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I’m a 46 Year Old Divorced Dad. I Have $460k in My 401(k) and Contribute the Maximum. Can I Retire in 10 Years?

Updated: 08-11-2024, 12.16 AM

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Early retirement is an ambitious goal. Reaching it isn’t just about making sure that you have the money saved up. It’s also about making sure you address the potential risks, changes and needs that can come along in your 40s and 50s, because most people will have more obligations in their mid-life than they will in retirement.

For example, say you’re a divorced father at age 46. You have $460,000 saved up in your 401(k) and would like to retire in 10 years. We’ll say that you earn $100,000. In most places this can afford you a comfortable lifestyle, but it won’t leave room for lavish saving — and you likely have some significant costs to cover before retiring.

Retiring in 10 years would be pretty early, but is it realistic in your situation? Here are a few things to consider. You can also use this free tool to match with a fiduciary financial advisor to discuss your goals.

The first issue to consider is retirement income. With this profile, what kind of income can you generate? This will depend on a balance of your portfolio and Social Security income.

At this stage in life your 401(k) is doing very well. The median household has around $115,000 saved for retirement by their mid-40s, so you’re well ahead of the curve. And most retirement advisors suggest that by this age you need between 2.5 and 4 times your salary saved up. For a median-income household, this would mean a 401(k) value between $193,750 and $310,000, again putting you ahead of the game.

So if you’re looking to retire at around 67, this portfolio is right on track. However, for a retirement at 56 we need to do a little more math. What kind of savings can you have 10 years from now? And will it be enough to afford a safe and comfortable retirement?

With 10 more years of work, you have 10 more years to contribute to your 401(k). Setting aside inflation (which erodes true account value) and cap increases (which can increase your maximum contributions over time), the IRS allows a maximum annual 401(k) contribution of $23,500 per year. If you are age 50 or older, they allow a maximum catch-up contribution of $31,000 per year.

Let’s say you have a modestly aggressive portfolio invested entirely in the S&P 500, giving you an average annual return of 11%. If you make the maximum contribution each year, this might give you the following returns profile:

First, you would make maximum annual contributions of $23,500 until age 50:

  • Starting Value at 46: $460,000

  • Annual Contribution: $23,500

  • Annual Return: 11%

  • Value by Age 50: $808,991

Then, you would make maximum contributions, including catch-up contributions, of $31,000 from age 50 to age 56:

  • Starting Value: $808,991

  • Annual Contribution: $31,000

  • Annual Return: 11%

  • Value by Age: 56: $1.76 Million

This is a strong retirement account for many cases. Depending on how you manage it and the risks you can mitigate, it might fund an early retirement.

For example, say that you invested $1.76 million into a lifetime annuity at age 56. This might generate a representative guaranteed income of $9,258 per month/$111,096 per year starting at age 56. Adjusting your current $100,000 income by a 2% inflation rate, you’d need $121,899 annually to reach your current income level, so this route could potentially work if you have a little wiggle room in your budget.

Or, say you follow the 4% rule. That ordinarily budgets 4% per year over a 25 year retirement, anticipating that you will need money from ages 67 to 92. Here, then, we would need money from ages 56 to 92, a 36 year retirement. So, following the same rule, we would budget to withdraw 2.7% per year (1/36 = 0.027). This would generate the lower, but still potentially workable, income of $48,888 per year.

As noted below, much of this plan will depend on how you bridge the gap between retirement and Social Security. Take our example here. If you withdraw 2.7% per year, you will have to live on $48,888 per year from age 56 until you begin collecting Social Security, likely between 10 to 14 years. But this would be a significant reduction from your current income in the meantime.

Your individual financial plan, and the specific investments you can purchase, will matter significantly here. Consider speaking with a financial advisor who can help you run the numbers in your situation.

You will also need to account for Social Security. With a retirement at age 56, you cannot begin to collect Social Security several years. At the earliest, you can begin to collect reduced benefits at 62. You can collect full benefits at age 67, and you can collect maximum benefits at age 70.

With this profile, depending on how you manage your money, you might be able to afford to wait until age 70 before collecting benefits. This would be a good way to address the inflation risks inherent to a long retirement, since boosting your Social Security payments might help offset the significant cost increases over a 30- or (hopefully) even 40-year retirement.

