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Saving for Retirement

When It's Time to Retire

You can call it quits before you reach 65 by saving as much as you can now then cutting expenses and squeezing the most out of your investments in retirement.

John and Pam Winkelman are the envy of their generation. While many baby-boomers prepare to work longer to pad their retirement savings, the Winkelmans will call it quits this spring, just after both turn 60. To reach this goal, they have been super savers: Although he plans to work only three months this year, John will put $20,000 into his 401(k) plan, the maximum allowed in 2006 for people 50 and older. To make their money last, he and Pam will now turn their attention to cutting expenses and squeezing the most out of their investments.

With a grown daughter and no college bills, John, vice-president of engineering for a steel company, was able to fully fund his 401(k) and save money on taxes. If your combined federal and state tax bite is 30%, every $1,000 you put aside in a 401(k) or other employer-provided plan saves you $300 -- extra money that grows tax-deferred in your retirement account. Workers younger than 50 can contribute as much as $15,000 this year, a tax savings of $4,500 in the 30% bracket.

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John also took advantage of a provision in his retirement plan that allowed him to roll over the bulk of his 401(k) funds to an IRA once he turned 59frac12;, even though he was still employed. The Winkelmans entrusted the money to their financial adviser, Therese Meike of A.G. Edwards. They hope to improve their investment choices and boost their return from 6% to 10% after expenses through a portfolio of actively managed accounts and exchange-traded funds.

When their home in Naperville, Ill., is sold, John and Pam can pocket as much as $500,000 in tax-free profits. They plan on using some of that money to pay off the mortgage on their lakeside house in Boulder Junction, Wis., where they'll live full time. The remaining home-sale profits, plus John's final paychecks and bonus, should carry them through their first year of retirement without having to touch their savings.

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Downsizing from two households to one will cut the Winkelmans' expenses considerably. Not only will they save about $7,000 a year in property taxes, but they'll also eliminate the gasoline bill on their 700-mile round-trip drives to the lake.

Pam and John -- who were childhood sweethearts and have been married for more than 40 years -- will hire a company that specializes in estate sales to sell most of the furnishings in their main house. They'll donate anything that's left over to charity and deduct the fair market value on their tax return. (If they need a furniture appraisal, they can get an expert estimate for $10 by uploading a digital photo and sending other information to WhatsItWorthToYou.com.)

Once they need income from their investments, the Winkelmans plan to tap their taxable accounts first. That way they'll pay a maximum capital-gains tax of 15%, rather than a higher rate on withdrawals from their retirement savings, which are taxed as ordinary income at rates up to 35%. In two more years, when they turn 62, they'll begin taking social security benefits, reducing the income they'll need to withdraw from savings.

The Winkelmans' biggest retirement expense will probably be health insurance, on which they've already received quotes as high as $18,000 a year. To trim the premiums, they hope to buy a high-deductible health plan and possibly set up a health savings account, which will enable them to pay out-of-pocket expenses with pretax dollars.

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And with a low-key, low-budget schedule of activities, such as snowshoeing and water sports, they'll save money on entertainment. Pam and John plan to spend most of their free time volunteering for animal-rescue groups and at their church and an outdoor discovery center for local schoolchildren -- not to mention soaking up priceless lakefront views.

PUMP UP YOUR YIELDS | Move to a high-rate money-market fund or CD

Cash is king. Yields on money-market mutual funds have climbed from less than 1% to almost 4%, making this investment one of today's best values. There's no need to park your money in a bank account paying less than 1% when all the ultra-safe investments below yield significantly more. And don't be put off by banking from a distance. "For an extra one or two percentage points, you should be happy to drop your check in the mail," says Greg McBride, of Bankrate.com. -- Steven T. Goldberg

Money-market mutual funds Tax-free money-market funds Bank money-market accounts Bank certificates of deposit
The average taxable money-market fund yields 3.8%, according to iMoneyNet. But why settle for average. Vanguard Prime Mone Market (www.vanguard.com; 800-635-1511) and TIAA-CREF Money Market (www.tiaa-cref.org; 800-223-1200) pay 4.1%. with annual expenses of just 0.3%. If you're in the 28% federal tax bracket or higher -- $119,950 or more in adjusted gross income for a couple -- consider a tax-free money-market fund, such as Vanguard Tax-Exempt Money Market. It yields 2.88%, which is the equivalent of a taxable yield of 4% in the 28% tax bracket or 4.3% in the 33% bracket. If your state income tax rate is higher than 6% or so, you may do better in a single-state money-market fund that's exempt from both federal and state income taxes. HSBC (www.HSBCdirect.com; 888-404-4050) yields 4.8% on a deposit. Umbrellabank.com (866-242-9175) pays 4.6% on a minimum deposit of just $1,000. One advantage of a bank money-market account: You can withdraw your cash at any time. Bank CDs require you to tie up your money for a certain period of time. On average, six-month CDs are yielding 2.9% and 12-month CDs yield 3.4%, according to Bankrate.com. But Chicago's Corus Bank (www.corusbank.com; 800-555-5710) is paying a juicy 4.8% on a six-month certificate and 5% on a 12-month CD, though you must deposit at least $10,000.