Optimized Financial Systems Helps Customers Meet Their Personal Finance Goals with Optimization

We consider the retirement planning question that a single taxpayer or couple faces when determining an amount to save for retirement and the type of retirement account in which to allocate the assets. Additionally, taxpayers can choose to convert savings from one account type, such as a traditional individual retirement arrangement (IRA), into another, such as a Roth IRA; all such choices have both immediate and long-term tax consequences. We give the rationale for applying stochastic optimization in this setting and explain how such an optimization model can be constructed as a multiple-stage stochastic linear or mixed-integer program. Optimized Financial Systems implements such a model and uses it to advise clients; we demonstrate the approach’s benefits by examining its recommendations both for test data and in a case study based on an actual customer.