I am a 43 year old divorced father. I have $315,000 in a traditional IRA, $90,000 in a Roth IRA, $22,000 in a health savings account (HSA), $8,000 in a 529 college savings account, $30,000 in a traditional 401k, $25,000 in US i-bonds, $40,000 invested in exchange-traded funds in the stock market (ETF) and $20,000 in cash. I max out my employer’s 401(k) and family HSA each year. At age 57, I would like to leave most of my full-time employment and start transferring money from my traditional IRA to my Roth IRA, up to the standard deduction each year. I would try to live on non-taxable income during that time until at least age 62. Then I would like to continue living off my Roth accounts until age 67, at which point I would take Social Security, which would be about $3,500 per month and is pretty close to my actual monthly expenses. Am I exaggerating?
-Jacob
First of all, I would like to congratulate you on both the savings you have already accumulated and the amount of thought you have put into this plan. All that work has put him in a fantastic position to be able to retire on his own terms.
So, are you on track to retire at age 57? And are you overdoing it? Let’s take a look. (And if you’re looking for help with your own financial question, this tool can help you find potential advisors.)
Back of the envelope math
Ask an Advisor: I’m a 43-year-old divorced dad with $315K in an IRA, $90K in a Roth, and other accounts. I max out my 401(k) every year. Can I retire at 57?
To take a quick look at your investing and saving situation, you can use the 4% rule and make some assumptions about your investment performance to see if you’re on the right track.
The 4% rule says that when you retire, you can withdraw 4% of your total retirement savings each year, adjusting for inflation, with minimal risk of running out of money. You may not want to bet your entire financial plan on this rule, but there is a lot of research behind it. Using the 4% rule is a good way to see if you are on the right track.
If you start at age 43 with $522,000 in retirement savings (I’m excluding your cash and 529 savings account, since they are for other purposes), and assume an inflation-adjusted annual rate of return of 4% with $29,700 in annual contributions, you will reach age 57 with $1,468,936 in your various investment accounts.
Applying the 4% rule to that $1,468,936 balance, you could withdraw $58,757 per year, which sounds like it should be enough to cover your expenses.
Of course, that’s a simplified calculation that doesn’t take into account Social Security or taxes, so let’s dig a little deeper. (Looking for help with a financial question? This tool can help you find potential advisors.)
Using the SmartAsset Retirement Calculator
For a more solid look, I used SmartAsset’s retirement calculator and entered all the details you provided in your question. I estimated his annual expenses at $60,000.
According to that calculator, you would need $1,342,034 to retire at age 57 and are on track to have $1,516,049. Again, it sounds like you are on the right track to achieving your goals. (Looking for help with a financial question? This tool can help you find potential advisors.)
Additional considerations
Ask an Advisor: I’m a 43-year-old divorced dad with $315K in an IRA, $90K in a Roth, and other accounts. I max out my 401(k) every year. Can I retire at 57?
While all of the above indicates that you are in very good shape, there are certain variables that we have not taken into account previously.
An important variable is the cost of college. There is a wide range of possibilities, from paying nothing to spending $70,000 or more a year at a private college. And while you have some dedicated college savings, a big college expense could force you to dip into retirement savings, which could require you to work longer or reduce your retirement expenses.
There are also many things about your situation that could change over the years, from your job to your health, the investment returns you receive, and your personal goals. No financial plan, no matter how good, is a finished product, and it’s important to reevaluate it periodically to make sure you’re still on track.
When it comes to your retirement plan, especially in the early years of retirement, I would also be careful not to place too high a priority on tax minimization. (Looking for help with a financial question? This tool can help you find potential advisors.)
You certainly don’t want to pay more than necessary, and being tax-conscious in your approach is the right idea. But it may be smart to have some taxable income in those early years to cover those lower tax brackets, which could allow you to avoid higher tax brackets in the future and actually pay less taxes in the long run.
I would also consider the possibility that living off cash and bonds during the early years of retirement could make your overall asset allocation more conservative than necessary for your goals and risk tolerance. It certainly may make sense to maintain ample cash reserves so you are not as susceptible to short-term market movements. But being too conservative could sacrifice long-term growth and security. And remember that paying taxes just means your money has grown, which is a good thing.
Of course, it’s also important to recognize that there are many details about your situation that I don’t know, so I’m certainly not in a position to give you specific advice on tax and retirement strategies. These are just things to consider as you continue to fine-tune your plan.
Next steps
He appears to be well on his way to his primary goals, with some wiggle room to weather the unexpected, which is exactly where he wants to be. As long as you continue to review your goals, save, and make adjustments along the way, you should be in good shape.
Retirement Planning and Investment Tips
If you have specific questions about your investment and retirement situation, a financial advisor can help. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors serving your area, and you can interview your matched advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
As you plan for retirement, keep an eye on Social Security. Use SmartAsset’s Social Security calculator to get an idea of ​​what your benefits could look like in retirement.
Keep an emergency fund on hand in case you have unexpected expenses. An emergency fund should be liquid, in an account that is not at risk of significant fluctuations like the stock market. The downside is that inflation can erode the value of liquid cash. But a high-interest account allows you to earn compound interest. Compare savings accounts at these banks.
Matt Becker, CFP®, is SmartAsset’s financial planning columnist and answers readers’ questions about tax and personal finance topics. Do you have any questions you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Matt is not a participant in the SmartAsset AMP platform nor is he an employee of SmartAsset, and has received compensation for this article.
The post Ask an Advisor: I’m a 43-year-old divorced dad with $315K in an IRA, $90K in a Roth, and other accounts. Can I retire at 57? first appeared on the SmartAsset blog.
