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EasyAllocator Help
Inputs Results
Core Inputs
The top four lines of the EasyAllocator form contain the key inputs needed to produce your results. Some detail regarding the less obvious inputs:
  • Taxable Account Value: The sum of your investments in regular, non tax deferred (non IRA or 401(k)) investment accounts.
  • Traditional IRA/401k Value: The sum of your Traditional IRA-type accounts. These include Traditional IRAs, 401ks, 403bs, 457 plans, SEP-IRAs, and SIMPLE-IRAs. Any investments now tax deferred, but taxed upon withdrawal.
  • Roth IRA Value: The sum of your Roth IRA and Roth 401(k) accounts.
  • Risk Tolerance: The higher risk tolerance setting you choose, the greater percent of your portfolio will be allocated to risky assets (stocks). A higher risk portfolio has a higher expected return. However this return is not guaranteed, and the higher the risk, the greater the portfolio volatility. Regardless of the risk tolerance you choose, EasyAllocator will reduce the risk of your portoflio as you age.
  • Annual Contribution (3 inputs, Taxable, TIRA, Roth): Your best estimate of the total amount you will save,per accounts, each year until you retire. EasyAllocator assumes your contributions grow annually with inflation.
  • Discount For Inflation: If you check this box, after all calculations EasyAllocator will discount all results by 3% annual inflation. Eaxmple: Today you have $100,000 in savings. You run EasyAllocator without discounting for inflation. The results say that at age 90 you'll have $300,000 in savings. When you rerun EasyAllocator, checking the Discount For Inflation checkbox, your worth at age 90 shows $80,000. Conclusion: At age 90, you'll have three times as many dollars as you have today, but will actually be 20% poorer in terms of purchasing power, since prices will be so much higher.
  • Other Retirement Income, Start Age: Estimate the annual value of any retirement income you may have in addition to the income your portfolio will provide (do not discount for inflation). This will normally consist of Social Security (get an estimate from the SSA Calculator), and any employer pension (estimate conservatively) when you retire. You could also include other income such as part time work, rental income, etc.
  • Retirement Withdrawal Rate: This is not the percentage of your portfolio you can take from your investments each year in retirement. It is the percent of your portfolio the day you retire that is used to create a "base withdrawal amount" for the rest of your life. This base amount is then adjusted for inflation. Example: You choose a 4% withdrawal rate, and at retirement have $1,000,000. In your first retirement year, you'll withdraw $40,000 from your investments. This base amount is then adjusted for inflation each year by EasyAllocator. In other words, your (inflation adjusted) income will be the same throughout retirement. What amount to choose? Many studies have shown 4% to be a reasonable medium between the risk of running out of money, and having to live like a pauper in retirement. If you run some historical simulations in EasyAllocator, you can see 4% has worked historically most (95%), but not all cases. 3.5% might be safer. EasyAllocator will recalculate your retirement withdrawal rate if you added any One Time Events.
  • Stock Return Type: EasyAllocator needs to estimate the returns of various asset classes to make predictions. EasyAllocator has set assumptions for some classes (bonds return 5%, REITs and commodities futures 7%), it allows you to choose your own stock return. You can choose Fixed or Historical returns. EasyAllocator defaults to a 9% fixed return - US stocks have returned about 12% over the last 60 years, but most other stock markets have had lower performance, and most expect lower returns going forward. If you choose Historical, S&P 500 total returns (including dividends) are used for US stocks. For foreign stocks, EAFE (in US$) total returns are used from 1969 forward. FTSE (Great Britian) return data represents foreign stocks before 1969. US inflation (CPI) numbers are used for discounting for inflation, if you choose that option. Also, historical data wraps back to 1927 after 2007. So if you chose 2002 as your start year, EasyAllocator would project your life using returns from 2002, 2003, 2004, 2005, 2006, 2007, then 1927, 1928... Give historical returns a try - choosing fixed makes your portfolio growth rise smoothly every year - not what happens in reality! You can also pick a year that has you retiring around 1929...just before the Great Depression.
  • Run Simulations With Variable: You can have EasyAllocator run a number of projections and report the results of each run in a single report. Leaving this as None - Detail View will run a single scenario on your financial life with the inputs you entered, and a by-year report with details of that scenario will appear at bottom when you hit Go. If you choose any other option here, a few simulations will be run, each time changing the variable chosen. Example: Choosing Retirement Year runs 10 simulations for retirement years five years before through five years after the Retirement Age you entered. The report then shows key metrics of each scenario, like your retirement income, and whether or not you outlived your money.

