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SNov 29, 2012

Personal Decisions: Often More Powerful Than Investment Decisions

Scott Burns

Q. A little over a year ago I took over managing of my accounts from our financial planner. I switched the accounts to Vanguard and read a couple of the books that you have recommended. I have read and re-read William Bernstein's "The Investor's Manifesto" and Andrew Hallam's "Millionaire Teacher.” Both are excellent books, especially for beginners like myself.

My question for you regards the rebalancing of the accounts. When the annual rebalancing is done, as has been recommended, do I concern myself with whether the market is high or low? I have been agonizing over this question for a couple of months now and would really appreciate some advice. Also, do you have any more book recommendations for beginners?  —S.F., Houston, TX

A. Rebalancing should not be a source of hand wringing. Remember, we don't know the future— so speculating about the best moment to rebalance is not a fruitful use of your time. A less wearing path is to set some time of year, such as anytime in the first quarter, as when you rebalance. Set a date that suits you. And then, if the allocations have moved enough to get your attention, rebalance. If the change is small, don't bother.

Why is the first quarter a good time? Two reasons. First, you are starting a new year and may want to make some cash distributions, even if you have not reach the age of Required Minimum Distributions. If you have reached that age, the need for a distribution is a good time to rebalance.

Both of those books, and their authors, are wonderful. You also can't go wrong with any of the books Daniel R. Solin has written and would likely benefit from "The Smartest Retirement Book You'll Ever Read" (Perigee, 2009).

In addition to the investing side of the retirement question, I think everyone would benefit from books that show the power of personal decision-making. They are important and empowering. Fred Brock's "Retire on Less Than You Think’" (Times Books, 2004) is direct and helpful.  So is "Rags to Retirement: Stories From People Who Retired Well On Much Less Than You’d Think” by Gail Liberman and Alan Lavine (Authors Choice Press, 2007).

Q. I am 65 and my wife is 67. We are retired. I currently have a 401(k) with my past employer worth about $618,000. I want to be able to access some money each year for personal reasons, not to exceed 3 percent of the total investment. I understand that at age 70, if I am in an IRA, that one must make required minimum distributions. The 401(k) is currently invested in two bond funds. We also have a reserve account with about $30,000 in it.
Our combined Social Security benefits will be about $40,000 next year. I also have a defined benefit pension of $43,500 a year with a 100 percent survivor benefit to my wife, if something happens to me first. So our total income is about $83,000— without touching the $618,000 in the 401(k). If something happens to either of us it would result in only $14,000 less a year— my wife’s Social Security. I want to be able to take some money out each year this account, if needed, not to exceed 3 percent of total invested.

Our goal is to leave some money to our son. Question is: Should I roll over my 401(k) to a Roth or a Traditional IRA? I would have to pay the taxes with money from the roll over if it is to a Roth IRA. —B.K., Austin, TX

A. Converting to a Roth is a non-starter for you unless you do it in small segments over a number of years, pushing the edge of the 15 percent tax bracket. Since a couple filing jointly can have a taxable income up to $70,700 in 2012 and remain within the 15 percent tax bracket and you also have at least $19,500 in exemptions and the standard deduction— not to mention some of your Social Security benefits not being subject to taxation— you should make sufficient withdrawals from your tax deferred accounts so that you can put as much as possible into Roth accounts without triggering a 25 percent tax rate.

The tax brackets, exemptions and deductions are adjusted for inflation each year so you should have some flexibility going forward. Also, the Required Minimum Distribution schedule isn't harsh: in your first year it is only 3.65 percent. It is, however, more than the 3 percent you wish to distribute, so you may want to re-invest some of your distributions.

This isn't a casual back-of-the-envelope exercise: I suggest visiting with your accountant so you'll have the guidance of a professional. The main thought is that converting to a Roth isn’t worthwhile if you have to pay at a higher tax rate to do it.