The issues aren’t quite the same as those one faces when considering the deepest aspects of personal faith and religious doctrine, but a “Roth conversion” can pose some difficult issues for investors nonetheless. And we’re going to hear much more about this going forward because of a scheduled change in the law: Unless something unexpected happens in D.C., come 2010 there will no longer be income limits on Roth IRA conversions.
There will be a lot written on the issue of whether one should convert or not, as well as endless articles describing all kinds of “strategies” to potentially leverage the change (some legitimate and others more questionable). For me, three things are important in considering this kind of “conversion”:
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How does your ability to make financial decisions change over time?
One research study suggests that, across the population, financial skill follows a hump-shaped pattern. In our youth, we start with low levels of financial knowledge. Over time, our ability grows through experience. However, as we age, our cognitive faculties begin to decline. Over time, the decline in ability outpaces the growth in experience, and as a result our net ability falls. Hence the idea of a hump-shaped curve: from a low in youth, to a peak in middle age, to a slope downward in our older years.
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Should you invest differently given the impending retirement of tens of millions of baby boomers? This is a question I’ve received from advisors and investors in recent weeks, and one which, quite frankly, I’ve given little thought to throughout the financial crisis. (It always seemed like a topic of conversation when the Dow was at 14,000 and not at 7,000.)
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This comment on Steve Utkus’ recent post about retirement struck a major chord with me:
“Our children’s incomes are not increasing, and they have their own children to support, let alone saving for their own retirement. No one is to blame or is being stingy; we simply must plan for and take charge of our own later years.”
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The national debate on health reform has me thinking about a particular angle of the question: paying for health care in retirement. Let’s put aside for the moment long-term care costs (i.e., nursing homes) and focus on regular medical care—doctors’ bills, hospital fees, drugs, and so forth.
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