I am a 55 year old single woman with a 19 year old child and a lawyer. My annual salary is $ 295,000. I own a $ 490,000 home. (I have $ 110,000 left to pay.) I have $ 53,000 in cash (in the bank) today and that will grow quickly as I finish with various home projects. I have $ 550,000 in my retirement fund from work. The job also gives me $ 1 million life insurance.
Aside from the balance of my home loan, I am completely debt free. Property tax is approximately $ 12,000 per year. I saved up for my child's tuition and I estimate I will need another $ 80,000 (for a four year college). I bought her a relatively new car in cash. I have very cheap tastes / habits and enjoy free entertainment (nature as opposed to travel).
I would like to retire early, but I'm adopting a teen who will have an adoption cost of about $ 45,000 between September and December this year if things work out. I have $ 45,000 in cash in the bank so I should have enough by September. Then I'd like to save some money for this second kid's college (although he's inclined to go ROTC or enroll and if he doesn't, he could always take out student loans if needed). I only mention college student loans because I would prefer to retire early if possible so that I can have more time with my second child. As far as relevant, my parents are in their 70s, quite wealthy, and I would expect an inheritance of at least $ 200,000.
In the future, when I adopt, it will be done again through the state care system, where there are no adoption costs.
Throughts? I would love to save up to pay my home manager and some tuition fees for my second child, but I really want to retire early if I can. I was wondering if I should take a $ 50,000 general loan (no reason) from my retirement plan so that I can use it for my $ 45,000 pending adoption costs and get early access to my retirement benefits (if I could retire earlier as a result). .
Debt free mom
See: I'm 62, unemployed, live on my savings and wait for social security – "Can I go fishing for the next 25 years and forget about work?"
Dear Debt Free Mama,
Congratulations on your adoption messages. That’s so exciting! Your children will be lucky to have you.
Let's start with a possible loan. You might want to hold back on that, said Kristian Finfrock, founder and financial advisor of Retirement Income Strategies. "First of all, she has so much money in savings," he said. "Although I don't want her to use up her savings, I prefer it to the retirement account, which I believe has far-reaching consequences."
You haven't specified what type of retirement account you have at work, but if it's a 401 (k) there are a few rules you should know about. The first: You need to have a repayment schedule on the loan and it will be paid for in after-tax dollars, said Brooke Hunady, a certified financial planner and partner at Moneta. Second – and perhaps most importantly – if you left your job before paying back the loan in full, you would have to pay back the rest or face taxes and possibly a fine depending on your age.
The funds you borrow will also no longer be invested, which means you could lose potential investment opportunities if the market did well.
"There are pitfalls and a 401 (k) loan really should be considered as a last resort, especially if you want to retire sooner rather than later," said Hunady.
Instead, do what you clearly did and "save, save and save even more," said Finfrock.
Also, consider using the cash you have available for adoption, and continue to use a portion of your income each month to build that balance. "While your intentions are gracious in wanting to cover all college bills for your children, you've probably heard the saying, 'You can borrow for college, but you can't borrow for retirement," and focus on it, like that save as much as possible now, ”said Hunady.
Check out the MarketWatch column "Retirement Hacks" for actionable advice for your own retirement planning journey
Retiring early to spend time with your kids is a wonderful goal, and if everything you've shared with us is correct, it's plausible, financial advisors said. However, there are risks associated with this plan as well as strategies for improving your situation.
"Early retirement is quite possible, but the risk of longevity increases," said Finfrock. "It will need a lot more money and tax diversification."
Finfrock suggests focusing on maximizing your retirement accounts and considering Roth options as well. Your income is too high to be deposited directly into a Roth individual retirement account, but you could convert assets from a traditional non-deductible IRA to a Roth account.
An HSA is another great savings and investment vehicle designed for healthcare spending. You may need a high-deductible health insurance plan to invest in one of these, but when it's available to you it has triple tax benefits: the contributions are tax-free, the profits are tax-free, and the distributions, when used for legitimate purposes, are healthcare expenses , are also tax-free.
Imagine the big picture of what retirement would look like and cost you if you retired early. For example, think about which health insurance you need for yourself and your children and what your expected tax payments will be.
"Also be conscientious about the expenses that are infrequent," said Hunady. "For example, you may have your retired car, but at some point you will have to replace it, which is another expense that needs to be budgeted." As you know, kids are expensive too, far beyond the cost of college and regardless of age!
See also: We have $ 1.6 million, but most of it is written into our 401 (k) plans – how can we retire early without paying so much tax?
Also, think about what sources of income you will have for retirement. For example, you are tapping into your retirement plan (which you may be able to access through the “55 age rule”), but what else? You may decide to retire early, but occasionally work in consulting or contract gigs, or take on a part-time job in a few years' time. And aside from these potential sources of income, consider carefully when you would start applying for social security benefits. If you start as early as possible at the age of 62, you will permanently reduce your total old-age pension that you would have received at your full retirement age. Other factors to consider when deciding when to apply for social security are your wealth, health, and longevity.
You mention a future inheritance but want to keep it out of your budgeting. "While it's tempting to include inheritance in your retirement equation, it's probably best to hope for it, but not plan for it," said Hunady. “Market conditions and your parents' needs can change. In addition, there are care costs that can quickly exhaust resources if there is no long-term care insurance. "
I always say this in my letters, but it has to be repeated. A financial planner can also help you estimate your current expenses versus your projected retirement expenses and how to get the most out of your assets and distributions in the event of early retirement.
Until then or without, just be careful. "Make a plan that focuses on all risks and plan for the worst," said Finfrock. “Higher taxes, stock market correction, prolonged recession, higher inflation, unexpected health concerns. If all goes well, you may have been too conservative, but when things get messy you will be happy to be prepared. "
Reader: Do you have any suggestions about Debt Free Mama? Add them in the comments below.
Do you have a question about your own retirement provision? Email us at HelpMeRetire@marketwatch.com