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).
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.