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Letters to the Editor

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To The Editors:
I think John Bajkowski’s article in the May 2004 AAII Journal, “Overseas Investing at Home: Screening for Reasonably Priced ADRs,” is quite good. However, there is one little (but bothersome) point about ADRs which might be mentioned. At least one country, Germany, clips off part of the dividends [in the form of taxes]. You can get some of it back, but this is where the bother comes in.

William T. McKenna
Palo Alto, California

The Editors Respond:
At year end, ADR holders receive a statement from the paying agent detailing the gross dividend and foreign tax withheld, which should be used to prepare their personal income tax return. A foreign tax credit may be available for taxes paid to foreign governments. However, the availability of a foreign tax credit or deduction will depend on each shareholder’s personal tax situation.

 

To The Editors:
I found the coverage of 529 college savings plans in your June 2004 AAII Journal to be disappointing [“College Prep Guide: Planning and Saving for a Child’s Higher Education,” by Mark H. Gaudet]. Consider a few things:

  • In order to utilize the 529 plan for four years of college, a person must be a least a high school junior this fall. High school sophomores and younger will not be able to maximize the use of this plan, since the 529 tax status after 2010 is uncertain.

     

  • High school juniors and seniors enrolling in a 529 plan would be on the short end of a college investment horizon. Most plans would, therefore, place them into bond funds. If you believe Alan Greenspan and the market concerning expected inflation, bond funds are headed for a fall over the next couple of years as interest rates rise.

     

  • You are probably aware of the investigation of 529 plans. Investors are making fleeced while the greed of investment companies is making them richer. Oversight of these plans is nil.

     

  • Too many controlling factors are tied to 529 plans— federal law, state law and investment companies act independently of one another in changing the rules. This makes for a poor investment environment.

The article did state that the 529 plan loses its free federal tax status in 2010. But I have to assume the author did not consider this overly important to 529 investors. If he had, he would have mentioned it in his comparison chart under “disadvantage

Vernon E. Harmon
Williamsport, Maryland

 

To The Editors:
Regarding “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable,” by Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz [February 1998 AAII Journal; found at AAII.com using the Search tool]: A better Table 3 might indicate the inflation-adjusted value of an annual withdrawal rather than a success rate. If one withdraws a fixed percentage each year based on the portfolio value each year (not its initial value), the success rate must be 100% as the fund would never run out. But would the inflation-adjusted income be 75% or 150% of where it started? An ideal withdrawal rate would leave your inflation-adjusted income at greater than 100% for 30 years.

Dennis Eccleston
Via E-mail

The Editors Respond:
The notion of withdrawing an inflation-adjusted percentage of the initial value of the portfolio is intended to provide a retiree with a relatively constant income over the years while maintaining a portfolio with an optional asset allocation that allows it to grow in real terms over time. If a retiree takes out a fixed percentage based on the portfolio value each year, the retiree’s “income” would vary widely year-to-year, and in years in which the portfolio lost value, the retiree would have to add to (rather than withdraw from) the portfolio.

Under this approach, the retiree would attempt to smooth income flows by investing his portfolio primarily in short-term fixed-income securities, exposing the portfolio to a loss in real value over long time periods.

 

 


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