Mary Ryan: Hi, I’m Mary Ryan, and you’re watching a replay of our recent webcast, “Year-end is approaching: What our advisors want you to know.” We hope you enjoy it.
Hi, I’m Mary Ryan, the moderator for today’s discussion. Thank you for joining us. As of a few days ago, summer is officially behind us. It’s hard to believe, isn’t it? It also means the end of the year is fast approaching with its various financial planning deadlines and tasks. So what do our financial advisors want you to know to make sure you’re doing everything you should?
Jessica McBride and Chuck Riley are senior advisors with Vanguard Personal Advisor Services®. They have a lot of experience helping Vanguard clients, and I’m looking forward to their insights and real-life stories. So let’s ask. Chuck, what should people be worrying about?
Chuck Riley: Well, Mary, one of the things I enjoy about being an advisor is that at the end of the year, there’s so many other things to worry about besides finances. You know, holidays, family gatherings, things like that. And so being able to help folks take some of those worries off their shoulders financially is really very satisfying for me.
Two of the things that jump to mind when I think about year-end planning, certainly the first thing for retirees—I have a lot of retirees that I work with—is required minimum distributions. So they have to take out a certain amount from their IRAs every year if they are older than age 70½. So there’s a very stiff penalty for not meeting that minimum, so that’s a very important deadline to make.
For folks who are saving for retirement, I always like to make sure that they have maybe contributed to their IRAs for the years. There’s a little bit of an extra deadline there because they can wait until the following year, until the tax deadline, to make the contribution. But those are 2 things that I’m always looking for as we approach year-end.
Mary Ryan: Yes, those are very good points. Jessica, what about you? What do you think about?
Jessica McBride: Yes, there’s a couple other items that a client would want to focus on. For some tax planning, maybe it’s doing some Roth conversions. Also some gifting, whether it’s to charities or family members. Year-end, December 31st, is the last day to get those done. But that’s what we’re here for, right, Chuck?
Chuck Riley: Right.
Jessica McBride: To help partner with our clients to make sure we’re getting those year-end checklists checked off for you.
Mary Ryan: So they can enjoy the holidays and whatnot, right?
Jessica McBride: Exactly, yes.
Chuck Riley: Right.
Mary Ryan: Thank you, because there is a lot of work going on behind the scenes here at Vanguard to make sure you get on track and stay on track to meet your goals. We’re going to get into all of the details of that in a minute.
First, I want to have some quick notes to share. I know that many of you have already submitted questions. Thank you very much. But we encourage you to keep sending them in throughout the webcast, especially if you hear something you’d like us to clarify or perhaps delve into it a little deeper.
Also, if you need to access technical help, it’s available by selecting the blue icon on the left. And you can learn more about Vanguard’s services by clicking on the green and white Resources List icon on the far right of the player. You’ll also find a page containing replays of past webcasts.
Now, let’s get started. So thank you both very much for being here with us this evening. Those of you who’ve attended our webcasts before know that we like to start off with a poll question before we begin answering previously submitted or live questions. You’ll see our first question on the screen now. Which of the following most concerns you regarding your investment portfolio? Is it tax efficiency, market volatility, cash flow planning? Perhaps it’s estate planning. Please take a moment to respond, and we’ll come back to your answers in just a few minutes.
This is, of course, a year-end planning webcast, but we have received a number of questions on volatility. So while we’re waiting for the poll question results, let’s go ahead and answer some of those volatility questions.
So this was sent in to us from Kevin from Troy, Michigan. And, Jessica, he wants to know, “What steps should I take to maximize my retirement portfolio in the face of growing market instability?” I bet you hear a lot of that.
Jessica McBride: I do, Mary.
Mary Ryan: Yes.
Jessica McBride: And just keep in mind, market instability’s nothing new, right? That’s the nature of the beast. We’re always going to see market instability popping up here and there throughout one’s lifetime. But what steps does he need to take? It actually depends.
The first thing I do when I am talking with my clients and where maybe they’re a little bit concerned, let’s just take a moment and take a look at their cash flow success rate. It’s available to all our clients within their [Vanguard] Personal Advisor® portion of the website, but let’s take a look. Are we on course in the green? Are we a little off course in the yellow? I would start there. If the client is in the green and on course, well maybe we don’t need to do anything, right? We’re doing everything we should. If you’re off course, well maybe we need to take some additional steps. The markets are going to do what the markets are going to do. We have no control over that. We can only control what we can. If we’re saving for retirement, maybe we need to save a little bit more. If we’re in retirement spending, maybe we need to cut our expenses down a little bit to get us back into the green, on course.
Mary Ryan: Those are very good points because there are so many variables, but we can’t control the market.
Jessica McBride: Right.
Mary Ryan: So it’s good to be able to have that insight and to be able to look at those different numbers at the end.
Jessica McBride: Exactly.
Chuck Riley: And, Mary, I think there’s a tendency also that folks tend to think that today is different than it was before. It was unstable before, but it’s really unstable now. There’s just so much uncertainty.
But to Jessica’s point, uncertainty is always out there. And I like to kind of put it into context where we’ve been through world wars, we’ve been through recessions, we’ve been through a depression, we were through the Great Recession, and we’re still here, right? And so it’s not going to go away, so how do you deal with it and what decisions do you make? And that’s really where, as advisors, we try to add a lot of value.
Mary Ryan: Yes, those are very good points. And I think we sometimes do forget that, that this isn’t the first time we’ve seen volatility.
Chuck Riley: Yes.
Mary Ryan: They may be a bit different or the reasons might be different, but we’ve seen it, we’ve seen a lot of volatility and some bad times in the past.
Chuck Riley: Right.
Jessica McBride: Yes.
Mary Ryan: So that, thank you, that’s a very good point. We have another question from Orlando in Redmond, Oregon. So, Chuck, he wants to know, “How do we achieve our investment goals when equities are projected to be flat or bearish?” So to kind of do what you were just talking about.
Chuck Riley: Sure, right, it can make you feel like, “I’m not going to achieve my goal because the stock market, the bond market’s not going to cooperate.” And, again, so when we use Vanguard’s approach with our portfolios, really what we’re trying to get is the market returns—stock returns and bond returns in a balanced portfolio to whatever allocation is appropriate for the investor’s goal, keeping costs low, things like that. So if we’re doing those things, we’re getting those things right, over time we know that gives us the best chance for success.
