Retired at 40 (p. 2)

In 1999, a year after Annika was born, the Nielsens were posted to Scott Air Force Base outside St. Louis. Expecting to be stationed there a few years, they bought their first home for $189,000 in 2000. But the day they closed on the house, Todd and Julie got orders to ship out to Portugal. In 2003 they were transferred again, this time to Germany, then to London in 2004.

Todd had always considered staying in the service beyond 20 years. But with the constant moves and two deployments to Iraq (in 2003 and 2006), the Nielsens decided the extra money Todd would earn by serving longer wasn't worth the risks. Their goal sharpened again: When Julie retired at the 20-year mark in 2007, Todd would too.

But the new plan had a hitch. Their portfolio, worth about $200,000 in the late '90s, had lost nearly half its value during the stock market downturn in 2000 and 2001. "I switched into tech stocks at the worst time," says Todd.

So they went into savings overdrive. It helped that Todd had just been promoted to chief master sergeant and gotten a big raise, bringing the couple's combined income to $127,000 a year. They banked Todd's take-home pay (he earned $75,000 a year) and lived off Julie's more modest paycheck.

"We probably saved more the last three years before we retired than the previous 15," says Todd. Grocery lists were based on the coupons they clipped. "It became almost like a game to see how much we could save," says Julie. They cooked all their meals at home, shopped at yard sales and bought the kids' clothes at the thrift store on base. By the time they left the Air Force, their retirement nest egg was up to $380,000 and they were confident they could live comfortably on their pensions in low-cost St. Louis.

Last August the Nielsens finally returned to their house in suburban St. Louis. They call themselves "freshman retirees" and say the motto for this new phase of their life is il dolce far niente - the sweetness of doing nothing. Once a week Todd and Julie go to the café at the local Barnes & Noble after dropping the kids at school. "We have coffee and read the paper while the rest of the world works," says Todd.

But there hasn't been that much down-time. Todd, a three-handicap golfer before his children were born, has yet to play a round. And Julie's crafts table in the basement is covered with boxes. They're fixing up their home after seven years of renting it out, and sorting through countless boxes of belongings that had been in storage.

The biggest difficulty has been helping their children acclimate to going to school in the U.S.; they get far more homework than at the British schools they attended overseas. "If we worked, I don't know how we'd get it all done," says Julie.

The Nielsens are determined not to touch their retirement nest egg for another 10 years at least, so their savings will continue to grow and they won't have to worry about running out of money when they're older.

To get by on their military pensions of nearly $60,000 now, the couple are sticking to a strict budget. They do most of their shopping at nearby Scott Air Force Base, where they can buy everything they need for 20% less than retail. Todd changes the oil in their Ford trucks himself. Julie still clips coupons and scouts out the brand-name clothes the kids crave at the thrift shop on base.

There are definitely sacrifices. Julie talks wistfully about the neighbor who bought all new furniture when she moved into her home. The only furniture the Nielsens have purchased recently is an $800 breakfast table that they researched for over a year. And, says Todd, "we have to be the last family in America without a flat-screen TV."

The Nielsen children only chafe a little at the tight rein on spending - at least for now. None of them has an iPod. Kayla has a cell phone but can't text message. When one of the kids clamors for Julie to splurge (they know better than to ask Todd), her standard response is, "Sure, I can buy that but then I'll have to go back to work."

For now at least, the kids clearly prefer having their parents around full time. "I get a lot more help with my homework," says Kayla. When Annika gets home from school, Todd jumps on the backyard trampoline with her. "My parents are at every one of my soccer games," Colin pipes up. And they have a few splurges: season passes to Six Flags amusement park and season tickets to watch the St. Louis Blues.

Todd and Julie don't want to live as frugally as they do now forever. They'd both like to travel and look forward to the day when they don't have to strategize over every penny they spend. Their biggest worry: how they'll pay for college for all three kids.

