3663: Should I Stop Using Retirement Accounts If I'm Planning To Retire Early? By Chris Reining on Retirement Investing

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[00:00:54] This is Optimal Finance Daily. Should I Stop Using Retirement Accounts If I'm Planning to Retire Early? By Chris Reining of chrisreining.com. And I'm Justin Malek. I read you articles and give a little commentary to go along with them, all to give us both a reminder about what's important every single day of the year. So let's get that reminder as we optimize your life.

[00:01:24] Should I Stop Using Retirement Accounts If I'm Planning to Retire Early? By Chris Reining of chrisreining.com. Today's question comes from Kenton. He asks, quote, I really appreciate you sharing your experiences about how you became financially independent. I read your article, Is Starting a Business the Fastest Path to Financial Freedom? And loved it. I'm 35, happily married with four kids in a typical financial situation,

[00:01:54] okay salary, mortgage, credit card debt, and small 401k. How did I find you? Well, that's a very personal discussion I'd like to share with you that leads up my question. My grandfather died at the age of 57 of a heart attack. He was a poor farmer, never had much, and left my grandmother destitute. My father died in January at the age of 65 of the same thing while on a bicycle ride.

[00:02:21] Lucky for him, he saved, invested, and worked for a company that gave him a pension. He retired two years earlier and was able to enjoy financial independence for a short amount of time. I remember snow skiing with him last year. We were riding up the chairlift and he suddenly screamed out, I wish I could do this every day. I thought he was crazy. He was loving life, loving retirement, and then, bang.

[00:02:50] While at the mortuary deciding on which casket to put him in, it hit me. My grandfather died at 57, and my dad died at 65. If I follow a similar path, that means my life is past the halfway mark. I saw myself laying in that casket. I determined at that time that I would be a better husband,

[00:03:12] father, brother, son, friend, and human being. But a strong desire also ignited within me to figure out how I could achieve financial independence early so I could have more time to spend with my wife, children, and grandchildren, helping them, helping others, and doing things that are meaningful to me. When I got home from the funeral, I immediately increased my life insurance policy

[00:03:39] so my family would be taken care of just in case, and started searching the internet for financial independence, how to retire early, and how much do I need to retire. That's when I found your site. Your experiences and insights have given me hope that one day, I'll reach financial independence, and hopefully, do it sooner than even my grandfather. You've been able to break it down into simple, understandable concepts. But here's my question.

[00:04:09] What kinds of investments should I get if my goal is early financial independence, like 50 years old? Do I even need to invest in a 401k? My company does do a pretty good match, so I'd be giving that up, but may not ever be able to use it. Do I just put everything into a post-tax index fund account and build it up to my financial independence amount? Do I have a combination of both? Because who knows, maybe I'll live till I'm 90, or they cure heart disease between now and then.

[00:04:40] What does the plan look like for people whose goal is to achieve financial independence before 67? Where should I invest money into? I realize that additional income will be needed, so I am currently working on creating a side business that I hope to build up to replace my current income. Any extra from that will go toward the plan, so hopefully I can speed things up with that."

[00:05:05] First of all, there isn't a one-size-fits-all solution for financial independence and early retirement. People successfully get there taking different approaches, so it's more important you figure out which approach best fits you personally. If your sole investment vehicle is the stock market, then you need to figure out where best to put your money. Number one, 401k account.

[00:05:31] Most people are concerned they can't access 401k money before age 59 and a half without paying a penalty. This is mostly true. However, if you retire at 55, the money you have in your 401k with your current employer is available without penalty. And if you're a public safety government employee, it's 50.

[00:05:55] If those things don't apply to you or you want to retire at 40, there is one option. You can take money out penalty-free using what's called a series of substantially equal periodic payments. This is also known as IRS Rule 72T. You have to take these payments for five years or until you reach 59 and a half, whichever comes later.

[00:06:21] Using this rule is complicated, so get help from a tax professional. Number two, IRA account. Any money you contribute to a Roth IRA can be taken out at any time without paying a penalty. However, the earnings are treated differently. Generally speaking, you can't access earnings prior to 59 and a half without paying a penalty. And number three, taxable account.

[00:06:50] Any money you have in a taxable account can be taken out at any time without penalty. The downside of a taxable account is that you might be paying double taxes. Why? First, you're paying income tax on the money before you even invest it. And then after you sell an investment, you pay a capital gains tax on any gains. This varies depending on how long you hold an investment and your tax bracket.

[00:07:18] It's difficult, but if you can keep yourself in the lowest tax brackets, you won't pay any capital gains on investments held for over a year. As you can see, the right answer for how to invest for financial independence is, it depends. Maybe sharing what I did will help. I was investing in two places, a 401k and a taxable account.

[00:07:44] I always contributed enough to the 401k to get the full company match because not taking advantage of a match is like not bending down to pick up thousands of dollars off your kitchen floor. After the 401k, any extra money I had went into the taxable account. When I quit my job at 37 and started living off investments, 25% of money was in the 401k with the remaining 75% in the taxable account.

[00:08:13] My thinking was that the taxable account would pay me for 25 years or so. And at that time, the 401k, just sitting there compounding the whole time, would pay me for the next 25 years. I didn't want to monkey around with a gazillion different accounts. So this two account approach seemed simple enough. Make sense? And it just so happens that the money in the taxable account will probably last forever. I overshot.

[00:08:42] That's okay because the 401k serves as a backup in case of spending shocks or lower future returns or all the known unknowns people like to worry about. Anyways, my own father was killed young, so I can relate to your story. When you understand that you're going to die, that everyone must die, it's the best motivator to start living the life you want to live.

[00:09:07] Try pretending for just a moment you're at the end of your life and ask yourself, what was important to me? You're not going to say it was a bigger house, fancier car, or more glamorous job because you're going to say things like family, relationships, and happiness. Align your life with what matters to your future self and you'll start living a more meaningful life right now.

[00:09:38] You just listened to the post titled, Should I Stop Using Retirement Accounts If I'm Planning to Retire Early? By Chris Reining of chrisreining.com. And I'll be right back with my commentary. I've tracked my income and expenses since 2010, back when that meant a spreadsheet I built myself and updated every day. I loved it, but I still missed things. Categories changed and I'd go months before noticing my spending had doubled.

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[00:11:52] That's S-Q-U-A-R-E dot com slash G-O slash OFD. Run your business smarter with Square. Get started today. Thank you to Chris, and really thank you to Kenton too for sharing something so personal. That's a heavy story to open with, losing his dad and his grandfather so young. And I think most of us can understand how a moment like that reshapes what we care about.

[00:12:19] On the money side, I'll keep it simple because I'm not a financial advisor, and this is exactly the kind of thing where a good tax professional earns their fee, like Chris said. But the big picture takeaway I got is just that there's more than one path. The retirement accounts and a regular taxable account each have their trade-offs, and the right mix really does depend on your own situation and timeline.

[00:12:44] Chris even shared his own split, and then admitted he overshot, which I actually found kind of reassuring. But even more important, I think, is his closing idea. To picture yourself at the end of your life, and ask, what actually mattered? And like he said, the answer is never a bigger house or a nicer car. It's people, time, meaning, those types of things.

[00:13:10] If you're interested in this idea, by the way, there's a book you can check out called The Top 5 Regrets of the Dying by Brawny Ware. In any case, try his little exercise for a second. Picture future you looking back, and ask what you'd want more of. Then see if there's one small way to take a step in that direction. So thank you to Chris, and thank you. I appreciate you being here and listening every day.

[00:13:39] Have a great rest of your day, and I'll see you tomorrow, where your optimal life awaits.