Make Your Money Last a Lifetime
The days of a simple source of retirement income are over. Most retirees will have to rely on a patchwork of sources.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
February 2007
Advertisement
Editor's note: This article appears in Kiplinger's special issue Success With Your Money.
Recent surveys indicate that many baby-boomers intend to work well beyond normal retirement age. But John and Pam Winkelman march to a different drummer -- and they were able to walk off the job early, thanks to years of hard work, diligent saving and a run of good luck.
The Winkelmans were among the first wave of boomers who turned 60 this year. Last spring, shortly after celebrating their 60th birthdays, John and Pam sold their house near Chicago and moved to the lake house of their dreams in Boulder Junction, Wis.
Thanks to a carefully planned exit strategy, which took full advantage of investing and tax-saving opportunities, their new phase of life is off to a good start. Now their challenge is to figure out how to turn years of saving into a dependable stream of retirement income -- and to make it last for decades.
Retirement countdown
Despite working only three months this year before calling it quits, John took full advantage of his company's 401(k) plan. Because he was over 50, he was able to stash the maximum $20,000 in his tax-deferred retirement account and lower his taxable income.
If your combined federal and state tax bite is 30%, every $1,000 you put in a 401(k) or other employer-provided plan saves you $300 in taxes—extra money that grows tax-deferred in your retirement account. Workers under 50 can contribute up to $15,000 this year -- a tax savings of $4,500 in the 30% bracket.
John also took advantage of a provision in his retirement plan that let him roll over the bulk of his 401(k) funds to an IRA once he turned 59½, even though he was still working. He entrusted the money to financial adviser Therese Meike, of A.G. Edwards, who was able to boost investment returns from 6% to 10% after expenses with a portfolio of actively managed accounts and exchange-traded funds.
Rustle up cash
Childhood sweethearts married more than 40 years, the Winkelmans had accumulated a lifetime of possessions. When they sold their house in Naperville, Ill., they sold most of their furnishings to accumulate extra cash and donated the leftovers to charity. That will pay off with a nice tax deduction.
Like all married homeowners, John and Pam were able to shield up to $500,000 of the profit from their home sale from taxes (individuals can claim up to $250,000 tax-free). There's no age restriction, and you don't have to roll over your profit into your next house.
John and Pam used some of the money to pay off the small mortgage left on their lake house and stockpiled the rest. Together with John's final paychecks and bonus, they should have enough cash to tide them over for a year or so before they have to touch their savings.
Downsizing from two households to one also reduced their cash-flow needs, including a savings of about $7,000 a year in property taxes. And eliminating the 700-mile round-trip drive between Naperville and the lake house will cut gas costs considerably.