Investor Profile: Nearing Retirement

Investors: Ron and Maria Johnson
Age: Ron is 52; Maria is 50
Occupations: Ron is a senior sales manager for an office-automation company ($82,000); Maria is an administrative assistant at a law firm ($38,000)
Family status: Married, three children (25, 23, and 20)

Over the past three decades, there have been sweeping changes in how people plan – and pay for – their retirement.

Ron and Maria Johnson certainly know that. In the roughly 30 years since they entered the job market, they've seen the emphasis shift away from pension plans with clearly defined benefits, and toward individually directed retirement planning that depends on IRAs, 401(k)s, and other investments.

They've seen both the upside and the downside of these changes. Ron, who's been with the same employer since his late 20s, is covered by a traditional pension plan with defined benefits. In addition, he invested in IRAs in the years that they were universally tax deductible, until 1986. If Ron stays with his company for 10 more years, he'll qualify for a full pension.

Maria's career has been different. She was a secretary in the early years of the couple's marriage, but left the profession for a decade when their children were young. Since her return, she has worked for several different employers – the result of her husband's job transferring him periodically. She didn't stay with any single employer long enough to accrue pension benefits, though she has had the opportunity to participate in three different 401(k) plans. She seized those opportunities, always setting aside the maximum amount allowed.

The Johnsons have a lot to think about as they put together their retirement plan. Ron is concerned about getting his full pension, because his company has been restructuring its sales force. He won't be left high and dry, because he already qualifies for a partial pension and has significant taxable investments built up. Nonetheless, he knows he needs to plan more actively for the couple's retirement.

The Johnsons have some flexibility because most of their family expenses are behind them. Their youngest son still has two years of study to complete at a state university, but otherwise their children are independent. However, they're wondering how to step up their retirement investing in a way that's meaningful, now that retirement is just about a decade away.

Piecing Things Together

One step in retirement planning is taking a look at current expenses. Although the Johnsons have paid for their children's education out of current income and investments, they may want to consider a different tack for the remaining years of their son's education. Low-cost loans are available to pay for college, and because their son is attending school in state, the tuition (and amount of borrowing) would be at a moderate level and could be paid off over a lengthy period. Similar programs to help pay for a comfortable retirement simply don't exist. This step would allow the Johnsons to free up more of their income for retirement investing, and help them avoid dipping further into their investments.

Fortunately, the Johnsons have many tools at their disposal to make the most of the money they set aside. For one, they are eligible to contribute $5,500 each to a Roth IRA annually. And, thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001, they can both take advantage of $1,000 "catch-up" contributions available to individuals who will reach age 50 before the end of the tax year. Although these contributions won't be deducted from their taxable income, as 401(k) contributions are, they will grow tax free as long as the Johnsons follow the rules for taking Roth distributions. Over the next 10 to 15 years, these investments could add up to a significant contribution to their retirement income.

In addition to investing the maximum amount possible in tax-advantaged retirement accounts, the Johnsons can also increase their rate of investing in taxable accounts. That takes more conscious effort than investing through a 401(k) or slowly building benefits in a pension plan, but the payoff can be rewarding. To make such investments a part of their monthly budget, they could consider adding to their investments with an Automatic Investment Plan (AIP). An AIP, which takes money directly from your checking account on the date you select each month and invests it in the fund of your choice, can help them to make sure that their retirement plans don't get derailed by household expenses – or unplanned splurges.

Like many other couples, the Johnsons have to contend with a degree of uncertainty as they move toward retirement, and some factors (such as the restructuring at Ron's company) are simply out of their control. By making the most of the investment opportunities that are available to them, however, they can still look forward to a comfortable retirement.

A program of regular investment cannot assure a profit or protect against a loss in a declining market.

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