There are going to be down years in the market. Last year was a down year. This year’s been a lot better. Will it stay that way through the end of the year? Your guess is as good as mine. There’s a lot of things, a lot of barriers.
Mary Ryan: Wish we knew, right?
Chuck Riley: Wish we knew, right. I don’t have a crystal ball.
But really, again, pointing back to the cash flow tool, that tool that says, “Hey, you’re on track, or you’re slightly off course.” What that does is it gives you the certainty or at least a feeling that you’re doing what you can, and folks who don’t have that kind of tool, they don’t really know, “Am I on track?” They’re kind of left wondering, and then I think they’re much more susceptible to the messages in the media or that they hear from friends or family members. So having a tool that uses those numbers and, also, we look at 10,000 different, what I call “stress tests” in that tool. So we’re testing the portfolio through really great markets, really horrible markets that we’ve never seen, and everything in between.
So if you’ve got a good success rate or you’re close, chances are you’re going to be successful.
Mary Ryan: Yes.
Jessica McBride: And I would add too, back to that cash flow, I just think it’s such a really helpful tool for our clients. But along the lines with the 10,000 scenarios, we assume that the markets are just going to be lower over the next ten years, and that’s been accounted for when we run those scenarios. So we do think stocks will be lower, and bonds are going to be lower. So just keep in mind that that’s already priced into that cash flow analysis.
Mary Ryan: And are you talking about lower returns or lower like in being negative?
Jessica McBride: Lower returns. Positive over a 10-year time period but just lower than historical averages.
Chuck Riley: Yes, we’ve had a really good 10-year run with the stocks and the bonds.
Mary Ryan: Yes, we have.
Chuck Riley: And so Vanguard’s been calling for it for the last couple of years to say, “Curb expectations. Hey, there’s still going to be growth, but it’s not going to be maybe the growth that we’ve seen in the past.” Like stocks might be a little bit higher than bonds. Bonds might be a little bit lower. You know, so we are calling to try to kind of check expectations.
Last year was, you know, they were down. This year they’re way up. So it just goes to the point of, how do you predict? But all of that, to Jessica’s point, is factored into that cash flow tool, the model that we use to run those tests so that it’s taken in and accounted for.
Mary Ryan: Yes, that’s important and, again, we go back to that tool. Those are very good points. Thank you.
So I think we’re starting to get some of our poll numbers in here.
Chuck Riley: Right.
Mary Ryan: So let’s see where we are. So again, remember, we’re talking about what concerns you the most. And looking at this now, no surprise, I don’t think. But we’re looking at this, and the greatest is market volatility, 43 percent said that is what they’re concerned about the most.
Chuck Riley: And that was before we answered the question.
Mary Ryan: That’s right. Now it’s going to be completely different because now it’s all changed. But, again, I say that probably isn’t a surprise. But how, I’m going to add onto this just a little bit. How do you all work with your clients to walk them back a little bit? They’re hearing all this noise, and they’re calling and they’re concerned. What do you say? How do you talk to them to sort of make them feel more comfortable?
Chuck Riley: I mean, the things that I’m saying here are the exact same things, my clients will tell you, that they’ve heard a lot of times from me. And I think one of the things, hearing that message over and over again, I sometimes get worried that if people are hearing it, it’s like a broken record. But it really is true. If you focus on the long term, it really, over time, what Mr. Bogle, our founder figured out in terms of saying, hey, you get the market returns, you give yourself the best chance of being successful. Keeping that perspective I think is critical.
But I was talking to a client who, you know, I asked her, “How often do you check out your cash flow tool?” And she said, “Hmm, not very often.” So she doesn’t see it very often, but she hears in the news every day something new that’s going to cause concern. So I encourage folks, come back, check in. Don’t check the returns like, “Oh, did I make money today?” but just to be able to say, “Am I still on track, even with the volatility that’s going on?”
Mary Ryan: Stay focused on that goal.
Chuck Riley: Right.
Mary Ryan: Yes, absolutely.
Jessica McBride: And I would say certainly watch the news to pay attention, but try not to take everything to heart. The headlines are scary, and any day I can see, “We’re going into a bear market” or, “This is a bull market, what you need to do.” And that changes daily or hourly. So if you’re nervous, concerned, put yourself on our calendar. Let’s talk through it, but really their job is to make it scary so like maybe you click on their article to read it or tune in for a little bit longer.
Mary Ryan: Bad news sells, right?
Jessica McBride: So just keep that in mind. They’re trying to get you to watch or to read their articles, and sometimes they have to make the situation scarier than what it really is.
Mary Ryan: Yes, and their advisors are there.
Chuck Riley: Right, and I feel, one thing with the success rate, a lot of times I found that clients are surprised that the success rate doesn’t change all that much, even on like bad days in the market. And so, again, it’s another sign to sayhey, maybe things really aren’t all that bad.
Mary Ryan: Right, right, these are very good points.
On this, with the survey that we had, an interesting one, 28% said tax efficiency. So, obviously, it’s not market volatility, but the second was tax efficiency, and we have some questions that came in on the tax efficiency.
So Betty from Ohio, Chuck, said, “What year-end task do I need to perform to increase my portfolio’s tax efficiency?”
Chuck Riley: Sure, so there are a couple of things that come to mind regarding it, and it also always depends on, kind of like, what your situation is.
As I mentioned, I work with a lot of folks who are in retirement, so they’re living off of their portfolio, but maybe they’re also trying to, you know, build a legacy for family. But a couple things that I tell folks there, the first thing is, if you’re of retirement age or over age 70½, a great way to minimize your taxes or reduce your taxes is you do qualified charitable distributions. So, essentially make a charitable contribution directly from your IRA. That’s a relatively new feature that’s been in place for the last couple of years. So that’s one thing.
When you do that contribution, you do not pay income tax on that contribution to the charity. So that’s one way to help to minimize the taxes. And then another thing, Jessica had mentioned it at the beginning of the webcast, are Roth conversions. So, essentially, taking money from a traditional or rollover IRA or a SEP IRA and then converting that money, taking it out of that account, and putting it into a Roth IRA, but paying the taxes on that distribution. So you’re essentially paying the taxes ahead of time, but putting it into a tax-free vehicle that you hopefully have many years for that to grow tax-free. So those are a couple of things that I think about in terms of increasing tax efficiency.
Mary Ryan: That makes a lot of sense, thank you.
Jessica McBride: And keep in mind too, when we create your portfolio, we do so creating a tax-efficient portfolio. So we might not actually have to do anything. It might have already been done up front when we created that plan and presented that plan to the client.
