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Investing Blog Roundup: Bogleheads Conference and 2023 Social Security COLA

It was a pleasure meeting many of you in person last week at the 2022 Bogleheads Conference. The sessions were all recorded and will eventually be made available on YouTube. I do not know the timing as far as when we should expect that, but I’ll share the link once they come out.

The SSA announced last week that the cost-of-living-adjustment (COLA) will be 8.7% for 2023.

To answer the question I receive every year: for anybody 62 and older, your primary insurance amount gets adjusted by the COLA each year regardless of whether you have filed for your benefit. In other words, a high (or low) COLA in a given year is not really a point in favor of filing earlier or later. (You can find a more thorough explanation for Social Security inflation adjustments here.)

Recommended Reading

Thanks for reading!

Use Cash for a Roth IRA Contribution or Roth Conversion?

A reader writes in, asking:

“I recently rolled over the balance (all in stocks) from my previous employer’s 403(b) into a rollover IRA. With the downdraft in the stock market, I am considering doing a Roth conversion with that balance, which would result in about a $7,000 tax liability. I have yet to contribute up to $7,000 to my Roth IRA for 2022. I would have funds for doing either one or the other this year. At first glance, there appears to be no advantage of doing one over the other choice (recognizing I have until the end of 2022 to do a conversion, 4/15/23 to do a contribution)… but I’m not so sure. Am I missing some angle that would help me lean one way or another?”

Let’s run through an example to illustrate the differences. If we assume, for example, a 25% combined federal/state marginal tax rate on the conversion, that would mean choosing between a conversion of $28,000 or a $7,000 Roth IRA contribution.

Option A: convert $28,000

Result:

  • You have taken $28,000 out of tax-deferred.
  • You have added $28,000 to Roth.
  • You have taken $7,000 out of taxable (i.e., $7,000 spent from checking to pay the tax).
  • As you noted, you still have the option (later) for a contribution for this year.

Option B: no conversion, contribute $7,000 to Roth IRA.

Result:

  • You have not changed the amount in tax-deferred.
  • You have added $7,000 to Roth.
  • You have taken $7,000 out of taxable (i.e., $7,000 moved from checking to Roth IRA as the contribution).
In other words, aside from Option A preserving the option to contribute to a Roth IRA for this year, the primary difference (in this scenario assuming a current 25% marginal tax rate) is that Option A leaves you with $21,000 more in a Roth IRA, whereas Option B leaves you with $28,000 more in tax-deferred. So of course a critical question is: would you rather have $21,000 in Roth, or $28,000 in tax-deferred?

And the primary factor in that decision would be: what tax rate would you expect to be paid on these tax-deferred dollars later (i.e., whenever they come out of the account later, if you don’t convert them now)? That tax rate might be your tax rate on RMDs in retirement. It might be a later tax rate at which you could convert them (e.g., after retiring but before Social Security and RMDs begin). It might be your heirs’ future tax rates. Or it might be 0%, if you would anticipate a high likelihood of these dollars ultimately going to charity as a qualified charitable distribution or as a bequest.

If that projected future tax rate is 25% or more, having $21,000 in a Roth IRA would be preferable to having $28,000 in a traditional IRA (i.e., the Roth conversion would be the better way to use the $7,000 of cash).

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Investing Blog Roundup: Can You Save Too Much in an HSA?

Health Savings Accounts are the most tax-efficient of all accounts, when the money is used for medical costs. You get a deduction on the way in, the account gets to grow tax-free, and the money comes out tax-free as well (again, assuming it’s used for qualified medical expenses). That’s the best tax treatment, at every step of the way.

This week, Christine Benz addressed the question of whether it’s possible to save too much in an HSA — and what to do about it, if you suspect that maybe you have done so.

Recommended Reading

Thanks for reading!

What is Comprehensive Financial Planning?

A reader writes in, asking:

“I’m currently ‘in the market’ for a financial planner. I’m looking at many different options, because I’m still a little unsure about exactly what I’m looking for. One phrase that I keep seeing is ‘comprehensive financial plan’ or other similar wording. What exactly would that include? On the one hand comprehensive sounds good. I don’t want anything important left out. But I also worry about the possibility of overpaying for services that I don’t really need.”

Financial planning includes several sub-topics. The following list is from the AICPA’s Statement on Standards in Personal Financial Planning Services. (Different sources have slightly different lists of sub-topics. For example, some omit elder planning or charitable planning.)

  1. Cash flow planning
  2. Risk management and insurance planning
  3. Retirement planning
  4. Investment planning
  5. Estate, gift, and wealth transfer planning
  6. Elder planning
  7. Charitable planning
  8. Education planning
  9. Tax planning

Of course, for a given household at a given time, not all of those topics will be equally important.

But, whether you’re doing your own planning or working with a professional, those are the topics that should be addressed on an ongoing basis — unless there’s a clear reason to exclude certain topics. (For example, if you have no kids, no plans for kids, no student loans, and no plans to go back to school, you have no need for education planning.)

