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Personal Economy: Turnaround tales

How one retired couple redefined their lives—and their financial plan.

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High above the Pacific Ocean one sunny summer day, Todd and Kathy Reece had a near death experience that changed the way they thought about life and money—for the better. The plane Todd was piloting went into a deadly spin. "The door had flown open and the water was spiraling ever closer," recalls Kathy, an artist with a fear of flying. Seconds before impact, Todd was able to level out the plane. "I felt like we had dodged a bullet," he recalls.

Shortly afterward, the couple decided to refocus their lives on what was really important to them—living every day to the fullest. That meant reassessing their personal and financial priorities. As Todd put it, "Each day is extra credit."

Adapting to the unexpected

It was not the first time that the Reeces needed to adapt quickly. In 2005, Todd’s longtime employer unexpectedly offered him an early retirement package. While he and Kathy relished the freedom it would provide, they were concerned they might need to constrain their lifestyle. With some help from their local Fidelity representative, they were able to determine that they did indeed have enough to retire. Says Todd, "Knowing we had the resources gave us the confidence to take that next step."

Saving early

What gave the Reeces the flexibility to adapt to life’s surprises was a lifetime of saving. Since Todd’s days in graduate school, the couple had been socking away roughly 20% of their income each year. They stuck to that savings discipline throughout their years together. They also took advantage of employee savings and investment opportunities like Todd’s workplace 401(k) plan, company stock options, and a nonqualified salary deferral plan, as well as personal IRAs. (Read Viewpoints: Where to save now?)

Living conservatively

Plus, they have long been frugal, often living below their means. "We don’t have a need to own the latest electronics," says Todd. Echoes Kathy, "We usually prefer the old to the new, whether it’s cars or homes. I really dislike oversized cookie-cutter houses, and I’d rather spend my time painting than cleaning."

Talking openly about money

It wasn’t always easy for Todd and Kathy to talk about money, however. Todd takes an analytical approach and uses Fidelity online tools to weigh investment options and to track performance. Kathy says she likes to step back and focus on the big picture. But they have learned to talk to each other about money matters. "Sometimes we agree, sometimes we don't," says Kathy. "It makes for interesting conversations over dinner—and the loser picks up the check."

Getting ready for retirement

Thanks to their smart and consistent savings, plus an early retirement package from Todd’s company, the Reeces were able to retire before age 59½—without having to tap their 401(k) plan or other retirement accounts. That was a good thing, because early withdrawals from retirement accounts are taxed at ordinary income tax rates (marginal rates currently up to 35%). Withdrawals from 401(k) or IRAs before age 59½ are also subject to a 10% early withdrawal penalty (exceptions may apply). Add in state taxes and you can forfeit nearly half of your early withdrawals.

But within a few years, the Reeces knew they would need to tap their retirement savings for income. How could they generate income from their savings? Would they need to change their investment mix? How could they minimize taxes? "What we needed was someone to help us focus on our needs and provide guidance," says Kathy. "And the tools to help us create a balanced portfolio and track its performance," adds Todd.

Enlisting the help of professionals

Working with their Fidelity representative, the Reeces decided to reconfigure their portfolio—which was largely invested in CDs and company stock—into a diversified mix of stocks, bonds, and mutual funds. They also decided to convert their traditional IRA savings into a Roth IRA. That meant paying some taxes on the converted amount, but it would enable them to withdraw money from the Roth IRA, tax free, later in retirement.1

Right now the Reeces are working with their Fidelity representative on a plan to turn their retirement savings into an income stream that will kick in once Todd’s early retirement package runs out. At that point, they will need to combine Social Security and a portfolio withdrawal plan to meet their income needs. So they are rethinking their investment mix. They are also weighing the possibility of using part of their portfolio to purchase an annuity that guarantees2 a certain amount of income each year.

The planning process has already had some surprising payoffs, says Kathy, who was considering going back to work so she could collect Social Security. "Our Fidelity representative made my day when she said that I could collect 50% of Todd’s monthly Social Security benefit. It’s a strategy we would have never uncovered on our own." Since Kathy doesn’t qualify for Social Security benefits based on her own work history, she is eligible for spousal benefits equal to half of Todd’s benefit once they’re both at full retirement age. (Get strategies on when to start taking Social Security.)

That kind of planning has given the Reeces the confidence to enjoy their lives, in spite of a rocky economic recovery that has left some investors stressed. Up next for the Reeces is a season of music with a Bruce Springsteen concert and the Rolling Stones’ 50th anniversary tour.

Learn more

  • Find tips for how to have the "money talk" in your family.
  • Use our evaluator to see if you should convert to a Roth IRA.
  • Explore income strategies with the Fidelity Income Strategy EvaluatorSM3 (login required).
  • For one-on-one help with your personal economy, call Fidelity at 800-343-3548 or visit a Fidelity location.
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The tax and estate planning information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide estate planning, legal, or tax advice. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Guidance provided by Fidelity is educational in nature, is not individualized, and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions. Always consult an attorney or tax professional regarding your specific legal or tax situation.
1. A distribution from a Roth IRA is tax free and penalty free provided that the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, death, disability, or qualified first-time home purchase.
2. Guarantees are subject to the claims-paying ability of the issuing insurance company.
3. Fidelity Income Strategy Evaluator is an educational tool.
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