Asset Allocations in Tabular Projections

Issues and Potential Errors

Last Post by Ram Kaushik 3 years ago

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Edwin

(@edwin)

New Member Customer

Joined: 4 years ago

Posts: 1

Topic starter January 4, 2024 11:24 pm

The asset allocations in the tabular projections appear to be labeled incorrectly. This is happening identically on both computers that I have downloaded the Pralana Gold file onto. One computer is running Excel 2007 SP3 on Windows 10, the other has Excel 2010 on Windows 11.

The overall allocations appear correct, but for the individual groups, such as regular, TD, or Roth, they are incorrect. For example, the amount shown for %stock is actually the %money market, for %bonds it is actually the %stock, and in all cases there is no column for %money market.

Is there any way to correct this?

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Stuart Matthews

(@smatthews51)

Member Admin

Joined: 6 years ago

Posts: 618

January 5, 2024 8:44 am

@bradley0003yahoo-com Your issue is that you're using asset allocation mode 1 (allocations at the account level) and looking at allocations for mode 2 (global allocation with asset location targets) on the tabular projections page; mode 2 uses only the stocks and bonds asset classes and the columns you're referencing are not applicable in that mode). Please note the header for those columns on the Tabular Projections > View Mgmt page; it specifically states that those columns are for Mode 2 only.

Stuart

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Richard Eaton

(@ricke)

Trusted Member Customer

Joined: 6 years ago

Posts: 58

January 6, 2024 8:45 am

@edwin

Stuart has answered the program question, but let me jump in with some thoughts on modeling.

Mode 1 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 Mode 1 - 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 Mode 2, set your overall asset allocation and select the order of which account should hold the most stocks.

Greg Ashford, Ram Kaushik and Bill Hines, Advice-Only Flat-Fee Investment Advisor, Tax/Financial Planner reacted

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Ram Kaushik

(@rrkaushik)

Active Member Customer

Joined: 3 years ago

Posts: 5

January 9, 2024 4:25 pm

Very interesting, thanks for this tidbit! Seems like I learn something every time I open this forum! I'm using Mode 1 because I didn't know enough to guess different and left the default. I did take a crack at the different periods and shifting stock/bond allocations as we get older. Per the manual, it looks like the program does make some smart judgment calls in Mode 1.

Since it is mathematically impossible to satisfy both a specific overall asset allocation and specific asset location (i.e., asset allocation at the account level) over time, PRC allows the user to specify the desired overall asset allocation along with target asset location values. In conjunction with this, PRC allows the user to prioritize all of the modeled accounts and then strives to achieve both the overall allocation and the target asset locations but inevitably it will have to deviate from the target values at some point to maintain the desired overall allocations. When this becomes necessary, the targets for the higher priority accounts will be maintained at the expense of the targets for the lower priority accounts. This account prioritization mechanism effectively enables you to achieve the desired overall asset allocation while also achieving the desired asset location for your most critical account(s).

I tried to toggle to Mode 2 but it looked more complicated than I wanted to mess with at the moment. Mode 1 seems to call for Roth conversions but still is smart enough to model per ACA/IRMAA limits. Unless someone makes a persuasive case for Mode 2, I guess Mode 1 should be fine?

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