Naked With Cash is the year-long series on Consumerism Commentary where seven readers’ households share their financial progress on a monthly basis. I’ve partnered with financial planners who will offer some guidance along the way. Read this introduction to learn more about the series.
SteveDH is retired, and he and his wife have two grown kids. By the time he retired in 2008, he had reached his retirement asset goal of $500,000. His goal now is to ensure his savings last as long as he does. Read his bio to learn more about SteveDH. SteveDH is on Team Roger, with Certified Financial Planner Roger Wohlner.
Keep reading to see his net worth report, which includes progress over the past year, with detail from the past several months, as of December 2012. Following the analysis from SteveDH, Roger Wohlner will offer his own thoughts and guidance from his planning perspective. Jacob Wade, a budgeting expert who publishes from iHeartBudgets, will also provide commentary.
Roger Wohlner, CFP appears courtesy of The Chicago Financial Planner.
Comments and analysis from SteveDH
We went over budget in 2012, spending $970 more than we had budgeted. Although we were under budget in four of our six budget categories two large expenditures pushed our overall budget performance into the red.
- A $3,500 out-of-pocket medical expense for hearing aids.
- $4,500 in additional income taxes, both federal and state, based on our Traditional to Roth IRA conversions ($10,000 in 2012 and $12,500 carryover from 2010).
- Fixed income cash flow: We spent 88% of our fixed income. (Our budget was to spend 85% of fixed income).
- Total income cash flow: We spent 71% of our total income.
Our cash flow for 2012 was a positive $23,842 excluding unrealized gains.
Our investments produced almost $12,000 of our total income. Their yearly performance was approximately 5.8% so overall our net worth increased by $36,667 in 2012.
2012 was an ideal year in that we spent less than our fixed income while doing the things we enjoy doing. Generally, my financial assessment follows these three rules:
- IDEAL: Spending less than our fixed Income.
- ACCEPTABLE: Spending more than fixed income but less than total income.
- TROUBLED: Spending more than our total income.
Comments from Roger Wohlner
First of congratulations on the planning you’ve done so far. Your ability to maintain a relatively frugal lifestyle is perhaps your biggest retirement asset. This is followed by your pension income.
While I might receive some negative feedback for this comment, I’d rethink the Roth conversion strategy at your age. I say this for several reasons. First I’m not sure that paying the tax is a good use of your cash. At your age (which I don’t know exactly) and your conservative investment allocation it will take you a long time to make up the cash spent on taxes. Further, you are doing this to derive some unknown tax savings benefit which I’m gathering will occur a number of years in the future. If you are working with a CFP you should at least ask him or her to run a discounted cash flow analysis to help you determine what would have to occur (i.e. how much would taxes have to increase vs. the return you could earn by investing this cash) for this to be a positive financial move.
I would tend to look at your pension income as fixed income (including Social Security?). Therefore I’m wondering if this in combination of 80% of your assets in bonds and cash isn’t a bit too conservative. I’m not advocating a huge shift to equities but you might consider ramping this up a bit to ensure that you stay ahead of inflation. I tend to like a bucket approach where retirees have a certain amount in cash (say to fund 2-5 years of retirement cash needs), another bucket that is a bit more risky (bonds, balanced funds, etc.) and then an equity or risk bucket for growth. Check out some of the articles that Christine Benz of Morningstar has written on this topic.
As far as your bond holdings go, if they are in bond funds I would suggest that you look to shorten up on the duration of these holdings.
Lastly I would suggest that you check into long-term care insurance. From what I can see a long-term care situation for either of you is one of your biggest financial risks. (I am assuming that your military service does not provide for long-term care.) You might decide not to purchase this coverage but I generally suggest that all of my clients in your age group at least check into it. It is definitely pricey.
Feedback from Jacob
Hey Steve, I like your style. Glad to follow along and help where I can. It sounds like you have a neat system going on, using a few programs to track your dollars, keeping out of debt, and living it up! I have no advice for now, but would just recommend that you continue to know where every dollar goes. I know that sometimes budgeting can be too much info, and since you value life simplicity, that sometimes lead to overlooking the details that can get you in trouble. But, as you’ve said, all you gotta do is “Manage your big S,” and you’re golden! :)