RESA Implications

Comment on the June 2019 AAII Journal Editor’s Note on “Modernizing the Rules for Retirement Plans,” by Charles Rotblut:

Although too late for us, raising the age of required minimum distribution (RMD) sounds good. It will depend on the rate of withdrawals as the retiree ages. In addition, raising the contribution age and amount could be a boon to late savers.

The worst part of the Retirement Enhancement and Savings Act of 2019 (RESA) proposal is to force withdrawal of the inherited IRAs within five years. This change can be a disaster for inheritors, especially if they are in a high tax bracket. The funds saved by the retiree, to be withdrawn in a low-tax environment, suddenly are highly taxed. The taxes could easily go from 15% to 39%, making the hard work of saving in a tax-deferred plan worth much less.
—Herb from California

Social Security & COBRA When Retiring Early

Comments on “Five Major Considerations for Early Retirement,” by Charles Rotblut in the June 2019 AAII Journal:

How would Table 1 (Social Security Cumulative Benefits) look if you didn’t spend the money but invested it at different interest rates of return (i.e., bond fund at 2% or 3%, stock fund at 6% to 9%)?
—Ken Ness from Washington

When I contact my HR department for COBRA details, I am told they will provide answers when I retire. I need answers before that. Specifically, I want to know whether the 36-month eligibility for my spouse will apply. What’s a good source for finding answers for different scenarios?
—John from Virginia

Charles Rotblut responds:
Ken, Social Security benefits increase by approximately 8% per year the longer you delay, and the increases last for the remainder of your life and are indexed to inflation. Plus, the increase in benefits follows through to one’s spouse if they have been the lower earner or will claim the survivor’s benefit in the future. The challenge with comparing cumulative benefits against projected returns from investing is that over your retirement time span, your actual gains may be more or less than projected. You also need to consider the potential adverse impacts that cognitive aging will have on your portfolio management skills.

James, you may want to try speaking to a health insurance agent about your options. They should be familiar with the COBRA rules. They would also be able to give you options for buying a policy on the open market, which may or may not be a better option than COBRA. Some of the websites listed in the Helpful Resources box in the online version of “Health Insurance in Retirement: Medicare and Beyond” by Steve Vernon in the April 2019 AAII Journal may be helpful to you.

The Value of the Level3 Passive Portfolio

Comments on “The Level3 Approach: Seeking Higher Returns by Going Beyond the S&P 500,” by John Bajkowski in the June 2019 AAII Journal:

I don’t see the Level3 Passive Portfolio adding any additional value to my portfolio.
—James Maher from Montana

The Level3 Passive Portfolio has been a win for the past three years even though not quite as good as a simple portfolio of just an S&P 500 index fund. However, the Investing at Level3 concept of replacing all bonds with 20% cash has been a major win for the past three years and looks good going forward.
—Gordon Robinson from North Carolina

There will be times when the S&P 500 outperforms, but often the diversification provided by the Level3 Passive Portfolio works. I have used a similar approach for several years and am much better off than with a 60/40 strategy.

The 50% portion of my personal portfolio that consists of Level3 funds differs somewhat: I have chosen to add a small-cap index fund, funding it by reducing each of the RSP, EQAL and VOE positions by 5%. Also, I have chosen a different real estate index fund than the VNQ fund used in the portfolio.
—Bud from Washington

From the Top 40 Archives

Comment on “Stock Buybacks: Misunderstood, Misanalyzed and Misdiagnosed,” by Aswath Damodaran—part of our AAII Journal 40th Anniversary Celebration Top 40 Archive:

This is a very good article, I just think the wrong “highlights” are stressed.

In my humble opinion, a buyback only returns money to specific shareholders. Long-term investors get no immediate effect other than what they would get if they sold their shares outright. Also, the money returned to shareholders is rarely done at a “premium” so the fact that everyone says “money is returned to shareholders” is a gross misstatement of the facts.

The future effect for the remaining shareholders is yet to play out, which is VERY much different than a dividend.
—Dave G from Washington