Mary Ryan: You must have ESP because, it’s funny, the next question came from Robert in Ocala, Florida, and his question is, “Is tax efficiency considered and incorporated in the portfolios constructed by Vanguard advisors for their clients?” So how do we do that? What do we do? What tools do we have?
Jessica McBride: So we think about our first conversation, we’re probably figuring out an asset allocation together to use in the portfolio. Then behind the scenes, Chuck and I are looking at the different account types. So there could be an IRA—traditional, rollover—then there could be the Roth IRA. There could be taxable accounts, an account in my name only, or a joint account with a spouse or a friend or whoever.
So we try to maximize, where do we put bonds, where do we put stocks, and where do you have cash, if any? So we look at the accounts specifically to give you the most tax-efficient outcome. So bonds, if you’re investing in a bond, they pay dividends every month. That’s taxed at ordinary income. That’s a great account to hold in an IRA that grows tax-deferred. So right there by putting your bonds inside of your IRA, you’re making the portfolio tax-efficient.
When it comes to the stock side we typically we put them into your nonretirement accounts. The money, the dividends that they pay on a quarterly basis, that’s at tax treatments, capital gains rate. When you’re selling, you get the benefit of capital gains rate, which is typically lower than ordinary income.
Mary Ryan: That’s a good point.
Jessica McBride: Yes, and so there we use tax efficiency of index funds or ETFs (exchange-traded funds). If bonds fit into your nonretirement account, depending on your tax bracket, we’re going to use tax-exempt bonds versus taxable. With your Roth account, that’s a great account that grows tax-deferred and essentially is tax-free. So if possible, we try to put stocks inside of there. So along with constructing the portfolio, and also the cost basis method that’s only available to our [Vanguard] Personal Advisor clients, is the minimum tax. So if you’re spending down, we can use that minimum tax, again, to help try to make the portfolio as tax-efficient as possible.
Mary Ryan: There’s a lot that goes into it. It isn’t just picking the mutual funds.
Jessica McBride: It’s not.
Mary Ryan: Wow, that’s wonderful.
Chuck Riley: And one thing, Mary, I think that a lot of times, especially when I’ve worked with clients who are maybe new to Vanguard, they aren’t familiar with how we approach investing, our approach of bonds in a regular IRA, non-Roth IRA, stocks in a taxable account or a Roth, it seems almost counterintuitive to them, right? They’ll say, “Well, my IRA is my long-term money, so really that should be in stocks. And I’m going to be spending soon, so I’m going to put my bonds in the taxable account.”
So it’s actually the reverse because of the tax-efficiency reasons that Jessica just described, because a big part of the value that we try to deliver at Vanguard, and we’re not out there trying to pick and choose stocks and time the market, we want to be efficient. We want to make every dollar in your portfolio work as hard as possible. And if we can keep the government’s hands off it and keep it in your pockets by doing something that might seem counterintuitive, by keeping the stocks in the taxable and the bonds in the IRA, we’re going to do it. It makes a lot of sense, and over time, again, gradually over time, that’s where you see the benefits. It’s not always immediate, but it’s like, over time, that’s how you end up building greater returns and greater value.
Jessica McBride: Yes, and Chuck had said, and I see this a lot of times when they come to me to prepare the plan, is I see a lot of stocks inside of their IRA, and I immediately think, well, you’re going to have a required minimum distribution at some point. If the growth component of your portfolio is inside of your IRA, your future required minimum distribution could be a lot larger than if the growth component occurred outside, and you have the bonds that are not the growth component, maybe it’s not going to grow as much, but you help reduce that future required minimum distribution.
Mary Ryan: Yes, that’s another good point.
And these are all things, as you were talking about, we can’t control the market. But what can we control?
Chuck Riley: Right.
Mary Ryan: These are the things we can control, that we can help long-term, whether it’s your taxes or how your assets are set up, to make sure that they are as efficient as possible. Thank you.
So I think we are ready for our second poll question. So it’s going to come up on your screen. Which of the following best describes your experience with charitable contributions? You could say I take full advantage of this opportunity, I prefer not to make charitable contributions, or I’m unaware of the tax benefits of charitable contributions. So while we’re waiting for those results, I’m going to take a few more questions that came in. And we did have some that came in talking about charitable giving and things like that, so let’s touch on that while we’re waiting for this.
So we have here Richard from St. Louis, and, Chuck, he wants to know, “Can Vanguard help with qualified charitable distributions? And please explain how this works.”
Chuck Riley: Sure, so the qualified charitable distribution is, essentially what you’re doing is you’re making a charitable contribution directly from your retirement account. So it goes from you directly to the charity, and that wasn’t allowed as many as five years ago.
Mary Ryan: So it’s relatively new?
Chuck Riley: Relatively new. It was temporary.
Mary Ryan: So a lot of people may not know about it.
Chuck Riley: Exactly, and it was temporary and now actually with the last set of law changes, it was made permanent. And so you can do this up to $100,000 per year if you’re over age 70½. That’s the first requirement. You have to be over age 70½ and be taking required minimum distributions.
So when you give that charitable contribution to the charity, that income or that contribution does not count against your ordinary income tax. And it can apply to your required minimum distribution. So it actually reduces the amount of your required minimum distribution—the amount is the same, but the taxable amount is lower because you’ve given something to the charities. So you can’t take a deduction on your tax return for it, but you are taking that income out and not getting taxed on it.
Mary Ryan: And does that count as their required minimum distribution?
Chuck Riley: It does. It does. It counts towards that, right. So if you have a $50,000 required minimum distribution and you give $20,000 to charity and then you take $30,000, you’re only going to get taxed at ordinary income tax rates on that $30,000. So that’s basically how, what a qualified charitable distribution is. And we definitely help, and it’s something that we certainly do not just at the end of the year, but really throughout the year. A lot of clients will come to us, and they will ask us to do these charitable distributions, so we can process them essentially. We’ll send you the check for the charity. There’s a specific process that you go through.
But Jessica and I mostly, how we’ll help is we’ll also say, “Well where does this money come from? What fund in my IRA are we going to take this from?” And that’s where we come in and say, “Well, let’s look at the diversification, let’s look at the allocation overall, and decide what’s the best place to take it from.” So we can absolutely help with that, and that’s something that we do all the time.