Asset Classes
EasyAllocator contains the four asset classes recommended almost universally by financial experts: Domestic (US) Stocks, International Stocks, Conventional Bonds, and Inflation Adjusted Bonds. In addition, investors may choose from a variety of other ideas which most agree are not required for a sound investment plan. Note that while the future benefit of the investments below is uncertain, the higher fees associated with them is guaranteed.
  • Commodities: Some financial planners believe adding a modest amount of commodities futures (contracts for future delivery of oil, gold, coffee, etc) reduce the volatility of your portfolio without hurting returns. However commodities futures funds are relatively expensive to invest in, and have low expected returns. Optional, leave out when in doubt.
  • Foreign Bonds: Stocks and "fixed income" assets like bonds, CDs, etc. are the two core components of your portfolio. Owning foreign bonds diversifies your fixed income exposure to countries outside the US. However, many experts believe fixed income investments should be free of the additional risks of international investing, as opposed to international stocks, a required part of any portfolio. Foreign bond yields are also unattractive at present. When in doubt, leave out.
  • REIT: Real Estate Investment Trusts allow ownership in shopping malls, hotels, apartments buildings around the US. While these are technically stocks, and are present to some degree in stock mutual funds, REITs are hard assets, behave differently from other equities, and offer important diversification benefits to most portfolios. REITs are not tax friendly and belong in tax deferred accounts, or Vanguard offers a variable annuity which can defer these taxes at a reasonable cost.
  • Overweight Small/Value: Cheap, out of favor "value" stocks have performed better over the long term than glamorous growth stocks in both US and foreign markets. Similarly, stocks of smaller companies have historically performed better than larger ones, though with more risk/volatility. More info. While no one knows if the small/value premia will exist going forward, the evidence is strong that overweighting small and value stocks will improve your returns, though with additional complexity, and tax drag in a taxable account (small/value funds are less tax friendly than total market funds). Note that even if you don't check this box, you'll get exposure to small and value stocks, you just won't own more than their proportion of the total market. If you check this box, your foreign stock allocation will also overweight value. Tip:  If you check this box, and due to IRA space constraints Easy Allocator puts the small/value allocation in your Taxable account, consider unchecking the box. Small/value in a taxable account isn't worth the additional taxes.  
  • Micro Cap Stock: See Small/Value above, microcaps are the very smallest public companies. High risk, high return. Optional, but worth considering for more advanced investors building higher risk portfolios.
  • Equal weight Euro/Japan/Emerg: This is short for "Equal Weight Europe, Japan, and Emerging Market Stocks". International stocks are a required part of any portfolio. By default, your foreign stock allocation will consist of a single, global mutual fund weighted by the stock market size of each world region, mostly Europe as of 2006. Check this box and you'll wind up with three separate funds in equal proportion, and may have to rebalance these three funds each year, since some will grow faster than others. Why bother? Equal weighting may cause you to "buy low and sell high", avoiding bubbles which may occur in one region or another by rebalancing out of them to maintain the equal weights. Statistically, you'd expect an equal weighted portfolio to outperform a market weighted one most of the time (the median of all possible outcomes is greater in the equal weighted case). Strictly optional, probably not worth the trouble for most. Since equal weighting will increase your risky Emerging Market allocation to 33%, versus about 15% if you weight by market cap, equal weighting increases portfolio risk. Note: in determining the equal weightings, your foreign value allocation (if you choose Overweight Small/Value) is taken into consideration. Since that's mostly Europe, you probably won't end up with a separate Europe fund if you choose both the Equal Weight and Small/Value options. 
  • Foreign Small Stock: See Overweight Small/Value above for the rationale for owning small stocks. The problem here is there are no reasonably priced foreign small stock funds. Vanguard's is closed to new investors, and there are no small foreign ETFs. Might want to skip this one for now, though foreign small stocks have been strong performers historically (with high risk to match).

Popular Portfolios
Due to popular demand EasyAllocator includes a few well known fixed asset allocation portfolios. The authors of these portfolios unanimously agree that you should adjust your asset allocation each year based on your time horizon and risk tolerance. It's better to create a customized portfolio with Easy Allocator than use these plans, simple as they may be. Fixed portfolios become increasingly risky (measured in dollars lost when risky asset prices decline) as you approach retirement.
  • Coffeehouse (Schultheis): Financial guru Bill Schultheis is author of "The Coffeehouse Investor", a classic investment guide. His portfolio combines many of the asset classes and return enhancement strategies described above into a straightforward portfolio. See Bill's website The Coffeehouse Investor for more.
  • Bernstein Simple 4:William Bernstein is the single most influential figure of the independent investing world. His financial writings and quantitative analysis are unmatched. See his website Efficient Frontier. Bill's architected many portfolios, here I offer one of his simple classics.
  • Scott Burns Couch Potato: Another hero of independent investors, Scott's column
    • in the Dallas Morning News is always satisfying reading. His famous Couch Potato portfolio, 50% US stocks and 50% US bonds, shows how simple effective investing can be.

