"Mark, thanks for an interesting and thought-provoking article. I'm not an economist, but I enjoy reading about it. I might quibble that what you are describing isn't a failure of TVM, but the intersection of TVM with diminishing marginal utility. TVM, at least as I understand it, makes no value judgments. Utility theory models our satisfaction with consumption. There are some interesting frameworks that extend utility theory to age and health and support your conclusions. But I'm not an economist and could have this all wrong."
"There is another way to figure out how you can determine what is an appropriate allocation. In 1985 Harold Evensky designed the bucket approach. I learned about this years ago in an article by Christine Benz of Morningstar. Here’s how it works: First one determines how much cash is needed annually from your retirement assets to meet your spending needs. Say your income needs are 100K per year, and your income from Social Security and pension is 80K. This person would need to withdraw 20K from their retirement assets annually to fill in the income gap. Next you divide your retirement assets into three buckets:
The first contains 1-2 years of cash (for immediate needs), the second contains 8-9 years of bonds (safer assets to cover a total of 10 years of safer income combined with your cash position to ride out most bear markets), and the balance is invested in stocks. The approach is rather simple. Here is an example:
Say you have a 1 million dollar portfolio, and again your annual cash needs from your retirement assets is 20K: Bucket 1 would contain 20-40K in cash
Bucket 2 would contain 160-180K in bonds (Christine also has some dividend paying stock funds).
Bucket 3 would contain the balance of funds."
THERE ARE FINANCIAL issues on which reasonable people can disagree. This article is not about those issues. Instead, it’s about issues where people disagree—because…
"I'm not sure why it's hard to compare prices? The umbrella premium is separate from auto and homeowners premiums ( both separate ) when you buy them from one insurer . You could obtain a quote from an insurer for an umbrella even if you don't own a car or home (i.e. large financial assets) . Not all insurers will write the policy . Chubb used to write stand alone umbrella for high net worth without underlying policies . Not sure about that currently . Umbrella prices are not that high. I would look at their A.M.Best rating and not worry about price that much."
AMONG THE MOST COMMON debates in personal finance is whether Roth conversions are a wise strategy. Especially as the end of the year approaches, it’s worth looking at both sides of this question.If you aren’t familiar with it, the idea behind a Roth conversion is that individuals can choose, at any time, and at any income level, to move money out of a pre-tax traditional IRA into a Roth IRA. There’s a catch, though: In the year that you complete a conversion, you must pay income tax on the amount that you convert. So, the bet you are making with a conversion is that your tax rate today will be lower than it will be in the future, when you otherwise would have taken those dollars out of your IRA.For example, if you could pay a tax of just 22% today to convert dollars from your pre-tax IRA to your Roth IRA, you would happily do that if you expected your tax rate down the road to be much higher—say, 32%. This seems straightforward, but not everyone agrees. For starters, Roth conversions’ detractors point to the uncertainty inherent in the exercise. Predicting future tax rates is an imperfect science, and if rates end up going lower in the future, that could turn the benefit of a conversion upside down. You could end up paying a higher rate today than you would’ve in the future.Given the state of federal finances, it might seem unlikely to expect tax rates to go down, but no one can say that with certainty. Congress often changes the rules, and as recently as the late-1980s, the highest ordinary income tax rate was nine percentage points lower than it is today (28% vs. 37%).In addition, it can be difficult to predict our own future income with precision. Consider required minimum distributions (RMDs) from retirement accounts. They’re a key component of most retirees’ income, but because they’re dependent on future investment returns, the best any of us can do is to estimate this figure.Roth conversions, in other words, involve uncertainty along multiple dimensions. This is a point even supporters acknowledge. That’s why, to help manage this uncertainty, I look at Roth conversion candidates as falling into one of three categories.The first category: When a taxpayer’s marginal tax rate is currently in one of the two lowest brackets, either 10% or 12%, I see it as an easy decision to complete a conversion. That’s because it’s hard to imagine that their future tax rate would be any lower. At worst, in that case, a Roth conversion in one of these two lowest brackets might just be a wash.The second category: When a taxpayer’s marginal rate is over 30%, I see that as an easy decision as