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Naked With Cash: Laura and Leon, May 2014

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Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs).

For more information, read this introduction.

This year, we have four participants who will share their financial reports, exposing the results of their financial choices. Each participant is paired with one of our Certified Financial Planners. The experts will provide insight and guidance that will help our participants take their finances to the next level by the end of 2014. Learn about this year’s participants and experts.

Laura recently received a raise, the combined household income for Laura and Leon is more than $125,000 a year. They want to tackle their student debt, and perhaps start a family soon. They hope to pay better attention to their finances in order get on track for a comfortable retirement, and to ensure that they are in a good position when they decide to have children. (Read last month’s update.)

After reading Laura and Leon’s comments, you can read commentary from Roger Wohlner, CFP. Roger Wohlner appears courtesy of The Chicago Financial Planner. This month, there is a focus on changes to income.

Laura and Leon’s Net Worth Statement

Laura and Leon’s Income Statement

Comments and analysis from Laura

This is the first month we’ve posted where our expenses exceeded our income, yet our net worth has improved in every account. This apparent deficit is more a byproduct of the peculiar way I set up this expense sheet. I do certain things like show our student loan payments with both the minimums and the extra we pay. By one set of reasoning this makes sense because anything I pay toward student loans is gone for good, yet from a net worth perspective this payment has no effect.

By comparison, I don’t show an expense for the automated deposits I make to my Roth IRA every month because that money is still there and available if I want it. It’s been interesting and educational to discover that even something like “list your income and expenses” is not always so simple.

One thing I think I will do to at least make my expense sheet more consistent is go back and show our paycheck withholding toward insurance, taxes, and 401(k) contributions. This will take a bit of work in going back and finding all the information, but I think it will ultimately paint a more complete picture.

I think it’s safe to say that Leon and I are “working for the weekend” employees. We’re going to work hard to do our jobs well, but it’s our time away from work that is most meaningful to us. Naturally the prospect of retirement is very important to us, but that’s about all we’ve figured out. We really don’t know how much we’ll need, when we want it, where we’ll be, or what kind of lifestyle we ultimately want to support, so the basic plan for now is simply to save as much as we can stomach and hopefully figure out the rest later.

In terms of actual numbers, we’re maxing out our Roth IRAs and contributing the minimum amount to our 401(k)s to get the maximum match from our employers. For 2014, this amounts to $11,000 to the Roths, $6,880 to our 401(k)s from us, $2,900 from employer matches, and $1,292 from company profit sharing. This totals $22,072 or 17.8% of our pre-tax salaries.

That’s not bad, but is it enough? To try to answer that, I set up a spreadsheet where I assumed a modest pay increase (2%) and investment growth (6%) from year to year. If we followed this plan and did nothing else, I estimate we’d have about $3.8 million, or 14 times our final combined salary, by the time we are 67. This is a very boring life, but as a worst case scenario it’s just fine.

What I’d rather do is pay off the student loans, then buy and furnish a modest house with low rate mortgage, then increase our 401(k) contributions all the way to the maximum. If we do that for long enough, we may even have the option to retire early, or travel the world, or become a stay-at-home parent, or any combination of worthwhile pursuits. Hopefully all this will shake out in due time.

Feedback from Roger Wohlner, CFP

I wouldn’t get too upset about the slight deficit in income this month. Overall, I continue to think you are doing a good job of saving and working down your student loan debt.

Certainly if you want to adjust your methodology to reflect various paycheck withholdings that would make sense, though I’m not sure that I would take the time and effort needed to go too far back to adjust your income. This is more important on a going forward basis in terms of making sure that spending stays in line with your income and net cash inflows.

As far as your retirement spreadsheet the one caution is that linear return assumptions can be misleading. There are a number of calculators that use Monte Carlo and other simulation tools to simulate the fact that market returns will fluctuate. This helps reflect that fact that markets can and will have extreme down years from time to time. At your ages I’d use this as a directional tool and suggest revisiting annually. Your focus should be on saving as much as you can for retirement early on to allow for years of growth. Time is your greatest ally at this point in your lives.

Feedback from Luke Landes

I don’t know if $3.8 million will be “enough” to retire at age 67, but you will undoubtedly be far ahead of most people. Just the fact that you’re thinking about this — and spent some time running the numbers — shows that your minds are in the right place for reaching your goals. Your dedication to investing for retirement will, statistically speaking, ensure you are prepared.

