What’s the Plan? A single woman sees domestic and international travel in her retirement

Think Europe! This week we look at a woman ready to retire with the excitement of travel on her mind, but concerns for the future are holding her back.

The Situation

Gail, 61, has been running her own public relations firm in Denver for the past 21 years. She has paid off the mortgage on her home in the Washington Park neighborhood. An avid reader of What’s The Plan, Gail wrote in because she was watching closely for a situation similar to her own and thought she may offer something unique to other readers. “I am going this alone!” she says, and hopes others will benefit from her story.

In Gail’s dream retirement she would love to travel both domestic and internationally for weeks at a time. She was raised by money-conscious parents, and the idea of retiring and spending her money in this fashion makes her feel very nervous. Her biggest concern is finding peace of mind so she can enjoy what she worked so hard to earn.

Gail is also considering relocating to a condominium or a home in a small mountain community as she reaches retirement. To do this, she would sell her current home and buy her new home with the proceeds from the sale.

In addition to her home valued at $500,000 (which she bought more than 20 years ago for $94,000), Gail also owns a singlefamily home nearby, valued at $300,000, with a mortgage of $180,000. Gail has $323,081 in her IRA, $48,151 in her Roth IRA, $99,452 in her Simple IRA, and $109,850 in her 401(k). She also has an annuity worth $123,781, $379,592 in stock and bond mutual funds, and $61,702 in a Health Savings Account. Her Social Security projection at age 66 would be $2,241 and at age 70 is estimated to be $3,042.

Gail knows she has longevity in her family. Her mother passed away at age 91 and her father is still going strong at age 90. To prepare for a similar situation, Gail has decided to take out a long-term care insurance policy to protect her as she gets older.

Recommendations

Gail has many positive things going for her! She has been an excellent saver, and has paid off her debts very carefully.

She has built a strong foundation for her retirement goals. If she continues to save $24,000 per year into her retirement plans, then we project that she can stop working at age 64, and spend approximately $6,700 per month in retirement, or $80,000 per year, after taxes, and adjusting for inflation. She thinks that this will be enough for her to live on and travel with in retirement.

Before she retires, Gail is planning to sell her home. She has had the good fortune to see the value of her house grow very well while she has owned it. Just like with other assets, she will have a capital gain that she will have to pay taxes on. There is a tax rule that will protect her, the primary-residence exclusion.

The primary-residence exclusion allows any person who meets the criteria to not pay taxes on up to $250,000 of the gain in the home for an individual (or $500,000 for a married couple filing jointly) from their income taxes in the year that they sell it, as long as they meet the criteria. The criteria are living in the home for two out of the previous five years, and only taking the exclusion every two years, with some exceptions. See your tax adviser for more details.

Gail believes that she can sell her home for $500,000 today. So, her total gain on the property would be $406,000. Of that total gain, she can exclude $250,000 from her income for the year. The total gain that she will pay taxes on is $156,000, which are taxed at the more beneficial long-term capital gains rate.

Although “going it alone,” her retirement dreams can be a reality because of her diligent saving! The $80,000 per year will allow her to take the international and domestic vacations she has been dreaming about for years and maintain her current quality of life. Pam Dumonceau has 22 years of experience and is the Principal of Consistent Values, a Registered Investment Advisory firm in Greenwood Village, Co. What’s The Plan is not a substitute for financial planning or dedicated professional advice.