There's only one shadow on the horizon of former mortgage banker Michael Kelly's long-planned retirement. That shadow, more a looming dark cloud at this point, is the volatile stock market and what it isn't doing for Kelly's $1 million-plus retirement portfolio.

Don't get me wrong-Kelly's zest for fun and travel his first year of retirement hasn't been slowed by the stock market's erratic heartbeat. In fact, since I last talked to him in September 2006 as he approached retirement, Kelly has been doing pretty much what he said he'd be doing: spending time at his beach house and traveling the world. The 63-year-old jetted off to Istanbul, Turkey, in 2007 and jaunted around Germany four times in the past 15 months, visiting a long-time friend and opera aficionado in Frankfurt. Next up? He was heading to London for a 10-day excursion. High on his priority list? He was planning to see the Royal Academy's exhibit of paintings from Russia's Hermitage and Ridiculousness on stage at the Barbicon Theatre.

"I usually stay with friends, and we all like to cook, which makes travel affordable," says Kelly, who also uses London's centrally located half-price ticket booth to his advantage. "I'm having a wonderful time. You can spend a lot of money, but you don't have to," says the former mortgage banker, who retired in December 2006.

It's exactly the lifestyle Kelly wanted in retirement. It may seem lavish, but it isn't, and frankly he can't afford an extravagant lifestyle. After all, his $1.1 million portfolio, which includes a pension, 401(k) and IRAs, only generated income of $34,875 last year. He also received $17,761 from Social     Security and $5,222 in dividends, capital gains and interest from other investments, bringing his total 2007 income to $57,858.

The good news is, Kelly has his budget under control and is determined not to touch the principal of his investments until he has to-at age 70½. He also has a paid-up beach house in Rehobeth Beach, Del. (property tax bill in 2007? $700); likes comparison shopping for travel bargains; and proudly drives his hybrid Toyota Prius (49 miles per gallon on the highway) to and from his primary home at the beach to his second home in D.C., a stately         Logan Circle town house his significant other owns.

Kelly's retirement would certainly be a dream for all those 60-plus year olds who haven't socked away anything for retirement, or those who rode the market down, or those who depend on scant bank account interest for their income.

The European jaunts are not unusual for Kelly, who has been a world traveler for decades. In his former life as a banker, he set up operations in far-flung places like Hawaii and Germany. His current income has made him a budget-minded travel planner, so you're not going to find any last-minute or first-class tickets or overpriced hotel rooms on his credit cards.

Kelly is admirable because he knows how to have a blast without blowing the bank. He offers a lesson that everyone, especially retirees, should be able to appreciate, and it's one that investment advisors might want to share with their spendthrift clients who think once they sock away a cool million it will be smooth sailing.

Kelly owns his home free and clear. Think of the folks you know who have those god-awful $10,000 monthly mortgage payments going into retirement. How many times would they visit Europe on a pre-tax income of $57,858?

Of course, the awful investment environment is not lost on Kelly, who spent more than three decades in banking. "I recognize that I have a pot of money and that it's finite. So it's pretty high anxiety when the market is gyrating. My portfolio is down 30% and it may be ten years before it comes back," says Kelly. "This is the worst of times for a retiree. Land values are down, the stock market is down and interest rates are down. You'd at least expect to be able to earn money on CDs, so it's an unusual period. I'm not hurting, but there are a lot of people relying on savings accounts and they must be traumatized."

The difference between Kelly and other retirees, who may be struggling in this low-return, low-interest environment? He lives within his means on investment income, without tapping into principal. As important, he decided to take the smart advice of one of the investment advisors we consulted for him before he retired and annuitized part of his retirement nest egg. The result? Kelly annuitized about 40% of his investments  ($400,000), while leaving the rest ($700,000) in a portfolio comprised of T. Rowe Price and Vanguard stock, bond and money market funds.

