Friday, December 15, 2017

Closing Out 2017

As the end of 2017 approaches and the holidays demand more attention, let me suggest a few topics to mull over a cup of hot cider. (See what I did there?)

The current status of a tax bill with major potential impacts on personal finance is the reason I don't spend a lot of time contemplating future taxes like Required Minimum Distributions at age 70½. Tax laws are just too unpredictable beyond the next few years.

My view of tax management is tactical and opportunistic. Republican Tax Bill Overhauls Rules Many Were Counting On from the New York Times[1] describes the impact of the new tax bill on people who "had a plan." I don't try to plan my taxes 15 years from now when I'm not sure what the law will be in 15 days, or whether future Congresses will change it back in 15 months.

To misquote an old, Yiddish proverb, "Man plans and Congress Laughs."

Some thoughts on closing out 2017. 
[Tweet this]

Speaking of opportunities, if you're early in retirement and will pay little or no federal tax for 2017, ask your tax planner about a Roth Conversion to pay little or no tax on some of your IRA savings. You have to make the conversion by the end of the year but if you later learn that you converted too much you can put back all or some of it with a "recharacterization."[2]

Retirement strategies span a spectrum from "safety-first" to "probabilist", the former recommending a safe floor of income from annuities, Social Security benefits and Treasuries before investing for upside potential, while the latter proposes that equity investment can solve both problems.

Another way to refer to these strategies is "risk pooling versus risk premium", or annuities versus stocks. In Risk Pooling Versus Risk Premium[3] Wade Pfau concludes that "Those favoring spending and true liquidity will find that it is much more difficult than commonly assumed for an investments-only strategy to outperform a strategy with partial annuitization." Pfau addresses some key issues like "true liquidity" and the diminishing advantage of stocks for leaving a legacy at advanced ages.

I've recently chatted with a start-up called Blueprint Income[4] that offers what is effectively a "mutual fund" of deferred income annuities. They will partner with top insurers to allow workers to "Contribute the amount you’re comfortable with whenever you see fit."

I find the idea quite interesting as it overcomes the issue of writing a single, large check and also provides diversification among the safest insurers. Take a look at their website linked below.

I have said before that as both a retirement researcher and computer scientist, I don't yet trust "robo-advisers." I am working with one that I believe is trying to do it right, though, A Forbes column, NewRetirement: A New Approach to Retirement Planning, interviews its founder, Stephen Chen. The website is operational and you can try it at no cost.

Thanks for reading Retirement Cafe´ in 2017. I have a long list of posts to write beginning right after the holidays, but in the meanwhile, I'm going to have that cup of mulled cider and listen to the Pentatonix.

Wishing you and yours a great 2018.

Cheers. . .


[1] Republican Tax Bill Overhauls Rules Many Were Counting On - The New York Times

[2] 6 Things to Know if You Are Thinking about a 2016 Conversion | Ed Slott and Company, LLC

[3] Risk Pooling Versus Risk Premium, Wade Pfau.

[4] Blueprint Income | Introducing the Personal Pension

[5] NewRetirement: A New Approach to Retirement Planning, Forbes.


  1. Roth Conversions are an important option to consider. However it should be noted that the new tax bill eliminates recharacterizations of Roth conversions. Many analysts believe that recharacterizations in 2018 even for 2017 conversions will not be allowed.

    1. Good point. I guess we won’t know for sure until the law passes whether we can recategorize a 2017 conversion. Here’s a discussion.

      Regardless, this doesn’t mean the Roth Conversion is a bad idea, but it does mean you won’t be able to “put it back” if you learn you converted too much.

      On a positive note, you and your spouse will be able to exempt up to $22M from estate taxes. That should ease your mind.

      Thanks for the comment!

  2. Hi Dirk...what about Robo-Vanguard as far as trust?

    If not, why not? Thanks!

