Most of us understand that the future is inherently unpredictable, yet many of us still desire an effective tool to assist us in making key financial and lifestyle decisions that will shape our future despite the uncertainties.  The Pralana Gold Calculator meets that desire with this design philosophy:

  • Since effective financial and retirement planning is not a one-time endeavor the tool must make the planning and analysis process as painless as possible for the user. This translates to an interactive tool that saves your data to enable you to re-visit and update your data as often as you wish without having to start over each time.
  • The tool must provide a high degree of user control over key modeling assumptions, including life expectancy, inflation and characterization of investment portfolios, while also enabling the user to define income and expense streams in as much or as little detail as desired.
  • It tends to be easier to specify income events relative to your age rather than to a year, so virtually all income is started and stopped in conjunction with the owner’s age.
  • Taxes are a significant part of most people’s financial life, so detailed treatment is necessary to get beyond a low-fidelity long-term projection.  Consequently, detailed federal, state and FICA tax calculations are performed and included as another expense stream in making future projections. Further, RMD’s from tax-deferred accounts are modeled and taxed properly, including early withdrawal penalties.
  • The tool must allow the user to specify contributions to tax-deferred and tax-free savings but it is problematic for the user to accurately specify contributions to regular savings.  Instead, contributions to regular/taxable accounts will always be calculated based on the difference between income and expenses.  This ensures that all money is fully accounted for while accommodating ebbs and flows of both income and expenses.
  • Since the future is inherently unpredictable, multiple analysis techniques are used to generate a range of possible outcomes based on the user’s detailed inputs. Fixed rate projections are useful for comparing alternatives and getting a rough idea of where the user is headed based on fundamental assumptions; however, since fixed rate 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 of these techniques are integrated within the tool to present the user with a comprehensive view of the future while avoiding nonsensical concepts such as “your retirement number”.
  • To facilitate a decision-making process and sensitivity analyses, the tool should make it easy for the user to define and compare major alternatives as well as small variations.  Consequently, the tool supports the detailed definition of three independent sets of inputs (scenarios) and presents side-by-side analysis results to facilitate easy comparison. Further, it provides supporting tabular outputs so the user can delve into the details and verify that the outputs make sense.  Even further, it provides capabilities for interactively examining the sensitivity of the plan to changes in key parameters and to study the effects of conversions from tax-deferred to Roth savings.
  • A tool can facilitate some complex decisions, such as how to maximize our standard of living, determining how much life insurance we need and determining the right time to start collecting Social Security benefits.  Consequently, the tool provides special capabilities to perform consumption smoothing, make life insurance recommendations to maintain the living standard of the surviving spouse and optimize the Social Security start age for each marriage partner. 

PRC contains no magic and need not be intimidating to anyone.  Like any calculator, what it does is just math.  It collects certain information from you, does the math, and then presents the results.  What makes it unique is its organized structure and the level of detail it is capable of working with to avoid large errors associated with simplifying approximations.  Additionally, PRC never gives you a single answer because there is no such thing.  Our financial future contains a number of unknowable variables which can have dramatic effects on the size of our savings over a period of many years.  Consequently, PRC is designed to address the uncertainties and, as a result, provides a range of possible outcomes based on your inputs.  Armed with this information, you will be in the best position possible to make financial decisions.

PRC/Gold is structured to lead you through the planning process step by step, allowing you to focus on one specific area at a time, save your inputs, and then move to the next area.  It goes WAY BEYOND simply providing data input rows where you can enter income and expenses with corresponding start and stop dates.  Rather, it leads you through the process of defining your income and expenses systematically and is capable of dealing with nuances associated with specific items.  One result of this is more pieces of data for you to collect and input; however, this is YOUR information and you can probably collect it with minimal difficulty.  The result, though, is a much higher fidelity model of your financial future than could be achieved by using just high level inputs, as is the case with most other calculators.

Pralana Consulting LLC, Plano, TX

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