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California Learning How to Succeed in Personal Finances

Giving Retirement a Trial Run Will Help Avoid Stumbling Later


Liz and Rob Cook are a two-income couple who are about to find out what it's like to live on one paycheck.

That's not necessarily a bad thing. At age 50, Liz has an opportunity to take early retirement, and in some respects, the timing couldn't be better.

She's eligible for early retirement from the telecommunications company where she has worked for the last 30 years. And if she retires by March, she can keep her fully paid health insurance and her option for a lump-sum buyout of her pension--worth about $250,000.

When Liz retires, however, the Cooks' income will be cut in half, to $50,000 a year. Can they cover their expenses--and maintain at least some of their present quality of life--without depleting the nearly $600,000 Liz plans to have in retirement savings by next spring?

For the Record
Los Angeles Times Thursday October 26, 2000 Home Edition Business Part C Page 3 Financial Desk 2 inches; 60 words Type of Material: Correction
Money Make-Over--An Oct. 17 article in the Business section incorrectly reported that a federal employee could buy long-term-care insurance through the California Public Employees' Retirement System. It also incorrectly reported the penalty for early withdrawals from an individual retirement account. The federal penalty for making withdrawals before age 59 1/2 is 10%; California imposes an additional 2.5% penalty.

Yes, as long as they practice moderation, says Sandra Field, a financial planner with Asset Planning Inc. in Los Alamitos.

"I suggest that you start acting as though Liz is retired now, that her paycheck does not exist," Field told the Cooks. "See how your life changes without her paycheck and then you can make a better decision about how things are working and how you'll have to tailor your expenses after Liz retires."

Field believes that the Cooks are likely to succeed because they've always more or less agreed on money management. They pay off their credit cards every month and contribute equal amounts to cover savings and household expenses. "Money causes so many conflicts in marriage, but we've never experienced those problems," Rob said.

Their only debt is two car payments, which total $375 a month, and the $450-a-month mortgage on their Woodland Hills home, which will be paid off in 2004. When they list their assets, they include their 20-year-old daughter, Dana ("Value: priceless!").

And after 26 years of marriage, their favorite activity is still just being together. Rob, a postal employee, loves watching sports on television while Liz works on a quilt beside him, and they often make bets on who will win a ballgame or what the weather will be, with the loser having to buy dinner.

Rob, 54, feels especially confident they can manage on one income because they've done it before: when he took seven years off to care for Dana after she was born.

"We did just fine then, and I tell Liz, if we can't live on $50,000 a year, something is wrong," Rob said.

But Liz is still worried. She hates to cook, and one of their favorite activities is eating out. She is addicted to crafting and feeds her habit with regular spending on supplies and shows. And she loves buying gifts for friends and family. She averages $800 a month on her credit card and she agrees she can trim her spending, but she likes buying for others.

"I'll still continue to shop. I'll just have to find better deals," she said. "But I don't want to diminish our quality of life. I know we can meet our expenses, but will we have enough for us to live our lifestyle?"

By pretending Liz is retired now, the Cooks can get a fair idea of how life will be on Rob's income, Field said. And they can use Liz's pre-retirement paychecks to bolster their emergency fund--now $9,000 in a money market account--to at least $15,000 to $30,000. Field also suggested splitting the emergency money three ways: a money market fund, a three-month certificate of deposit and a six-month CD to get the maximum interest while maintaining accessibility.

When Liz retires, she also expects to receive $23,000 from bonuses, unused-vacation pay and 401(k) contributions that were made after taxes early in her career. Those after-tax moneys can't be rolled over into an investment retirement account after she retires. The Cooks thought they could use that $23,000 to supplement their income for a year or so after Liz retires, but Field recommends they use it to boost their emergency savings and start two Roth IRAs.

Both Liz and Rob are healthy and should plan for a life expectancy into their 90s, Field said, which gives them more than 30 years to build their Roths. Unlike traditional IRAs, which require distributions by the age of 70, there are no such restrictions on Roth IRAs. And withdrawals from a Roth IRA are tax-free after age 59 1/2.

Ultimately, Field said, early retirement works for the Cooks because they've been diligent savers, each putting 10% of their monthly salary into 401(k) plans. When she retires, Liz will have about $325,000 in her 401(k), which, coupled with the pension amount, will give her about $575,000 to invest. Rob's 401(k) has about $115,000 now, and he expects it to grow to $225,000 by the time he's ready to retire in five years, when he's 59.

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