Please enable JavaScript to view the comments powered by Disqus.

Making Your Money Last

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.

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 59#189;, 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.

A new set of rules

No more paychecks generally means you'll have to file your own federal and state income taxes each quarter. (If you're collecting Social Security benefits, you can elect to have taxes withheld from your monthly checks.) And once your mortgage is paid off, the property-tax bill that used to be included in your monthly payment becomes yet another thing you have to pay on your own.


Perhaps the biggest shock for new retirees, particularly those under 65 who are too young to qualify for Medicare, is the cost of health insurance. Only one-third of major employers now offer subsidized health benefits to their retirees, and many of those companies will likely reduce or eliminate benefits in the future. Fidelity Investments estimates that a 65-year-old couple retiring today without employer-provided health benefits would need about $200,000 to pay out-of-pocket medical costs and insurance premiums for the remainder of their lives. And that doesn't include long-term-care expenses.

John and Pam don't have retiree health benefits, but they held down their premiums by selecting a health-insurance plan with a high deductible. Nevertheless, they expect to pay about $18,000 a year for individual health policies until they qualify for Medicare.

Tap your savings

Once upon a time, retirement income was a simple affair. You received a monthly pension check and another from Social Security, and together they dictated how much you could afford to spend. If you were lucky, you had some savings on the side to take an occasional trip or fix a leaky roof.

But the days of simple solutions are pretty much over. Most retirees will have to rely on a patchwork of sources to get income in retirement. And retirees will be increasingly responsible for investing their nest egg in a way that protects their assets from a volatile stock market and inflation, and that lets them withdraw funds at a modest rate -- usually no more than 4% or 5% a year -- to ensure they don't outlive their savings.


When it's time to begin tapping their investments for income, John and Pam intend to start with their taxable accounts. They'll leave their IRAs untouched to grow tax-deferred as long as possible (to plan your finances in retirement, use the calculators at

Once you turn 59#189;, you can tap your IRA without triggering the usual 10% early-withdrawal penalty, but you will still have to pay income taxes at your regular tax rate on all your distributions. An exception is the Roth IRA, from which you can withdraw all of your funds tax-free once you turn 59#189; and the account has been open for at least five years.

After age 70#189;, you must start taking minimum annual withdrawals (based on your life expectancy) from traditional IRAs and 401(k) plans. If you don't withdraw the required minimum, you'll owe a penalty equal to half of the amount you failed to withdraw. Again, the Roth IRA is an exception. You are never required to make a withdrawal from a Roth, and you can pass it on to your heirs tax-free.

Boost your income

Need more income than savings and Social Security can provide? Fortunately, there are a number of ways to get it.

One option is to buy an immediate-income annuity. You give an insurance company a chunk of money in exchange for its promise to send you regular payments for a certain period of time, or for the rest of your life.

There are two types of immediate annuities, fixed and variable. A fixed annuity is tied to a specific interest rate, so you get stable payments for the life of the contract. With a variable annuity, the money is invested in mutual-fund-like accounts, and payments may rise and fall.

Although investing in an annuity can provide a guaranteed source of lifetime income, there's a downside: The purchase is usually irreversible, whether you live to a ripe old age (which would be a great deal for you) or get hit by a bus right after signing the contract. In that case, your money would stay with the insurance company, unless you bought protection to continue payment for a certain period of time to a surviving spouse or other beneficiary. Recently, however, some insurers have rolled out features to make annuities more flexible and, in some cases, cheaper to buy.

In general, the older you are when you buy an annuity, the bigger your annuity payment. Men receive larger payments than women because they have shorter life expectancies. (For an idea of how much income you could expect, go to

Now Vanguard has joined a handful of companies that offer medically underwritten annuities, which actually pay more if you have certain medical conditions, such as heart disease, cancer, diabetes, Alzheimer's or other illnesses that can shorten your life expectancy. Specifics vary by company.

For example, a 75-year-old man with coronary artery disease who invested $100,000 and submitted his medical records might get $1,052 a month from Vanguard, compared with $940 a month for a healthy man of the same age. That's an extra $1,344 per year. Or he could reduce the investment amount from $100,000 to $89,344 and still receive $940 each month. Medical annuities are best for people who have health problems that are being controlled, so they could live long enough to benefit from a lifetime income stream.

Sell your life insurance

Once the kids are grown or you've sold your business, you may no longer need life insurance. Rather than letting the policy lapse, you could take advantage of what's called a life settlement: You sell the policy to a third party for a portion of the face value. The buyer pays the premiums and collects the death benefit when you're gone.

When Wally Jones of Jacksonville, Fla., sold his business last year, his wife, Donna, sold a $1.5-million term policy on Wally's life to a life-settlement company for $187,500. "I wish I had known about this option sooner," says Wally. "I let several policies lapse."

The amount you'll get from a life settlement depends on your age (in most cases, you must be at least 65) and the face value of the policy (usually at least $250,000). Most life-insurance policies—including term-life policies, which normally have no cash value—qualify, as long as they are convertible. That means you can change them to universal-life or whole-life policies without furnishing proof of good health to the insurer.

Policyholders and professional advisers can get an estimate of the potential value of a life settlement using the LIVEpdq calculator at

Retire on the house

You can also generate retirement income by treating your house like a piggy bank: Consider a reverse mortgage, which lets you receive payments instead of making them.

Reverse mortgages are available only to homeowners age 62 or older. The amount you can borrow depends on your age (the older you are, the more you can borrow), the value of your house and its location. You can choose to receive the money as a lump sum, a monthly payment or a line of credit. In any case, the debt will never exceed the value of your home, and you can't be forced out of the house to repay the money. Instead, the money will be repaid from the proceeds of the home sale after you move out or die.

One downside to reverse mortgages: steep upfront fees, which make them unsuitable if you plan to remain in your house for only a few years. For more information, download “Home Made Money,” a guide to reverse mortgages, at, or go to

Get a job

Although it may sound like an oxymoron, the best source of additional income for "retirees" is simply staying on the job a little longer, or switching to part-time work. More than three-fourths of baby-boomers expect to work in retirement, either part-time or intermittently, according to a study by AARP. Most say they want to stay busy, and about one-third say they'll need money to bolster their retirement savings or replace lost pensions.

Working longer not only increases your income, it also delays the day when you'll have to tap your savings and reduces the amount you'll need to save, because you'll have to finance fewer years of retirement living. It can also enable you to wait until you reach full retirement age to collect Social Security -- and that translates into bigger checks.