a deterministic analysis alongside the median final savings across all 1000 test cases of the Monte Carlo analysis.
User Controls
Pralana gives you control over two very significant aspect of Monte Carlo simulations:
Whether the simulated returns from the asset classes specified on the Build > Financial Assets > Asset Classes page are to be correlated or uncorrelated.
The standard deviation associated with the rates of return specified on the Build > Financial Assets > Asset Classes page.
Standard Deviation
Per Wikipedia: In statistics, the standard deviation is a measure of the amount of variation of a random variable expected about its mean. A low standard deviation indicates that the values tend to be close to the mean (also called the expected value) of the set, while a high standard deviation indicates that the values are spread out over a wider range.
During a Monte Carlo analysis, Pralana simulates market volatility by using random rates of return (ROR). These random ROR values are based on the ROR that you have specified for each of your asset classes and the associated standard deviations, using a normal distribution. If you are using Advanced Portfolio Modeling, Pralana gives you two options for dealing with standard deviation, and your choice is specified via the check box on the Analyze > Monte Carlo Analysis page (please see below).
Calculated default value (uncheck the box to use this option). The calculated default value for each asset class is simply assumed to be the geometric nominal ROR x 1.5, thus freeing you of the burden to research and select these values. Here are two Historical data points that were used to establish this simple algorithm:
The long-term average ROR for S&P stocks is 11% and its SD is 19%; the Pralana algorithm would yield an SD of 16.5%.
The long-term average ROR for T-Bonds is 4.8% and its SD is 7.5%; the Pralana algorithm would yield an SD of 7.2%
Custom ROR Std Deviation value for each asset class (check the box as shown in the screenshot above to use this option). For each time period specified on the Advanced Portfolio Modeling page, the display on the Rate of Returns Std Deviations tab of the Analyze > Monte Carlo Analysis page contains a row for each of your asset classes where you can specify the standard deviation for that asset class in that period. Here is an example of this tab:
Assets with higher returns will tend to be more volatile than assets with lower returns. If you take a conservative stance relative to the ROR of the assets in your portfolio, then Pralana’s Monte Carlo analysis will depict a narrower range of returns than a portfolio with a more aggressive stance on RORs.
Modeling of Market Volatility in Monte Carlo Simulations
As described in Volatility Drag and Its Impact on (Arithmetic) Investment Returns in Monte Carlo Analysis by Michael Kitces, the technically correct way to model market volatility in a Monte Carlo simulation is to use the arithmetic mean in generating the random numbers for the simulated annual returns. In contrast, the technically correct way to make deterministic projections is to use the geometric mean (because it considers the Historical volatility of a particular asset class). Pralana assumes the values entered on the Asset Classes page are geometric returns. It uses these values in generating its fixed rate projections and, along with the corresponding standard deviations, approximates the arithmetic mean for each asset class. Pralana then uses this arithmetic mean to model market volatility in its Monte Carlo analysis.
We built a simple model to study the effects of using geometric and arithmetic means as well as correlated and uncorrelated asset classes. The model used just two asset classes, stocks and bonds, and we assumed our portfolio was 50% stocks and 50% bonds. With a user-specified average rate of return (ROR) to be interpreted as the appropriate geometric mean for those asset classes, we first converted it to the approximate arithmetic mean (where arithmetic mean = geometric mean + standard deviation2/2) and then generated a series of random annual returns for each class over a 40-year time span.
We then did two checks on this random sequence of returns before getting into Monte Carlo simulations. The first was to integrate the individual class returns into a portfolio return and compute the geometric mean for the entire 40-year sequence of portfolio returns. With both this computed geometric portfolio mean return and the corresponding random sequence of returns we projected the future balance of an initial investment that grew over the 40-year period in accordance with these returns. We successfully verified that the final account balances of the two approaches were always the same regardless of the random sequence. This is the expected result as described in the Kitces article.
The second check was designed to confirm the expected long-term effects of correlated vs. uncorrelated assets. We generated two sequences of returns for the two-class portfolio: one in which a single random number was used to generate the annual returns (for correlated returns) and one in which independent random numbers were used to generate the annual returns (for uncorrelated returns). Then, we created the aggregate portfolio return for each sequence and compared the long term geometric and arithmetic means of those sequences. Regardless of the mean type, the mean of the uncorrelated sequence was nearly always higher than that of the correlated sequence. This seems to support the notion that uncorrelated assets are a desirable feature in a portfolio (with all else being equal).
With these checks complete and seemingly validating the correctness of the model, we ran some Monte Carlo simulations with the following observations:
We get similar deterministic and MC results when using geometric ROR for deterministic and arithmetic ROR for MC and only a single asset class (i.e., 50th percentile MC results are similar to deterministic results)
MC results are similar to deterministic results when using geometric ROR for fixed rate and arithmetic ROR for MC and two correlated asset classes (i.e., 50th percentile MC results are similar to deterministic results)
MC results are always better than deterministic results when using geometric ROR for fixed rate and arithmetic ROR for MC and two uncorrelated asset classes (i.e., 50th percentile MC results are always better than deterministic results)
Historical Analysis
The Pralana database contains historical inflation rates and market returns for three asset classes since 1928: the S&P 500 Stock Index, 10-year Treasury Bonds, and 3-month Treasury Bills. Based on this data and any additional historical information for other asset classes that you provide, Pralana’s Historical analysis generates multiple projections using historical inflation and historical ROR to simulate market volatility. Expenses and income streams tied to inflation (e.g., Social Security income) in the model are adjusted in accordance with historical inflation rates. The first projection begins with the first year of Historical data on the Historical Data page (i.e., 1928) and proceeds in the Historical sequence for the number of years corresponding to your expected lifetime, the next projection begins with the second year of Historical data (ie., 1929), the next with the third year of Historical data (i.e., 1930), and so on for as many projections as are possible with the data available. Pralana does not do any form of looping to create additional data sequences and stops creating projections when the Historical sequence starting year gets within 10 years of the amount of Historical data available. With a model starting year of 2024, this is a total of 86 separate projections (2024-1928-10 = 86). Most other calculators that do historical analysis stop creating new sequences when the combination of the Historical sequence starting year plus your remaining lifetime exceeded the amount of Historical data available. The actual number of test cases generated is equal to the number of years of historical data available minus your remaining lifespan, which yields only 46 projections for someone with a 50-year lifespan ahead of them if the Historical data goes back to 1928. In contrast, Pralana generates almost twice as many projections with the same data. The Pralana algorithm is based on determination that market returns in the early years of any projection (let’s say the first 10 years) are far more significant than are market returns in the later years in determining long-term results and that, therefore, other designs are not exploiting a good deal of the Historical data available. Based on this assumption and to take better advantage of the data available, Pralana Historical analyses uses sequences that begin as late as 2014 and then replaces the missing history for the years beyond 2023 with fixed returns as specified on the Build > Financial Analysis > Asset Classes page and fixed inflation as specified on the Build > Get Started > Scenario Assumptions > Inflation page. This creates additional sequences with solid Historical data on the front end where it matters the most and fake data on the back end where it does not matter as much.
As with the Monte Carlo analysis, to characterize the range of outcomes without overwhelming you with data, Pralana analyzes the results and presents them in terms of percentiles. By attempting to simulate year-to-year fluctuations in inflation and rates of return (i.e., market volatility), historical analyses are an attempt to address the weakness of the deterministic analysis method described above. On the other hand, like Monte Carlo analysis, this is a poor tool for trying to make trade-offs between major choices or to study the sensitivity of your plan to certain parameters.
Here is a screenshot of historical analysis results:
In this case, none of the 86 test cases ran out of money and that resulted in the 100% success rate as indicated by both the gauge in the upper left corner and in the final row of the success rate table to the far right of the graph. To the right of the success rate gauge, there is a small table that shows you the final savings based on a deterministic analysis alongside the median final savings across all 86 test cases of the Historical analysis.
If there are any failed test cases discovered in doing a Historical analysis, the three best and worst cases will be identified in the table beneath the Success Rate table. Additionally, a message will be shown that indicates how many years before the end of the modeling period these cases ran out of money, on average. A screenshot of these messages is shown below. If you would like to explore the worst-case sequence in detail, you can do so via the Historical Sequence Analysis discussed a bit later in this document.
A Note on Income Streams
All income streams are adjusted in accordance with historical inflation IF they are specified in terms of a real annual rate of increase on the Income page. Of course, Social Security income is always a function of inflation, so it is always adjusted in accordance with historical inflation. This could be a source of different results between PRC2023 and Pralana, but Pralana will be the more accurate of the two.
A Note on Rates of Return During Monte Carlo and Historical Analyses
Simulated Volatility with Simple Portfolio Modeling
To simulate market volatility during Monte Carlo simulations, the ROR for each of your accounts is randomized using the average geometric mean you specified for each of your accounts and Pralana’s algorithm for a corresponding standard deviation. To simulate market volatility during historical simulations, the ROR you specified for each of your accounts is replaced by a default historical ROR sequence associated with a historical ROR sequence from Pralana’s database. You can change this mapping between your accounts and historical return sequences on the Analyze > Historical Analysis page.
Simulated Volatility with Advanced Portfolio Modeling
To simulate market volatility during Monte Carlo simulations, the ROR for each of your accounts is achieved by aggregating the randomized RORs for each asset class based on your specified asset allocation. During historical simulations, the ROR for each of your accounts is achieved by aggregating the Historical RORs for each asset class based on your specified asset allocation.
A Note on Withdrawal Errors
The Build > Financial Analysis > Management page enables you to specify scheduled withdrawals from specific accounts and the Build > Income > Annuities page enables you to specify the purchase of annuities from specific accounts. These features create the opportunity for user-induced errors because it is possible the specified source account will have insufficient funds to support the scheduled withdrawals and/or annuity purchases at the specified time during Pralana’s simulation. Since account balances are a function of the dynamic sequence of returns being modeled during Monte Carlo and historical analyses, these types of errors cannot be determined until the analysis is being conducted. Consequently, Pralana will detect these errors if they occur and will present a corresponding alert message.
A Note on Percentiles
In statistics, a percentile is the value of a variable below which a certain percent of observations fall. For example, if you are at the 80th percentile of human heights, then 80% of all people are shorter than you, and 20% are taller. You can interpret Pralana’s percentile outputs as follows: Out of all the test cases executed, X% of the cases yielded results below the Xth percentile edge, and Y% of the cases yielded results below the Yth percentile edge.
Control and Presentation of Monte Carlo and Historical Analysis Results
After entering all your assumptions and the details of your financial assets, income and expenses on the Build pages, you can come to the Analyze pages to investigate long term projections. This is the point within the tool where all your inputs and all the tool’s calculations are integrated into a view that reflects the resultant range of likely outcomes, specifically illustrating total savings vs. total spending over time.
The Analyze > Monte Carlo Analysis and the Analyze > Historical Analysis pages incorporate these features:
Addresses one scenario at a time in a large easy-to-read graph
Presents total savings vs. total spending over time, using the deterministic method and either the Monte Carlo or historical method, depending upon the page you are on
Presents Monte Carlo and historical analysis results as a family of percentile bands (10th-20th, 20th-30th, 30th-40th, 40th-60th, 60th-70th, 70th-80th and 80th-90th percentiles) and the overall success rates
Optionally overlays a graph of expenses resulting from deterministic, Monte Carlo and historical analyses
Historical analysis only: Enables you to activate an Historical Sequence Analysis beginning with a specific year in Pralana’s Historical returns and inflation database
Monte Carlo analysis only: Enables you to specify whether Monte Carlo analysis is to assume correlated or uncorrelated assets
Running an Analysis
Several control buttons are located at the top of the page (beneath the navigation links) as shown in the screenshot below. This is from the Monte Carlo Analysis page, but the Historical Analysis page is nearly identical.
