Investor Profile: Living in Retirement

Investors: Sam and Margie Franklin
Age: Sam is 66; Margie is 63
Income: Both are retired from full-time work; Margie works part-time at a children's library.
Family status: Married, with four grown children

Even when you've reached the finish line, there's still some planning to do.

Sam and Margie Franklin are two happy retirees. Their retirement income includes monthly Social Security and pension payments, as well as withdrawals from traditional IRAs they invested in every year from 1982. Through careful planning, they've been able to build a retirement portfolio that all together gives them an annual income of $50,000 – enough to enjoy the kind of retirement they'd planned.

They favor inexpensive, active recreation – traveling to nearby parks for light hiking most weekends in the spring, summer, and fall. Sam enjoys working in his woodshop, making toys for the family's grandchildren and occasionally selling some handmade furniture to neighbors. Margie works part-time in a children's library, partly for a little extra income but mostly because she enjoys the activity. She puts most of the money she earns away.

The Franklins' house is paid off, and while they don't have an extravagant lifestyle, neither do they have extravagant tastes. The only real splurge in their budget is for twice-yearly visits to visit their children and grandchildren out of state.

Sam and Margie got their retirement off to a good start years ago by making yearly contributions to traditional IRAs – even after these contributions were no longer tax deductible for them. They continued to enjoy the benefits of tax-deferred growth, and also built substantial assets to supplement their pension and Social Security income. In anticipation of retirement, they put most of these assets into bond mutual funds and money market funds.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although Wells Fargo Money Market Funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

Sustaining a Comfortable Income

The Franklins can count on a fairly steady level of income from Social Security and Sam's pension. Although his Social Security payments will rise along with inflation, his pension won't. That's why the Franklins may need to extend their investment vision a bit.

Inflation has been running at a rate of about 3% in recent years. However, even that low rate can erode buying power over time. To keep the same standard of living 10 years from now with 3% inflation, the Franklins would need an income of more than $67,000. There's also no guarantee that inflation will continue to run at such a modest rate. With only a portion of their retirement income set to increase directly with inflation, the Franklins will need to boost the return on their IRA portfolio.

Bonds are an important part of almost any portfolio. Over the long term, though, stocks have provided the kind of growth potential that can allow investors to keep ahead of inflation. Even though the Franklins are already retired, generating a comfortable level of retirement income remains a long-term goal for them. That's because their retirement could very well run for 25 years or more.

To enjoy those years to the fullest, Sam and Margie may want to put more of their IRA assets into stock mutual funds, perhaps half of their assets or slightly more. Given their risk tolerance, they'll probably want to focus on those that take a relatively conservative approach.

Because they're just at the beginning of their retirement, the Franklins may want to consider continuing investing new assets toward their long-term goals. Thanks to Margie's earnings from the library, they're still eligible to contribute the maximum $5,500 each per year to a Roth IRA, assets that could then grow tax-free. (The Economic Growth and Tax Relief Reconciliation Act of 2001 also allows individuals who will reach age 50 by the end of the tax year the opportunity to invest an additional $1,000 each year.) They would have to keep the account open for five years before they could begin to take tax-free withdrawals, but this shouldn't be a major obstacle, given their other income and assets. An important benefit of the Roth IRA is that there are no mandatory distributions at age 70½, as there are with other tax-advantaged retirement investments. They can choose the pace of withdrawals that makes the most sense for them.

Stock funds should only be considered for long-term goals as values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond fund values fluctuate in response to the financial condition of individual issuers, changes in interest rates, and general market and economic conditions. Some funds, including non-diversified funds and funds investing in international securities, high yield bonds, small- and mid-cap stocks and/or more volatile segments of the economy, entail additional risk and may not be appropriate for all investors. Consult a Fund's prospectus for additional information on these and other risks.

  • Not FDIC Insured
  • No Bank Guarantee
  • May Lose Value