well, but for the opposite reason. Roth conversions rarely make sense at that level because it’s hard to make the argument that a taxpayer in a very high bracket might end up in a bracket that’s even higher. To be sure, it can happen—and I’ll describe one clear case below—but it’s hard to have confidence in that expectation. For that reason, a conversion at a rate over 30% typically doesn’t make sense.The third category: If your marginal rate is in one of the middle brackets—either 22% or 24%—that’s when the conversion decision doesn’t have an easy “yes” or “no” answer, and it’s worth examining other factors.When would a conversion in this middle range make sense? If the composition of your assets is such that you have significant balances in pre-tax accounts and you haven’t yet hit RMD age (either age 73 or 75), that’s when you’d want to sharpen your pencil. If your RMD based on your current pre-tax balances would push your income into a much higher tax bracket, then it would be safe to assume that, with some additional investment growth, your tax bracket will almost certainly be higher down the road. That’s a clear case for a Roth conversion. Similarly, if you have other income sources, such as a pension, that are guaranteed, that too would make the conversion decision easier.What if the comparison between your current and projected future tax rates isn’t conclusive? Suppose, for example, your taxable ordinary income today is $210,000. For someone married and filing jointly, that would translate to the 22% marginal tax bracket. Even if your income rose sharply in future years with required minimum distributions, up to $300,000, for example, the tax impact would be modest. Income of $300,000 would translate to a marginal bracket of just 24%. So a Roth conversion might not seem like an urgent priority. In that case, there’s another factor that might be a tie-breaker. If one spouse passed away, the surviving spouse would be subject to the tax brackets for single taxpayers. Continuing with this same example, $300,000 of income would result in a substantially higher marginal bracket of 35%. If that were the case, then a conversion today at 22% might make good sense.The upshot: If you’re doing Roth conversion math, and the results look inconclusive, consider what might tip the scales.Another potential tie-breaking factor to consider, if the math isn’t conclusive, would be the estate tax. At the federal level, a tax of 40% applies to assets over $15 million, or $30 million for a married couple. For someone with a balance sheet at that level, Roth conversions can make a lot of sense because they have the result of reducing the size of an estate without reducing the after-tax value of the assets. Consider a simple example: If you complete a conversion of $200,000 that results in $40,000 in taxes, that $40,000 is no longer in your estate, and thus no longer subject to estate tax. This is the only case in which I see an argument for conversions at rates over 30%, because any tax below 40% would still be less costly than the future estate tax levy.Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossmanand check out his earlier articles.
"Dan, those Saturdays sound like a gift to all three generations: time with your parents, lunch with your dad, and those long conversations between your mom and daughter. I smiled at the thought of your dad being treated like royalty over a burger and a beer. Your parents’ generosity helped in so many practical ways, but I can see why those ordinary Saturdays are what you treasure most."
"Bill, Thanks for the reminder. I'm really happy Adam is getting the recognition and look forward to watching his presentation. Jim Dahle's appearance on Christine Benz's podcast last week was well worth a listen. best, Rick"
"A waste of time. Just read from Dalbar Study 4% of the stocks are responsible for all gains over last 100 years
Your odds are slim if you are a LT stock picker"
SINCE RETIRING, WE’VE done a lot of traveling. One thing that continually stands out is just how crowded airports have become—even top-tier airline lounges are sometimes packed to capacity. Watching the endless stream of travelers, my wife often turns to me and asks, “Where do all these people get their money?”I suspect some of them, especially the older travelers, are “middle-class millionaires.” They didn’t build their wealth through massive salaries. Instead, they accumulated it gradually through home appreciation, retirement savings, disciplined investing, and decades of compound growth.That’s how my wife and I built our net worth. We grew our savings slowly over the course of our careers through patience and discipline. Now that we’ve reached a point where we feel we have enough, our focus has shifted from growing our wealth to protecting it.Here are three ways we are protecting our hard-earned savings while continuing to enjoy our retirement.Fortifying Our Liability CoverageEver since a friend told me that his own son-in-law sued him after falling down his stairs, I’ve been concerned about our own liability exposure.I