Scenario selection is done via the radio buttons on the upper left. The button labeled “Run Monte Carlo Analysis” (or Run Historical Analysis) will execute a new analysis using either the Monte Carlo or Historical methods as previously described and the latest set of inputs (demographics, assumptions, income, expenses and spending strategy). The two green buttons on the right side of the page are shortcuts to get to other pages you are likely to want to visit in conjunction with analyzing your plan, and those pages have similar buttons that give you a shortcut to get here. With this mechanism, you can quickly switch back and forth between these pages. Here is an example:
The graphical portion of the display always shows a combination of deterministic analysis results and either Monte Carlo or historical analysis results, depending upon which page you are on. Deterministic results are presented via individual lines, where the solid line is total savings and the dashed line is total expenses; Monte Carlo and historical analysis results are presented via the colored bands. Please refer to the screenshots above to see examples of the analysis results diagram.
Monte Carlo and historical analysis results are saved and only change when you click the “Run Monte Carlo Analysis” button, but the deterministic analysis results are dynamic. If you make any changes that affect those projections, either on this page or on any other page, the graph on this page will reflect the projection based on the current set of inputs (with orange lines) as well as the most recently saved projection (with red lines). As an example, the screenshot below illustrates the case where the spending strategy has been changed to “Fixed % Spending” since the last saved analysis (which used specified expenses only). Note the spending strategy spelled out in a box at the bottom of the graph indicating that the most recent analysis was done with the “Use Specified Expenses Only” strategy. By referring to this indicator you can always know which strategy was used to create the baseline results being reflected in the graph on this page.
The button labeled “Show Expenses” gives you the ability to optionally show (or hide) the dashed lines of fixed rate expenses and the gray bands that depict variations in expenses resulting from Monte Carlo and historical analyses. Depending on your case, these bands can almost completely overlay the blue bands depicting your savings and this control enables you to remove the gray bands to get a better view of the blue bands. Alternate clicks will change the setting from “Hide Expenses” to “Show Expenses”. Here is a view of this page with the expense bands shown:
Possible Run-Time Errors
Immediately after doing an import from another copy of Pralana or from the Simplified Inputs page, the analysis results will be invalid and, consequently, the display will be blank. There may also be other conditions which prevent the analysis from being performed, such as blank or invalid data on various input pages. If you see a message pop up that indicates invalid input data, you will need to investigate and resolve the issue before the analysis will run.
Interpreting the Results
Each Monte Carlo and historical simulation involves way too many test cases to present individually and, consequently, Pralana creates a “range of likely outcomes” based on percentiles. This translates to a family of colored bands representing the following percentile ranges: 10th-20th, 20th-30th, 30th-40th, 40th-60th, 60th-70th, 70th-80th and 80th-90th percentiles, and they are ordered in this manner with the 10th-20th percentile band always on the bottom and the 80th-90th percentile band always on the top. You can hover your mouse over these bands and some text will pop up to identify the specific percentile range of the selected band. Referring to the example shown above, the light blue envelope near the bottom of the graph represents the set of outcomes that fall between the 10th and 20th percentile of the total set of results. In other words, only 10% of the results fell below (are worse than) this envelope and the remaining 80% fell above (are better than) this envelope. The overall range of likely outcomes is huge and the final savings balance varies from about $2M to about $10M. This clearly illustrates the potential effects of market volatility on the long-range performance of a portfolio. For reference purposes, the fixed rate projection is overlaid on the envelope with the solid red line and tends to be close to the 50th percentile level.
Total Spending
Here is a screenshot of the Analyze > Monte Carlo Analysis page that enables a closer look at the Total Spending illustration. The first thing to note is that total spending is calibrated against the vertical axis on the right side of the graph. The dashed red line is the total spending produced by the deterministic method and the gray envelope that generally brackets that line is the range of total spending produced by the Monte Carlo (or historical) analysis method. The bottom edge of the envelope is the 10th percentile of results and the top edge is the 90th percentile of results. The spending expands into a range of possibilities when using either Monte Carlo or historical analysis for two primary reasons:
Tax variations, which are a function of the performance of your portfolio. When your portfolio performs better (such as in the case of the results in the 60th-90th percentiles) your taxes will be higher due to higher RMDs and higher earned interest. Conversely, when your portfolio performs worse (such as in the lower percentiles of results) your taxes will be lower due to lower RMDs and earned interest. We conducted a study of the correlation between savings and expenses due to these tax variations and confirmed a high degree of correlation (about 95%) between total savings and total expenses.
Spending variations, which are a function of your spending strategy in conjunction with the performance of your portfolio. For example, if you have selected fixed % spending, you will be able to spend more when your portfolio performs better but will have to spend less when your portfolio performs worse. This will NOT be a contributor anytime you have selected the “Specified Expenses Only” or the “Consumption Smoothing” strategies.
Why Do Expenses Drop Dramatically in the Final Year?
Regardless of whether you are looking at deterministic, Monte Carlo or historical analysis results, you will usually see a substantial reduction in expenses in your final year. This is simply the result of Pralana modeling your final year as a partial year of income and expenses, based on the birthday of the last-surviving spouse. The savings balance does not exhibit a similar reduction because the balance on the date of the latest death is carried to the end of the year with no further increases or decreases.
Zooming the Analysis Results Display
If you wish to zoom in to look at any portion of the analysis results,
you can do so by clicking the Zoom icon on the upper left side of the
graph and then using your mouse to draw a box around the area of
interest (point to one corner of the desired box, click and hold, then
drag to another corner, then unclick). If you want to zoom in even
closer, just repeat the process of drawing a box around the area of
interest. Click the Reset icon ( 
) to return to the normal zoom
level. Here is an example of the zoomed-in display:
Historical Rates of Return and Inflation
You can view the historical data in Pralana’s database as well as add your own historical data via the Historical Rates of Return and Inflation tab on the Analyze > Historical Analysis page. Please see the screenshot below.
As you can see, the Historical Asset Classes and Inflation tab contains nominal (inflation effects not removed) rates of return for three historical sequences, plus historical inflation rates and CAPE values. These are hard-coded and cannot be changed by the user, and correspond to the following: Standard & Poor’s total stock market returns since 1928 (Robert J. Shiller, Professor of Economics, Yale University), 3-Month T-Bill total returns since 1928, 10-Year T-Bond total returns since 1928 (http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html), a cash sequence with 0% returns, the Historical Inflation sequence corresponding to Historical inflation back to 1928, and the CAPE values (both provided by Robert J. Shiller, Yale University).
Create User Historical Asset Classes
You can add your own historical sequences for other asset classes via the Create User Historical Asset Classes tab. The table is initially blank as shown below:
To enter the data for a new class, just enter an Asset Class name in the new row and then copy two columns of historical data from your information source (years from 1928 through 2023 in the first column and the corresponding nominal RORs in the second column) and paste it in the “Paste list of: year, rate of return” column of the new row. Here is an example after creating a simple two-column table with years (from 1928 through 2023) in the first column and rates of return in the second column:
Edit User Historical Rates of Return
If you have created one or more user historical asset classes, you can go to the Edit User Historical Rates of Return tab and make any changes you wish to make. Here is how this tab looks after entering the details for User Class #1:
To make changes, simply select the Rate of Return in any year and enter a new value.
Mapping Historical Data to Your Portfolio
To use the historical data in Pralana’s database for historical analysis, we must make an association between the historical asset classes and your portfolio. The mechanism for doing this depends upon whether you are doing Simple Portfolio Modeling or Advanced Portfolio Modeling, as described in the section of this manual on portfolio modeling.
Mapping for Advanced Portfolio Modeling
The Map Asset Classes to Historical Classes tab on the Analyze > Historical Analysis > Historical Rates of Return and Inflation page provides a mechanism for you to associate the Historical sequences with the asset classes you defined on the Build > Financial Assets > Advanced Portfolio Modeling pages. The table on this page lists the asset classes for the active asset allocation mode on the left and presents a pull-down menu of the available historical asset class names on the right. To do the mapping, simply visit each pull-down menu and select the historical asset you want to map to each of your own asset classes.
Note: Pralana allows you to define different asset classes in Mode 1 (asset allocation by account) and Mode 2 (specify portfolio overall allocation with account target allocations). The currently active asset allocation mode is shown on the page and the asset classes assigned to that mode are listed in the table.
Here is an example:
When Pralana performs the Historical analysis on your plan, it will use the Historical sequences for these asset classes to establish the annual aggregate rate of return to use for your accounts rather than the fixed returns specified via the Build > Financial Assets > Advanced Portfolio Modeling pages; however, it will always use your asset allocations to combine the returns of particular asset classes into an aggregate return.
When performing the Historical data simulation, Pralana requires that there be historical data back to 1928 for all asset classes. If you attempt to initiate an analysis and this condition is not met, Pralana will generate an error message stating that there is insufficient Historical data available. If you see this message, you will need to come back to this page and remedy the problem by either getting more history data or changing the association between your asset classes and the available Historical data sequences.
Mapping for Simple Portfolio Modeling
The Map Accounts to Historical Classes tab on the Analyze > Historical Analysis > Historical Rates of Return and Inflation page provides a mechanism for you to associate the Historical sequences with your accounts. The table on this page lists your accounts on the left and presents a pull-down menu of the available historical asset class names on the right. To do the mapping, simply visit each pull-down menu and select the historical asset you want to map to each of your accounts based on which class best represents the assets you hold in your respective accounts.
When Pralana performs the Historical analysis on your plan, it will use the Historical sequences for these asset classes as the annual ROR for your accounts rather than the average returns specified via the Build > Financial Assets > Simple Portfolio Modeling page.
When performing the Historical data simulation, Pralana requires that there be historical data back to 1928 for all asset classes. If you attempt to initiate an analysis and this condition is not met, Pralana will generate an error message stating that there is insufficient Historical data available. If you see this message, you will need to come back to this page and remedy the problem by either getting more history data or changing the association between your asset classes and the available Historical data sequences.
Historical Sequence Analysis
The Historical Sequence Analysis allows you to investigate the long-term result of any specific Historical sequence of returns for your particular asset classes as established via the Analyze > Historical Analysis > Historical Rates of Return page, and the corresponding inflation sequence. Pralana uses these historical sequences in conjunction with your asset allocations to generate an aggregate rate of return sequence for each of your accounts and then produces a future projection and presents it as an orange line juxtaposed to your baseline analysis results in the graph on the Analyze > Historical Analysis page. This line will be one of the 86 test cases comprising Pralana’s historical analysis and all Pralana’s tabular projection pages will reflect the details of this projection based on the selected historical sequence. When the Historical Sequence Analysis is active, a corresponding message (“Historical Sequence Analysis is Active”) will be presented near the top of each tabular view so there will be no confusion as to what is being displayed.
To enable the Historical Sequence Analysis, just check the associated box near the top of the page and enter the first year of the desired sequence in the Historical Sequence Analysis Start Year field. This will immediately cause an orange line to appear on the graph that reflects a deterministic projection using the specified historical inflation and returns sequence which you can then compare to the red line representing the baseline deterministic projection produced from the average inflation rates specified on the Build > Get Started > Scenario Assumptions page and the average ROR values specified on the Financial Analysis/Asset Classes page. By clicking the View Historical Sequence button, you can view the sequence of returns, inflation and CAPE values for the specified historical sequence. Except for the ROR and inflation rate, all other parameters, income and expense details are identical to those of the normal deterministic projection. Income taxes (which are typically a function of the performance of your portfolio) are recalculated based on the “what-if” ROR profile.