"If I hadn't annuitized, I would be off the wall at this point," Kelly says. "I'd have negative income. I'd be losing money."  Before retirement, Kelly was very concerned about how an annuity would impact what he could leave to his significant others. But pragmatism and persuasive advice won out and Kelly decided that partial annuitization-which guarantees that his monthly bills can be paid no matter what the stock and bond markets do-was his best bet. After all, Kelly still has his home, a $700,000 portfolio and two pieces of land to leave to his beneficiaries.

By annuitizing through his former employer's pension plan, Kelly is guaranteed monthly income, which has become his saving grace. He gets the cash he needs to live and doesn't have to dip into his portfolio's principal, which could lead him to run out of money down the road.

It was Mark Cortazzo, founder of Macro Consulting Group in Parsippany, N.J., who recommended that Kelly annuitize part of his portfolio as Kelly prepared to retire back in September 2006. Cortazzo warned then about the potential looming disaster of investing 100% of Kelly's portfolio in the stock market. "If I gave him the average large-cap-growth portfolio over the past five years and he was drawing down 6% annually, his million would be worth about $100,000 today," Cortazzo says. "If the bad years come first, it won't matter what the averages are."

With five-year CDs paying just shy of 3.5% and even 10-year Treasury yields below 4%, it's a hard-scrabble life for retirees depending on cash and bonds to generate retirement income. "This environment always kills those people determined to keep their money in CDs," says Darin Pope, senior vice president and chief investment officer of United Advisors in Secaucus, N.J.  "They literally find themselves riding down the slope of interest rates."

To offset that for clients, Pope says he uses intermediate and long-term corporate bond funds, which returned approximately 7% last year, and looks at immediate annuities, also paying around 7%. "The bond and guaranteed portions of our portfolios allow us to also invest in stocks, so clients are able to beat price increases and inflation going forward," says Pope.

The firm typically invests 50% to 60% of his retired clients' portfolio in bonds, but goes as high as 70% depending on client needs, Pope says. To quiet retirees' concerns, Pope has starting holding "market" conference calls to explain and give context to stock market declines and recessionary concerns. "We don't get a lot of clients who call our offices randomly, but we had 45 people on this call in the middle of a January afternoon, and that tells me people are interested."

Keeping investors comfortable is critical in this environment, says Bryan Place, president of Place Financial Advisors in Manlius, N.Y., who manages $110 million for 125 clients, about half of them retirees. "The fact that Kelly covered his fixed expenses through annuitization is critical, not only because it extends the longevity of his portfolio, but because it gives him psychological comfort. A guy like that is not selling into the market's weaknesses. It allows him to stay in the market when times are tough," says Place. To help investors and advisors get the most competitive quotes, Place spent the past year creating http://www.AnnuityQuickQuote.com, which launched earlier this year. The site gives users the top five insurance companies in order of payout rates and also provides a phone center staffed by CFP licensees should an advisor have a question. Place is seeing top rates come in between 7% and 8% from companies such as Mutual of Omaha, American National, Genworth, AIG and Metlife. Advisors who work on a fee-basis can waive commissions.

http://www.AnnuityQuickQuote.com is seeing tremendous interest from baby boomers, Place adds. "We're just at the earliest stages of their need for income planning, so I think it will just build and build from here."

There is another income option worth noting if investors have a paid-up life insurance policy. Instead of borrowing against their policy or cashing it in-options that leave investors with loan payments or without life insurance-Larry Fondren, president of Legacy Funding Group in Malvern, Pa., has created an innovative product that allows seniors 65 and older to take out a Legacy Loan. The product pays the policyholder the highest amount the life settlement market would provide but leaves the policy in place and pays all premiums-the policyholder never pays another dime. It works by charging the policyholder 9% interest. The face value of the policy is reduced according to a formula over many years, but the contract always leaves at least 10% in place for beneficiaries. "We think it's a great alternative," says Fondren. "You get to borrow against the policy, keep ownership, we pay all premiums and you get to capitalize on the arbitrage you'd otherwise be selling."

As for Kelly, he was determined to spend the first summer of his retirement at the beach home he's owned for two decades, and he says he's enjoyed every minute of it.  "I had a great time. I even got bikes," he says.