Retire Early Lifestyle
Retirement; like your parents, but way cooler

In 1991 Billy and Akaisha Kaderli retired at the age of 38. Now, into their 4th decade of this financially independent lifestyle, they invite you to take advantage of their wisdom and experience.

Personal Risk Tolerance and 401(k) Investment Decisions

Billy and Akaisha Kaderli

From the mail bag.

We often get questions from our Readers running the gambit. These questions have to do with risk tolerance, investment and personal finances.

Billy answers them all.

See below!

Would you cross this bridge? What is YOUR risk tolerance?

Reader:  How should one rebalance their 401(k) portfolio to align with changing market conditions and personal risk tolerance?

Billy:  Now into our 34th year of retirement, we have experienced many market changes through the years, including four bear markets.

My opinion is, in your 30’s, 40’s, and 50’s, you should be wanting growth. Investing in VTI, VOO, SPY, or similar low-cost Index mutual funds can achieve this. A slightly more aggressive approach would be to split your portfolio between VTI and VGT, so that you have more exposure to tech.

Remember that time is your greatest asset - don’t waste it - and let the markets work for you. 

Our portfolio is 75% equities and 25% cash/bond equivalents, as we continue to grow our assets, even at our age. Since we retired decades ago our portfolio has outpaced both spending and inflation. 

Traditional IRA vs. Roth IRA:

Tax-Deferred vs. Tax-Free Growth

Reader:  How do the tax implications differ between Traditional and Roth IRAs during the contribution and withdrawal phases?

Billy:  When we were working and in our early retirement years in the 1990’s, only traditional IRA’s were available. Roth’s were added in 1998, and by then we already had our early retirement plan in motion.

I know there are many strategies for doing Roth conversions, but I never wanted to pay the IRS early and preferred to let our tax deferred money continue to work for us. That said, we are 72 years old and are now dealing with future required minimum distributions, RMD’s.

The difference between Traditional IRA’s and a Roth is that you can deduct your contribution from your current year’s taxes with the traditional IRA, however need to pay those taxes upon withdrawal many years later.

The theory is that your income will be less in your retirement years, therefore your taxes due will be at a lower tax rate than your current tax bracket. In your Roth your contributions are made with after-tax dollars, however your withdrawals are tax free during your withdrawal phase.

I doubt this is going to be a popular opinion; however, Congress makes the tax rules and changes. My concern is that with the US reaching the tipping point regarding interest payments on our debt, Congress is not going to be able to resist the trillions of dollars sitting in Roth accounts as being a source of revenue for the government, and will find a way to tax the Roth distributions.

Another controversial opinion of mine is that if I had to do it over again, I would not have either the Traditional IRA or Roth.

I would simply invest that money into VTI, SPY and VGT and let it ride. These ETF’s pay very little in dividends therefore barely affecting our taxable income. When sold, the gains would then be taxed at the more favorable lower capital gains rates.

The question is - would this work for you? Depending on how good you are regarding spending and investments and the discipline of not touching this money before retirement, IRAs are great as a guardrail for people who cannot control their financial habits. This is not the case with us.

Note: I am not a Tax advisor so please do your due diligence.

Managing HELOC Risk in a Volatile Market

Reader:  How can fluctuations in interest rates impact the effectiveness of using a HELOC for velocity banking, and what safeguards should individuals put in place?

Billy:  Home Equity Line Of Credit is another tool that can be used as an emergency fund or for home upgrades. Other than those uses, I do not like the idea that people tap into them for vacations and other depreciating consumer goods purchases.

The equity in your home can be tempting in the short term, however, that can be a major source of money funding your future retirement.

Typically, people sell the Mc Mansion and scale down to a lower cost of living housing alternative, and invest the rest giving them a major boost to their retirement nest egg. It is wise to look at your home equity more as an IRA that you cannot touch and less as a piggie bank.

Velocity banking is a new term for me, and maybe I am showing my age. While working in the brokerage business as well as my continuing financial education, I have seen many “investment opportunities” that are not the best for most people. However, they can be great for the banks, brokerage and insurance firms.

Our method has always been utilizing the KISS system. Keep it Simple Stupid. We did have a HELOC when we owned our home, however we never used it.

Debt Repayment Strategies: Beyond Traditional Methods

Reader:  In what scenarios does velocity banking make more sense than traditional debt repayment strategies, and what are the crucial factors to consider?

Billy:  I suppose that if you have high-interest rate credit card debt, and your HELOC is at a much lower rate it might make sense for you to pay that CC debt off. However, do not use the cards again until the the HELOC is paid off. Otherwise, I don’t see the benefit of doing this.

Since it is doubtful that most people will be disciplined enough to achieve this goal, it’s better to simply not get into that scenario to begin with, and to pay off your credit cards’ entire balance monthly.

I pay my balance every Monday as a habit therefore, it is rarely unaffordable.

We eliminated all debt once we made the decision to retire - including selling the house. Paying interest on debt is a detriment to your financial independence goals. Eliminate all debt as quickly as possible and stay out of it and you, too, will be free from wasting money on interest payments. 

Retire Early Lifestyle appeals to a different kind of person – the person who prizes their independence, values their time, and who doesn’t want to mindlessly follow the crowd.

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