Best practice is to update your active analysis (either Monte Carlo or Historical) prior to enabling the Historical Sequence Analysis to ensure that the red projection line is based on all your current inputs. By doing this, you will ensure that the only differences between the deterministic projection (the red line) and the selected historical sequence (the orange line) are the inflation and returns sequences.
Here is a screenshot of the Historical Analysis page with the Historical Sequence Analysis activated. Note that the Historical analysis shows a 97% success rate (see the green arrow) and the worst historical sequence detected was the one beginning in 1965 (see the red arrow). To examine the case of the 1965 sequence, we activated the Historical Sequence Analysis and entered 1965 into the Historical Start Year field (see the blue arrow), and that resulted in the solid orange line (see the orange arrow) on the graph which represents the associated projection.
Here is a screenshot of the selected Historical sequences generated by clicking the “View Historical Sequence” button:
Using Variable Spending Strategies
A ‘deterministic’ analysis of your plan with specific income, expenses, and portfolio performance is a great way to evaluate its fundamental viability and compare alternatives. ‘Deterministic’ means the scenario projection are calculated, for all years, using your specified inputs.
In the real world, though, if your portfolio was underperforming your expectations, you probably adjust your spending over time based on your portfolio’s performance to avoid outliving your money. Pralana supports these eight strategies for making spending adjustments:
Consumption Smoothing
Constant Spending
Fixed % Spending
Fixed % Spending with Floor and Ceiling
Guyton-Klinger Rules
Target % Adjustment
Actuarial
CAPE Rules
Spending strategy selection and inputs are on the Analyze > Spending Strategies page.
Six of these strategies are described in a paper by Wade D. Pfau (Professor of Retirement Income at The American College, Bryn Mawr, PA) entitled Making Sense Out of Variable Spending Strategies for Retirees. All these spending strategies can be applied to deterministic projections as well as Monte Carlo and Historical Analyses.
A 9th strategy, CAPE Rules (Cyclically Adjusted Price Earnings ratio-related rules), is applicable only during historical analyses and is, therefore, enabled on the Analyze > Historical Analysis page.
You can read more on each spending strategy in subsequent sections.
The Audits tab provides insight into the calculation of the variable spending amount for most strategies.
Important Spending Strategy Concepts
Specified Expenses Only (default): scenario projections are based strictly on the your inputs provided on the Get Started, Financial Assets, Income and Expenses pages.
Consumption Smoothing: scenario projections are calculated the same as for Specified Expenses Only plus Pralana adds an amount for “consumption-smoothed expenses” generated by consumption smoothing algorithm in all plan years. This is a single calculated amount adjusted annually for inflation.
All other strategies: scenario projections are calculated the same as Specified Expenses Only except as follows:
These strategies apply only upon retirement. For single plans, these strategies alters spending in the retirement year. For married plans, these strategies alters spending in the year the later of the two retirement years.
Your non-essential expenses are replaced by the strategy’s calculated ‘variable expense’. Non-essential expenses include Phased and Miscellaneous Expenses that are designated ‘non-essential’ as well as non-QCD Charitable contributions. (Pralana considers your QCD’s to be essential).
Essential expenses are never changed. Essential expenses include expenses for Property, Rental, Children, Healthcare and Life Insurance Expenses pages, QCD expenses from the Charity page, and essential expenses from the Phased and Miscellaneous Expenses pages.
The Spending Rate parameter: Many of these strategies use a ‘spending rate’ which refers to your non-essential spending rate, not your overall spending rate. For users of Pralana Gold, you will recognize this as being the same as the Pralana Gold approach. Note: For your information, this approach may be enhanced in an upcoming update such that the Spending Rate parameter will optionally refer to your overall spending rate, including essential and non-essential spending plus all taxes. The revised implementation will be more consistent with the terminology used by Wade Pfau.
Pralana’s tabular projections, charts and other representations of your scenario projections will always reflect the active spending strategy.
Pralana’s Monte Carlo Analysis and Historical Analysis will run using the active spending strategy as will the optimization features for Roth conversions, Social Security Start Ages, Withdrawal Priorities, and Earliest Safe Retirement.
Consumption Smoothing
Pralana’s consumption smoothing provides three alternative approaches (‘solution methods’) which allow you to specify a goal and the calculate the consumption-smoothed spending to reach that goal. These solution types are:
Deterministic: You specify your goal for the scenario’s final effective savings, in today’s dollars. Pralana will calculate the consumption-smoothed spending to reach that goal.
Monte Carlo and Historical: You specify a goal success rate, e.g. 90%, and Pralana will calculate the consumption-smoothed spending that achieve that success rate when running at least 500 iterations of the Monte Carlo Analysis or running the Historical Analysis.
All of these solution types require iteration. Pralana will iteratively guess a spending amount, run the calculations, adjust the guess and recalculate until the result is within a small tolerance of your goal.
When the analysis is complete, the summary results will be shown along with a chart showing the spending amounts evaluated and the result (savings or success rate) each yielded.
Important notes about Consumption Smoothing:
The calculated spending amount may be positive or negative. Positive amounts mean you can spend more than your specified expenses and achieve your goal. Negative amounts mean you need to reduce your spending to achieve your goal.
- In rare cases, no solution may be found that achieves the goal. For the Deterministic solution in particular, a very small change (a few cents) in the consumption-smoothed spending amount will increase a taxable withdrawal just enough to trigger a tax or IRMAA ‘cliff’ in one or more years. Compounded over many years, the jump in tax expense may lead to a sizable reduction in final savings.For example, in one scenario, spending of
Here are some resources where you can learn more about consumption smoothing:
A book entitled “Spend ‘til the End” by Laurence Kotlikoff and Scott Burns.
A Forbes article by Wade Pfau entitled Lifetime Finance: An Alternative for a Lifetime Financial Plan (Lifecycle Finance: An Alternative For A Lifetime Financial Plan (forbes.com)
An alternative and equally important use of Pralana’s consumption smoothing capability is to gain insight into the amount of margin that exists in your plan: the Calculated Consumption-Smoothed Spending field is the amount by which your annual spending can be increased without you running out of money in your expected lifetime.
The Deterministic Algorithm
Here is a screenshot of a deterministic consumption smoothing example:
At the bottom of this page you can see a graph depicting the smoothing solution as well as a few other solutions that were considered.
Please note the Manual Consumption-Smoothed Spending (CSS) field, located just above the Calculated CSS field. You can manually enter a value in this field (in today’s dollars) and it will override the calculated CSS value.
This result is shown in the Expense Statement:
The Advanced Algorithm
Any projection based on fixed inflation and constant rates of return (i.e., the basic algorithm) is unlikely to come true in the real world due to market volatility (see discussion in the Analysis section). Roughly half of the time you will do better and half of the time you will do worse. To improve on this, Pralana provides a more advanced algorithm than the one described above: consumption smoothing done in conjunction with statistical analysis.
As described in the Analysis section of this manual, Pralana uses your family information, assumptions, financial assets, income, and expenses inputs while performing both Monte Carlo and historical analyses to simulate sequence of return variations over many test cases and ultimately generate a range of likely long-term outcomes. The power of those simulations can also be harnessed to calculate a CSS value that results in a plan with a given probability of success. Pralana strives for a success rate of 90%. So, the advanced algorithm arrives at a solution by first running the deterministic CSA algorithm to establish a baseline value for CSS, then uses either Monte Carlo or historical simulations to run a large number of test cases (which introduce simulated annual variations in rates of return and, in the case of historical analysis, inflation) using that value to determine the corresponding probability of success (i.e., the percentage of test cases that resulted in a positive EOLSV). If the probability of success is lower than 90% (i.e., the failure rate is too high), the CSS value will be decreased; if the calculated percentage is higher than 90% (i.e., the failure rate is too low), the CSS value will be increased. Then another set of either Monte Carlo or historical simulations will be run again and this process will repeat until the calculated probability of success is within proximity to 90%.
When the advanced algorithm finishes, you will have a value for CSS that is optimized to yield the highest standard of living consistent with a high degree of confidence (i.e., 90%) that you will not run out of money in your lifetime.
Control of Pralana’s Consumption Smoothing Function
Pralana’s Consumption Smoothing function is accessed via the Analyze > Spending Strategies page. To activate consumption smoothing, just select “Consumption Smoothing” from the Spending Strategies pull-down menu and the relevant set of controls will become visible in a new window.
Just click one of the radio buttons to specify the preferred solution type: Deterministic (which uses the deterministic CS algorithm), Monte Carlo or Historical (both of which use the advanced CS algorithm). Then click the “Run Consumption Smoothing” button to initiate the calculations and note that the Monte Carlo and historical methods will always take longer to execute than the deterministic analysis because there is much more computation being done. When the process is completed, the Calculated Consumption-Smoothed Spending field will contain the calculated annual spending amount in today’s dollars. Thereafter, Pralana will include this value as an annual inflation-adjusted expense in all its projections and analyses UNLESS you choose to manually override the calculated value by making an entry into the Manual Consumption-Smoothed Spending field or change the spending strategy.
Pralana will generally calculate a smooth spending level throughout the entire modeling timeframe; however, if the age at which you and your spouse will cease full-time employment (i.e., the retirement date specified on the Build > Scenario Assumptions > Retirement & Life Expectancy page) is still in the future, Pralana will strive to minimize withdrawals from tax-deferred and Roth accounts up to that point. In that case, you will probably observe one spending level prior to full retirement and another spending level thereafter.
As you have seen on other pages, Pralana can reduce your expenses upon the death of a spouse. In the case of consumption smoothing, Pralana will reduce your consumption-smoothed spending upon the death of the first spouse to die by the amount specified in the field called “% Reduction for Survivor” tab on the Build > Phased Expenses page.
Use of the Results
If the calculated consumption value is negative, it represents the amount by which you need to reduce your spending to make your plan viable. When you have completed this exercise, you can optionally incorporate this spending into the table on the Phased expenses page and then delete the computed value in the Consumption-Smoothed Spending fields on the Analyze > Spending Strategies page. If you are not interested in using the consumption smoothing function and want to ensure that its outputs do not get included in your expense stream, you can change the Spending Strategy selection to something other than “Consumption Smoothing”. Please note that the consumption smoothing calculations can only be performed and the results will only be used when the Spending Strategy selection is set to “Consumption Smoothing”.
Example 1
Using the screenshot below as an example, we computed CSS at $30,278; however, the Pralana algorithm strives to minimize tax-deferred and Roth withdrawals while you and/or your spouse are fully employed. In the case of this example, full-time employment ends in the year 2035 and you can see in the tabular projection shown below that the computed CSS is indeed $30,278, but it does not begin until 2035. Prior to that, CSS is reduced to avoid withdrawals from the tax-advantaged and Roth accounts.
Example 2
Now let’s look at another example in which we compare the results of using the deterministic method against the results of using Monte Carlo method for computing the smoothed spending value. As described above, the Monte Carlo method yields a more conservative solution, and this is illustrated somewhat dramatically in the screenshot below. The diagram on the left depicts use of the deterministic method, meaning that Pralana uses the life expectancy and ROR as specified on other pages. The diagram on the right depicts use of the Monte Carlo method. You can readily see that the plan built with the deterministic method runs out of money in the expected death year of 2068 with an expected success rate of 58%. In contrast, you can see that the plan built with the Monte Carlo method still has about $1M in 2068 and a success rate of about 90% (i.e., a 90% chance you will not go broke prior to 2068).
