Key Points
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There are many risks to consider when planning for retirement
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These can include inflation risk, interest-rate risk, and longevity risk.
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For such a big question, it might be smart to consult a financial professional.
As always, The Motley Fool cannot and does not provide personalized investing or financial advice. This information is for informational and educational purposes only and is not a substitute for professional financial advice. Always seek the guidance of a qualified financial advisor for any questions regarding your personal financial situation. If you’d like to submit your question for feedback, you can do so here.
Financial planning for your future is tough. It’s hard to know how much you need to save for retirement — because each of us is different, with different spending habits, needs, preferences, goals, expected longevity, and costs of living, among other relevant factors.
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An early retirement with $5.5 million?
Someone on Reddit asked an interesting question. She wondered if she could retire early, at age 50, with about $5.5 million. That sure seems like plenty, right? It might not be, though — so read on, for some important considerations.
Here’s the question as posed:
In a nutshell:
- She’s 50 and married, with four kids.
- She’s earning a $125,000 salary and her husband’s is $200,000.
- She has $4 million in a 401(k) account and $1.5 million in a brokerage account.
- She has $570,000 in one or more 529 plans (for college expenses) and plans to spend $1 million on college for all four kids.
- The household spends about $200,000 per year.
- Her husband will still work, but she wants to retire and spend more time with her children.
So, is an early retirement possible? Well, here are two initial considerations:
- College costs here are a wild card. College can cost relatively little if a kid goes to a state school and/or gets a lot of scholarship money. Or it can cost a lot depending on the college — and on how old the child is now. A 10-year-old child still has about eight years until college, and costs might be much higher by then. Still, this family already has nearly $600,000 in 529 plans, which should grow in value as the kids age.
- The money in the 401(k) account is meant to be withdrawn after the account owner turns 59 1/2. Taking money out earlier is considered an early withdrawal, subject to a 10% penalty and income taxes on the amount withdrawn. So money that she needs to take from financial accounts might first be withdrawn from her regular taxable brokerage account, where there would be no penalty.
How to make it work
It’s not really possible to say how financially safe an early retirement would be in this situation, as there are lots of risks and variables to consider. Here are some of the risks:
- Inflation: If inflation is very high for a prolonged period, the buying power of her financial accounts can shrink a lot. Even if inflation is close to its average of about 3% annually for 25 years, that would be enough to cut the purchasing power of today’s dollar roughly in half.
- Interest rates: If interest rates are fairly high during her early retirement, she might park a sizable chunk of her investment money in interest-bearing accounts or bonds, and collect significant income from that. But if rates are low, there will be little income available.
- Longevity: Living a very long time, into your 90s or even beyond, can be a blessing. It can also be a curse, financially, if your savings and investments aren’t sufficient to support you for so long. You might consider a deferred fixed annuity to help address this risk — it will start paying you at a specified point in the future. An immediate fixed annuity that’s set to pay you for life can also help, especially if it includes annual increases.
- Stock-market volatility: This can also be an issue if the stock market crashes (as it has always done every now and then) at an inopportune time (although it always recovers, too, eventually). If you’re planning to withdraw from investment accounts to support yourself and your accounts are suddenly 30% smaller, you might be shrinking them more than you want to. Ideally, don’t keep any money in stocks that you might need within five years.
- Healthcare costs: Healthcare costs, especially for retirees, who are older and tend to have developed more health issues, are already steep and are likely to get steeper. The questioner’s husband is expected to keep working, so she should be able to remain covered under his plan. But should he end up out of work, that could end up costing them a lot until they qualify for Medicare at age 65.
Given all that, the questioner might be best off consulting a financial advisor or two — some of whom might offer free initial consultations. If it ends up seeming a bit risky to stop working now, she could consider just cutting back on work. She might work part-time, for example, remaining mostly free when her kids are free.
It’s also a good idea to formulate a household budget and stick to it, to help keep spending in check. If there’s a way to shrink that $200,000 in annual spending, that could also help her savings go further.
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Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