For example, say that you will collect average Social Security retirement benefits. This would make your full benefits $1,907, boosted by 124% at age 70 to $2,363 per month/$28,376 per year. In this case, you might buy a representative annuity to fund your retirement. The annuity would hedge against volatility with a representative income of $111,096 per year from ages 56 to 70, then your increased Social Security benefits might help mitigate the impact of inflation with a combined income of $139,472 from age 70 on.

The next question is how to balance this income against your needs and risks. This profile raises a few specific questions that you should consider.

If you are divorced, there is a decent chance that you owe associated costs. A headline issue here is alimony, which will is a fixed monthly payment to your ex-spouse. In addition, though, divorce can have many long financial tails. For example, are you continuing to pay for a family home? Do you pay for insurance or other costs? Does your ex-spouse have a claim to your retirement account?

All of these costs, and others, will affect your planning.

Then, consider the costs associated with your children. If your ex-spouse has custody, what are your child support payments? If you have primary custody, what is your annual childcare budget?

In addition, what kind of spending do you have beyond structured payments or budgeting? For example, do you pay for your family’s health insurance? What kind of college fund contributions do you make? What kind of unstructured spending is common around your family?

This is particularly important because your family costs are, to a large degree, fixed. You can mitigate your lifestyle costs to afford an early retirement if you choose, but not your obligations to your children. Make sure you plan for that carefully, or consult a financial advisor to explore your options for planning ahead.

We note inflation risk above. With an early retirement, inflation is a particularly urgent issue. At the Federal Reserve’s 2% target inflation rate, prices double around every 30 to 35 years. If you retire at age 56, based on median life expectancy in retirement, you should expect at least another 30 years. If you beat the median even modestly (which, by definition, about half of retirees will), you might expect another 40 years or so.

This means that prices will likely more than double over the course of your retirement.

Now, there are many ways to address this. You can invest for some growth, for example, making sure your portfolio has a reasonable weight of equities which tend to grow with inflation, but may entail more risk. Or, if you have structured assets such as bonds or annuities, you can re-invest any excess withdrawals each year, creating a taxed savings fund to help boost your future income. As noted above, you can even structure your Social Security plan around hedging for inflation and price increases.

There are many ways to deal with inflation risk. The important thing is not to ignore it.

Finally, consider your health insurance needs. This is particularly essential given that you have dependents.

If you get your health insurance through work, you will lose it upon retirement. At the same time, you won’t be eligible for Medicare until age 65. This means that you will need to buy your own health insurance to cover that interim. If your insurance covers your children, you will need to account for the additional costs of a family insurance plan.

These costs can be significant, with the average family of four spending around $1,400 per month on premiums for unsubsidized insurance. Make sure you’ve budgeted for this spending, because unexpected health insurance bills can quickly ruin a retirement budget.

Ultimately, this profile raises two questions:

First, can you afford this retirement plan? How well would this plan meet your retirement needs?

Second, are these numbers realistic?

As to the first issue, any retirement plan is about balancing your spending against your income. And the biggest question is likely health insurance. Unlike alimony or child care, this would be a new cost for anyone who draws insurance from their workplace, and based on the averages it might add more than $16,000 per year in additional costs. You can know these costs in advance, though, so make sure to run the numbers before leaving your job.

The bigger question is whether these numbers are realistic. This retirement is potentially possible. It may generate less money than in your current lifestyle, and you will probably have to accept more risk, but it might be possible depending on your overall financial plan. It will depend significantly on the investments you can find, and what kind of a plan you can make for risk mitigation. It will also depend on your family’s needs, and how you can balance your retirement income against your savings. If you need help building or managing an effective plan, consider matching with a fiduciary financial advisor.

Early retirement is an ambitious goal, but you can do it with careful planning. In your 40s, you can potentially begin to plan for a retirement in your 50s, but it will depend significantly on what kind of assets and investments you can find.

  • Want to get out of the rat race? Then there’s no better place to start than our comprehensive guide to early retirement. 

  • A financial advisor can help you build a comprehensive retirement plan. 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 have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

  • Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

Photo credit: ©iStock.com/nensuria, ©iStock.com/SbytovaMN

The post I’m a 46 Year Old Divorced Dad. I Have $460k in My 401(k) and Contribute the Maximum. Can I Retire in 10 Years? appeared first on SmartReads by SmartAsset.

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