In the diagram on the right, note that the lower edge of the set of blue bands approaches the zero axis at the far-right side of the diagram. The bottom (lightest blue) band represents the 10th-20th percentile Monte Carlo analysis results, so that confirms that Pralana did the consumption smoothing calculations correctly to yield a solution with a 90% success rate. It also depicts about a 50% success rate at dying with about $1M as opposed to the diagram on the left which predicts about a 50% probability of dying broke and a 10-20% probability of running out of money at age 80.
Conclusions
This discussion may well lead you to wonder why you would ever want to use just the basic CSA, but there are good uses for both versions depending upon your situation. First, it is totally impossible to predict the future so no algorithm exists anywhere that can do it and, therefore, using the advanced CSA with a 90% probability of success is still no guarantee. Second, if your investments are very conservative, the basic algorithm may work just fine for you. Third, another good use for the basic algorithm is to investigate how much “margin” is in your plan. You could do this by fully defining your expected expenses in the other expense-related pages and then perform consumption smoothing using the deterministic method. The calculated CSS would indicate how much more you could theoretically spend on an annual basis and still have your money last for the rest of your life assuming deterministic projections. If this is negative, you probably need to modify your plan. If it is way positive, you can probably feel pretty good about your plan. Regardless, we would always recommend that you revisit your plan on a regular basis.
Constant Spending Method
With this method, initial spending at the start of retirement is established by the fixed percentage method and, thereafter, annual adjustments are made based strictly on inflation to maintain a constant, inflation-adjusted level of non-essential spending. Depending on long term portfolio performance, this method has the potential to deplete your savings completely. When you select this method, Pralana provides a data input field where you can specify the initial percentage. Here is a screenshot of a Pralana simulation using this method:
Prior to retirement, spending is the same regardless of the spending strategy and, thereafter, non-essential spending is based on the constant spending method while essential spending is as specified on the various Pralana expense pages. You can see that the spending level is generally at a constant level (the variations are due to taxes) but is higher or lower than the specified level depending upon portfolio performance leading up to the start of retirement.
Fixed Percentage Spending Method
With this method, spending is always a constant percentage of your remaining savings in each year of retirement. Year-to-year spending will vary some because it is tied directly to market returns; however, unless your essential spending is overwhelming, your savings will never be depleted because non-essential spending will be decreased in proportion to the remaining balance. When you select this method, Pralana provides a data input field where you can specify that percentage. Here are screenshots from the Run Analysis page after a simulation using this method:
The graph on the left is the scenario run using specified expenses only, where the spending envelope straddles the deterministic spending line due to variations in income taxes as described above. The graph on the right is the same scenario run using the Fixed Percentage Spending method. In this example, retirement begins in year 2042. Prior to retirement, spending is the same regardless of the spending strategy and, thereafter, non-essential spending is based on the fixed percentage spending method while essential spending is as specified on the various Pralana expense pages. You can see that spending starts much higher than the as-specified level immediately after retirement but levels out as the upward trend in savings is halted and becomes generally flat. One particularly notable feature of this method is that spending will continue to be reduced as necessary to prevent savings from being depleted.
Fixed Percentage Spending with Floor and Ceiling Method
With this method, retirement begins by using the fixed percentage method which allows greater spending when markets do well and which forces spending reductions when markets do poorly; however, it imposes hard ceiling and floors on spending. Spending is not allowed to rise above a ceiling set at some percentage higher than the real value of spending in the first year of retirement and it is not allowed to fall by more than some percentage below the real value of first-year spending. The idea is to smooth out annual spending fluctuations by preventing spending from drifting too far from its initial level. When you select this method, Pralana provides a data input field where you can specify the initial spending rate as well as the ceiling and floor levels. Below the next paragraph there is a screenshot of a Pralana simulation using this method, organized as described as above in Fixed Percentage Spending Method.
Prior to retirement, spending is the same regardless of the spending strategy and, thereafter, non-essential spending is based on the fixed percentage with floor and ceiling spending method while essential spending is as specified on the various Pralana expense pages. You can see that spending starts much higher than the as-specified level immediately after retirement but then drops somewhat as savings starts trending lower; however, it does not drop below the specified floor level which, in this case, results in excessive long-term spending and eventual depletion of savings.
Guyton-Klinger Spending Method
With this method, initial spending at the start of retirement is established by the fixed percentage method and, thereafter, annual adjustments are made based on inflation, portfolio performance and long-term deviations from the initial spending level. More specifically, spending is adjusted annually for inflation unless your portfolio had a negative return in the previous year and the current spending rate is higher than the initial spending rate. Additionally, annual spending is increased by 10% in any year where the current spending rate is 20% less than its initial level (this is known as the prosperity rule), and annual spending is decreased by 10% in the first 15 years of retirement whenever the current spending rate is 20% higher than its initial rate (this is known as the capital preservation rule). When you select this method, Pralana provides a data input field where you can specify the initial spending percentage rate. Here is a screenshot of a Pralana simulation using this method.
Prior to retirement, spending is the same regardless of the spending strategy and, thereafter, non-essential spending is based on the Guyton-Klinger spending method while essential spending is as specified on the various Pralana expense pages. You can see that spending starts much higher than the as-specified level immediately after retirement but then drops somewhat as savings starts trending lower. The reduction in spending is initially due to a combination of the “capital preservation rule” and the absence of adjustments for inflation. After the first 15 years of retirement (around 2039) the “capital preservation rule” is no longer in play and further reductions are due strictly to the absence of inflationary adjustments. The inability of the algorithm to reduce spending sufficiently results in the eventual depletion of savings in a number of cases.
Target Percentage Adjustment Spending Method
With this method, a target savings profile is established based on total savings at the start of your retirement and spending a specified rate of your total savings in each year of retirement. Initial non-essential spending is the level that would cause your savings to track this target curve. Thereafter, annual inflation adjustments are made to this spending level if the projected savings balance is higher than the target curve. If the projected savings falls below the target curve, non-essential spending is not adjusted for inflation that year. Here is a screenshot of a Pralana simulation using this method:
Prior to retirement, spending is the same regardless of the spending strategy and, thereafter, non-essential spending is based on the Target Percentage Adjustment spending method while essential spending is as specified on the various Pralana expense pages. The key observable here is that spending trends slightly downward over the long term because it can never climb faster than inflation but can remain constant in future year dollars whenever savings fall below the target value (the solid line). Therefore, on a diagram calibrated in today’s dollars, spending adjusted for inflation would be flat and spending not adjusted for inflation would decrease over time. This is generally the case in this example because the savings are in many cases below the target line.
Actuarial Spending Method
With this method, the objective is to calculate sustainable annual spending based on the remaining portfolio balance, remaining longevity and expected portfolio returns. This method allows you to specify a legacy value, in today’s $, for your final savings balance. The legacy value you enter will be inflated using your general inflation rate to find the desired future legacy amount in the final scenario year.
Prior to retirement, spending is the same regardless of the spending strategy and, thereafter, non-essential spending is based on the Actuarial spending method while essential spending is as specified on the various Pralana expense pages.
Important note: The actuarial spending algorithm currently uses prior year saving and expenses to calculate the year-to-year actuarial spending, as shown on the Audit tab. Because prior year expenses will be different than current year expenses, the final plan savings will be close to the desired inflated legacy amount, but will not match it exactly. A future enhancement will be to use iterative tax calculations to find the exact final year spending to achieve the legacy amount.
CAPE Spending Strategy
With this method, the objective is to calculate sustainable annual spending based on the remaining portfolio balance, a user-specified constant withdrawal percentage, the CAEY (Cyclically-Adjusted Earnings Yield which is the inverse of the Cyclically-Adjusted Price Earnings ratio, or CAPE) and a user-specified CAEY multiplier. Withdrawals governed by this method tend to be smoother than those such as the fixed rate which is purely a factor of the current portfolio value. You can read more about this method in this informative article on the EarlyRetirementNow blog. The CAPE Rules method is only applicable during historical analysis because the CAPE is a calculated value that is a function of the Price Earnings (PE) ratio for a 10-year period and is a matter of historical record and is included in Pralana’s historical data. Consequently, this value simply does not apply to deterministic or Monte Carlo analyses because they do not use the historical record. Therefore, if you run either a fixed rate or a Monte Carlo analysis using the CAPE Rules method Pralana will default to using specified expenses only.
There are two parameters associated with the CAPE Rules method: CAPE a, the fixed withdrawal rate, and CAPE b, the multiplier to be applied to the CAPE for a given year. Note, though, that CAPE Rules are only applicable for historical analyses and deterministic and Monte Carlo analyses will be run using specified expenses only if the spending strategy is set to CAPE Rules. The formula for determining the variable withdrawal rate = portfolio value at the end of the prior year x (CAPE a + CAPE b /CAPE for the applicable year). So, the “CAPE b / CAPE” term in the formula provides some additional smoothing of annual fluctuations in the withdrawal rate in this mode. Here is a screenshot of a Pralana simulation using this method:
Prior to retirement, spending is the same regardless of the spending strategy and, thereafter, non-essential spending is based on the CAPE Rules spending method (during historical analyses) while essential spending is as specified on the various Pralana expense pages. In the diagram on the right, note that the red fixed rate line is the same as in the diagram on the left. That is because CAPE Rules are not applicable to fixed rate projections and, hence, Pralana always defaults to the specified spending strategy for fixed rate projections whenever the CAPE Rules strategy is selected. In general, the CAPE spending strategy is not used for any other analysis or optimization, including Roth Conversion optimization.
Final Commentary on Variable Spending Strategies
One key point to keep in mind when studying the examples shown above is that the spending data always includes income taxes in addition to the essential expenses as entered on Pralana’s expense input pages and the variable non-essential expenses generated by Pralana’s variable spending algorithms. In your retirement years, the tax component may become particularly significant after you begin taking RMDs and this will contribute to making the width of the spending envelope larger and more variable than you might otherwise expect.
Using Analysis Results
Pralana will not generate any form of messages to tell you that your plan is solid and that you should sleep well at night or that your plan is not viable and that you need to take corrective actions. Rather, it produces objective outputs and leaves the interpretation to you. With that said, let’s say that you have just retired and plan to live off your investments and your Social Security benefits for a 40-year period. You would probably be reasonably happy to see a Monte Carlo analysis result like the one shown below. 100% of the 1000 Monte Carlo projections ended up with positive account balances after a 40-year retirement while annual spending, adjusted for inflation, diminished just slightly over that period.
On the other hand, you do NOT want to see an analysis result like this one. This predicts that the owners of this plan will be dying broke if they indeed do live to their life expectancies. This particular example is the result of excessive spending in the early retirement years, but similar results could be the result of reductions in income or investment returns insufficient to sustain spending levels.
Other than Federal taxes, the only spending specified is $70,000 prior to retirement in 2024, annually increasing at the rate of inflation. In the case of the first example, $35,000 is essential spending and the other $35,000 is non-essential spending which is replaced after retirement by the Fixed % Spending strategy with a 4% withdrawal rate to regulate the non-essential spending as a function of portfolio performance. In the second example, $50,000 is essential spending and the remaining $20,000 is non-essential spending which is replaced after retirement by the Fixed % Spending strategy with a 4% withdrawal rate to regulate non-essential spending. In the second example, non-essential spending is high initially but quickly starts dropping and eventually goes to zero as the portfolio gets consumed. The variable spending algorithm cannot save the day in this case because the essential spending level is so high. Obviously, the better way to proceed is as shown in the first example which is based on more spending flexibility and, thus, lower essential spending. There, non-essential spending can be reduced if the portfolio drops but it can also increase substantially if the portfolio performs especially well. If you see a result like the second example in building and analyzing your own plan, a suggestion would be to re-examine your essential spending level and plan to be flexible with your non-essential spending in retirement, or to seek a source of supplementary income or possibly adjust the investments in your portfolio to get better returns over the long haul. These things are easy to say but harder to do. Regardless, the analysis features of Pralana give you the tools you need to evaluate your options and make decisions to establish a viable plan that leads to a great future.