I would suggest taking some time to really think about the lifestyle you want, and when you want it. When I saw my father for dinner on Father’s Day, we discussed his upcoming retirement. He’s past traditional “retirement age,” but has avoiding leaving his work. He makes good money from what I can tell, and is probably financially capable of retiring, but he hasn’t. He doesn’t really know what he would do with his time. Here’s the problem: while he’s still healthy, he’s not physically able to do many of the activities he was able to do ten years ago, and with some of the activities he is still able, he’s not that agile. I think I will address this in an upcoming article.

This is a prime visualization that to me says, “Don’t wait until retirement to do everything you want to do with your life.” I think this is something people easily recognize, but seeing it happen in person makes it more real.

So think about how you want to live your life, set some lifestyle goals to guide your financial goals, and keep “working for the weekend” so you can enjoy your life. Yes, it’s an upper-middle-class ambition, and a luxury many people in the United States (not to mention beyond the nation’s borders) will not achieve, but in your particular situation, with a combined six-figure income, it is within the realm of possibilities.

Updated July 1, 2014 and originally published June 26, 2014. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 4 comments… read them below or add one }

avatar Jake and Allie

Laura,

Amazing job paying down the debt! over 21% in 5 months is great!!!!

Our June is going to be like your may, spent more than we made. :(

Reply to this comment

avatar Laura

Hey Jake and Allie.

I admit I hadn’t even realized we’d made that kind of progress on our loans until you pointed it out. All I could see was the fact we were making huge contributions each month yet there was still a huge amount left behind, like emptying a pool one bucket at a time. Thanks for giving me a change of perspective.

I wouldn’t sweat about your June expenses too much. You guys have shown an amazing month to month savings rate, but it’s your long term average that really tells the story. If that number dips into the negative, then maybe we can consider the frowny-face. Until then, keep using this. :)

For what it’s worth, I have revisited our Income/Expenses breakdown to now include our gross pay, payroll taxes, and insurance withholding. My May month now shows a Net Income of $668 instead of a $216 loss. Of course the bulk of that has gone to illiquid long-term savings, so it’s a matter of opinion as to whether this was a “good month” or not.

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avatar Laura

Roger,

You’re definitely right that a linear projection is less than ideal for predicting growth. Until you brought it up, I’d never heard of a Monte Carlo but after some brief research I agree that this is a superior projection model. It’s not perfect, but it’s probably the best available for anyone with less than a PhD in Statistics and Economics.

I found a handful of online simulators that projected retirement fund depletion but nothing for the accumulation side. So I went into Excel and made my own simulator using our numbers.

I found one site that had annual market returns from 1928 to 2013 and another that contained inflation information. With this, I ran first 100, then 500 simulations for a portfolio containing 100% stocks (this is also less than ideal but I haven’t been able to find complete information on the returns of bond markets). The results were similar. I defined “success” as inflation adjusted monthly income near our current spending level at various annual Safe Withdrawal Rates.

My question to you is this: what do you believe is an appropriate SWR and why? Do you believe the Trinity Study of the 1990s projecting a 4% SWR is still applicable or has enough changed that a more conservative 2% or even 1% is better?

Thanks,
-Laura

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avatar Roger@The Chicago Financial Planner

Laura I’d love to see the excel spreadsheet if you wouldn’t mind sharing. It sounds like Monte Carlo has resonated with you. Again I like this approach in that it tries to take variations in investment returns into account, though like any planning tool it is an imperfect guide.

As far as a safe withdrawal rate at your age this really shouldn’t really enter into your thought process. Your total focus should be on accumulating as much as the two of you possibly can while you are young.

I use these percentages as a guide or perhaps a talking point with clients or prospective clients as a “back of the napkin” tool to see if their expectations are in the ballpark. However, my client base is generally in their 50s or older and close to or in retirement. The 4% rule implicitly assumes a 30 or 35 year life span. I had the good fortune to see fee-only planner Bill Bengen speak at a conference a few years ago, Bill is the investor if this model.

The reality is that I try different spending rates in the Monte Carlo simulations to get a range of what is doable for a client and aside from a quick estimating tool I never use a percentage rule in my planning for a client.

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