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The Impact of Rates of Return on Roth Conversion Decisions and Retiree Savings Wealth.……………………………………29

Lewis W. Coopersmith, Ph. D., Professor Emeritus of Management Sciences, Rider University, Lawrenceville, NJ, and
founder and Chief Research Offi cer of VestaEdge, Inc.
Alan R. Sumutka, MBA, CPA, CGMA, Associate Professor of Accounting at Rider University, Lawrenceville, NJ.


A tax-optimal retirement savings withdrawal model, implemented as a linear programming application, is used to compare savings wealth growth when Roth conversions are permitted (RC) and when they are not (NoRC). Evaluations are made for combinations of percentage rates of return (ROR) for taxable, tax-deferred, and tax-free savings. 

PctDiff , the difference between tax-free and tax-deferred (TD) account RORs, is an important conversion consideration. When investment strategies target PctDiff s at two percent or greater, RC provides substantial benefits. As PctDiff increases, the percentage of initial TD savings that should be converted rises, the time to recover savings wealth lost to conversion-related taxes declines, and savings wealth growth surges. When PctDiff is less than two percent, savings wealth growth is small and savings wealth loss due to conversion-generated taxes persists for more than 13 years; retiree health and prospects of living long enough to realize savings wealth gains becomes a vital concern. Conversions are best made relatively early in retirement and at varying annual amounts. Conversion of all initial tax-deferred savings in the first year of retirement rarely results in maximum savings wealth growth.

Do Financial Advisors Follow Their Own Advice? Evidence from 2008-2011…………………………………………40

Dominique Gehy Outlaw, PhD , Hofstra University
Jesse Outlaw, CPA, Outlaw, Bruno, and Associates, Family Offi ce


Consistent with previous literature, we find that financial advisors’ trade recommendations do not outperform the trades that are independently initiated by their clients. At best, their recommendations outperform their clients’ selections in the short-term, but still underperform the market. What is unknown in the literature is whether it is misaligned sales incentives that cause advisors to give their clients suboptimal advice. Using transaction-level data from a U.S. brokerage fi rm, we compare financial advisors’ personal trades to their clients. We find that financial advisors do not outperform their clients, suggesting that advisors are giving clients their best advice which they, too, follow.

Expected vs. Actual Retirement Savings Behavior of Highly Educated Individuals………………………………….51

Kristine Beck, Ph.D., Assistant Professor, California State University, Northridge
Inga Chira, Ph.D., CFP®, Assistant Professor, California State University, Northridge


Using a unique sample of 318 respondents, we design a custom survey to examine savings understanding and behavior with respect to demographic attributes, long-term financial goals, and the level of financial knowledge of highly educated individuals. We fi nd that savings expectations diff er from actual savings behavior with regard to demographics and individuals’ articulation of personal financial goals. However, we fi nd a strong relationship between the level of financial knowledge and savings behavior. Financial knowledge is measured using awareness of the tax benefits of retirement savings, stock market performance, specifics of financial instruments, and self-reported financial savvy.

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Welcome to the Spring 2017 issue of the Journal of Personal Finance. We are excited to bring you six articles representing cutting edge research in the field of personal finance.

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Volume 16 Issue 1,  2017

The Home as a Risky Asset  ………………………………...7

David Blanchett, PhD, CFA, CFP , Morningstar Investment Management LLC


Despite being one of the most valuable assets in the world and one of the largest assets on many household balance sheets, real estate—in the form of homeownership—presents considerable risks that are generally poorly understood. Through an analysis, we find significant homeownership risks that are primarily idiosyncratic (i.e., not market-related), driven largely by the illiquid nature of owning a single home. We find the risk of homes is approximately double that of city-specific home price indexes (e.g., the S&P Case-Shiller Home Price Indices), with an annual standard deviation of 12%, which is approximately equivalent to the historical volatility of a portfolio invested in 60% stocks and 40% Treasury bills. While the return on house price indexes has exceeded
inflation historically (with a real return of approximately ~1%), the actual real return realized by homeowners, after considering the various costs associated with owning and selling a home, has likely been negative in real terms. Renting is often a better option for many households, especially those households with lower marginal tax rates (i.e., households that do not itemize deductions) and have shorter expected housing durations. We note significant differences in the returns, volatility, and market risk of homes and REITs; these differences suggest REITs are a relatively poor proxy for residential real estate from an investment perspective. We also identify the factors, such as home price, county unemployment rate, housing turnover, home size, and even average annual
temperature, that can diff er by region and are strongly related to the returns, volatility and market risk of homeownership. Many households may use this factor information to better approximate the risk of their homes. Overall, the impact of owning a home on the optimal total wealth financial portfolio is likely to vary significantly by household, based on the unique risks associated with the home, household wealth, and other non-financial household assets.

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Risk Tolerance and Goals-based Savings Behavior of Households: The Role of Financial Literacy.…………………………………………66

Swarn Chatterjee, University of Georgia, Athens, GA
Lu Fan, University of Georgia, Athens, GA
Ben Jacobs, University of Georgia, Athens, GA
Robin Haas, University of Georgia, Athens, GA


This study uses a national dataset to examine the association among risk tolerance, financial literacy, and goals-based savings behavior of households. The results indicate that three out of five households do not have any emergency funds set aside, and about half the households have not calculated how much money they will need for retirement. However, both fi nancial literacy and risk tolerance are associated with goals-based savings behavior,
such as saving for emergencies, and planning for retirement among households. Although risk tolerance appears to be an important factor in the savings and investment decisions of households, the findings of this study provide further evidence regarding the role of financial literacy in improving household fi nancial capability. Implications for policy makers, scholars, and researchers in the area of behavioral economics and household
fi nance are included.

Preventing Financial Elder Abuse..…………………………………………78
Kenn Beam Tacchino, JD, LLM, RICP, Professor of Taxation and Financial Planning and Boettner Endowed Professor in
Financial Planning, Widener University, Chester PA


Clients may not only need a financial planner’s help and advice when it comes to their finances— they may also need their protection as well. Because billions of dollars are financially exploited each year, planners and financial service institutions are increasingly being called upon to walk the tightrope between a client’s autonomy and a client’s need to be safeguarded. In order for the financial planner to better serve his clients we first look at the financial elder abuse problem and share examples, which highlight the scope of the issue. We then point out some red flags that will alert financial planners to a potential problem. We examine the legal requirements and protections that are germane to understanding the financial planner’s responsibility in recognizing and preventing
fi nancial elder abuse. We review actions the financial planner can take to cope with or prevent financial elder abuse. And finally, we discuss a systematic response that an organization should take to create a business culture that seriously addresses financial elder abuse.