Modeling Your Roth Conversions
This page enables you to model the conversion of some or all your tax-deferred savings and/or your spouse’s tax-deferred savings to Roth savings, including both pre-tax and after-tax contributions. You can do this independently for each scenario and immediately observe the effects on the projection of your Total Savings by monitoring the on-page graph.
All pre-tax contributions and all growth of tax-deferred accounts are taxable upon withdrawal or conversion; after-tax contributions are rolled over without further taxation. If your account includes after-tax contributions, all Roth conversions from that account will contain pre-tax and after-tax money such that all annual conversions will contain pre-tax and after-tax amounts in direct proportion to the relative balances of those components at the end of the prior year.
The Roth conversion page is intended to give you a high degree of control over the conversion of pre-tax dollars in your tax-deferred accounts while working well with deterministic, Monte Carlo and historical analysis methods. All Roth conversions will be modeled to occur over a user-specified time span of years and for each of these years you have control over whose accounts are being converted and limiting factors including marginal tax bracket, LTCG tax bracket, IRMAA bracket and FPL (Federal Poverty Level) multiple. This enables you to control the effect of Roth conversions on your Medicare premiums, your Federal taxes, and your ACA subsidies.
The Effect of Asset Allocations on the Evaluation of Roth Conversions
Before getting into the mechanics of planning and optimizing Roth conversions with Pralana, some discussion of asset allocation and its effects on the evaluation of Roth conversions is warranted. Unless you are using the account level asset location mode (described above in the section on Financial Assets) with the same asset assignment in each of your accounts, Roth conversions (actually, any movement of money between various account types ) will change your overall allocation and, in turn, your overall returns, your annual taxes and your risk, which distorts your ability to ascertain the true benefits of that conversion. Here is an example to illustrate:
Suppose you have a tax-deferred account allocated 100% bonds earning 2.5% with a $1,000,000 balance; a taxable account allocated 100% stocks earning 5%, with a $750,000 balance; and a Roth account allocated 100% stocks earning 5%, with a $500,000 balance. This portfolio is allocated 56% stocks and earns an overall return of 3.9%. Now, let’s move $500,000 from the tax-deferred account to the Roth account. This results in a tax-deferred account allocated 100% bonds earning 2.5% with a $500,000 balance; a taxable account allocated 100% stocks earning 5%, with a $750,000 balance; and a Roth account allocated 100% stocks earning 5%, with a $1,000,000 balance. This portfolio is allocated 78% stocks and earns an overall return of 4.4%. The shift in allocation toward more stocks will tend to make Roth conversions appear to be more favorable but this comes at a cost: it may be increasing your long-term risk by putting a greater share of your money into riskier assets.
To get a good comparison of the benefits of a Roth conversion using the account level asset location mode (i.e., mode 1), you need the same allocation for each account type because this will ensure a consistent overall allocation before and after the conversion. Arguably, a better approach is to use the overall asset allocation mode (i.e., mode 2) to evaluate Roth conversions because it automatically maintains a desired asset allocation while still allowing you to generally control asset locations for optimizing tax efficiency.
To emphasize these points, here are two unedited Pralana Forum posts on the subject by Rick who is both an experienced investor and a knowledgeable Pralana user:
*“Account level allocation is used if you want to hold the same asset allocation in all types of accounts (taxable, Roth, tax deferred). This is fine as you can accomplish all your financial goals this way. You can switch up to 4 times in Pralana, so for instance, you can ramp your bond allocation up as you approach retirement. But be very careful in account level allocation - if you start trying to hold different allocations in different types of accounts, then you can’t really do any optimization studies because moving money between different types of accounts is also changing your asset allocation. *
For instance, if you are holding more bonds in your tax deferred (IRA, 401K) and more stocks in Roth, then the program will think it is extremely favorable to do Roth Conversions - but not because Roth Conversions are right, but because it is simply increasing your stock allocation as it shifts money from the account you told it was full of bonds to the one you told it was full of stocks. That sneaky asset allocation shift totally overwhelms the real effect of Roth Conversions. That issue is not a “Pralana” problem, it is just math, but it can lead to making terrible decisions. I troll some retirement forums and occasionally someone will post that they are in the low bracket but they Roth converted to the top bracket because their tool told them to and this is invariably the issue - they didn’t understand how their tool worked, and they cost themselves huge money, they would have been better off doing nothing.
If you do want to hold different allocations, say bonds in tax deferred and stocks in Roth & taxable, then select the overall allocation mode, set your overall asset allocation and select the order of which account should hold the most stocks.”
*“Doing studies to optimize things like Roth Conversions when using account level allocation while holding different asset allocations in various types of accounts is the issue. It is not a Pralana problem, it’s just a bad science experiment, where you failed to control the relevant variables. You end up measuring the mixed effect of Roth Conversions and an asset allocation shift to more stocks. That will make it appear to the bad scientist that there is an enormous benefit to Roth Conversions and that’s where the “terrible” part comes in, if you do a bad comparison, you get a bad result. You are free in reality to hold differing allocations in different accounts, but don’t expect to be able to make meaningful comparisons that way. *
Using account level allocation when the asset allocations in all accounts is equal (often called “mirrored” allocations) is the gold standard of knowing your overall asset allocation and therefore your risk. Pralana allows you to reset the allocation 4 times in the model so you can even approximate a glide path.
*Overall allocation mode (many writers call it “tax efficient asset location”) allows you to hold different allocations in different accounts and many writers recommend it. This reduces current taxes by putting bonds in your IRA instead of taxable or Roth and increases growth by putting stocks in Roth. *
When we do this and use a constant projection of returns, we see that we end with more money using the overall allocation mode than the same allocation using account level allocation - Hooray, it’s magic! However, if you test a bad historical sequence (Analysis-Run Analysis-then click the button to enable a historic sequence and choose a poor one such as 1966 as the starting year.), then you end up with less money than Mode 1 - Uh-oh, not magic, more risk!
That extra risk is the source of the extra return. When we load our IRAs up with bonds, we are effectively foisting a portion of them on the government (since we owe some fraction of that account in taxes). Meanwhile the stocks we hold in Roth are all ours, so it’s effectively an asset allocation shift towards stocks. We could get exactly the same final estate value using Mode 1, equal allocations in all accounts, with some higher allocation to stocks. That equivalence actually holds up pretty well in both bull and bear markets. Pralana is such a powerful tool that you can actually check this yourself.
I happen to currently hold something in between equal allocations in all accounts and the “tax efficient”. So I check Roth Conversions with equal allocations in account level allocation mode (which will generally favor more Roth Conversions) and with “tax efficient” overall allocation mode (which will generally favor smaller conversions) and make the current year’s conversion somewhere in between.”
Introduction to the Roth Conversion Page
The radio buttons at the top of the page allow you to specify which scenario you want to work on and whether you want Roth conversions enabled or disabled. If set to “disabled”, all parameter settings on this page will be ignored for the associated scenario. If set to “enabled”, your deterministic, Monte Carlo and Historical Analyses will include Roth conversions as specified by the settings on this page.
Roth Conversion Parameters
The section at the top of the page contains the parameters by which you control Pralana’s Roth conversion modeling. There is one tab for the active settings and another for the baseline settings in place the last time either a Monte Carlo or historical analysis was run. Your control inputs are made via the Active tab; the contents of the Baseline tab are read-only and there strictly for your reference.
Each row in the active tab contains the following control information:
Year: This is a year in which you want to do a Roth conversion.
Account Priority: Pralana can model Roth conversions for one or both marriage partners concurrently, and the Account Priority setting is the mechanism by which you tell Pralana how to do it. Your choices are: no conversions, you only, spouse only, you have priority, spouse has priority, and proportional, and these settings can be different each year. If you specify “no conversions”, conversions will not be considered in the associated year. If you select “you only”, conversions will only be considered for your account in that year. If you select “spouse only”, conversions will only be considered for your spouse’s account in that year. If you select “you have priority” or “spouse has priority”, conversions of the higher-priority account will be used to reach the limits established by the tax bracket, IRMAA, and FPL multiple controls. When the higher-priority account has been fully converted, then the lower-priority account will be converted up to the annual limits. If you specify “proportional”, your account and your spouse’s account will be converted concurrently with annual conversion amounts being apportioned between the accounts in accordance with their relative account balances.
Max Ordinary Income Tax Bracket: The primary control for establishing the annual amount to be converted each year is the maximum federal income tax bracket. Pralana will start by determining the difference between the top of the specified tax bracket and your taxable income exclusive of Roth conversions and LTCG, and that amount will become the annual Roth conversion amount UNLESS either the IRMAA limit, FPL Multiple limit or maximum LTCG bracket is encountered first. LTCG are excluded from the taxable income estimate because they are taxed at different rates.
Max LTCG Bracket: Roth conversions will increase your MAGI and, therefore, have the potential to increase your LTCG taxes. This control enables you to limit your Roth conversions to keep your MAGI within a specified LTCG bracket. You can select “No Limit” if you do not want Pralana to consider this in modeling Roth conversions.
Max Medicare IRMAA Bracket: Roth conversions will increase your MAGI and, therefore, have the potential to increase your Medicare premiums. This is because Income-Related Monthly Adjustment Amount (IRMAA) rules make Medicare premiums a function of MAGI (with a two-year lookback). Within Pralana, if on the Healthcare Expenses page you’ve specified that Pralana is to automatically calculate Part B and Part D Medicare premiums and surcharges, this relationship will be modeled. Pralana’s optimization algorithm will take this into account when trying to determine the optimum maximum tax bracket, but this control enables you to manually limit the annual conversion amount to avoid large increases in your Medicare premiums while the conversions are being done. There are separate IRMAA thresholds for single folks and married couples, and all IRMAA brackets are included in the pull-down list associated with this control. Note that the brackets are defined in terms of today’s dollars, and they are adjusted annually based on the specified inflation rates. You can select “No Limit” if you do not want Pralana to consider this in modeling Roth conversions.
Max FPL Multiple: ACA subsidies are a function of your Modified AGI (MAGI) and the relative cost of your actual ACA premium and the Second Lowest Cost Silver Plan (SLCSP) in your area. The amount you are expected to pay for your ACA health insurance is based on the relationship between the Federal Poverty Level (FPL) and your MAGI, and Uncle Sam provides a subsidy to offset your actual ACA premium so that your effective premium matches the amount you are expected to pay. As with most government programs, there are some exceptions: If your MAGI is less than the FPL or more than 4 times the FPL, you are not entitled to a subsidy. In between those limits, there is a curve that determines what percentage of your MAGI you are expected to pay for your ACA premiums. That, in turn, determines the size of your subsidy. But, in 2022 (because of the American Recovery Act of 2021) and in 2023-2025 (because of the Inflation Reduction Act), the 4 x FPL limit is removed so that you may still be entitled to the subsidy at the higher income levels. Keeping that background in mind, you can readily understand that Roth conversions are taxable income and, as such, affect your MAGI and can reduce or eliminate ACA subsidies that you may otherwise be entitled to. Consequently, Pralana provides you the controls to limit (or not) the size of the Roth conversions to restrict your MAGI to a particular multiple of the FPL. The multiples you can select from correspond to the breakpoints in the ACA rules: 1.5, 2, 2.5, 3 and 4. You can also select “No Limit” if ACA does not apply to you or you do not care about limiting Roth conversions as a function of FPL multiples. There is plenty of information available on the Internet if you would like to learn more on the details on expected contributions under the ACA.
