Index Funds: Jack Bogle has convinced me.....sort of.

[Petunia 100]

If you quote standard "expert" advice, it gives the appearance of being authoritative. Someone is more likely to listen to it. But you quote it not because it will give BeeGee good direction, but because you don't know enough about the op to determine whether they use 100% roth or 100% trad ira? Seems you are directing the op authoritatively to choose a particular solution when in truth you have no idea what is in their best interest? Is this responsible?

It isn't MY advice, smk, it is the standard advice given by "experts". I didn't quote it, I repeated it. Why you would find that "irresponsible" and take issue, I'm afraid I can't guess.

I'm not certain how you get either "100% Roth" or "100% trad IRA" out of the standard advice I repeated; by the time you get to #2 you already have some of each, do you not?

[Petunia 100]

I appreciate all of the input.

Here is my personal situation. I'm 35, married with 3 kids. I make 60K and the wife makes 35K when she's not on maternity leave. I have 16K in a Edward Jones Roth IRA and 17K in a 401K at my work (they don't match) that apparently is managed by BOTH "The Newport Group" and something called "Advanced Capital Group". (Is it likely that they are both charging me fees on top of what the individual mutual funds charge? )

I'm considering moving my Edward Jones Acct into a Roth IRA at Vanguard and also moving my works 401K to vanguard and then converting it to a Roth so that I won't be taxed on any future earnings.

Am I onto something or on something?

It is entirely possible you are paying a number of fees on top of the expense ratios charged by the individual mutual funds.

Unless you are separated from your employer, you cannot roll your 401k money elsewhere.

Your own IRA (Roth or traditional) is always under your control and can be transferred to any custodian you please.

Personally, I would move my Roth IRA from Edward Jones to Vanguard yesterday. If that were not possible, I would move it today.

Does your wife have a 401k or other employer plan?

[smk]

the formula for the return on the roth after it was converted from a trad ira in excel is

=((1+F$8)^$E9)-$H$6*(1+(F$8*(1-$H$6)))^$E9

f8 is expected return
e9 is the number of years
h6 is the tax rate on the conversion, which is expected to remain the same going forward.

the first part of the equation is the return of the roth. the second part is the negative return from paying the tax. then it is all raised to the power of the number of years to reflect that the return takes place over a period of time.

the formula for the return in the trad ira (or trad 401k) is

=(((1+F$8)^$E9)*(1-$F$6)

here, the addition to f6 is the tax rate when you take the money out. the first part is the return in the trad ira account. the second part is the part of the return that remains after taxes are taken out.

simply copy the formulas and plug them into excel. put the proper term in the cell i described above for each. an important factor will be the difference between the tax rate when you retire (f6) and the tax rate when you convert (h6). (note all tax rates are marginal tax rates and not average tax rates. marginal rates are the amount of tax paid or saved only for the changes you make from the converting to a roth.) plug in what you think is going to happen and see which gives you more money at the end of the term (e9). you can do this for any year you are making the evaluation.

[smk]

It isn't MY advice, smk, it is the standard advice given by "experts". I didn't quote it, I repeated it. Why you would find that "irresponsible" and take issue, I'm afraid I can't guess.

the standard expert opinion when you are driving a car is if you want to get to the destination, you need to depress the gas pedal.

i don't know much about driving a car and i am approaching a dangerous curve. i ask you how to get to my destination and you authoritatively explain that the standard expert advice when you want to get to a destination is you must depress the gas pedal. i take your advice and go over the curve, roll my car and die. do you still need me to explain why i find that irresponsible?

[Petunia 100]

the standard expert opinion when you are driving a car is if you want to get to the destination, you need to depress the gas pedal.

i don't know much about driving a car and i am approaching a dangerous curve. i ask you how to get to my destination and you authoritatively explain that the standard expert advice when you want to get to a destination is you must depress the gas pedal. i take your advice and go over the curve, roll my car and die. do you still need me to explain why i find that irresponsible?

This is not even logical.

[smk]

This is not even logical.

I thought I replied to this but it looks like it didn't show up. The analogy is not logical, but it is what you are effectively doing.

when you give generic advice for a specific situation where the context of the situation differs from the context of the generic advice, the generic advice will probably be bad. that is the situation for telling someone to hit the gas without knowing that they are driving around the curve. it is irresponsible. it is also the situation where you say that the experts tell people to max their roth before their trad ira when you have no idea what their tax situation is. if they are having a good year and/or expect to have lower tax rate in retirement, it is a bad idea. it is not responsible to give someone authoritative advice without a rationale for it. they are asking about their circumstances, not the situation where the expert advice was given...

[beegee]

Is it common for someone to have a lower tax rate after retirement?

I feel like because the country is so deep in debt that taxes are likely to increase in the long run.

[Petunia 100]

I thought I replied to this but it looks like it didn't show up. The analogy is not logical, but it is what you are effectively doing.

when you give generic advice for a specific situation where the context of the situation differs from the context of the generic advice, the generic advice will probably be bad. that is the situation for telling someone to hit the gas without knowing that they are driving around the curve. it is irresponsible. it is also the situation where you say that the experts tell people to max their roth before their trad ira when you have no idea what their tax situation is. if they are having a good year and/or expect to have lower tax rate in retirement, it is a bad idea. it is not responsible to give someone authoritative advice without a rationale for it. they are asking about their circumstances, not the situation where the expert advice was given...

Again, there was no specific situation given.