don’t consider us to live a lifestyle that would expose us to a particularly high risk of being sued. We don’t have a dog, swimming pool, rental property, or boat. Even though I consider our risk relatively low, I’ve become more conscious of how much we have to lose from an unexpected liability claim, such as a severe auto accident.I’m not an attorney or insurance professional, so I’m not suggesting that our approach is appropriate for everyone. But it did lead me to take a closer look at how our assets might be protected if we were ever sued and a judgment entered against us.In recent years, our modest California home has appreciated significantly alongside real estate values across the state. When I considered our home equity together with our taxable savings and other assets, we eventually concluded that our existing umbrella coverage was no longer sufficient for the amount of wealth we had accumulated.I also learned that California’s homestead exemption provides a certain amount of protection for equity in a primary residence, although the rules are more complicated than I had previously realized. The amount of protection depends on the circumstances and is subject to statutory limits and adjustments. For our home, I didn’t want to assume that all of our home equity would be protected from a judgment.Our IRAs also have statutory protection under California Code of Civil Procedure §704.115 based on what is deemed reasonably necessary for retirement support. Learning this gave me some comfort, but it also reinforced the fact that different types of assets can have different levels of protection.Our taxable brokerage account, however, does not have the same type of statutory protection. It remains exposed to potential legal claims.We ultimately purchased additional umbrella coverage through a specialty insurer. Securing that extra layer of protection provides us an invaluable peace of mind.Adopting a Moderately Conservative Asset AllocationNow that we’re in our 70s, we feel we can afford to be less aggressive in the stock market. Our portfolio is currently allocated 45% to stocks, 45% to bonds, and 10% to cash. This asset allocation gives us enough exposure to growth to help combat inflation while providing some protection against a severe bear market.Consider a difficult scenario in which the stock market falls 40% and the bond market declines 10%. Under those conditions, our portfolio would lose roughly 22.5%. Alternatively, if our 55% allocation to bonds and cash holds its value while stocks absorb the full 40% decline, we would still have 82% of our portfolio’s value intact.This allocation gives us a larger cushion against a severe stock-market downturn. It would allow us to rebalance into stocks after a major decline, rather than being forced to sell stocks when prices are depressed.More importantly, this asset allocation has so far allowed us to maintain a comfortable lifestyle without worrying about market swings.Hiring a Financial AdvisorI don’t recommend a financial advisor for everyone. In fact, if we were younger, we probably wouldn’t have one. But at age 75, I have to concede that I’m not as sharp as I used to be, and I can get emotional at times.Those aren’t ideal qualities to have in a world where scammers are becoming increasingly sophisticated.What I like about having a financial advisor manage our money is that I have to go through my advisor to access our funds. That extra layer of protection helps protect our portfolio from scams—and from ourselves. It gives us a chance to pause and think things through rather than make an emotional decision in the moment.At this stage of our lives, we’re paying for more than investment management. We’re paying for another layer of discipline and protection—and for the peace of mind that comes with knowing someone else is looking out for us.Focusing on Making It LastNow that we're retired and have accumulated enough to support the life we want, our priorities have changed. We don't need to squeeze every last dollar of growth from our portfolio. Instead, we're trying to make what we've built lasting—protecting it from lawsuits, market declines, scams, and, perhaps most importantly, our own mistakes. Dennis Friedman retired from Boeing Satellite Systems after a 30-year career in manufacturing. Born in Ohio, Dennis is a California transplant with a bachelor’s degree in history and an MBA. A self-described “humble investor,” he likes reading historical novels and about personal finance. Follow Dennis on X @DMFrie and check out his earlier articles
"Mark, thanks for an interesting and thought-provoking article. I'm not an economist, but I enjoy reading about it. I might quibble that what you are describing isn't a failure of TVM, but the intersection of TVM with diminishing marginal utility. TVM, at least as I understand it, makes no value judgments. Utility theory models our satisfaction with consumption. There are some interesting frameworks that extend utility theory to age and health and support your conclusions. But I'm not an economist and could have this all wrong."