Specific Conversion Amount (Today’s $): You may override Pralana’s automatic calculation of the conversion amount by entering a specific conversion amount in today’s $. If this field contains an amount, Pralana will inflate the amount and use it in the specified year(s) for the conversion amount (assuming the source account(s) have sufficient balance).
If you wish to use the same control parameters for multiple years, you do not need to replicate the rows. Starting with the year associated with the first row, Pralana will use those same parameters for all subsequent years until it gets to the year associated with the next row in the table. To add another row, just fill in the fields in the blank “new row” at the bottom of the tab and it will be added to the table and then another empty “new row” will appear. You can repeat this process as many times as you desire to define all the control parameters you want Pralana to use, and it will organize the rows in year-order. If you want to limit the conversions to a specific time period, you only need two rows in the table: the first row should specify the first year of the period and the second row should specify the end of the period and its Account Priority should be set to “No Conversions”. You can also do conversions for several years, then stop for one or more years and then resume conversions again. You do this by entering a row for each of the change points: a row to start the conversions, another row to stop them, another row to start them again and a final row to stop them once and for all. If you want conversions to continue to the end of the modeling period, you need a minimum of only one row: the one that identifies the starting year.
Revert to Saved Baseline
A “saved baseline” of all the parameters in the Active tab are saved whenever you run either a Optimize Roth Conversions, Monte Carlo or Historical analysis. Baseline parameters can be viewed via the Baseline tab. Click Revert to Saved Baseline button to replace your active parameters with the baseline parameters.
Optimize Roth Conversions
The Optimize Roth Conversions button initiates an optimization process to determine the optimum settings of the Maximum Marginal Tax Bracket column in each year between the starting year and the last (“No Conversions”) year. Note that prior to optimization, your current Roth Conversion inputs are copied to the baseline inputs
The optimization process will use the LTCG bracket, IRMAA bracket and FPL Multiple settings you have specified in the input table. When the process is completed, the Maximum Marginal Tax Brackets column in the table will be filled in with the results and this may add more rows to the table because the optimization may involve different tax brackets for different years. This process will overwrite any manual changes you have made to this table.
The Roth conversion optimization process is done as follows:
Pralana’s Roth optimization algorithm seeks to determine the optimum marginal tax brackets while using the Max LTCG bracket, IRMAA and FPL Multiple limits that you specify. It does not do any form of optimization of those settings.
A 3-pass algorithm is used to determine the optimum marginal brackets for every year in the conversion period. In the first pass, it uses the same bracket in every year and determines which bracket yields the highest effective savings at the end of the modeling period. In the second pass, it applies the best overall bracket established in the first pass to every year in the modeling period and then seeks improvements on a year-by-year basis. It starts with year 1 and tests all marginal brackets for a possible improvement in the final savings balance while all future years are using the best overall bracket established in the first pass. It then modifies the bracket for year 1 with the bracket yielding the best long-term result. Then it tests all marginal brackets in year 2 for a possible improvement in the final savings balance while all future years are using the best overall bracket established in the first pass. It then modifies the bracket for year 2 with the bracket yielding the best long-term result. This process is repeated for all remaining years in the modeling period. The third pass is exactly like the second pass except that it begins with the results of the second pass to make one final refinement on the optimum marginal tax bracket to use in each year of the Roth conversion period.
When the 3-pass optimization algorithm is completed, it updates the input table with the optimum settings and the graph is updated to show the deterministic projections using these settings juxtaposed with the baseline established the last time either a Monte Carlo or historical analysis was run.
If you elect to not to use the recommended conversion, you may click the “Revert to Saved Baseline” button to restore the pre-optimization parameters.
You can then manually adjust any or all the parameters in the input table while immediately observing the long-term effects both graphically and in tabular form without having to leave the page.
The specified settings will be used in deterministic, Monte Carlo and historical analyses as well as in all tabular projections whenever Roth conversions are enabled, as indicated by the enabled/disabled field near the top of the page.
Roth Conversion Results
The Roth Conversion Results section consists of two tabs: Active vs. Baseline and Details by Year.
The Active vs. Baseline tab presents a graph that shows Total What-if Savings compared to your Total Baseline Savings (established the last time you ran an Analysis on the selected scenario). In a glance, you can see whether the proposed Roth Conversions (as represented by the parameters on the Active tab) yield any long-term improvement over the baseline settings (which could be a “no Roth conversions” baseline. The graph can be calibrated in terms of either future dollars or today’s dollars, depending on your selection via the related radio buttons, and it can also show either absolute dollars or effective dollars, again depending on your selection via the related radio buttons.
Absolute dollars reflect actual account balances and effective dollars reflect account balances with all money in tax-deferred accounts being reduced to estimate its after-tax value (the effective buying power of this money). This translation process is based on a user-specified effective tax rate setting provided on the Build > Financial Assets > Management page. This control lets you provide that value to allow for the possibility that the funds in the tax-deferred accounts might be inherited by someone in a different tax bracket than you.
The Details by Year tab contains various outputs from the conversion algorithm so you can immediately see the effect of any changes you have made via the control just above.
This is a close-up of Details by Year tab on the Roth Conversion page, and it contains details relevant to the Roth conversions being modeled so you can get immediate feedback on the effectiveness of the changes being made on the controls table on the left side of the page. Here are some key observables in this example:
Conversions begin in the year 2040.
From year 2040 onward, the 22% tax bracket is the limiting factor on how much is converted each year, and on the right you can see that the Roth conversions completely fill the bracket (since there is no remaining headroom in the ordinary bracket).
In 2045, no conversion is done because ordinary income exceeds the the top of the 22% bracket before any Roth conversions are done.
A Note on IRMAA Limitations on Roth Conversions
Your Medicare premiums in the current year are a function of the relationship between your MAGI from two years ago and the IRMAA brackets for the current year. Therefore, when Pralana computes your IRMAA-limited Roth conversions, it does so by limiting the conversions (and your MAGI) in the current year so that it does not exceed the specified IRMAA limit two years in the future.
Taxes on Roth conversions
Pre-tax money converted from a tax-deferred account to a Roth account is taxed as ordinary income in the associated tax year. Pralana includes this in your taxable income for that year (along with all other sources of taxable income) and does a single income tax calculation which is then treated as an expense in that year. If that results in a negative cash flow, it will be handled via Pralana’s normal process for dealing with negative cash flows (described above in the section called “Modeling of Accounts and Cash Flow”). In other words, the taxes on the Roth conversion will not be taken from the money flowing from the tax-deferred account to the Roth account.
Define and Compare Alternatives via Use of Multiple Scenarios
With its extensive modeling, analysis, and presentation capabilities, Pralana 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 Pralana allows you to define and model three (3) independent scenarios simultaneously and then compare the results. On any given page, typically only one scenario will be visible at a time as selected via radio buttons near the top of the page. What this is allowing you to do is define different values for the various data fields for each of the scenarios. Examples of this are life expectancies, inflation rate, asset allocations, income streams, expenses, and the list goes on and on. One important thing to keep in mind is that the components of a given scenario are defined over all of Pralana’s data input pages and that the “Scenario 1” referenced on one page is the same “Scenario 1” referenced on all other pages, and the same is true for Scenarios 2 and 3. In other words, to fully define a given scenario, you need to provide its demographics and assumptions on the Build > Get Started > My Family and > Scenario Assumptions pages, its income streams on the Income page, and its expenses on the various expense pages, and so on.
Pralana will analyze each scenario using three different analysis methods upon your command: deterministic analysis, Monte Carlo simulation and historical simulation. The results will be presented to you in graphical form to illustrate a range of possible outcomes. You can read much more about this in the paragraphs related to Analysis.
When you first start using Pralana, you will be creating Scenario 1; however, this designation will remain hidden until such time as you create a second scenario on the Build > Scenario Assumptions > Add/Delete Scenarios page. When you are finished defining your first/baseline scenario and are ready to create another scenario to examine alternatives, just go to that page and enter a name and description for a second (or third) scenario. When you leave the page, that new scenario will be created with a few inputs copied from the first scenario. At that point, the scenario selection radio buttons will become visible on the other pages of the tool and you can then selectively modify any of the associated input fields you choose and then initiate a separate analysis of the new scenario. You can also go to the Review > Tools > Compare Scenarios page to see a direct comparison of your scenarios.
You may also use the Copy Scenario feature to copy all inputs from scenario 1 to the new scenario and the final savings metrics should match exactly.
Scenario Comparisons
The Scenario Analysis Comparisons page shows the Key Baseline Metrics by Scenario graph depicting deterministic analysis comparisons as well as a graph showing Monte Carlo or Historical analysis comparisons and a table that presents a side-by-side success rate summary of your scenarios, but it will only contain results from the scenarios on which you have run either a Monte Carlo or an historical analysis.
Here is a screenshot:
The graph in the upper left simultaneously shows the 10th and 90th percentile values from all three scenarios, color coded so you can distinguish one scenario from another. The entire set of colored bands (like on the Run Analysis page) are not shown because the results from one scenario would obscure the results from the others. It may still take some study time to decipher the results but here is the key to understanding this graph: the 10th and 90th percentile lines from a given scenario are of the same color and the space between them is all the blue bands shown on the Run Analysis page would be located. So, by comparing this “transparent” envelope from one scenario with that of another scenario, you can get a good sense of the relative success rates of those scenarios. With that said, this graph can display either savings or spending results as specified by the radio buttons at the top of the page. Similarly, the graph presents either Monte Carlo or Historical analysis results. Further, it can present the data in terms of future or today’s dollars and the savings views can be calibrated in terms of effective or absolute dollars, all of which is controlled via the radio buttons at the top of the page.
The Key Baseline Metrics graph contains a display of the deterministic projections of the three scenarios (savings and net worth totals) overlaid for easy comparison. The horizontal axis of the graph will be scaled to match the maximum lifespan of you or your spouse across all three scenarios. We envision this tab as being particularly useful for lifestyle decision making, such as assessing the long-term ramifications of taking a lower-paying but more satisfying job, working after retirement, or buying a more (or less) expensive home, and so on. You have the option to de-clutter the graph by hiding scenario 2 and/or scenario 3 savings and net worth lines, or by hiding the net worth lines associated with all scenarios. The “show” or “hide” decision is controlled simply by clicking the relevant portions of the legend beneath the graph, shown in the screenshot below. If you have not run either a Monte Carlo or an historical analysis on a scenario, that scenario number will not be included in this legend.
The table beneath the two graphs contains tabular success rates for the final 10 years of all three scenarios and variable spending for the next 5 years.
In the case of a scenario that models a shorter lifespan than the other scenarios, you will observe that the time axis extends beyond the death year and the savings and expense values drop to zero in those final years.
Here is an example:
Let’s suppose you want to do long-term comparisons related to two different housing options in your retirement years. What probably matters most in this case is looking at comparisons of deterministic projections. So, navigate to the Analyze > Scenario Comparisons page and you will see a graph that overlays the deterministic analysis results of your scenarios. It will look something like this, where only scenarios 1 and 2 are relevant:
This page contains a feature that enables you to do a comparison between scenarios using “effective” dollars in addition to absolute dollars. This concept was introduced above in the paragraph entitled ANALYSIS and this is one of the two pages where you will see it implemented. To illustrate this feature, we have made an identical set-up of scenarios 1 and 2 with no Roth conversions. At the start of the owners’ retirement in the year 2040 the regular investment account held $750K, you and your spouse’s tax-deferred accounts held a combined total of just under $1M, and the Roth account balance is zero. Then we modified scenario 2 to include conversion of 100% of the tax-deferred funds to Roth accounts over a 10-year period starting in 2040. This completed the Roth conversions just prior to the time that RMDs would have started. The first screenshot below shows a comparison of these two scenarios using absolute dollars.
