new ETFs on the way

This is a step in the right direction since heretofore if you wanted to invest in an international stock ETF, you most often had to accept econonic sector exposure corresponding to the economy of the country or continent in question. Now, these ETFs allow you a bit of fine tuning of economic sectors, but less choice with respect to specific countries. Also, from just peeking at the top ten holdings of the ETF for Consumer Staples ex US, it appears that most of the exposure is related to large cap companies, the stocks for which one could purchase individually now on the US exchanges. In other words, it's not like the Malaysia ETF held in our model portfolio that provides access to a bunch of stocks you just can't buy here.

model portfolio performance update

Quote from the Sunday Richmond Times-Dispatch

From an article related to the Lebron James saga:

"We are engaged in the age-old struggle between order and chaos. For all their limitations, the games we play nonetheless represent something of our attempt to organize the world in which we live.

Perhaps the growing fear that the world is only chance explains the current rage for order. But life is neither wholly determined nor wholly arbitrary. Men are neither completely free nor completely enslaved. We must contend with both contingencies and necessities. For all our striving, we shall never impose our will upon creation. We will never eliminate chance." - Mark Malvasi; teacher at Randolph-Macon College in Ashland, VA.

roth conversion (part 2)

Not a real post this weekend b/c was too busy catching up at the office. However, geekonwheels recovered my files this week, so I've posted the charts above pertaining to the roth conversion analysis.

roth conversion

Lately I've been meaning to convert my Regular-IRA account over to a Roth-IRA account and pay the associated income taxes (that would be levied this year on the amount converted) by pulling funds from my regular (taxable) brokerage account. The reason such a move would be beneficial under current tax law is because I wouldn't have to pay taxes on any withdrawals from the Roth account when I retire (unlike a regular IRA where the entire amount of the withdrawals are taxed at ordinary income rates). Thus, converting to a Roth now would increase my after-tax retirement nut assuming (i) the market provides a positive return between now and my retirement date and (ii) my income tax rate in retirement is equal to or higher than my current income tax rate. If I weren't comfortable with the first assumption then I wouldn't be in the market at all and the entire analysis would be mute. I'm pretty comfortable with the second assumption given the fiscal dynamics of our government and the fact that I probably won't have a mortgage interest deduction when I retire (house will be paid off).

I was going to upload a few charts I put together, but my laptop crashed just as I was going to, so you'll have to take my word for it. For these charts, I assumed the market provides a 5% annual return (pre-tax), I can retire in 20 years, the capital gains rate on my regular brokerage account will still be 20% when I retire, and my marginal income tax rate will still be 35% when I retire.

First, I calculated the after-tax retirement nut on my retirement date under two scenarios. Scenario 1: "As-Is" & Scenario 2: "Convert to Roth", with the difference between the two scenarios stated in terms of annual after-tax returns. I was a little surprised at how small the benefit is of a Roth conversion - only 0.2% per year. Of course this small difference still compounds handsomely if we're assuming it will be 20-30 years until I retire.

Next, I calculated the after-tax retirement nut under Scenario 3: "Convert to Roth and Government Renegs", which calculated what happens if congress renegs at some point and decides to levy a 7% tax on the gains accrued in the Roth account post conversion. The result of this scenario is there is exactly no benefit to the Roth conversion (the difference in annual returns is 0%). I chose the 7% gains tax assumption for purposes of illustration because it's the exact capital gains tax rate that results in 0% benefit (i.e. I would be indifferent to doing a Roth conversion or leaving things As-Is. If the hypothetical new capital gains tax is greater than 7%, then I would be better off not converting to a Roth.