The math behind our simple number
Investing money effectively without “tax drag” can be overwhelming - there’s way too much information out there. AMA Finance cuts through the noise. By knowing a few financial parameters about you, we can help you prioritize which few things are likely to have the biggest impact.
As an example, AMA Finance claims that a Roth contribution this year has a value of $---- to you. What does that even mean?
We run a simulation of your portfolio from now until age 80, tracking the value of your savings. Our simulation is unique in that it models taxes, income, expenses, social security, and many other factors every year, to help understand what’s valuable.
In more detail, every year, we:
We compute the value of your portfolio under two scenarios:
And then we compare the portfolio size difference.
For clarity, our graphs only compare the performance of the actual contribution in Roth vs. taxable - this is done by subtracting out a variant portfolio where you spend the Roth contribution this year.
If the Roth strategy produces positive value, we ask the question:
If I elect to put my Roth contribution in taxable rather than a Roth IRA this year, how much additional money must I save (not spend) this year to have the same portfolio value at age 65?
We calculate that money amount using a search algorithm; it is that number that we view as the “value today” of contributing to a Roth. (vs. putting the money in taxable).
We use a “simple model” that lets us calculate your personalized values in real-time and obtain high accuracy without asking you dozens of time-consuming questions.
One asset with
These assumptions give reasonable results for most people, though not all. We’ll expand to ask more detailed questions in the future.
For most people, the assumptions above, while never perfectly accurate, do a good job of prioritizing what strategies you should employ. However, in some instances, it won’t.
Specifically, you are likely to need to enter more information to get reasonable results if one of the following are true:
We have run Monte-Carlo stock return simulations and have found that the average “value realized” of using strategies like a Roth IRA are within 20% of that calculated by our simplified model. (more value is realized by Roth IRAs the better your assets perform)
“value realized” also is similar if rather than looking at portfolio value at age 65, we look at how much Roth IRAs reduce the chance of “portfolio failure” (calculated via Monte-Carlo simulations) - running out of money before you die.