Typical retirement strategies assume a retirement age of over 60. With an earlier retirement goal, a careful look is required to determine what strategies will create the best outcome. James responds to a listener’s question about where to invest as he anticipates an early retirement. James walks through the steps of Root’s Sequoia System to explore options for early retirement scenarios.
Questions Answered:
How does early retirement impact traditional retirement planning
strategies, such as the 4% rule?
When deciding between retirement accounts (e.g., 401k) or brokerage accounts for pre-60 funds in early retirement, what factors should be considered?
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⏱Timestamps:⏱
0:00 – Question about early retirement
2:21 – Is early retirement possible?
3:30 – Why the 4% rule doesn’t apply
6:08 – Assessment of Juan’s situation
8:11 – The Sequoia system Step 1 – purpose
10:16 – Step 2 – retirement income
12:49 – Relying on SS benefit?
14:09 – Withdrawal strategy
15:32 – Sourcing funds from age 50-59
17:20 – Brokerage vs 401K
20:22 – A part-time income scenario
23:04 – Consider how expenses might change
25:14 – Step 3 – investment planning
28:09 – Steps 4 & 5- taxes and protection
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Maximize Your Early Retirement: Should You Save to 401k or Brokerage Accounts?
Planning for retirement is an important financial goal that many people strive towards. For those looking to retire early, it’s essential to carefully consider where to save and invest your money in order to maximize your savings and ensure a comfortable retirement.
When it comes to saving for retirement, there are two main options to consider: a 401k or brokerage account. Both have their own advantages and disadvantages, and choosing the right option can have a significant impact on your financial future.
A 401k is a retirement savings plan offered by many employers, where employees can contribute a portion of their salary on a pre-tax basis. One of the main benefits of a 401k is that contributions are tax-deductible, which can lower your taxable income and save you money on taxes. Additionally, many employers offer matching contributions, which can provide a significant boost to your savings over time.
On the other hand, a brokerage account is a type of investment account that allows you to buy and sell stocks, bonds, mutual funds, and other securities. While contributions to a brokerage account are made with after-tax dollars, the advantage is that you have more control over your investments and can choose from a wider range of investment options.
So, which option is better for early retirement savings? The answer ultimately depends on your individual financial situation and goals.
For those looking to retire early, a 401k can be a great option due to its tax advantages and potential for employer matching contributions. By contributing as much as possible to your 401k, you can take advantage of compound interest and potentially grow your savings faster than with a brokerage account.
However, some people may prefer a brokerage account for early retirement savings, as it offers more flexibility and control over investments. With a brokerage account, you can choose how and where to invest your money, potentially earning higher returns than with a traditional 401k.
Ultimately, a combination of both a 401k and brokerage account may be the best strategy for maximizing early retirement savings. By contributing to both accounts, you can take advantage of the tax benefits of a 401k while also diversifying your investments and potentially earning higher returns through a brokerage account.
In conclusion, deciding whether to save to a 401k or brokerage account for early retirement savings is a personal decision that should be based on your individual financial goals and risk tolerance. By carefully weighing the advantages and disadvantages of each option, you can create a retirement savings strategy that maximizes your savings and sets you on the path to a comfortable and secure retirement.
man great video thanks for the insight – so much to consider but great video
He is forgeting that if he retires early at 45. He won’t have 35 working years. Social security takes the average of your highest 35 working years of income. So you will have significantly less social security.
Oh man. I'm thinking five years At 56, wife 62. Health care is number one thought or concern. Maybe work part-time just for insurance… And absolutely take social security early for the wife to help cover medical… Because we've saved quite well otherwise.
I do both => Roth 401k + brokerage + crypto
Regarding SEPP/72t: I've had to explain to several people that you do not have to SEPP your entire IRA balance. You can split your IRA into multiple accounts without triggering anything. You can then take any number of those and set up an SEPP on them and they are each treated separately in the eyes of the IRS. SEPP is on a per-account basis, not a per person basis. So you could kick one off aimed at covering say 50-75% of your expenses, then use your Roth contributions and/or Brokerage balance to cover the rest. Doing this give you a lot of flexibility in being able to ratchet up/down spending as needed without dire penalties.
You could at a later date kick off a second SEPP from another portion of your remaining IRA to cover inflation, or increased spending if you need/want to. You could also cancel one SEPP and only pay the penalties on that single account.
A viable strategy might be to kick off an SEPP amount that fills up the 10% bracket (~$52k MFJ), then fill in the rest with Brokerage/Roth which up to ~123k/year combined would be taxed at 0% federal. With 23k of room leftover Juan could use for tax gain harvesting or even do some Roth conversion at 12%.
Lastly, beware the ACA phaseout "not a tax" ~8.5% tax that can be a bummer if you really thought you were getting away with 0/10/12% tax rates.
That 2.8m figure is very conservative eh? 3-4% rule is conservative
I thought you’d use like 6% and would only need like 1.8m which he’s very much on track for. And that’s not even including his social security or his part time job that he mentioned
I am not in the US so the investment specifics are of no interest to me but what is really helpful is the thought process and the overall strategies that are spoken about which are all universal and extremely helpful in retirement planning.
It’s funny. I never hear any advisor suggest that the non-income producing spouse consider getting a job even part time. Even after the kids are older.
$250k income? You should have no problem surviving and thriving in retirement better than 98% of the people out there with ease. You have more money than many of us to save.
4% is a very conservative withdrawal rate, even for a 40+ year long retirement. If you look at the data, the vast majority of those following this rule would end up with portfolios substantially larger than what they started with. Moreover, studies have found that most retirees will not simply increase withdrawals at the rate of inflation indefinitely – hence the "retirement smile." This is a long way of saying – 4% for 40+ years is just fine. You may even push it to 4.5%, especially if you have the ability to adjust down in poor market years.
James, thank you for the heads up on demonstrating the confluence of factors & how they add up to the need correct our vision on how much we need to have assurance that there is enough cushion for the later years. Inflation is both the elephant & lion in the room: it will sit on you & devour you in concert!
Really LOVE the idea of using the 72t to be able to withdraw from your pretax 401k at ANY time without penalty. This strategy seems especially good for those who plan to retire in their 50s who would love to have a set amount, say $35k based off a $700k portfolio, to live off each year from 51-59. Because retirees tend to spend whatever amount they have coming in, designating a reasonable $35k per year to spend without guilt, seems like such ideal scenario. I can't wait for your deep dive about this rule that not many seem to be aware of.
As always James doe a great job. My first question for Juan would be can he really live on $100k. If he is making $250k now and only saving $40k where is the rest of his money going?
Outstanding video!! Juan needs to put most of his money into a brokerage account until 50, live on that until the the rule of 55. Then his Roth IRA
Great topic. Like Juan, I’m trying to retire early, maybe between 52-54. For many years I’ve been focused on maxing out my 401k and IRA. But now I’m wondering if I should focus my savings on my brokerage account so that I have a good chunk of non-qualified money I can use until I get to 59.5.
My plan for early retirement was to pick a desired retirement age. For example, age 52. Then, save as much money as I could in a personal brokerage account to be able to pay for living expenses during the age gap from 52 to 59 1/2. This assumes losing my job before age 55 (worst case). While saving this money, max out my HSA and contribute enough money into my 401k to receive 100% of the corporate match. Once reaching the minimum amount of money needed in the personal brokerage account, go back to trying to max out my 401k. Investment gains in the personal brokerage account is all you need at that point. I would not retire until having enough money in the 401k account to carry me to a sufficient old age, like 90.