Financial Shuffling

I have been and will be doing a lot of rework on our financial plans. In December, 2008, I recharacterized my Roth IRA conversion, and started changing the allocation of funds to different investment managers. This month, I'll be transferring funds to make our 2008 IRA and our 2009 college 529 contributions. I'll also be finalizing the allocation across investment managers. Finally, I'll be looking at opportunities to generate regular income in the short term.

Recharacterization. In 2008, I transferred stock from my traditional IRA to a Roth IRA, in the form of a Roth conversion. Taxes were to be paid on the fair market value of the stocks, but a conversion avoided the 10% penalty. Unfortunately, the value of the stock dropped significantly in 2008, meaning that I would owe about 50% more taxes, than if I had done the exact same conversion of stock at the end of 2008.

Fortunately, the IRS allows undoing a Roth conversion, in a process called recharacterization. By doing so, I avoided paying taxes on the amount that the stock lost in 2008.

For reference, an 2008 IRA recharacterization can be done anytime up to the due date of the 2008 tax return, including extensions, i.e. October 15, 2009. A downside is one is restricted from making any further contributions or conversions for 30 days or the next tax year, whichever is later.

Reallocation. While 2008 was a difficult year for investing, we have maintained the funds we have invested in the stock market. Recently, I decided eliminate one manager from our managed accounts and reduce funds invested in another. In January, I will be eliminating another manager. The main reason for doing this is to reduce exposure to financials and increase exposure to consumer staples and health care.

We did raise about 10% cash at the end of the year which will be allocated in the month of January. By the end of the month, I expect to reinvest these funds, some of which will be going to 529 plan and IRA contributions. However, at this time, I am still not adding any new money.

Refining. Our current withdrawal rate is 3.5% from our retirement savings, up from 2.6% when our investment portfolios were much higher. Unfortunately, we will have a significant increase in health care premiums for 2009, to about 5% of last year's expenses. We've reviewed our expenses and decide to make a conscious effort to reduce spending by 5% versus 2008, meaning we will need to cut about 10% total from last year due to the health care increase. Assuming the stock market is flat, this will make a slight reduction in our withdrawal rate of 0.2%, not significant, but helpful. We will continue to look for opportunities to reduce expenses.

With interest rates coming down, we're investigating the potential of refinancing our mortgage. We currently have a 5-3/8% 30 year fixed rate. If we can get below 4-1.2 % , we'll give serious consideration to refinancing.

Finally, I think it's time to give serious consideration to job options to generate higher regular streams of income. I will continue to give the part time seasonal work a chance, but I may need to consider full time options if the market continues to have poor returns in 2009.

Overall, 2008 has been quite a financial shock to our early retirement plans, from which it may be challenging to recover. The one silver lining is that it happened early in our retirement phase, and thus, we can have more options we can use to address the challenge.

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This is not financial, tax or retirement advice. Please consult a professional advisor.

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