Jessica McBride: Yes, we try to just make the process easy. If you’re looking to do this, give us a call, tell us the name of the charity, give us the dollar amount, and we’ll handle the rest of it for you.
Mary Ryan: And when you take it out, as you say, you look to where to take it, but again by making sure their asset allocation remains as it should.
Chuck Riley: Right.
Mary Ryan: So always looking at that as well.
Chuck Riley: Yes.
Mary Ryan: Thank you.
So I think we’ve got our responses back on this question. So since we’re sort of talking about these charitable things, let’s see here. So we’re coming up, it’s pretty close. It said, I take full advantage of this opportunity, almost 39 to 40 percent said that. And then, I’m unaware of the tax benefits of charitable contributions, 44½ percent.
Chuck Riley: Wow.
Mary Ryan: Yes, so very close. And, I prefer not to make contributions, 15 percent. So we’ve got sort of, on both sides there, but a very interesting mix of, “I get it, I like to use it,” and then, “I’m not so sure.” So does this, tell me again, do you all see this a lot in your business in talking to clients and stuff? That it’s like, “I know about this, but.”
Jessica McBride: I find a lot of clients aren’t really sure what a qualified charitable distribution is, and then it’s, “Oh, it’s just another way to gift.” You know, they’re used to giving, writing a check or giving cash to a charity. That’s what they’ve become used to.
But working with the advisor, trying to explore other ways than just giving cash because it may work more in their favor than just, “Here’s a check from my bank account.”
Mary Ryan: Yes, that’s a very good point. So I had one other charitable question that I want to get to. “I set up a donor-advised fund this year.” This is from Lynn in Houston, Texas. “Do I need to make any gifts to charities prior to year-end?” Jessica.
Jessica McBride: Sure. If I’m understanding the question correctly, I think what she’s asking is, let’s just use Vanguard Charitable Endowment Program as an example. I’m just going to assume that was opened here. So the account was opened at Vanguard Charitable; either securities or cash was transferred to that account. That makes that gift a complete gift at that time. Whether or not you make a charity, that’s up to you. Here at Vanguard, Vanguard Charitable, they say every three years you have to make at least one gift, make one grant to a charity for a certain dollar amount.
So the takeaway should be opening the account at the endowment, funding it, completed gift. When you make the charity here at Vanguard, it’s at least every three years. It could be a little bit different elsewhere, but I think the takeaway is the gift is complete once you put the money into the account.
Mary Ryan: And that we do have folks here too that could help with that.
Jessica McBride: We do, yes.
Mary Ryan: Oh, that’s great.
Chuck Riley: I want to just follow up since we were talking about qualified charitable distributions. So with qualified charitable distributions, these would be distributions to registered 503(c) charities, so like the Red Cross or United Way. You cannot actually make a qualified charitable distribution to a donor-advised fund. That’s not permitted by the IRS, so just in case anybody had that question.
Mary Ryan: Okay, that’s a very good point, thank you, because we want to make sure of that.
We’re starting to get some live questions, so thank you very much for sending them in. We just got one in here that is, “What is MinTax?”
Jessica McBride: I knew that question was going to pop up.
Mary Ryan: So there you’ve got it, Jessica.
Jessica McBride: Okay, so minimum tax is a cost basis election. So on default, most mutual funds use what’s called average cost. So think about every time you make a purchase in. So whether you make a purchase every month, that’s considered a “lot.” Every time there’s a dividend that buys more shares, that’s another lot. What average cost does is it puts them all together in an average. So when you go to sell, it’s going to sell the average of all those lots together.
What MinTax does is it unbundles it, so you can look at each lot line-by-line. So when you are selling down, the goal is to minimize the tax consequence. So if there’s any losses, it will sell a loss first. If there’s gains, it will sell the gain last. There could be long-term gains versus short-term gains, so it will sell a long-term gain first and then a short-term gain last. So it’s really just unbundling the average, looking at each line when you’re selling down, and just trying to put you in the best tax outcome per transaction.
Mary Ryan: And do we do that for our clients when we’re selling and working with them?
Jessica McBride: We do. So it’s only offered to our [Vanguard] Personal Advisor clients, so just another benefit to the service.
Chuck Riley: Yes, one key. So you do have to consent to it. So everybody starts out with average cost. And for Jessica and I and all of our advisor colleagues, we’ve been spreading the word this year and encouraging our clients. Sometimes they get emails. Sometimes we can send them direct links to the consent form. So if our clients or any clients out there see something about MinTax in their message center, please click on it, and click “Accept.”
And to follow up on Jessica’s point, so this is not something that most folks do on their own. Everybody kind of follows average cost. If they were managing their portfolios on their own, you have to go in and you’ve got to look at the specific lots. You have to identify which ones you’re going to sell, which ones you’re not. So we’re doing all that for you.
Jessica McBride: Yes, that’s the hard part. Yes.
Chuck Riley: Right, exactly. And it’s using technology, leveraging technology so that we can be able to do it in a time-efficient way and the most cost-efficient way as well. So, again, to me it’s just another way that we add value to our clients. Maybe if they were doing things on their own, they wouldn’t be doing those things.
Mary Ryan: Yes, that’s a good point. Thank you, thank you for answering that.
So we’re talking about IRAs and Roth IRAs and things, this is from Bonnie in Fairport, New York, “How to evaluate your portfolio for IRA to Roth IRA conversions, how much to convert?” Chuck, can you take that one?
Chuck Riley: Yes, sure. So I really like Roth conversions as a concept. I really like them, especially for clients who are interested in leaving a legacy. Because when you can put money into a Roth, not only does it grow tax-free, you never have to take a distribution, like a required minimum distribution that I’ve talked about. You never have to take one from a Roth IRA.
So, you know, the tradeoff is though, that when you convert—so how do you evaluate your, I wouldn’t say it’s necessarily your portfolio, but it’s more of your tax situation. So in terms of looking at your portfolio, I’d say so if you have a large traditional IRA or rollover IRA and you have very little in a Roth, that’s possibly a time to consider doing that, or a reason to do that, to fill up that Roth bucket.
The things that you want to be aware of in making that decision is what is your current taxable income? So if you’re still working, then you may not end up, it might not be the best time because any money that you convert from a traditional IRA to a Roth is counted as ordinary income. It’s piled on top of that other income. It could push you into a higher tax bracket, right?
Mary Ryan: Right.
Chuck Riley: So that’s the first thing to look at. If you’re not working or you have relatively low income, it might not hurt to, I would encourage folks to talk to a tax advisor, look at their situation, and have the tax advisor say, “Convert this amount so that you don’t go over into a higher tax bracket.”
