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. |
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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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