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 U.S 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 each year. At age 57, I’d like to stop most of my full-time employment and start rolling over money from my traditional IRA into my Roth IRA, up to the standard deduction each year. I would try to live on nontaxable income during that time until at least age 62. I would then like to keep that up by living on my Roth accounts until age 67, at which point I would take Social Security, which would be around $3,500 per month and is pretty close to my actual monthly expenses. Am I overdoing it?
-Jacob
First of all, I’d like to commend you on both the savings you’ve already accumulated and the amount of thought you’ve put into this plan. All of that work has put you in a fantastic position to be able to retire on your 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 match you with potential advisors.)
Back-of-the-Envelope Math
For a quick look at your investing and savings situation, you can use the 4% rule and make some assumptions about your investment returns in order 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 might not want to bet your entire financial plan on this rule, but there’s plenty of research behind it. Using the 4% rule is a good way to see if you’re 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 those are for other purposes), and assume a 4% annual inflation-adjusted rate of return with $29,700 in annual contributions, you reach age 57 with $1,468,936 across your various investment accounts.
Applying the 4% rule to that $1,468,936 balance, you would be able to 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 factor in Social Security or taxes, so let’s dig a little deeper. (Looking for help with a financial question? This tool can help match you with potential advisors.)
Using SmartAsset’s Retirement Calculator
For a more robust look, I used SmartAsset’s retirement calculator and entered all of the details you provided in your question. I estimated your annual expenses at $60,000.
According to that calculator, you would need $1,342,034 in order to retire at age 57 and you are on track to have $1,516,049. So again, it’s looking like you’re on the right track to meet your goals. (Looking for help with a financial question? This tool can help match you with potential advisors.)
Additional Considerations
While all of the above indicates that you are in very good shape, there are certain variables that we haven’t accounted for above.
One big variable is the cost of college. There is a wide range of possibilities there, all the way from paying nothing to spending $70,000 or more per year for a private university. And while you do have some dedicated college savings, a big college expense could force you to dip into retirement savings, which could require you to either work longer or reduce your retirement spending.
There are also plenty of things about your situation that could 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, is ever a finished product and it is important to regularly reevaluate to make sure you’re still on track.
When it comes to your plan for withdrawals, especially in the early years of retirement, I would also be careful about making minimizing taxes too high of a priority. (Looking for help with a financial question? This tool can help match you with potential advisors.)
You certainly don’t want to pay more than you have to, and being tax-conscious in your approach is the right idea. But it may be smart to have some taxable income in those earlier years to fill up those lower tax brackets, which might allow you to avoid higher tax brackets down the line and actually pay fewer taxes over the long term.
I would also consider the possibility that living off cash and bonds during your first few years of retirement could cause your overall asset allocation to be more conservative than it needs to be for your goals and risk tolerance. It can certainly make sense to keep ample cash reserves so that you’re 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 acknowledge that there are many details about your situation that I don’t know, so I’m certainly not in any position to give you specific advice on withdrawal and tax strategies. These are just things to consider as you continue to fine-tune your plan.
Next Steps
You seem to be right on track for your major goals with some wiggle room to weather the unexpected, which is right where you want to be. As long as you continue to review your goals, save and make adjustments along the way, you should be in good shape.
Investing and Retirement Planning Tips
- If you have questions specific to your investing and retirement situation, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches 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.
Matt Becker, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d 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 SmartAdvisor Match platform, and he has been compensated for this article.
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