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Letters to the Editor

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To the Editors:

Christine Fahlund’s article, “Should You Consider a Roth IRA Conversion in 2010?” [August 2006 AAII Journal] contains a completely unrealistic assumption in all of its scenarios: a steady 8% average return pre-retirement, and a steady 6% average return post-retirement. Had the article used real-world rates of return (for example, actual S&P percentage returns over a 30-year pre-retirement period, and actual S&P returns over a 30-year retirement), showing a “bad patch” early in the accumulation phase as well as late in it, and the same for the retirement/distribution phase, I believe the results would have been completely different and would lead to the opposite conclusion (i.e., conversion does not work in the real world). Many investors who chose to convert using the four-year averaging rules provided when conversions were first allowed in the late 1990s did so to their detriment, since they ended up paying taxes on investments that later lost a major portion of their value in the sharp market decline of March 2000 to December 2002. These investors paid taxes on value they subsequently lost, and in most cases, the taxes have never been recouped, because the losses were inside Roth IRAs

Jon Silverberg
Via E-mail

To the Editors,

Ron Francisco’s Letter to the Editors in the January 2007 AAII Journal referring to the importance of dividends versus capital gains was right on the mark. There’s an old saying in golf: “Drive for show; putt for dough.” I think the same thing applies to investing. Capital gains/total return is something that people like to talk about and that mutual funds use to sell themselves. However, dividends are much more reliable and can be the difference between winning and losing with a retirement portfolio.

In a similar vein, the January 2007 article “Choosing the Right Mix: Lessons From Life Cycle Funds” [by William W. Jennings and William Reichenstein] was a very good one, but nowhere did it mention that those funds are a “one size fits all” approach developed for non-savvy investors. They’re good for that purpose. But for those who have taken the time to educate themselves with journals like yours, such portfolio approaches may make no sense at all. For example, for the 70-year-old retired individual who has an IRA used to supplement a good pension, a 90% stock investment emphasizing growth dividends may be much more balancing against his total estate than one emphasizing bonds.

Clarence Newberry
Via E-mail

To the Editors,

Christine Fahlund states that the decision as to whether the individual takes his Social Security benefits at age 62, at full retirement age, or at age 70 “really depends on whether you can afford to delay receiving benefits and how long you expect to live” [“Invest or Delay? Strategies for Taking Social Security Benefits,” February 2007 AAII Journal]. This list does not consider the federal government that has promised to pay those benefits. If the government either increases the taxes on benefits after the individual who elects to delay the receipt of benefits turns 62, or if it actually reduces those benefits, then the “winner” of this Pyrrhic situation would be the individual who elects to take as much as he can get, as early as he can get it. Let’s not forget that, historically, the greatest investment “risk” has always been political, not economic.

Richard W. Liberman, M.D.
Via E-mail

To the Editors:

This E-mail is in response to the comments from Rick Spillane and James Cloonan in the Letters to the Editor column in the February 2007 AAII Journal.

Mr. Spillane asked about an all-equity portfolio without bond funds, and I feel that Mr. Cloonan might have also referred Mr. Spillane to the recent Portfolio Strategies articles regarding portfolio management in retirement—especially those pertaining to the extended portfolio derived by calculating and including the valuation of Social Security and retirement pensions as bond funds with his existing investments. [See “Retiree Stock Allocation Recommendations: Do You Fit the ‘Mold’?” (February 2004 AAII Journal) and other articles by William Reichenstein, available at AAII.com.]

I discovered the above investing pathway when I was 65, and by combining my military retirement pension with Social Security benefits I discovered a $325,000 bond fund equal to 60% of my total portfolio at the time. I therefore reduced bond and money market funds to 25% of the portfolio, which includes a 10% money market fund in the IRA to cover the annual required minimum distribution by the IRS.

Charles R. Corbin
Via E-mail

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