A May-December retirement plan

Separated by 13 years, these big savers want to know whether they can afford to retire together.

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By Joe Light, Money Magazine staff reporter

purdy_kramer.03.jpg
Jana Purdy, 61, and Tim Kramer, 48
Lakewood, Colo.
Goals
  • Retire together in less than 5 years
  • Simplify their finances
  • Winter in Florida or California
  • Assets
  • $630,000 in retirement accounts
  • $595,000 in taxable investmenets
  • $550,000 in home equity
  • $50,000 in emergency savings
  • portfolio.gif
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    (Money Magazine) -- Jana Purdy, 61, jokes that she robbed the cradle when she nabbed her husband Tim Kramer, 48. The pair met in a volleyball league, and they got married just before a tournament in 1988.

    For the past 20 years, their age difference was more of an amusement than a challenge. But with Jana hoping to retire soon - in less than five years - the couple are starting to worry if it might complicate their plans. After all, when she turns 66, Tim will be only 53.

    Yet Tim still hopes to quit at the same time as Jana. "We've tried to look at retirement calculators and programs that would let us know what we can do, but they try to squeeze every kind of couple into a shoebox," he says. "We don't fit into that shoebox."

    Where they are now

    Fortunately, this couple took retirement savings seriously and started socking away money decades ago. On their combined annual income of around $120,000, Tim, an engineer for a safety-equipment company, and Jana, who runs her own small law practice, have accumulated $1.2 million.

    With no kids, these world-class savers are socking away some $45,000 a year - more than a third of their income - by maxing out their 401(k)s and IRAs and saving additionally in a sprawling collection of taxable investments and variable annuities.

    Tim is also vested in pensions through his current and a former employer. What's more, they have around $550,000 in equity in their Lakewood, Colo. home and a nearby condo they own and rent out to Jana's sister Pam.

    Still, it's a challenge to keep up this savings pace. In 2006, Jana was diagnosed with chronic fatigue syndrome. The illness forced her to scale back her work and added $16,000 in annual unreimbursed medical expenses.

    What they should do

    Time their withdrawals properly. Once they pay off their modest mortgage in three years, Tim estimates that he and his wife can get by on about $43,000 a year. But they want to live a little larger once they ditch their jobs. At the very least, they hope to spend winters near family in Florida or California. "My illness has made me really cold-sensitive, and Colorado winters are tough," Jana says.

    Doing so will probably push their annual income requirement up to $80,000, says Karlton Childress, a Denver-based financial planner. But that's still a realistic target - even if Tim retires early, Childress says.

    Assuming Jana and Tim retire in five years, market appreciation and their ongoing savings should push their nest egg to nearly $2.1 million, Childress says. That, plus Jana's Social Security benefits - which she'll start tapping at 66 - should be more than enough to generate $80,000 a year safely. It should also allow Tim to wait until his mid-sixties to draw on his pensions and avoid having to settle for a permanent early-retirement reduction in his monthly benefits.

    Unravel their variable annuities. Lured by the promise of "guaranteed returns," Tim and Jana are investing in two variable annuities. But Childress thinks their accounts' high fees make them bad long-term investments.

    The first annuity, which they purchased six years ago, has a value of $115,000. Its surrender charge has steadily dropped from 8% to 5% over the past few years. Once it hits zero, Childress recommends they get out of it.

    Streamline their investments. Childress says the couple are on target with their investment mix, with roughly 70% of their portfolio in stocks and 30% in bonds. Their real problem is how chaotic their portfolio is.

    Between them, Tim and Jana own about 90 funds and stocks spread among three brokerage accounts, three IRAs, two 401(k)s, two variable annuities and an old-fashioned Keogh account.

    Most troubling is the fact that Tim and Jana keep almost $215,000 in brokerage accounts they use to trade stocks. Childress suggests they trim that down to $50,000 of "play money." The rest would be better off in diversified funds, like Vanguard Total Stock Market (VTSMX) or Vanguard Total International Stock (VGTSX), which they can buy and hold.

    Tim, the stock picker of the two, thinks he's doing just fine trading securities in those accounts. But Jana is in favor of liquidating at least her share. "If we're looking to retirement, let's 'play' with less money," she says, "and invest in things that we don't have to spend as much time watching."

    The makeover
    • Problem #1: Tim, who's 13 years younger than Jana, will need to support himself for many more years if they retire together.
    • The plan: Retire together but use only their retirement savings and Jana's Social Security benefits to generate income early on.
    • The payoff: By relying on these sources first, Tim can delay tapping his pensions, maximizing the benefits to cover his long life expectancy.
    • Problem #2: The couple set aside nearly a fifth of their $1.2 million nest egg to trade, a risky strategy.
    • The plan: Liquidate most of those accounts and reinvest the money instead in low-cost mutual funds they can buy and hold.
    • The payoff: Not only will this keep their trading to a minimum, it will simplify their portfolio of stocks and funds.
    • Problem #3: Lured by "guaranteed returns," they're invested in two high-fee variable annuities.
    • The plan: Pull the money out once the surrender charges disappear, and invest in low-cost mutual funds.
    • The payoff: They'll free themselves of the high fees that are cutting into their returns.
    •  To top of page
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