I am a 43 year old divorced father. I have $315,000 in a traditional individual retirement account (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 (ETFs) and $20,000 in cash. I max out my employer’s 401(k) and family HSA every year. At age 57, I would like to stop most of my full-time employment and start moving money from my traditional IRA to my Roth IRA, up to the standard deduction each year. I would try to live on a tax-free income for this period until at least age 62. I would then like to maintain this by living on my Roth accounts until age 67, after which I would take Social Security, which would be about $3,500 per month and is pretty close to my actual monthly expenses. Am I overdoing it?
-Jacob
First, I’d like to congratulate you on both the savings you’ve already accumulated and the thought you’ve put into this plan. All this work has put you in a fantastic position to retire on your own terms.
So, are you on track to retire at 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 father with $315,000 in an IRA, $90,000 in a Roth and other accounts. I max out my 401(k) every year. Can I retire at 57?
For a quick overview of your investing and savings situation, you can use the 4% rule and make some assumptions about your investment returns to see if you’re on the right track.
The 4% rule states that in retirement, you can withdraw 4% of your total retirement savings each year, adjusting for inflation, with minimal risk of running out of money. You might not want to stake your entire financial plan on this rule, but there’s plenty of research to support 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 savings account and 529 since those are for other purposes) and assume a 4% inflation-adjusted annual rate of return with $29,700 in annual contributions, you reach age 57 with $1,468,936 in your various investment accounts.
By applying the 4% rule to that $1,468,936 balance, you would be able to withdraw $58,757 per year, which seems like enough to cover your expenses.
Of course, this is 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.)
Use SmartAsset’s retirement calculator
For a more robust overview, I used SmartAsset’s retirement calculator and entered all the details you provided in your question. I estimated your annual expenses at $60,000.
According to this calculator, you would need $1,342,034 to retire at age 57 and you are on track to have $1,516,049. Once again, it looks 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 father with $315,000 in an IRA, $90,000 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’re in great shape, there are some variables we haven’t considered above.
One important variable is the cost of college. There is a wide range of possibilities, from paying nothing to spending $70,000 or more per year on a private university. And even if you have dedicated college savings, a large college expense could force you to dip into your retirement savings, which could force you to work longer or reduce your retirement spending.
Many elements of your situation could also change over the years, from your job to your health to the investment returns you receive to your personal goals. No financial plan, no matter how good it is, is ever a finished product and it is important to re-evaluate it regularly to ensure you are still on the right track.
When it comes to your withdrawal plan, especially in the early years of retirement, I would also be careful not to place too high a priority on minimizing taxes. (Looking for help with a financial question? This tool can help you find potential advisors.)
You certainly don’t want to pay more than you owe, and being tax conscious is the right idea. But it may make sense to have some taxable income in these early years to fill these lower tax brackets, which could allow you to avoid the higher tax brackets in the long run and pay less in taxes in the long run.
I would also consider the possibility that living off cash and bonds during your early retirement years could make your overall asset allocation more conservative than it should be for your goals and risk tolerance. It can certainly be a good idea to maintain sufficient cash reserves so that you are not as sensitive to short-term market movements. But being too conservative could sacrifice long-term growth and security. And remember, 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 able to give you specific advice on withdrawal and tax strategies. These are just things to consider as you continue to refine your plan.
Next steps
You appear to be on track to achieve your major goals with some wiggle room for unforeseen circumstances, which is exactly where you want to be. As long as you continue to review your goals, save money, and make adjustments along the way, you should be in good shape.
Investment and retirement planning advice
If you have questions specific to 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 licensed financial advisors who serve your area, and you can survey your advisors for free to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start 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 face unexpected expenses. An emergency fund should be liquid – in an account that doesn’t have the risk of large fluctuations like the stock market. The tradeoff is that the value of cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.
Matt Becker, CFP®, is a financial planning columnist for SmartAsset and answers reader questions on topics related to personal finance and taxes. Do you have a question 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 an employee of SmartAsset, and he was compensated for this article.
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