Kautzmann also was surprised the Typicals had paid off their mortgage. "I see a lot of 65-year-olds with $500,000 mortgages -- they're going to be 90 years old before they pay them off. It's crippling."
After paying off the credit card, Kautzmann would have the Typicals divide Harry's now-$95,000 inheritance into two buckets -- 50 percent in a fixed-rate annuity to defer and shelter some taxes. "I'm not a huge fan of annuities," Kautzmann says, but "in this case, I think it makes sense. It will give them a guaranteed decent rate of return -- and it's an inheritance -- they don't need to leave that money liquid."
He would put the other 50 percent of the inheritance in short-term municipal bonds or municipal bond funds. "The income is tax-free. I would stay on the shorter end of the yield curve. You don't want a fund where the average maturity is 25 years. Some funds are paying 4 percent. But if inflation or interest rates kick up, these bonds are going to go down in value as rates go up."
Are bonds really safe these days? Kautzmann says yes. "I think the fear is overblown. There have been serious cutbacks in municipal spending in most places. I live in New Jersey and I wouldn't buy Jersey municipals, but (I) own New York munis."
If the Typicals didn't like the idea of an annuity, Kautzmann would recommend they put half of Harry's inheritance in dividend-paying stocks. "Even with the recent market downturn, the average dividend-paying stock is only down 2 percent to 3 percent. Between municipals and dividends, they'll outpace inflation and make money even if the stock market goes sideways for several years," he says.
With many municipals tax-free and stock dividends subject to only 15 percent capital gains tax through 2012, this strategy also will protect the Typicals from rising taxes, which Kautzmann believes are almost inevitable.
Kautzmann would urge them to leave their 401(k)s in diversified investments -- the best strategies their employers make available. "You can't go wrong with a diversified portfolio."
Beyond that, he thinks both Mary and Harry should keep working -- maybe until both are 70 years old. "It's not what you make, it's what you save," he says.
If both of the Typicals keep plugging away at their current jobs until they are 70 years old, here's what their retirement income will look like:
At 70, Harry will get $2,571 from Social Security, and at 70, Mary will get $1,628, for a total of $50,388 annually from Social Security.
If they continue to save at their current 10 percent level for the next nine years in Harry's case and 12 years in Mary's, and get their employer matches plus 5 percent interest, they'll have a nest egg of $609,833, which will allow them to safely pull $24,393 from their 401(k)s annually.
Kautzmann figures the inheritance will grow so it will provide $6,700 in income every year and they'll get $9,000 from Harry's pension.
This amounts to an annual total income of $90,481 -- very comfortable with money to spare for a nice cruise each year.
To protect themselves, Kautzmann urges them to buy a long-term care health insurance policy right away. "Even home health care can run $12,000 a month in some parts of the country," he says. "Buy a policy young and it's pretty cheap. Even if you only buy three years' worth of benefits, it will help out and protect your estate."
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