Mary Ryan: Sure, so you want to stay within the bands, sort of, of this conversion.
Chuck Riley: Right, every tax bracket has a high and a low, and you want to stay kind of in between whatever bracket that you’re in so you’re not pushing yourself and paying higher taxes on that amount that you convert.
So a lot of times clients who are maybe retired in their early 60s or mid-60s, things like that, and they haven’t started taking their required minimum distributions, that’s a perfect window of opportunity, that 3, 4, 5, 7 years before you actually start taking required minimum distributions to be able to start to do partial conversions of your IRA into a Roth. And so maybe a little bit every year.
Mary Ryan: Right, spread it out rather than these big chunks.
Chuck Riley: Right. And then when you put that money in there, you’ve paid the tax, now we plan for everybody to live to age 100. But sometimes folks go, “I’m not living to 100.” But we’re very optimistic, and people are living longer. But the point is, they have a long time horizon for that money in the Roth to grow tax-free. And then when they pass that money to their heirs, because typically Roths are the last thing that we would recommend that you use for income purposes, they’re going to have a nice large amount. They’ll have to take money out—it’s required, your heirs will be required to take distributions from the Roth. But it’ll all be tax-free, so you’ve given them a nice tax-free gift.
Mary Ryan: And I think the main thing when we talk about, whether it’s tax-free and tax-deferred, it’s tax-free. I mean that I think that’s the biggest thing is, people, we say “deferred” a lot, and everybody thinks, “Well, I’ll have to pay it one day.” They think of their 401(k)s or whatever. It’s free.
Chuck Riley: Right. The government doesn’t give out many of those breaks.
Mary Ryan: No, they certainly do not. To take advantage of it is certainly important, very important.
Jessica McBride: Something else I like about the Roth conversions and, like Chuck said, there’s probably a sweet spot. Maybe you just retired, not taking Social Security, not taking required minimum distributions. And with the current tax law, tax brackets, we’re in a lower tax bracket today. And know that they’re going to sunset December 31st, 2025, and go back into the higher brackets. So depending on your income, there could be that sweet spot to do it before Social Security starts and required minimum distributions.
But also if you think about yourself in 15, 20, maybe 30 years, it might be nice to have another account from a tax-diversification standpoint. For clients that I work with that have both, maybe they’re trying to manage their tax situation. They don’t want to go over a certain dollar amount, so, “Hey, I have this other account, the Roth, that’s tax-free. If I need to take $20,000, $30,000 out, if I do it from the traditional, maybe it pushes me into the next bracket. Maybe it bumps up my Medicare Part B premiums in 2 years.” Having that Roth account can alleviate some of that tax burden and just give you some additional diversification.
Mary Ryan: Yes, that’s a really good point because if you need money, at least you have that diversification. Where do I take it? How do I take it? And that, it’s a lot to think about. Not everybody has all that information to be able to decide, “This is my best option.” So it’s certainly a benefit having people to ask.
Chuck Riley: Right, and, I think, withdrawing from a portfolio is one of the times that folks feel the most anxious, right? “Where do I take the money from?” And they’re not always aware of the tax consequences of what they’re doing. But that’s what we’re looking at all the time.
Mary Ryan: So it’s interesting because Shay from Texas asked a question that I think is also something that would be helpful to everybody. “How can I take advantage of a ‘backdoor’ Roth IRA?” Jessica, you want to say how that goes?
Jessica McBride: Yes, I love this one. If anybody has the opportunity to do it. I’m not a tax advisor, but you should always check with your tax advisor. But if you have the opportunity, you should really consider it.
So, essentially what this means is, you do not have any IRAs. You don’t have any rollover IRAs, previous employer plans rolled over to the IRA. You haven’t started a traditional. So, essentially, you don’t have any dollars within an IRA. So essentially, what it is, it typically means you’re making a high amount of income where you’re not eligible to make a Roth contribution directly. So you put it into the traditional IRA, and then you convert it to a Roth IRA. It’s considered a nondeductible contribution, right? You’re allowed to make a nondeductible contribution regardless of your income. But then you’re not deducting it from your taxes. So when you convert it, there’s really no taxes to you.
Mary Ryan: So you do it quickly from when you put it in?
Jessica McBride: Well that’s the little gray area with the IRS. They never came out and said how long you need to keep it in the traditional IRA for. Is it 5 days, a month, 2 months? We would say, talk to your tax advisor, how long should it stay in there for? But, essentially, you put it into the traditional IRA, you wait a period of time, and then you move it into the Roth. And it’s just a “backdoor” way to get your Roth contribution in.
Mary Ryan: Interesting.
Chuck Riley: And you put that into a money market fund, right, so that it doesn’t really grow. So that way you don’t have any earnings or anything like that. If there might be a little bit of interest, but no, your goal is just to kind of keep it that way so then the growth happens in the Roth.
Jessica McBride: Yes, because when you do the conversion, if you’re putting in $7,000 and it grows to $7,100, that $100 would be a taxable event to you.
Mary Ryan: Yes, right.
Jessica McBride: But I mean, it’s only $100.
Mary Ryan: We want to avoid it at any cost for something like this.
Chuck Riley: That’s right.
Mary Ryan: We want to be prudent about this, even if it’s $100. Don’t want to pay those taxes.
So getting some questions coming in, and this is from Leslie, asking how a Vanguard advisor helps a retired client plan. So you’re already retired. How do you help them plan?
Chuck Riley: I like to help them plan for vacations when I can by telling them, “Please take your vacation and enjoy your retirement.” So, but I mean that is actually one …
Mary Ryan: I can’t wait for that.
Chuck Riley: Right. And, actually, that’s one thing, I think one of the things that I encounter most with a lot of retirees. Jessica and I work in the Flagship® space. With our Flagship clients, they tend to have been great savers over the years. A lot of times folks, yes, they get in that habit of saving, and then they aren’t in the habit of spending.
I had one client say to me, “You know, I learned to save, save, save not spend, spend, spend.” And so one of the things that I really enjoy doing is helping my clients feel comfortable in saying, hey, this is how much you can spend, and if you want to spend a little bit more, go ahead and do that. You want to take that extra vacation?
