Free at 40
by Donna Rosato

February 22, 2008

[Continued, page 3]

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.

THE ADVICE

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.

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The opinions and views expressed in this publication are for general information only and are not necessarily those of Mutual of America Life Insurance Company.

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