[Petunia 100]

Is it common for someone to have a lower tax rate after retirement?

I feel like because the country is so deep in debt that taxes are likely to increase in the long run.

It just depends. Some people retire with pensions, sizable tax-deferred monies, income from rentals, an ownership stake in a small business, etc. Some people retire with nothing but SS benefits and a small nest egg. If you are in the first group, you may find yourself in the same or even a higher tax bracket. If you are in the second group, you may find that you have no income tax liability whatsoever.

And as you say, tax rates are always subject to change.

With 3 young children, you are currently enjoying quite a few tax breaks which will eventually come to an end.

There are quite a few discussions on the Bogleheads Index Forum on this topic. Have you tried a forum search?

[smk]

Again, there was no specific situation given.

which is precisely why giving authoritative advice from the "experts" is irresponsible...no expert looked at his situation and advice is highly situation dependent. thank you for agreeing with me...

beegee...whether one likes it or not, the decision between trad ira and roth is a bet on tax rates. a good question is also whether it is likely you may have a bad year before retirement. in managing taxes, those are good years to consider taking capital gains or doing a conversion. i am not a tax expert. but looking closely at your current return, talking to your accountant and some side research are good places to start...

[Petunia 100]

which is precisely why giving authoritative advice from the "experts" is irresponsible...no expert looked at his situation and advice is highly situation dependent. thank you for agreeing with me...
.

No, I don't at all agree that rules of thumb are "irresponsible". To the contrary, I think rules of thumb are quite helpful.

I am weary of your arguing a point I haven't made, simply for the sake of arguing. I realize some people do find it amusing to be contentious and constantly derail threads; I am simply not one of those people.

[smk]

No, I don't at all agree that rules of thumb are "irresponsible". To the contrary, I think rules of thumb are quite helpful.

I am not arguing for the sake of arguing. you gave no explanation for why rules of thumb are helpful. take this situation. say someone is in a high tax bracket with the expectation of lower tax bracket at a later point. the rule of thumb assumes they will be in a higher tax bracket later on. no one specifies the underlying assumptions of the rule of thumb. people do not understand the underlying assumptions and follow it. they do the opposite of what is in their best interest. how is using the rule of thumb helpful/responsible in this type of situation?

[kv968]

I am not arguing for the sake of arguing. you gave no explanation for why rules of thumb are helpful. take this situation. say someone is in a high tax bracket with the expectation of lower tax bracket at a later point. the rule of thumb assumes they will be in a higher tax bracket later on. no one specifies the underlying assumptions of the rule of thumb. people do not understand the underlying assumptions and follow it. they do the opposite of what is in their best interest. how is using the rule of thumb helpful/responsible in this type of situation?

rule of thumb
— n
a. a rough and practical approach, based on experience, rather than a scientific or precise one based on theory.

I agree "rules of thumb" can be misleading, if not dangerous, when adhered to in situations that don't apply. However when one hears a "rule of thumb" I would hope that they'd realize that its just that...a very broad, generalized assumption that may not fit into that person's specific situation.

However, if you have no idea whatsoever on the criteria needed to make a decision, a rule of thumb isn't a bad place to at least start looking for your answer. Hopefully though, realizing that it may not be applicable to your situation at all but at least giving you a starting point in which to begin your search.

[smk]

rule of thumb
— n
a. a rough and practical approach, based on experience, rather than a scientific or precise one based on theory.

in this particular case, the "expert" advice is based upon a scientific process with certain underlying assumptions about the circumstances of the person to whom it is applied.

if the problem is intractable, then you may have no choice but to use a "rule of thumb" as you mention above. your approach seems sound on how to work with it.

this problem is far from intractable...

[kv968]

in this particular case, the "expert" advice is based upon a scientific process with certain underlying assumptions about the circumstances of the person to whom it is applied.

if the problem is intractable, then you may have no choice but to use a "rule of thumb" as you mention above. your approach seems sound on how to work with it.

this problem is far from intractable...

You're right, this problem is far from intractable, however here's the opening line of the OP's post:

Newbie here.

No problem with being a newbie (we've all started somewhere) nor confused (we've all been there) and definitely no problem at all with asking questions. However a lot of people stop right about there when it comes to learning more about investing (not to imply that's the case the with you beegee and certainly not picking on you) so the problem could be intractable for them.

So what's left after that? Either seek professional advice (which in my experience most won't) or to just go with the "rule of thumb"/"expert" advice. As you said the "expert" advice is based on assumptions of the person its applied to. I believe its being applied to an "average" person (even though everyone's situation is unique so it could be argued that there is no "average" person). However if someone isn't willing to learn more and/or get professional advice all that's left are the "rules of thumb" and there could worse ways to go about things.

For example, target date funds...Could you reasonably construct a better fitted portfolio for a client? I'm quite sure you could. However there are many people out there who have no clue in investing but don't seek professional help and do it themselves. I'd rather see them use a target date fund (which in a way uses a general "rule of thumb" approach) than just pick funds that "have performed well recently" and forget about them for the next decade or so. An approach I've seen plenty of in my dealings with people's 401k's and IRA's over the years.

Like I said, I'll agree "rules of thumb" can be unfitting for some/most and I'm not saying people should assume they apply to them. However if the person isn't willing to do the work or get the help, there are worse rules to go by. Are they doing themselves a disservice by not learning and/or getting help...? Probably, but you can't force them to do either.

And again, none of this was pointed at you beegee