So in looking at the big picture overall, and over the planning in terms of like, are you going to be okay over the long run if you, maybe you take an extra vacation or maybe you help your kids put a down payment on a house, things that maybe they wanted to do but weren’t sure about doing. Those are the things that I, I love doing with clients because a lot of times they, if they were on their own, they might not feel they could. But having an advisor, having the tools that they have, you know, really just gives them that confidence. But sometimes it’s a tough sell.
Mary Ryan: Yes, I’ve heard you mention that, that sometimes you’re like, “No, no, it’s okay.”
Chuck Riley: It’s okay.
Mary Ryan: Go on vacation, it’s okay.
Chuck Riley: Yes.
Jessica McBride: And I would say we have a lot of tools available to our Personal Advisor clients. So if you’re, “How do I plan?” When do you take Social Security, if you are by yourself or with your spouse. “What strategy should we take to maximize our benefits?” We can help with that. If you’re spending from the portfolio, we set up a spending fund. We put some parameters around it. You tell us how much you want to keep in there, you take money out of it, Chuck and I get notified, we’re replenishing that. So you don’t have to worry about that. We set that up ahead of time, and then you’re just taking money out as you need it.
We have a health care tool to help estimate your out-of-pocket expenses during your lifetime, and if there could be a long-term care expense, what could those ranges of expenses look like? Our cash flow analysis, how likely are you to meet that goal? And, you know, we’re giving you a green or a yellow. So there’s lots of tools available. It’s really just talking with the advisor, going through one by one what does health care look like, what’s the spending look like. We also have a dynamic spending tool. Again, just lots of tools available to help us to help our clients.
Mary Ryan: Because everybody’s situation’s different. They all have different needs. But, again, just because somebody’s retired doesn’t mean they don’t have goals. You know, doesn’t mean they don’t have things that they still want to accomplish because they always looked at retirement as “the goal.” And then when you’re there, you still have things you want to do. And helping them get there is so important.
So we have a live question that came in asking about the Roth IRA, the backdoor. This is asking, “Going back to the backdoor Roth IRA conversion, is there a limit to the amount that can be contributed to a traditional IRA to convert to a Roth later?”
Jessica McBride: Well there is the limit of how much you can put in each year. So if you’re over 50, it’s $7,000. If you’re under 50, it’s $6,000. So that’s the most that you can put into the traditional IRA. If you put these into the traditional IRA, maybe they accumulated for whatever reason, you can convert any dollar amount to the Roth.
Mary Ryan: So that gives that flexibility to be able to have both, but you need to know.
Chuck Riley: Yes, I mean it’s very, because you’re doing a contribution and then you’re doing a conversion. A lot of times folks get confused between contributions and conversions. So there is a limit on the contribution amount you can do each year.
One thing, conversions, you can convert, if you have $500,000 in an IRA, you could convert that entire IRA in a single year into a Roth. You would be paying taxes on $500,000 of ordinary income, but there is no limit on the amount that you can convert from money that’s already in an IRA into the Roth.
Mary Ryan: With a conversion.
Chuck Riley: Right.
Mary Ryan: As you mentioned before though in talking about that, that a lot of people do this for estate planning purposes, these conversions. So while it may seem like a lot, if they look down the road as to the size of their estate and the estate taxes, you know, it is something to even look at it from that lens.
Chuck Riley: Right, some of our legal folks that work with clients on estate planning, they say, you know, you pay those taxes. You’re paying the taxes, but you’re also getting that money out of the estate because the estate tax is really very, it’s 40 percent, a flat 40 percent rate. So it’s, you know, it would be less than that.
Mary Ryan: Yes, it can be a little painful, but when you look long term, it does make some sense.
Chuck Riley: Sure.
Mary Ryan: Yes, yes. So thank you. We’ve got a few more questions that have popped in here. So this is also going back to MinTax. It says, “MinTax involves selling and rebuying. Does it trigger a tax consequence?”
Jessica McBride: MinTax requires selling and rebuying?
Chuck Riley: Well, so, I think there might be, maybe we weren’t as clear. So MinTax, so that is the method that we’re using to calculate what the gain is. So it is just related to a sale. So when you sell, when we sell shares from our clients’ accounts, in a taxable account, we’re going to calculate what the gain on that sale was using the MinTax method.
So, and that’s going to probably be lower than the average cost because we’re going to be selecting specific share lots to sell in order to generate that money that we’re looking to generate.
Mary Ryan: So it’s not really a buy/sell kind of thing? It’s really a method.
Chuck Riley: No, no. It is, exactly, yes. Yes, we’re clear about that. Hopefully that gives it some clarity.
Mary Ryan: Yes, so thank you for that clarification. That’s important.
So going back to a little bit of the volatility questions that we’ve been hearing, Robert’s asking, “Is there a time to get out of the stock market?” I’m sure we also get a lot of those. Like I think this is it. It’s time.
Jessica McBride: I can take that one. I get that question a lot. I have good practice answering it. But, you know, is there a right time to get out of the market? Nobody really knows. But what I find interesting is when you look at historical averages, right, a mix of 50/50 gives you 8% or something like that. It’s not market-timing. You know, it’s going through corrections and bear markets. And like you said, world wars and natural disasters. There is no market-timing when you look at the historical returns.
So what I like to say to clients is, are we just going to try to market-time this 2019 possible correction because, depending on your age, you can see a handful of corrections or bear markets? You can see two handfuls of bear markets or corrections. Are we going to try to market-time every one? Because you need to make the decision when to get out and that decision when to get back in.
And we think we’re doing the right thing, but it’s so hard to know when to get out. Things seem like they’re doom and gloom, and all of a sudden they turn around.
Mary Ryan: Right.
Jessica McBride: Right. And then all of a sudden now the market’s up 2 or 3 percent. So to be able to time when to get out, when to get back in, and if you’re going to do that every time, it would get exhausting. So we really do use a buy/hold/rebalance approach. So we’re making sure we’re putting you in the amount of stocks that you’re comfortable with through the good times and the bad times. And if the markets are pulling back, well, then maybe your stock position’s low. We’re going to sell some bonds to buy back the stocks. If the stocks are doing well, we’re going to sell some stocks to buy bonds to maintain the allocation.
Mary Ryan: Yes.
Jessica McBride: If we try to make some changes, we end up typically, according to our research, hurting ourselves and lagging the market.
Mary Ryan: Yes, it’s that sell high, buy low.
Jessica McBride: Yes.
