Help Me Retire: I’m a 55-year-old single mom adopting a teenager. I have $550,000 in my retirement account, make $295,000 a year but would like to retire early. Can I?

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I am a 55-year-old single woman with one 19-year-old child, and am a lawyer. My annual salary is $295,000. I own a home worth about $490,000. (I have another $110,000 left on it to pay.) I have $53,000 in cash (in the bank) as of today and that will be growing quickly since I am done with various home projects. I have $550,000 in my retirement fund through work. Work also provides me $1 million in life insurance.

Besides the remaining principal on my home loan, I am completely debt free. Property taxes are about $12,000 a year. I have saved for my child’s college tuition and estimate I need another $80,000 (for a four-year college). I bought her a relatively new car in cash. I have very inexpensive tastes/habits and enjoy free entertainment (nature, as opposed to traveling).

I would like to retire early but I am adopting a teenager which will involve adoption expenses of about $45,000 to be incurred between September and December this year if things work out. I have $45,000 in cash in the bank so I should have plenty by September. Then I would like to save some money for this second child’s college (though he is inclined to go ROTC or enlist, and if he doesn’t he could always take out a student loan if necessary). I only mention student loans for college because my preference would be, if possible, to retire early so I can spend more time parenting my second child. To the extent it is relevant, my parents are in their 70s, are fairly wealthy and I would anticipate an inheritance of at least $200,000.

In the future when I adopt, it will be through the state foster system again, where there are no adoption expenses. 

Thoughts? I would like to save to pay off my home principal and some college tuition for my second child, but really want to retire early if I can. I wonder if I should take a $50,000 general loan (no reason necessary) from my retirement plan so I can use it toward my $45,000 in upcoming adoption expenses, thereby getting access to my retirement money earlier (if that would allow me to retire earlier).


Debt-Free Mama 

See: I’m 62, unemployed, living off my savings and waiting on Social Security — ‘Can I go fishing for the next 25 years and forget about work?’

Dear Debt-Free Mama, 

Congratulations on your adoption news. That is so exciting! Your kids are lucky to have you.  

Let’s start off by talking about a potential loan. You might want to hold off on that, said Kristian Finfrock, founder and financial adviser at Retirement Income Strategies. “First of all, she has that amount of money in savings,” he said. “Although I don’t want her to deplete her savings, I prefer it over the retirement account loan, which has far-reaching consequences in my opinion.” 

You didn’t specify what type of retirement account you have at work, but if it’s a 401(k), there are a few rules you should know. The first: You’ll have to have a repayment plan in place for the loan, and it will be paid for with after-tax dollars, said Brooke Hunady, a certified financial planner and partner at Moneta. Second — and perhaps most important — if you were to separate from your job before repaying the loan in full, you’d have to repay the rest or face taxation and perhaps a penalty, depending on your age. 

The funds you borrow are also no longer invested, which means you could lose out on potential investment opportunities should the market be performing well. 

“There are pitfalls and a 401(k) loan should really be considered as a last resort, especially if you are looking to retire sooner as opposed to later,” Hunady said. 

Instead, do as you have clearly been doing and “save, save and save some more,” Finfrock said. 

Also, consider using the cash you have on hand for the adoption, and continue to allocate a portion of your income every month to building that balance. “While your intentions are gracious in wanting to cover all college costs for your children, you’ve probably heard the saying ‘you can borrow for college but you can’t borrow for retirement,’ putting the focus on saving as much as you can now,” Hunady said. 

Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey

Retiring early to spend quality time with your children is a wonderful goal, and if everything you shared is accurate, it is plausible, financial advisers said. Still, there are risks associated with this plan, as well as strategies to improve your situation.  

“Early retirement is entirely possible but the longevity risk increases,” Finfrock said. “She will need much more money and tax diversification.” 

Finfrock suggests focusing on funding your retirement accounts to the max, and considering Roth options as well. Your income is too high to contribute to a Roth individual retirement account directly, but you could convert assets from a traditional nondeductible IRA into a Roth account. 

An HSA is another great savings and investment vehicle, earmarked for health expenses. You might need a high deductible health plan to invest in one of those, but if it’s accessible to you, it’s got triple-tax advantages: the contributions are tax-free, the gains are tax-free and the distributions, if used for eligible healthcare costs, are also tax-free. 

Think of the whole picture of what retirement would look like and cost you if you end up retiring early. For example, think about what healthcare insurance you’d need for you and your children, as well as what your estimated tax payments would be. 

“Also, be conscientious of those expenses that may arise infrequently,” Hunady said. “For example, you may own your car going into retirement but at some point, you will need to replace it, which is another expenditure to be budgeted for.” As you know, children are also expensive, well beyond the cost of college and no matter at what age! 

Also see: We have $1.6 million but most is locked in our 401(k) plans — how can we retire early without paying so much in taxes?

Also think about what sources of retirement income you’ll have. For example, you’ll tap into your retirement savings (which, keep in mind, you may be able to access through the “age 55 rule”) but what else? You might decide to retire early but occasionally work on consulting or contracting gigs, or take up a job part-time in a few years. And aside from those potential income streams, carefully consider when you would begin claiming Social Security. If you start as soon as you can at age 62, you’re permanently reducing your total retirement benefit that you’d have gotten at your Full Retirement Age. Other factors to think about when deciding when to claim Social Security include your assets, health and longevity. 

You mention a future inheritance, but you might want to keep it out of your budgeting. “While it is tempting to include inheritance in your retirement equation, it’s probably best to hope for one but not plan on it,” Hunady said. “Market conditions and your parents’ needs can change. Long-term care costs can also come into play, which can quickly deplete resources if long-term-care insurance is absent.” 

I always say this in my letters, but it bears repeating. A financial planner can also help you estimate your current expenses versus your projected expenses in retirement, and how to make the most of your assets and distributions in an early retirement. 

Until then, or without it, just be careful. “Build a plan focused on all of the risks and plan for the worst,” Finfrock said. “Higher taxes, stock market correction, extended recession, higher inflation, unexpected healthcare concerns. If all goes well, you may have been too conservative, but if things get messy, you will be glad you were prepared.” 

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