Ramblings On Investing In General -- August 31, 2021

Market: the market had a huge day yesterday. Today is the last day (and last trading day) of the third quarter. One would expect a huge sell-off as fund managers lock in their third-quarter profits. But so far that hasn't happened. 

My favorite chart, US money market fund monitor, link here. These folks are earning zero percent on their money. They are also ignoring the recent $1 trillion infrastructure bill already passed and the $3.5 trillion social infrastructure bill working its way through the US Congress.

Hold that thought.

Today, from The WSJ: Fidelity wants to add 9,000 jobs by year-end. Move to meet investing demand will boost company's workforce to more than 60,000. 

Of course, this is in addition to all the independent financial advisors who use Fidelity as "their platform" to invest clients' funds.

From the linked article:

Fidelity’s hiring spree is its third in the past year, when millions of new investors flocked to brokerages like Fidelity, Charles Schwab Corp. and Robinhood Markets Inc. Including the latest push, Fidelity’s total workforce is expected to grow more than 22% this year, to over 60,000 employees.

Drawn to the market’s rally, individual investors have changed the fortunes of the brokerage industry. 

The no-commission stock trades and low-fee investment funds now offered by many firms have brought in plenty of new clients. They also have thinned money managers’ profit margins and forced them to compete on price. Traditional products, like stock- and bond-picking mutual funds, have been leaking client money.

There's some disagreement which of the three was the first to introduce commission-free trades: Fidelity, Schwab, or a third firm (whose name I've forgotten). 

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Not Ready For Prime Time

Now back to that investing article I linked some days ago: "84% of retirees are making this RMD mistake."

Link here. 

Pet peeve.

I very much enjoy informative articles on investing but when a writer categorically suggests "84% of retirees are making a mistake with regard to their RMDs" it rankles me. 

In this case, the premise of the "financial advisor" is this: if one takes only the minimum of the RMDs from one's retiree accounts, most retirees (84%?) will leave a lot of money in their retirement accounts at time of death.

Well, la de da.

Maybe, that's their goal, or maybe there are other reasons.

The advice of this writer might hold some water now with the US market doing so well, but if the market collapses and/or if fund managers manage their funds poorly, that advice may be wrong.

Retirees' biggest fear is their "retirement money running out" before they die, and that's why they may be taking the minimum required. I would assume intelligent folks would take out as much money as they need/want, while at the same time taking into consideration how long they might live and whether the market might collapse.

However, the bigger issue is this: the writer implies, or states outright, that folks are only taking the minimum required. What study is that based on? This would be incredibly difficult data to come by. 

 But I digress.

Many folks with retirement accounts and RMDs don't need the money in the first place. For many, it was wonderful when no RMDs were required in 2020 due to Covid-19 (which made no sense, by the way) and it was even more wonderful when the age was moved from 70 1/2 to 72 years of age when RMDs are first required. That was huge and although it looks like it is not going to happen, there were many in Congress who were hoping to advance that age ever further, to age 74 years of age, or even 75 years of age.

If one doesn't need the money, the worst thing to do is take money out of a tax-deferred account. That was the first thing I thought of when reading this article -- and suggests to me that the writer is incredibly naive. If one needs cash, and all things being equal, wouldn't it be better to take money out of a non-tax-deferred account. In fact, if dividends are being automatically reinvested in a non-tax-deferred account, perhaps it would be best to take out those dividends first if one needs cash. They are taxable, regardless.

Suppose I have two accounts side-by-side, one is a tax-deferred-retirement account, the other is a simple brokerage account, taxable, with dividends automatically reinvested.

Suppose I don't need the cash. Perhaps my pension, social security, my spouse's social security, other sources of income, are more than adequate.

Wouldn't it be great if I could substitute / replace the RMDs as required by current law from the tax-deferred account with an identical withdrawal from the non-tax-deferred account. 

If the taxes paid to the IRS were identical, why would the IRS care whether the fungible cash came from one account or the other?

As it is, because of the RMD rules, I won't touch the simple brokerage account -- I will let it grow (hopefully) and leave it to my heirs who will benefit from the stepped-up value rule (unless that changes).

Obviously the writer of this article is much smarter than I so I must be missing something. But for the life of me I would wonder why I would be advised to take more money than necessary from a tax-deferred account. 

My hunch: Congress knew this also, and that's why they established RMDs.