Chuck Riley: Yes, and if I can just add to that, I will say that, so there is, Jessica’s absolutely right. That buy and hold, long-term approach, that’s the key. That’s what we preach, and that’s what we believe. That’s what I believe, and that’s what I do with my own portfolio. You know, I have an allocation. I follow that allocation, and it’ll get more conservative as I approach retirement.
One thing to think though, like, so you don’t want to necessarily pull your money out of the market if you think the market’s going to go south tomorrow. That’s really like classic market-timing. But I will say that you do always want to have, Mr. Bogle talked about “keeping your powder dry.” You always want to have some of your powder dry, right? You want to have cash. If you’re going to be spending from your portfolio, that’s money that shouldn’t be in the stock market.
I talked to a lot of clients in 2008 who had their retirement money, they were getting ready to retire, but they were still 90% in stocks and then were also in 529 plans for college tuition. They were getting ready to pay their college tuition. Their portfolio, they were 90% in stocks, it dropped 30%. All of a sudden they had to scramble for tuition money, right?
So, no. Pulling money out of the market at any time because you’re worried about what’s going to happen, no, we don’t feel that that’s the best approach. But you should keep some money, you should have money on hand, cash for your spending, that should not be invested in the market.
Mary Ryan: For your short term.
Chuck Riley: For your short term, that’s right.
Jessica McBride: Yes, we typically say 1 year. Depending on your comfort level, maybe we can go up to 2 years of cash. So 1 to 2 years of your expenses in a cash position.
Mary Ryan: Thank you. Thank you. So I want to take us back a little bit here to talk about some other sort of more planning-issue areas. So William from Harrisburg, Pennsylvania, is asking, “Can you please explain the dynamic spending plan? Is it similar to the bucket system?” Jessica, can you tell us about that?
Jessica McBride: So I’m not sure if everybody knows what the bucket system is. But it’s typically saying, whatever your expenses are, maybe you keep 2 years of your expenses in cash, and then maybe you take the next 10 years of your expenses and leave them in bonds, and the rest of your portfolio is in stocks. So that’s the bucket system.
With dynamic spending, what we do is we look at your basic living expenses, and then we’re going to increase them by the rate of inflation. And then if markets are doing well, well maybe that following year you spend a little bit more. If markets are pulling back, maybe you spend a little bit less. But essentially, we’re putting parameters around your basic living expenses, always keeping them up with inflation, and then a little bit more, a little bit less depending on market activity. But we focus on the overall asset allocation, not that bucket of certain expenses in bonds versus cash versus stocks. We maintain the overall asset allocation, the buy/hold/rebalance, and then the basic living expenses up with inflation and up or down a little bit more or less depending on market activity.
Mary Ryan: Thank you. That’s helpful.
Chuck Riley: And with the tool, if I could just add to that.
Mary Ryan: Please.
Chuck Riley: So with the tool, it will automatically—so this is part of the cash flow tool. The dynamic spending is a piece of the cash flow tool. Actually, it’s part of that whole modeling system. And each year, so depending on what the balance of the portfolio was the prior year, it will increase the spending number that you’ve told us that you were going to spend. So like hopefully this year’s going to be a good year. January 1 clients who are using the dynamic spending model with their advisors, they should see an increase in the spending amount for next year. And then like last year, we saw a little bit of a reduction.
So, really, what we’re trying to do is give folks that comfort level of how much should I be spending? It’s a down year, should I be spending less? How much less should I be spending? We’re trying to give some concrete numbers around that to help people feel comfortable and to say, “I know the markets were down, but I can spend this much. It’s okay.” Maybe pull back a little bit. And by following that approach, the really cool thing is that that actually can extend the life of your portfolio, because you’re taking out less in those years that there’s—and I’m not talking like we’re slashing your spending in half. I mean, really, it’s 2 percent, it’s 5 percent. It’s on the margins, which actually has a big impact over the long term, and that’s all factored into the model to be able to give you that comfort level of, “How much should I spend?” and, “Am I spending too much or too little?”
Mary Ryan: Good. It’s that whole concept of, again, how would we know? You know, the market’s down a little bit or it’s down at the end of last year, for example. I feel like I should probably pull back a little bit, but I don’t know how much, you know. And so it’s hard to know if you don’t have the right tools to be able to plan.
Chuck Riley: Absolutely.
Mary Ryan: Yes, yes. So here’s another one. This is from Cynthia from Denison, Texas, “How can I be sure I’m taking the correct amount out of IRAs for RMDs before the end of the year? Can a Vanguard advisor help me with this?”
Chuck Riley: Yes. So, yes, as I mentioned, that is probably one of my biggest focuses, I’m sure for Jessica as well, is making sure—it’s like the “blocking and tackling” of financial planning—is making sure that our clients are taking out the required minimum distributions. And we have a tool on the website that will actually calculate your required minimum distribution. It’s a service that we offer, so, you know, there shouldn’t be any doubt about how much your required minimum distribution should be.
And so that’s the tool that I rely on to make sure that they are taking it. And that’s just on money here at Vanguard. It’s not money elsewhere. So if you have assets outside of Vanguard, you’d have to calculate the RMD on that. But, you know, I set reminders for myself around October 1 to make sure that my clients are on track to either take out their RMD, or if they’ve taken out some, to take out the rest.
I will say that a lot of times with a lot of my clients, this is not something that they’re waiting to the year-end to do. They may be spending from their portfolio. The required distribution is one of the first things—is the first thing for retirees who are taking them—that we’re going to spend because you’ve got to take it out. You have to pay the taxes. So, really, it is something that we can do throughout the year. You don’t have to wait till the end of the year. And I say, don’t wait until the end of the year. I don’t wait until the end of the year. I like to do it around December 1st or so as, you know, I take a little bit of time off during the end of the year. My goal is …
Mary Ryan: No panicking.
Chuck Riley: Right, no panicking. My goal is for my clients never to have a financial planning emergency. So, hopefully, we live up to that.
Mary Ryan: Yes. And as you were saying at the very beginning, people have got a lot of things on their mind, a lot of things and the holidays and all of that. Let’s check the box on this one. Let’s get it done and take care of it. I think that’s a very good point.
So we have a live question here continuing on talking about RMDs. “Should I take my RMD early in the year, at the end of the year, or monthly? I can afford to do any of these.”
Jessica McBride: I would say if you don’t need to take it, I usually say leave it in there, let it grow, have the potential to grow. There’s no guarantee that the markets are going to go up just because you’re waiting to take your required minimum distribution. So essentially, if you don’t need it, you can leave it in there, let it grow as much as it can. And then like Chuck said, you know, in the beginning in December, just take it out. The IRS only cares that you take it out by December 31st. If you want to do that on a monthly basis or in a lump sum, that’s up to you and your own personal situation, just as long as it’s out by December 31st.