You can clearly see that scenario 2 (with the Roth conversions and the attendant increase in taxes during the conversion process) immediately falls behind scenario 1 and then gradually converges toward the end of the modeling period. The next screenshot (below) shows the comparison in terms of effective dollars:
In this case scenario 2 has similar results to scenario 1 for most of the modeling period despite the increased taxes and emerges ahead over $200K by the end of the modeling period.
Optimize Social Security Start Age
If your Social Security benefits have not already started, Pralana will conduct an analysis to determine the ages at which you and your spouse (if applicable) should start taking benefits (on your own records, respectively) to maximize your effective savings at the end of the modeling period. The only variables this analysis considers are your Social Security benefit start ages and it does include spousal benefits in its calculations; it assumes you retire from full-time employment as described on the Build > Get Started > Scenario Assumptions page. The analysis Pralana performs during this process is considerably more involved than just determining the start ages that result in the largest long-term SS income; instead, it examines the long-term effects of this income on your savings, taxes, and survivor scenarios (i.e., what-if scenarios you may have set up to investigate the premature death of you or your spouse) 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 slightly better than some other solutions, Pralana examines the set of possible solutions associated with all start dates and identifies the subset of these that are almost as good as the best one. Through the “Sub-Optimum Selection Threshold” field, you can control the range of alternate solutions that Pralana will identify as viable alternate solutions. The value you enter in this field is used by Pralana as a threshold and if the long-term results of other solutions are above the specified percentage of the best solution, they will be highlighted.
Clicking the Optimize Social Security Start Ages button on the Analyze > Optimize Social Security Start Age page will trigger Pralana to calculate the optimum ages for you and your spouse (if applicable) to begin taking Social Security benefits. The result will be reflected as a dark green dot in the matrix diagram. Pralana will also calculate slightly sub-optimum ages, based on the Sub-Optimum Selection Threshold percentage that you specify, and these ages will be reflected as lighter green dots in the matrix. In the immediate vicinity of the dark optimum dark green dot, the lighter green dots will be placed with one month granularity and slightly farther away from the optimum position the light green dots will be placed with three months granularity. If you wish to see the optimization results in greater detail, you can zoom in. To do this, click the Zoom icon on the left side of the matrix to enable the Zoom function (a vertical bar will appear on the right side of the icon when Zoom is enabled) and then use your cursor to draw a box around the area of interest (point to one corner of the desired box, click and hold, then drag to another corner, then unclick) and that area will be expanded. If you want to zoom in even closer, just use the cursor to draw another box around the area of interest and it will be expanded further. At any point, you can just hover your cursor over a dot and you will get a pop-up that provides details on the related start ages and a comparison between the final savings balance that would result from using these start ages versus the optimum start ages. To return to the original zoom level, just click the Reset icon next to the Zoom icon.
If either your or your spouse’s benefits have already started, optimization of the start age for that partner is moot and will not be performed. In that case, the matrix will contain only one column or one row which depicts the optional start ages for the partner whose benefits have not yet started.
Some additional calculated outputs are provided in the box just above the optimized results matrix. These depict your final effective savings for the Social Security start ages currently specified on the Build > Income > Social Security Income page and the what-if final effective savings if those inputs were changed to the optimized values. To incorporate the insights you gained here into your plan, you will need to go to the Build > Income > Social Security Income page and revise the Social Security start ages specified previously. Note that a shortcut is provided: just click the blue button labeled “Edit Social Security Inputs” and it will take you directly to the relevant page.
Here are some screenshots. The first one shows the page immediately after completing an optimization.
The shot below shows a portion of the matrix after zooming in, with the cursor over one particular result. You can then see the corresponding start ages, the what-if final savings value and how much it differs from the optimum start ages associated with the dark green dot.
Optimize Withdrawal Priorities
We will begin this section with a quick review of how Pralana manages your Cash Account. The cash account is central to all cash flow in Pralana. All positive cash flows are treated as deposits to the Cash Account and all negative cash flows are treated as withdrawals from the Cash Account; however, it has user-specified minimum (floor) and maximum (ceiling) levels. An overflow condition occurs when those deposits would cause the balance to exceed the ceiling. When that happens, the excess money is withdrawn from the Cash Account and deposited in the Taxable Investment Account. An underflow condition occurs when negative cash flows would cause the balance to go beneath the floor. When that happens, Pralana will seek another source of funds to cover the spending deficit and will refer to the user-specified settings in the Withdrawal Priority Table on the Build > Financial Assets > Management > Account Withdrawal Priority page to make subsequent account withdrawals. In a plan with no deficit spending, the account withdrawal priority is irrelevant and meaningless.
In plans with deficit spending, Pralana’s Optimize Withdrawal Priorities (OWP) algorithm seeks to identify the best account withdrawal priorities to cover deficit spending and maximize final effective savings. The analysis calculates final effective savings for up to 625 combinations of withdrawal priorities based on time periods defined by the distinct years in this list: scenario start year, first retirement year, first RMD year, and the scenario end year.
‘First retirement year’ means the year earlier of the retirement years in two-person plans.
‘First RMD year’ means the earlier of the first year of requirement minimum distributions in two-person plans.
First retirement year and/or first RMD year are disregarded if they fall before the scenario start year or after the scenario end year.
The OWP algorithm’s time periods are the gaps between these two, three or four distinct years.
For example, many users will have three time periods: 1) scenario start to first retirement, 2) first retirement to first RMD, and 3) first RMD to scenario end. Others may have two time periods if the first retirement year and first RMD year are the same year: 1) scenario start to first retirement/first RMD and 2) first retirement/first RMD to scenario end. Likewise, users may have two time periods if, for example, the first retirement year is prior to the scenario start. Finally, some users may have just one time period if they are already retired and have started RMDs at the start of the modeling period.
If there are three time periods, OWP will optimize the second and third periods and assume the user-provided withdrawal priority in the first time period. If there are one or two time periods, OWP will optimize each period.
For each optimization time period, OWP will calculate the scenario’s final effective savings using 24 permutations of withdrawal order, plus the Proportional withdrawal option, from these four accounts: taxable investment, your and your spouse’s tax-deferred, and Roth. OWP assumes inherited accounts, the HSA and College Savings Plan will fall after these accounts in the priority order.
Designer’s note: If there is only one time period, the OWP algorithm only has to evaluate 25 permutations of withdrawal order; if there are two time periods, the OWP algorithm has to evaluate 625 permutations of withdrawal order. We consider optimizing the four primary accounts for three time periods to be impractical in this operational tool because it would require the evaluation of 15,625 permutations. Also, in cases where there are three time periods, the first time period will likely be pre-retirement where it is unlikely to have much deficit spending, so we do not believe this is a significant limitation of the tool.
Run Optimization
No user inputs are required for this algorithm other than to select the desired scenario at the top of the page. So, just click the “Run Optimize Withdrawal Priorities” button to initiate the process and wait for it to finish.
Important note: Withdrawal priority is moot if there is no negative cash flow in your plan because it only comes into play whenever you have negative cash flows that would take the Cash Account balance below its floor level. If this is the case for your plan, Pralana will inform you that optimization is not necessary by generating this display:
If your plan does have some negative cash flows, Pralana will list the years in which those occur and then present an output like that shown below.
The objective of the optimization process is to maximize your final effective savings balance, and that is shown at the top of the section, along with the corresponding amount of improvement relative to your current settings (in terms of both dollars and percentage). Beneath that, it shows a number of different withdrawal priority options, ranked from best to worst and includes your current selections as specified on the Withdrawal Priorities tab of the Build > Financial Assets > Management page. In this example, the cursor was placed over the dot representing the best option and this has resulted in the pop-up box shown which identifies the final effective savings amount and other information.
If you want to replace your current withdrawal priority selections with the optimized settings, just click the Adopt Optimized Withdrawal Priority button. Clicking the button will render the display obsolete, so the optimization results display will disappear.
Another possible outcome of the optimization process is the one shown below, in which your plan runs out of money prior to the end of the modeling period regardless of the withdrawal priority. In this case, no optimization results are shown.
Optimization Results Table
One important thing to note is that there are up to 625 different withdrawal priority options and that many of these options yield the same final effective savings amount. The Optimization Results Table on this tab presents the complete set of results in tabular form. If you want to change your current setting to any particular one of these results, just click the Adopt button on the right side of the corresponding row in the table.
Earliest Safe Retirement Analysis
Pralana contains an advanced optimization algorithm that can help you select a retirement date. To do this properly, we need to be able to associate the end of pre-retirement income and expense streams and the beginning of post-retirement income and expense streams with that optimum retirement date. Rather than specifying a particular age, year or date to start or stop an income or expense stream (on the Income and Expense input pages), just enter the wild card character “R” (for Retirement). For pension, just enter “R” as your start date. The optimization algorithm will do the analysis to identify the date that keeps you from outliving your money in 90% of its test cases using the Monte Carlo analysis method.
Now let’s look at an example. To begin, you must ensure that your employment income stream(s) is associated with a designated retirement date, and this is done as follows. First, go to the Retirement & Life Expectancy tab of the Build > Get Started > Scenario Assumptions page, as shown below,
and enter your retirement date and your spouse’s retirement date. These are the dates on which you plan to cease full-time employment. Then, go to the Build > Income > Employment page and enter an “R” for the stop date on your employment income stream, as shown below. Although not shown here, you may also want to enter an “R” for the start date of another employment income stream or a pension stream, meaning that this is the date those streams are expected to begin.
Note that the “Date at which full-time employment will cease” is currently set at 1/1/2041 and that Joe’s Employment Income Stream #1 begins at age 40 and extends to the designated retirement date (as indicated by the “R” in the Stop field. With the employment income streams set up we can proceed to the Analyze > Earliest Safe Retirement Analysis page. Just click the Run Earliest Safe Retirement Analysis button and Pralana will run repeated Monte Carlo analyses until it finds the retirement date that results in about 90% of the test cases ending with a positive savings balance. When it completes, you will see something like this:
This graph shows the optimum solution of three slightly suboptimum solutions. At this point, the Earliest Safe Retirement Date of 10/22/2029 is just an “FYI”. If you want to incorporate this into your plan you will need to go back to the Retirement & Life Expectancy tab of the Build > Get Started > Scenario Assumptions page and manually insert this. If you were to do this and then go to the Analyze > Monte Carlo Analysis page and update the Monte Carlo analysis of your plan you then get a diagram that looks something like this:
This analysis incorporates the early retirement date of 9/30/2023 and ends with a 92% success rate, about as expected. Every update of the Monte Carlo analysis will not end with a success rate of exactly 90% because of sequence of return variations from one run to the next but they should all be close.
Sensitivity Analysis
This analysis allows you to adjust selected scenario inputs and quickly see the impact on your scenario projections. Changes to sensitivity inputs only affect the ‘What If” projections shown on this page. They have no effect on you plan beyond this page. This page has 3 sections:
‘What if’ vs ‘Current’ Inputs
This section allows you to adjust various plan and scenario inputs by either entering a value or using the up and down arrows to adjust the ‘what if’ value by pre-determined increments.
Life Expectancy: Use this field to adjust life expectancy.
Retirement Start Date: Use this test changes to your retirement start date. The arrows will adjust the date in one year increments. Changing the retirement date affects any income or other inputs for which you enter ‘R’ as the start or end date. Also, it may affect the healthcare expense periods.
Social Security Start Age: Enter adjustments to Social Security enrollment age(s). Start ages must be between age 62 and 70.
