Fund Guide Suggestions

Comment on “The Individual Investor’s Guide to the Top Mutual Funds 2021,” by AAII Staff, in the February 2021 AAII Journal:

There is a strong focus on three-year returns which, from everything I’ve read, have minimal correlation to future returns. Basically, the farther back you go the better the correlation. I usually use 10 years.

It would be helpful in all of the ratings categories to provide an explanation of how things are calculated. For example, what is the calculation for total risk index? In deciding how to use it one would want to know exactly how it measures risk.
—Hyam S. from Vermont

The Editors respond:
Hyam, thanks for your suggestions. Definitions of all data points are found at the expanded Fund Guide page at www.aaii.com/guides/mfguide. Look for the Field Definitions link.

Total risk index is the standard deviation of a fund’s return divided by the standard deviation of return for the average fund. Standard deviation is a measure of return volatility computed using monthly returns for the last three years. A value of 1.00 is average risk. Values above 1.00 are riskier than average and values below 1.00 are of less risk than average.

Researching ETFs

Comments on “Which Funds Fit Your Needs? Here’s How to Decide,” by Charles Rotblut, CFA, in the February 2021 AAII Journal:

Excellent presentation of information. When searching the ETF section, I was looking for an ETF that represents dividend stocks with low costs. My goal is to have the ETF as part of my portfolio with relatively little need to manage for the long term. My thought at the time was possibly a search bar that would identify ETFs and mutual funds with criteria that would narrow my search. Thanks for this product and all the hard work went in to it.
—Theodis P. from North Carolina

What is the difference between what AAII offers in looking over ETFs than what one can glean from looking at what information Schwab has on the same ETF? This subject has never been addressed. In addition, why pay extra for AAII information as there is little provided that the information is superior?
—Glen D. from Iowa

Glen, if you simply want the fact sheet on the fund, then either site works. I wanted to start with the whole fund universe (“thousands” handled at Schwab; 24,500 at AAII). The Schwab site exposed me to an effort to sell me on their funds. No such pressure at AAII. The difference is one is for profit and one is nonprofit. I’d rather make my selections based on facts, not a sales pitch and pressure to “buy our funds” so I appreciate AAII.
—Eric S. from Michigan

Retirement Taxes

Comments on “How Much of Your Retirement Income Will Go to Taxes?,” from Dispatches in the February 2021 AAII Journal:

I find this article extremely misleading. The last paragraph should be the lead off—most people are going to pay much more, especially if they are doing Roth conversions under the current tax brackets. Most retirement planning software projections do not emphasize that deferred-tax accounts will pay taxes on withdrawals.
—Mary M. from California

Mary, this is only a summary of the original research paper attributed to the author. A thorough read of that paper, for which there is a link at the end of the article, is fairly full of data points and a comprehensive overview of tax liability for retirees. Bottom line is if you got it, you’re going to be taxed on it, not much differently than when you were making it.

The two most interesting takeaways in my mind are 1) marriage is so much more common with those in the higher and highest brackets and 2) it can be shown that only 50% of Social Security income should be taxed for any income level, pointing to the fact that IRA savings and defined-contribution plans have become so much more prevalent. The only data points that may be missing are monetary retirement income figures to match the quintile and highest brackets, but these can be deduced from figures in tables of the research paper itself.
—Scott O. from Florida

The policy implications of the findings are: 1) Taxes are meaningful for the top quintile, who are mostly married couples with average combined Social Security benefits of $50,900, 401(k)/IRA balances of $325,400 and financial wealth of $441,400. 2) If these retirement and financial assets were fully annuitized, the amount a household would receive is equivalent to about $3,000 a month, and these households face tax liabilities of about 11%. 3) Thus, for many households reliant on 401(k)/IRA or financial assets for security in retirement, taxes are an important consideration.
—Norman B. from South Carolina