Retirement savings can be stretched

Q. I am 59 years old, single, and have no mortgage or any other debt. I make about $55,000 a year. I have an individual IRA and a work IRA invested in indexed mutual funds with a combined worth of about $280,000. I have savings of $60,000 earning 5.25 percent interest.

Do you advise converting the IRA funds to a Roth IRA and paying the taxes now? If so, would you do it all at once, or do it over a few years?

I don't plan to retire anytime soon, but how bleak does my future look with those assets? My personal Social Security payments would only be $612 at 62, $968 at 66 or $1,484 at 70. I would qualify for one-half of my former husband's Social Security if it is higher than mine, but how do I find that out?

What financial advice do you have for me to better prepare for my future? I tried to see a fee-only financial planner, but when I found out he would charge me more than $1,500 to give me advice (not invest my money, only look over my assets and advise), I passed. -- G.G., by e-mail

A. As a single taxpayer with an income of $55,000 a year, you are in the 25 percent tax bracket for federal income taxes. You'll probably be in the 25 percent tax bracket when you retire, as well. This doesn't mean you will pay taxes on all income at 25 percent. It means that the highest rate you will pay will be 25 percent.

Remember, you can have $10,050 of income tax-free due to your personal exemption ($3,400 this year), your standard deduction ($5,350 this year), and the $1,300 elderly deduction when you are 65 and single.

Depending on your other income, much of your Social Security benefits may not be taxed, either. You can have another $7,825 of income that will only be taxed at a 10 percent rate. So you can have income of $17,875 a year before you enter the 15 percent tax rate. Then you can have another $24,025 in income before you start paying taxes at 25 percent.

That's why doing a Roth IRA conversion now won't do much for you. You'll have to pay 25 percent taxes today to avoid a 15 percent or 25 percent tax rate tomorrow.

And cheer up, your future isn't bleak. If you work another seven years to age 66 and save a portion of your current income, you have a reasonable shot at doubling your current financial assets of $340,000 to $680,000. That amount, at a 5 percent withdrawal rate, would provide you with $34,000 a year. Add about $12,000 more from Social Security and your cash retirement income may be $46,000 a year, with virtually all of it taxed at 15 percent or less.

That's nearly 84 percent of your current earned income. Since 7.65 percent of your current income goes to the employment tax, you only need to replace 92.35 percent of your earned income in retirement, less any current saving. Basically, you've got a very good shot at maintaining your current standard of living in retirement.

If you were married at least 10 years and your former husband is a long-term high earner, you have a chance of bettering your Social Security benefits by drawing on his record, not yours. I suggest making an appointment and visiting the local Social Security office to get an estimate. It will be time well spent. Don't, however, expect a bonanza from this -- the difference will likely be small. Remember, there are lots of people out there who would love to have your earnings record and expected benefit.

You aren't the only person who has balked at a $1,500 bill for creating a financial plan. A good planner, however, will spend the time it takes to have you gather all the necessary information, will massage that information for different options, and will present her findings. Done correctly, it's a very time-consuming process.

That $1,500 represents 10 hours of work at a billing rate of $150 an hour. That's a common rate for counselors who don't have an M.D. -- so you could think of it as 10 hours of therapy that is likely to improve the remainder of your life.

Ironically, many people are so service-fee phobic, they will happily pay a 5.75 percent commission on a $30,000 mutual fund purchase instead, even though the commission is greater.

The problem with many financial plans is that they are designed to open the door to selling you financial products rather than scoping out your options for the future.

Ask the planner what her primary source of income is. If her primary income is commissions from product sales, save your money. You can find a fee-only financial planner by visiting the Web site for their association, www.napfa.org, and clicking on "Find an Adviser."