One Time Cash Flows
EasyAllocator supports financial events you may expect to encounter in future years. You may need to draw down your portfolio to pay for a child's education, for example, or you may anticipate a windfall from moving to a smaller home in retirement. Or you might want to see the impact on your retirement income of buying an RV in a few years. And after retirement event will cause EasyAllocator to recalculate your retirement income based on your portfolio value after the event. Positive cash flow events are added to your taxable account. Negative events are taken from your taxable account, then your IRAs if the taxable account is exhausted. Do not add events you'll pay for outside your portfolio, or with the retirement income it naturally generates. Some detail on each input:
  • Event Name: "Inheritence", "College Education", "Lump Sum Pension Payout", etc.
  • Amount: Be sure to use a minus (-) sign with events that cause withdrawals from your portfolio. Use after tax, future dollars (estimate the dollar value of the event in that future year, not the amount today).
  • Your Age when Event Occurs: Make your best guess.

Results: Your Recommended Portfolio
Click Go and EasyAllocator produces a table titled "Initial Portfolio" showing the investments you should make by account type. How did it calculate these results? While they may quibble over the details, financial experts in both the academic and practitioning worlds agree unanimously on a few key asset allocation principles:

  • Asset Allocation: Your financial portfolio should be composed primarily of stocks and bonds, and your stock-to-bond ratio is the most important factor in determining your future returns and wealth. The more risk (stocks) you take, the more return you should achieve, but the more dramatically the value of your portfolio will change from day to day ("portfolio volatility"). Further, the outperformance of stocks is not guaranteed - you get that higher return for accepting the risk that stocks will underperform other asset classes over your time horizon.

    EasyAllocator determines your stock and bond allocations based on your time horizon (age and years to retirement) and your risk tolerance. Those with longer time horizons get greater stock allocation because a) historcially stocks have outperformed bonds consistently over long (20+ year) periods, and b) those with longer time horizons have more human capital (future earning/saving potential) and so a greater ability to recover from a downturn in the stock market. Risk tolerance just means the amount of volatility you can accept. Example: a 20 year old with a Very High risk tolerancce might have a 100% stock allocation, while a 60 year old with an Average risk tolerance would be closer to 50% stocks/50% bonds. Your ratio of stocks to bonds is reduced each year, as shown in the results report, again reflecting the fact that stocks are long term winners, but are less certain to do will over shorter periods.

    After this crucial stock/bond division, EasyAllocator.com further breaks down your allocation as follows: Choosing to overweight small cap and value stocks divides your US stock allocation into 75% large blend, 25% small value, your foreign into 67% total market, 33% value. Any large value or small cap allocation adds 1% return to that portion of your portfolio. Small and value stocks, and microcap (very small) stocks add 2%. Default stock allocation is 60/40 US/International. Bond mix is 50/50 conventional/inflation protected, with 20% of the total going to foreign bonds if you choose that option. REITs are 10% of your portfolio, commodities futures 7% if you choose these options. These allocations are somewhat arbitrary, but reflect and average of what many academics and other experts recommend.

  • Asset Location: With your Asset Allocation determined the next task is figuring out which account types will hold which assets. The answer: You should hold bonds in your retirement accounts and stocks in your taxable accounts. Stocks are more tax friendly than fixed income- they throw off less taxable income, most stock capital gains grow tax deferred for decades, and the dividends and cap gains are taxed at more favorable rates. Experts agree (and some Excel analysis will show) that sheltering the income from bonds in Traditional IRA type accounts, and keeping stocks in Taxable accounts is the most profitable way to invest. The Roth IRA versus Taxable account calculation is a bit more complicated, but in most cases it's still better to keep your most tax friendly investments (stocks) in your taxable account. Fun fact: If you were going to live forever, your stocks would belong in your Traditional IRA type accounts, since the dividend tax drag of the stocks would eventually be greater than that of the less tax efficient (but slower growing) bonds. Mere mortals will come out ahead by keeping tax friendly stocks in their Taxable accounts.
  • Investment Selection: You should buy and hold low fee, tax efficient index funds for the long term. Owning individual stocks, for example, results in more risk (single companies go bankrupt all the time), but no more expected return (no individual stock should be expected to do better or worse than any other). Trying to guess which stocks will outperform the market is as futile as trying to pick active mutual fund managers that claim they will do the same. The two main options for those investing in low fee index funds are those offered by Vanguard and ETFs, or Exchange Traded Funds. Note that for risk free assets like government bonds, diversification is not absolutely necessary, though it may be beneficial.