Mary Ryan: Because people have different things that they need, but if somebody’s flexible enough, again, what’s the strategy? And as you say, keep it in. Hopefully, the market’s up, but even still, you know, at least they have that potential to grow.
Chuck Riley: It really comes down to, are they spending from the portfolio? If they’re taking, you know, money from the portfolio, they need the money on a monthly basis, I mean that’s something that we’ll do for our clients is set up a monthly, almost like a monthly automatic distribution from their IRA into their bank account so they’re like getting a little paycheck. And which helps a lot of times folks feel a little more comfortable knowing that they’re getting …
Mary Ryan: They’re used to the paycheck.
Chuck Riley: They’re used to it, right?
Mary Ryan: They’re used to getting a paycheck, right.
Chuck Riley: Right. They say, “You worry about what my paycheck is and that it gets to me, and I’ll just worry about spending it.” So that’s a good feeling to have.
Mary Ryan: Yes, it is.
Jessica McBride: And I would just go back to the question just to make sure. She’s mentioned she had options. Just to make sure that you’re not selling from a taxable account and causing capital gains and then taking your required minimum distribution. So just make sure from a tax standpoint you’re not taking on too much.
Mary Ryan: More than you need to.
Jessica McBride: More than you need to.
Mary Ryan: Right, right. That’s a good point because you don’t want to take some and then you think you need more, and you don’t want to take it from that account.
Jessica McBride: Yes.
Mary Ryan: So here’s a question that I think is certainly very helpful given all these conversations that we had. Leslie from Annapolis, Maryland, wants to know, “What are the benefits of Vanguard [Personal] Advisor Services in comparison to simply putting my retirement savings into a target-date fund?”
Jessica McBride: I can start off with that one.
Mary Ryan: Thank you, Jessica.
Jessica McBride: So earlier I talked about the tax efficiency on creating the portfolio. So the Target Retirement Fund is a mix of stocks and bonds all rolled up into one fund. So if you have a Target Retirement (Fund) in each of your accounts, right off the bat you’re losing the tax efficiency that we had talked about earlier. Secondly, all the benefits or the tools that we provide, you don’t get that with a fund. That’s only available in [Vanguard] Personal Advisor Services.
So we talked about MinTax, we talked about dynamic spending, the spending fund, the health care tool, the Social Security analyzer. So if these are helpful to you, you’re not going to get that from the Target Retirement Fund. And there’s other reasons too probably that, you know, you can shed some light on.
Chuck Riley: We were talking a little bit about this question before and, you know, Jessica said, “The Target Retirement Fund doesn’t talk to you.” Right? The Target Retirement Fund doesn’t know who you are. Right? That’s, you know, that’s one of the things that, you know, we …
Mary Ryan: It doesn’t tell you to go on vacation.
Chuck Riley: Right, exactly, right? So I mean, but that’s a key part, right, because we do get to know our clients, we get to know what their goals are, what they’re trying to achieve. And in times when the market goes crazy and you’re feeling uncertain and you’re not sure what to do, you want a voice that you can trust. And trust is paramount. And that relationship that we build with our clients, that we try to build, it really is a relationship because I want the best for you, right? And I want to help you achieve your goals. And so maybe talking some of those things through.
And we might say to you, “Hey, this isn’t the time to sell.” And if it’s somebody that you’ve been working with and that you’ve trusted, and you know they’ve helped you with decisions in the past, you’re more likely to stick with that decision and say, “Okay, I know we’re not going to do that,” and make the best decision for you.
So I mean, Target Retirement Funds are great, and there are a lot of folks that can benefit from them. I’m not saying that there’s not. But, you know, I do think that there’s a help in having that relationship.
Mary Ryan: Yes. Good, thank you. So I can’t believe it, but we’re just about at the end here.
Jessica McBride: Wow!
Mary Ryan: So I’m going to ask you both just for some quick closing thoughts of things that we think people that are watching us can take away with them. Jessica.
Jessica McBride: I would say when markets are volatile and I’m talking to a client, they’re expressing their concern, it’s kind of like, “What do I do?” But as I take the onion and I peel it away and I’m asking questions, really getting to the root of their concern, it’s not really so much the stock market’s up or down or interest rates are going to go up or down. Really the root of the concern is, “Am I going to meet my goal?” That’s really the fear.
And everyone shares very similar goals—being able to retire at a certain age, keeping the current lifestyle that you’re comfortable living, or maybe passing on a certain amount to family members. So it’s really not what the market’s doing. Think about that. It’s really about your goal.
But we can help with that. We had talked about that cash flow analysis tool, that success rate. If you’re in the green and the markets are pulling back, you should feel very comfortable with your situation, confident that you’re going to meet your goal. If you’re in the yellow, well, put yourself on our calendar. Let’s talk through strategies that we can do to move you back on track. That’s what we’re here to do, to help.
Mary Ryan: That’s a good way to look at it. Thank you. Chuck, what are your thoughts?
Chuck Riley: So we covered a lot of different topics, a lot of different questions, a lot of things that folks aren’t sure about. And so, you know, to me I want to encourage clients out there. So if you’re working with an advisor, that’s what we’re here for is to be a resource for you for these questions. You don’t have to wait for a webcast. You have an advisor there. You can call into Vanguard and speak to an advisor if you’re a [Vanguard] Personal Advisor client.
And it’s not just about investing. So Jessica and I are Certified Financial Planner™ professionals. A lot of our colleagues are. So we have education and experience talking about things like paying off a mortgage or estate planning. Those are all things that we’re very comfortable talking about and we didn’t even get into them here. But I would encourage you if you have any type of question during the year, reach out to us. That’s what you’re paying us for is to be there as a financial information resource to help you make good decisions.
Mary Ryan: Thank you. Thank you. We’ve covered a lot of interesting material tonight, and I think we have given you some insights into how our advisors work for you. Thank you, Jessica and Chuck, for your thoughts and expertise, and thank you, members of the Vanguard community, for joining us tonight.
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On behalf of Jessica, Chuck, and all of us here at Vanguard, thank you and good night.
All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss. Past performance is no guarantee of future returns.
Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).
Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target date funds is not guaranteed at any time, including on or after the target date.
IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.
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