"There is another way to figure out how you can determine what is an appropriate allocation. In 1985 Harold Evensky designed the bucket approach. I learned about this years ago in an article by Christine Benz of Morningstar. Here’s how it works: First one determines how much cash is needed annually from your retirement assets to meet your spending needs. Say your income needs are 100K per year, and your income from Social Security and pension is 80K. This person would need to withdraw 20K from their retirement assets annually to fill in the income gap. Next you divide your retirement assets into three buckets:
The first contains 1-2 years of cash (for immediate needs), the second contains 8-9 years of bonds (safer assets to cover a total of 10 years of safer income combined with your cash position to ride out most bear markets), and the balance is invested in stocks. The approach is rather simple. Here is an example:
Say you have a 1 million dollar portfolio, and again your annual cash needs from your retirement assets is 20K: Bucket 1 would contain 20-40K in cash
Bucket 2 would contain 160-180K in bonds (Christine also has some dividend paying stock funds).
Bucket 3 would contain the balance of funds."
THERE ARE FINANCIAL issues on which reasonable people can disagree. This article is not about those issues. Instead, it’s about issues where people disagree—because…
"I'm not sure why it's hard to compare prices? The umbrella premium is separate from auto and homeowners premiums ( both separate ) when you buy them from one insurer . You could obtain a quote from an insurer for an umbrella even if you don't own a car or home (i.e. large financial assets) . Not all insurers will write the policy . Chubb used to write stand alone umbrella for high net worth without underlying policies . Not sure about that currently . Umbrella prices are not that high. I would look at their A.M.Best rating and not worry about price that much."
AMONG THE MOST COMMON debates in personal finance is whether Roth conversions are a wise strategy. Especially as the end of the year approaches, it’s worth looking at both sides of this question.If you aren’t familiar with it, the idea behind a Roth conversion is that individuals can choose, at any time, and at any income level, to move money out of a pre-tax traditional IRA into a Roth IRA. There’s a catch, though: In the year that you complete a conversion, you must pay income tax on the amount that you convert. So, the bet you are making with a conversion is that your tax rate today will be lower than it will be in the future, when you otherwise would have taken those dollars out of your IRA.For example, if you could pay a tax of just 22% today to convert dollars from your pre-tax IRA to your Roth IRA, you would happily do that if you expected your tax rate down the road to be much higher—say, 32%. This seems straightforward, but not everyone agrees. For starters, Roth conversions’ detractors point to the uncertainty inherent in the exercise. Predicting future tax rates is an imperfect science, and if rates end up going lower in the future, that could turn the benefit of a conversion upside down. You could end up paying a higher rate today than you would’ve in the future.Given the state of federal finances, it might seem unlikely to expect tax rates to go down, but no one can say that with certainty. Congress often changes the rules, and as recently as the late-1980s, the highest ordinary income tax rate was nine percentage points lower than it is today (28% vs. 37%).In addition, it can be difficult to predict our own future income with precision. Consider required minimum distributions (RMDs) from retirement accounts. They’re a key component of most retirees’ income, but because they’re dependent on future investment returns, the best any of us can do is to estimate this figure.Roth conversions, in other words, involve uncertainty along multiple dimensions. This is a point even supporters acknowledge. That’s why, to help manage this uncertainty, I look at Roth conversion candidates as falling into one of three categories.The first category: When a taxpayer’s marginal tax rate is currently in one of the two lowest brackets, either 10% or 12%, I see it as an easy decision to complete a conversion. That’s because it’s hard to imagine that their future tax rate would be any lower. At worst, in that case, a Roth conversion in one of these two lowest brackets might just be a wash.The second category: When a taxpayer’s marginal rate is over 30%, I see that as an easy decision as well, but for the opposite reason. Roth conversions rarely make sense at that level because it’s hard to make the argument that a taxpayer in a very high bracket might end up in a bracket that’s even higher. To be sure, it can happen—and I’ll describe one clear case below—but it’s hard to have confidence in that expectation. For that reason, a conversion at a rate over 30% typically doesn’t make sense.The third category: If your marginal rate is in one of the middle brackets—either 22% or 24%—that’s when the conversion decision doesn’t have an easy “yes” or “no” answer, and it’s worth examin
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