"We want to give them the opportunities we didn't have," says Todd. But they don't have any money set aside specifically for college. They hope the kids will go to state schools to keep costs down and that they'll be able to cover the bills through a combination of current income and financial aid. But they concede that may not be realistic. Still, Todd and Julie are determined not to return to work. "As hard as it was working when the kids were younger, I can see how much they need us now," says Julie.

Money consulted Jack White, a St. Louis financial planner, Ellen R. Siegel, a certified financial planner in Miami and Mark Kantrowitz, publisher of FinAid.org. Here's what they recommend:

GROW THE NEST EGG... At ages 40 and 44, Julie and Todd need to make sure they'll have enough money to live on for the next 40 to 50 years. Fortunately, their pensions will be adjusted for inflation. But for a more comfortable lifestyle, they need to keep adding to their portfolio for the next 10 to 15 years at least and keep a lid on spending.

If the couple can boost their savings to $8,000 to $10,000 a year (from $5,000 a year now), White calculates, their $380,000 portfolio will grow to about $1.3 million in 12 years, assuming an 8% rate of return. At that point, he says, they could start withdrawing $50,000 a year to supplement their pensions without depleting the portfolio - and they'd still only be in their fifties. But even if they don't add to their $380,000 nest egg, it will grow to $1.2 million over the next 15 years or so, White says, as long as they refrain from making withdrawals in the meantime.

...AND PROTECT IT Todd and Julie risk blowing their hard work by not having a more diversified portfolio, says Siegel. "What Todd has done lately with their portfolio - concentrating it in large-cap value stocks - has worked well," says Siegel. "But for the best shot at surviving any shocks in the market, they need to be more diversified." She recommends this mix: 30% large-cap growth stocks, 30% large value, 20% in bonds, 10% small-cap and 10% in foreign stocks. "By spreading their investments among assets that aren't correlated with one another, they'll reduce their risk and volatility," says Siegel.

STRATEGIZE FOR COLLEGE Even though their income is fairly modest, the Nielsens' assets are significant enough to have a big impact on their eligibility for financial aid, says Kantrowitz. The assets that aren't in a retirement plan will be taken into account when colleges decide how much aid to offer, and their expected family contribution could be as much as $20,000 a year at a private school.

The couple could lower that assessment if they use some of their savings to pay down their mortgage before Kayla enrolls, since home equity is not counted in the federal aid formula. But that would mean giving up growth in their portfolio.

Alternatively, if they could reduce their taxable income below $50,000 through the use of deductions and credits, their assets would be ignored entirely in the aid analysis, says Kantrowitz. But that strategy will have to wait until Kayla is already in college and qualifies for tuition and student-loan tax breaks, since the couple aren't eligible for any other write-offs.

Best bet, under the circumstances: Once the kids are in college, divert the $8,000 to $10,000 currently earmarked for savings to paying tuition bills. That's enough to cover the tab at an in-state public school, and the Nielsens' portfolio will continue to grow, albeit more slowly.

CONSIDER PART-TIME WORK The Nielsens don't really want to hear this one. But as a dental hygienist and a fire fighter they both have skills that are transferable to the private sector, and the extra income could help them pay down their mortgage faster and cover any unexpected expenses, says White. Plus they'd be able to put savings in a tax-advantaged account like an IRA, since these retirement plans can only be funded with earned income.

Todd is eager to work on rejiggering the mix of investments in the couple's portfolio, and he and Julie are weighing the various college strategies proposed. But while they say they'll consider taking a part-time job down the road if they must to help with college costs, they are for now, as suspected, completely resistant to the idea of working for pay again.

Their new life is simply too sweet. Todd is coaching Colin's soccer team and has plans to fix up a '65 Barracuda. Julie hopes to volunteer at a pediatric ICU and is eager to put together scrapbooks of family photos from their stints around the world.

"We love the freedom we have with our time," says Julie. And they're particularly looking forward to the day 10 or so years from now, when the kids are in college and they can finally start tapping their savings and spending a little more freely - traveling, perhaps, and decorating their home. Says Todd: "That'll be when our real retirement begins."

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