The truth is, there’s no way for one person to have a deep level of expertise in all of those topics, even if the person is a full-time professional with a ton of letters behind his/her name. There’s simply too much material.

Ideally, the financial planning field would work like the medical field in this regard.

For instance, there are outpatient dermatology practices that do what they do, and they’re good at it. But nobody at such a practice is going to perform your colonoscopy. And you know that without even needing to ask.

And there are big hospital systems. They have radiology, oncology, anesthesiology, you name it. But it’s not one single professional doing all of those things.

And with regard to the individual physicians, there are specialists with clear areas of expertise. And there are primary care physicians who know something about all of the various specialties, but they recognize the limits of their expertise and they regularly refer out to specialists as necessary.

Ideally financial planning would function similarly.

There would be broad financial planning practices with a team of professionals with expertise in various areas, with the goal of keeping everything “in house.” And there would be smaller practices, specializing in various areas and regularly referring to each other.

And financial planners (and financial planning practices) would make it clear that they do offer this and they don’t offer that.

What makes me nervous are the solo practitioners who offer “comprehensive financial planning” and rarely refer out to other professionals. I do not understand how a person can in good faith assert that they have deep expertise in all of the above topics.

Investing Blog Roundup: Where to Find Prior Bogleheads Podcasts, Videos, Interviews, and More

A reader writes in, asking:

“Is there a hub with a list of previous educational Bogleheads meetings that gives access to listen to them? I think I found it in the past and even listened to or read notes, but this was a few years ago, and I cannot recall how I found that place either.”

Yes, there’s a new such resource in fact. The Bogle Center (formally, The John C. Bogle Center for Financial Literacy) has recently had its website redesigned, to serve as a hub for all of the Bogleheads educational resources. You can find it here:
https://boglecenter.net/

Just below the large banner with the photo of Bogle himself, you’ll find links to the podcasts, Twitter Spaces interviews, YouTube channel, etc.

You’ll also notice that there are still some available tickets for the 2022 Bogleheads Conference, next month in Chicago. (The new venue has significantly more capacity than the prior venue in Philadelphia.) It’s quite the agenda, with speakers including Burton Malkiel, Jason Zweig, Michelle Singletary, and many more (including the regular Bogleheads faces, such as Bill Bernstein, Rick Ferri, Allan Roth, Christine Benz, and myself).

Recommended Reading

Thanks for reading!

Calculator for Backtesting a Portfolio or Asset Allocation (Also Monte Carlo Simulations)

A reader writes in, asking:

“Is there a website or calculator that you recommend for showing the historical results of a portfolio? Something where I can enter an asset allocation and the calculator will tell me what the return would have been and how risky.”

Yes, absolutely. PortfolioVisualizer.com is an excellent tool for this sort of thing. From the homepage, select the link for “backtest asset allocation” if you want to choose from inputs such as “US large cap,” or click the link for “backtest portfolio” if you would prefer to provide the ticker symbols of specific mutual funds.

The calculator lets you adjust your modeling for various rebalancing options. For example, you can assume the portfolio is rebalanced monthly, rebalanced annually, never rebalanced, or rebalanced using “rebalancing bands” (e.g., rebalanced whenever the allocation is off-target by 10%).

And it lets you make assumptions about ongoing contributions to, or spending from, the portfolio. You can make adjustments such as whether the spending is a fixed percentage or a fixed dollar amount. (And if it’s a fixed dollar amount, should it be inflation-adjusted over time?)

After you provide all of your inputs, the calculator tells you the historical return, standard deviation, best/worst years, maximum drawdown, and other various results.

PortfolioVisualizer also has the option to run Monte Carlo simulations. (Select the link for such from the homepage.) On the Monte Carlo simulation page, you can have it use historical data, or you can select other options for the return assumptions (e.g., “parameterized returns,” which lets you input expected return and standard deviation for yourself).

The PortfolioVisualizer website also has a ton of other calculators that I’ve never even used. In short, it’s an incredible resource. And it’s free. (Though there’s also a paid version that gives you some additional capabilities, such as saving results, exporting to spreadsheets, etc.)

Of course, when backtesting, be sure to remember the limitations of relying on historical data. Just because a portfolio provided a particular return in the past doesn’t mean it will do so in the future. And the same goes for all of the other outputs (e.g., how risky an allocation would be, or whether it would have satisfied a particular spending rate in the past).

And ditto for the Monte Carlo simulations. They can be useful, but remember that we don’t actually know what the future distribution of returns will look like for any asset class. If a set of Monte Carlo simulations shows, for example, that a particular portfolio has a 92% chance of satisfying a given spending rate over a given length of time, we don’t actually know that the portfolio has a 92% chance of satisfying that spending rate over that length of time. Rather, what we know is that, given the assumptions that you used, the portfolio had a 92% chance of success.

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