    1. What problem are you trying to solve?

      I’m a big fan of Vanguard, but I wouldn’t use them for financial advice. Actually, I wouldn’t use anyone for investment advice because there is no firm evidence that they add value. Vanguard says the human support you will receive “have a CFP or are earning one.” If there are good financial advisors out there who add value, I doubt they work for Vanguard, Fidelity, etc.

      Two months before the Tech crash, a young Fidelity rep called me to tell me I was holding too much cash (thank heavens I was holding A LOT). I’m sure he was one of the laid-off reps shown leaving the State Street office with a cardboard box a week later.

      Vanguard will do tax harvesting if you ask, though it isn’t automated. I’d rather have a tax specialist with a complete view of my finances provide tax advice than “someone earning her CFP.”

      They will also, I believe, provide asset allocation advice, but as I recently wrote, the 95%-Ile confidence interval for the optimal asset allocation is 10% to 85%, that according to Gordon Irlam. I suspect his software would do a better job than any of these robos and it’s free at

      Vanguards fees are low for advisors but you will also pay the expense ratio for the individual funds.

      Computer software won’t make a mediocre advisor much better and the real benefits of robos go to the investment firm who can now enable their employees to manage more accounts. That means that your account will receive less attention from an advisor and be primarily watched by computer algorithms.

      It seems wiser to me to build a portfolio of index funds and pick an asset allocation that often works and that meets your risk tolerance using AACalc.

      I believe Vanguard’s robo also rebalances, but the value of rebalancing often is arguable. I’ve been retired 12 years and rebalanced 3 times. It’s not like a robo is going to save me a lot of effort.

      I read a review that says millennials like robots because it “takes the guesswork out of investing.” You can’t take the guesswork out of investing.

      If you are among those who believe that anything coming out of a computer algorithm somehow has greater authority, I can tell you as a computer scientist for 40 years that isn’t how it works.

      So, again I’d ask. Which problem are you trying to solve?

  3. Thanks for the detailed, thought-provoking reply Dirk. I will check out AAcalc.

    Mainly what I would look for in an adviser are:

    a) Confirmation on whether we're on target for desired retirement withdrawal amounts.
    b) Course correction advice if a is off
    c) Thoughts on financial impacts of transitioning to a consulting role (rather than employee) before full retirement age
    d) Helping to weigh tradeoffs of home sale and move post-retirement (since we live in one of the highest cost areas in the country, Silicon Valley)

    I realize mileage may vary. I have chatted with a few hourly fee advisers over the years and they have been very helpful at providing perspective. The guy I chatted with briefly at Vanguard wasn't too impressive, but he was the first-line, get acquainted and try to bring in the business guy (I think). He didn't inspire confidence and I didn't sign up.

    I believe you're right about most AA problems and re-balancing as being relatively easy to solve for a DIY type (as I tend to be with this stuff).

    As per algorithms + authority, that's a good one. I would ask who designed the algorithm? Is it an expert system based on an extensive database of clinical outcomes over a significant period of time that is helping a good doctor to look at efficacy rates on treatment for what ails me? Personally, I think I would trust the authority of such a human-machine pairing a lot more than just the human opinion alone. And I would be suspicious of the machine only recommendation, but I think this is only because we are still very early into the ML & AI revolution. On the other hand, it that autonomous vehicles tend to be much better drivers than humans. We can't see in 3d, or multiple cars in front of and to the sides of us (yet).

    1. I am yet to find a robo-advisor that claims the use of AI. If you find one, please share. Even if there is one, AI is pretty limited in its current investment capabilities. In terms of robo-advisor downmarket services you should probably be thinking less IBM Watson and more souped-up ATM. See A.I. Has Arrived in Investing. Humans Are Still Dominating.

  4. This comment has been removed by a blog administrator.

  5. This comment has been removed by a blog administrator.

  6. This comment has been removed by a blog administrator.

  7. This comment has been removed by a blog administrator.

  8. This comment has been removed by a blog administrator.

  9. This comment has been removed by a blog administrator.