General Inflation Rate: Enter an amount to be added to your general inflation rate for all inflation time periods. The up and down arrows will change the adjustment by 0.2% per click. Example: If your general inflation rate is 3.5% for 2025 and you enter an adjust of negative 1.0%, sensitivity projections will use a 2.5% general inflation rate (3.5% - 1.0% = 2.5%). The change will also alter healthcare, long-term care, college and other inflation rates which are based on apply to other inflation rates which are based on the general inflation rate. When you are using Simple Portfolio Modeling or Advanced Portfolio modeling with ‘real’ rates of return (RORs):
Adjustments to inflation rates will affect account/asset rates of return (RORs) because the adjusted inflation rate is added to your real RORs to get the nominal RORs.
If you also enter a rate of return sensitivity adjustment (other than 100%), both adjusters will apply.
Rates of Return: This adjustment will change the nominal rates of returns used to calculate annual account growth. The arrows will change the adjustment in 2% increments.
Example 1: Using Advanced Portfolio Modeling (with nominal RORs), an account holds an asset ‘Stocks’ with a nominal ROR of 5.0% and you enter a adjustment of 90%. ‘Stocks’ nominal ROR will be 5.0% * 90% = 4.5%.
Example 2: Using Simple Portfolio Modeling (which uses real RORs), an account’s real ROR is 6.0% and you enter a adjustment of 120%. Assuming the inflation rate is 3.0%, the nominal ROR will be (3.0% + 6.0%) * 120% = 10.8%.
Note: when using real RORs, if you also enter a sensitivity adjuster for the general inflation rate, both adjusters will apply.
Consumption Smoothing Amount: This adjustment is only visible when using the Consumption Smoothing Spending Strategy. You may enter either a positive or negative amount. Negative amounts have the effect of applying a reduction to total expenses in each plan year. The arrows will adjust the Consumption Smoothing amount in $1,000 increments.
The background color of the input fields is light yellow if the value will change the scenario projections or light green, if not.
‘What if’ vs ‘Current’ Chart
The chart will show the impact of the sensitivity adjustments on your scenario projection for one of several metrics you may select in the Chart Metric dropdown list. The ‘Current’ line shows the projection using your current scenario inputs, without any adjustments. The ‘What If’ line shows the scenario projection with the adjustments applied. Notes:
If you have not made any adjustments, or only small adjustments, the lines will be the same or nearly the same and will overlap each other.
If you adjust your life expectancy, one line will be longer than the other. The X-axis labels will reflect the ages associated with the longer line.
Hover over the chart to see a popup showing the metric’s Current, What If and Different (in $ and %).
You may click and drag on the chart to zoom in. Click the reset button on the left to reset the zoom.
‘What if’ vs ‘Current’ Tabular Projection
This table will show selected What If and Current values of selected metrics. In the Table Metric dropdown, you may choose to show the same metric as in the chart, no metrics, or all the available metrics in the Chart Metric dropdown.
Reports
In addition to robust set of tabular and graphical projections discussed previously, Pralana also generates print-formatted PDF reports and renditions of IRS tax forms and other tax-related information.
Print-Formatted PDF Reports
Pralana enables you to create reports in PDF format for a selected scenario. One report will contain a summary of your inputs and the other will contain all the output tables and graphs generated from your inputs. These reports can be customized with the titles, subtitles, and page headers and footers of your choice, and can be formatted with either portrait or landscape orientation.
To create a PDF report, start by going to the Review > Reports > Reports Setup page which looks like this:
As you can see, there are several data entry fields on this page which allow you to specify the main title of the report along with two subtitles and multi-part page headers and footers. The information you enter on this page will apply to all scenarios.
To generate an input report, go to the Review > Reports > Plan Inputs Report page. Each report will be scenario-specific, and you can select the desired scenario via the control on the upper left of the Reports page. There are also controls on the page that enable you to specify paper size, portrait vs landscape orientation, and whether to hide unused input tables and fields. When you have the controls set as you desire, just click the Create Plan Inputs Report button and Pralana will generate your report. Here is a screenshot of that page prior to the report being run:
Here is a screenshot of the top portion of the page after the report has been generated:
A preview of the entire report is shown on the same page where the report was initiated, and there are controls on the upper right of the window showing the report preview that enable you to save or print the report. If you click the “save” icon, you will get a page that looks like the one shown below where you need to specify that the report is to be printed to PDF and then specify your filename.
If you click the “print” icon, you will get a page that looks like the one shown below where you need to specify that the report is to be printed with margins set to “None” or “0”.
Alternatively, by clicking the “Open report in new browser tab” button, the report will appear in a separate tab in your browser, and you can examine it there while going on to a different page in Pralana. If you wish to print the report from the new browser tab, just use your browser’s print controls to do so. Here is an example of how to initiate that from MS Edge:
You start by clicking the 3 dots in the upper right corner of the browser window (this may be different on your browser):
And this will cause a pop-up display like the one shown below, where you just click the Print option:
That will then bring up the pages where you can specify the destination for printing the report (i.e., either to a PDF file or to a printer) and the margin settings (always set to “none” or “0”).
Alternatively, there are other controls on the upper right of the window showing the report that enable you to save or print the report directly from the Review > Reports > Plan Inputs Report page. Regardless of the page from which you initiate the printing, please note that you will need to set the margins to “None” or “0” prior to printing.
To generate an output report, go to the Review > Reports > Plan Outputs Report page. Each report will be scenario-specific, and you can select the desired scenario and the preferred dollar units via the control on the upper left of the Reports page. There are also controls on the page that enable you to specify paper size and portrait vs landscape orientation and the remainder of the process is identical to that of printing plan input reports.
Tax Forms & Brackets
Pralana gives you an in-depth look “behind the curtain” for how it calculates federal and state taxes. You can access this information via the Tax Forms & Brackets page under the Review > Reports menu. This page contains three tabs. The Tax Forms tab contains detailed renderings (but lacking some of the detail) of IRS tax forms, including form 1040, publication 915, Child Tax Credit worksheet, schedule 1, schedule 2, schedule A, and so on. You can specify the tax year in which you are interested, and Pralana will give you the details for that year.
The Tax Brackets tab will show you the Federal Ordinary Tax Brackets that it is using, along with the LTCG brackets, and the IRMAA brackets.
The State Taxable Income tab shows you a summary of is excluded from state taxable income in all 50 states and the District of Columbia. Pralana does not attempt to implement fully detailed state tax calculations, but the information on this tab is intended to show you what the tool does do.
Advisor Capabilities
The initial release of Pralana provides the ability to create and manage plans for up to 25 clients and to put your name and professional affiliations on the reports produced by the tool. Otherwise, the capabilities are identical to those of individual users. Other advisor-only capabilities will come in subsequent updates.
Advisor Profile
This is the page where you can enter your name, contact information, and professional affiliations, and where you will see your Pralana advisor code. Here is a screenshot:
If you are working with a client who has his or her own subscription to Pralana and they wish to share their plan with you, you can give them your Pralana Advisor Code shown on this form. If they grant you permission to see their plan, it will appear in your list of client plans. You will be able to review and edit the plan as if it were your own, including changing inputs, copying scenarios, deleting the plan, etc. Shared plans will not count against the maximum number of client plans you are able to have in the tool.
Client Plans
To manage the plans for your clients, go to the Advisor > Client Plans
page. This will display a complete list of your plans and it enables you
to add, delete and select plans to be worked on. To add a client plan,
on the “new” row simply enter Client Name 1, Client Name 2 (if
applicable), and Plan Start Year. This action will cause a blank plan to
be created in Pralana for that client and the Pralana Plan Code will be
created automatically. To work on that plan, just click the Select
button and it will take you to the Build > Get Started > My Family page,
and you can navigate from there as desired. If you previously used
Pralana Gold and have export files for your clients, you will need to
create a plan for each of these clients in Pralana as just described,
and then import the data from Pralana Gold via the Build > Get Started >
Import PRC Excel Export File page. Once the plans have been created and,
if appropriate, populated via Pralana Gold imports, you can use Pralana
on the selected plan just as an individual user would use it for an
individual plan. To delete a plan, just click the icon
adjacent to the plan to be deleted and please note that this action is
irreversible.
Data Security
We, at Pralana Consulting (“Pralana”), put a high priority on the privacy and security of your data. The information below describes, at a high level, the websites we operate and our data security practices. We will periodically update this document to provide more details and to reflect infrastructure changes.
Pralana operates two separate websites, hosted by different third-party vendors. These are:
Subscription Site: Our customer registration and subscription enrollment website is: www.pralanaretirementcalculator.com (‘Subscription Site’). You use this site to create your Pralana username, purchase paid subscriptions, download the Gold Excel-based Pralana Retirement Calculator, access the user forum and for other related activities. This site collects your name, email address, and payment information and maintains related information about your subscriptions.
Pralana: The web version of the Pralana Retirement Calculator is: www.pralana.online (Pralana). On this site, you may enter information to create your Pralana financial plan, including first name(s), date(s) of birth and information about your assets, income and expenses. Pralana uses this information to make various financial projections and perform various analyses as described in the user manual.
Access to Pralana
You access Pralana by clicking a link on the Subscription Site, which acts as the Identity Provider (IdP). This link initiates a secure single sign-on (SSO) transaction to log you into Pralana. The only user information included in the SSO transaction is your Subscription Site username and the names of your active Pralana subscription plans. Authentication is performed using the username and x.509 security certificate information in the SSO transaction. Your full name, email address, physical address and payment information are not passed to Pralana.
Best Practices for Securing Your Data on Pralana
Safeguard your Subscription Site username and password and do not share them. Use a strong password.
First names are used to personalize the data entry pages and fields and column/row labels in reports, etc. You may enter “Me”, “Spouse”, “Child1” or other aliases. Do not enter full or last names.
Birth dates and years (for children) are used to calculate the start and stop dates of various income and expense cash flows. They are also used to estimate social security benefits, IRA required minimum distributions, eligibility age for qualified charitable distributions and similar age-based calculations. You may choose to enter a date other than your actual birth date. This may introduce some small inaccuracies, but if the date is close to your actual birth date, those inaccuracies will likely be immaterial.
Use generic financial account labels like “Checking”, “Savings”, “Bob’s IRA” etc. Do not enter your actual account numbers or other account access information.
For your homes and rental properties, use generic labels like “Current home”, “Shore house”, “Rental home 1”, etc. We suggest you do not enter identifiable property addresses.
Avoid entering personally identifiable information about your sources of income and expenses.
Pralana Website Hosting and Data Security
Pralana uses servers provisioned and managed by Render.com. User data is stored in a PostgreSQL database. The data is encrypted at rest using AES-256 data encryption in the database server and in the automated backups. Data is encrypted in transit using HTTPS secured by TLS certificates provided by Render.com. Backups are retained by Render.com for 7 days after they are created. More information about data security and trust at Render.com may be found at render.com/trust.
Pralana Consulting LLC Employees May Access Your Data
If you submit a question, suggestion or bug report we may access your plan or create a backup of your plan to investigate.
Social Security Disability Modeling
Pralana does not specifically model Social Security Disability benefits. If you need to do this, we recommend using two Other Income streams: one to represent the taxable portion of the SSDI stream and another to represent the non-taxable portion of the SSDI stream. Determining how much of your SSDI is taxable and how much is non-taxable is a function of your MAGI and is an exercise you will need to perform outside of PRC. The maximum taxation on any SS income is 85%, so a worst-case way to go would be to set Other Income #1 (taxable) to 85% of your SSDI and Other Income #2 (non-taxable) to 15% of your SSDI.