Results: Single Run Graph and By Year Detail Report
If you don't select a simulation from the "Run Simulations With Variable" drop down, EasyAllocator displays by-year report detail in the bottom results table. Results may be discounted for inflation, if you check that checkbox. Definitions of each result column:

  • Age, End Of Year:The first row in the results shows your portfolio today. The second row shows it at the end of Year One, 12 months from today.
  • Portfolio Value: The sum of your three account types at the end of the year.
  • Return: The annual return of your portfolio after expenses and fees, but before taxes. See EasyAllocator and Taxes below for the returns EasyAllocator assumes for each asset class. This number is not discounted for inflation, even if you choose that option.
  • New Money: The total contributions you make to the three account types for that year.
  • Retired Income: Your total pre-tax income in retirement. This number is based on your withdrawal amount at retirement (your withdrawal rate times portfolio value), adjusted for inflation each year. Retirement income also includes any Other Retirement Income you typed in, plus one time events.
  • Expenses Paid: The fees you paid to the mutual fund industry. EasyAllocator uses 2007 Expense Ratio data reported by the funds it recommends for you. Note that you will not see this expense on any financial statements - mutual fund fees are silently deducted from your account over time.
  • Taxes Paid: The involuntary taxes you paid as a result of taxable distributions from the funds you held. This is based on 2007 data reported by Vanguard and other funds. EasyAllocator assumes a tax rate of 10% for qualified, and 20% for ordinary distributions (see two bullet points immediately below).
  • Qualified Distributions: The involuntary taxable amount your funds distributed, from your taxable account only, which are taxed at preferential capital gains rates. Reported mutual fund data from 2007 used. While funds in IRAs make distributions, these are not taxed and since the same dollar amount can be immediately reinvested, they have no financial planning effect.
  • Ordinary Distributions: The involuntary taxable amount your funds distributed, from your taxable account only, which are taxed at ordinary capital gains rates. Reported mutual fund data from 2007 used.
  • Percent Stocks: The proportion of your portfolio in common stocks. Excludes REITs. The initial stock percent is determined by your risk tolerance, age, and years to retirement. This percent can be as high as 100%, with a floor of 25%.
  • Risk (SD): This is the annual expected standard deviation of your portfolio, based on weighted average historical data. This measurement describes the volatility of your portfolio, a common measure of risk. Google "Standard Deviation" for more.
  • Pre Tax/Expense Expected Return: This is the expected annual return of your portfolio before mutual fund expenses and tax effects, if any.
  • Taxable, TIRA, and Roth Value Columns: The current value of each of these account types.
  • Taxable, TIRA, and Roth Cash Flow: The Taxable, Roth, and Traditional IRA Cash Flows represent the net cash in and out of each account type. For example, one year you contributed $10,000 to your Taxable account. You also had distributions (eg dividends) from your taxable account, and paid $500 in taxes on these (Taxes Paid column in the results). Finally, you paid $700 in mutual fund fees. Your Taxable cash flow would be $10,000 - $500 - $700 = $8,800. Any other cash flows (One Time events you specify, retirement withdrawal amounts) would also be factored in to the three Cash Flows columns.

Results: Multi-run Simulations
If you select a simulation from the "Run Simulations With Variable" drop down:

  • Sim #: The simulation run. The sim number appears on the graph and results, so you can match the graph to the report data.
  • Retirement Age: A simulation variable. EasyAllocator chooses 10 retirement ages at two year intervals around the retirement age you typed in.
  • Risk Tolerance: A simulation variable. Execute a Single Run to see how each level of risk tolerance affects your initial risky asset allocation.
  • Retirement Withdrawal Rate: A simulation variable. See Inputs above for how this variable affects your results.
  • Retirement Withdrawal Amount: The amount you can withdraw from your accounts in the first year of retirement.
  • End Value: The value of your portfolio at age 90.
  • Stock Return: A simulation variable, if you chose the Fixed stock return type in the Inputs. The annual return of your stock allocation.
  • Historical Return Start Year: A simulation variable, if you chose the Historical return type in the inputs. The year EasyAllocator uses for stock, bond and inflation data in Year One of your returns.
  • Annual Roth, TIRA, and Taxable Contribution Fields (3): Simulation variables, If the Annual Contribution you typed in is greater than zero for one or more of the account types, EasyAllocator will run simulations with varying annual contribution amounts to these accounts.
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