My husband and I have always been big fans of retirement accounts. We both opened 401(k) accounts when we started our first corporate jobs in our early 20s. When we left those jobs to become self-employed, we rolled the funds over to IRAs. But we had a period of about 18 months when we didn’t contribute to retirement savings because we were barely earning enough to cover our mortgage in our new self-employed life. As soon as possible though, we set up monthly contributions to our IRAs. In the beginning, it was only $100 a month into each account, but it was something. And as time went on, we bumped up our contributions – I think we were contributing the maximum amount by about 2007/08.
We also opened a health savings account during the years we had an HSA-qualified health plan, and contributed the max each year (we don’t withdraw from that account – it’s there as a backup medical expenses account for now, but ideally we’d like to have it be there to cover medical expenses later in life. And it can also be used as a regular retirement account after we turn 65, taxed the same way our traditional IRAs are). Our HSA is invested in the stock market, not just sitting in a bank account – that’s an important part of using an HSA as a supplemental retirement account… you don’t want it sitting in an account earning 0.09% if you’re not planning to use it for several decades.
When I worked at the local library several years ago, I opened a 403(b) account as soon as I was eligible to do so, and after a while, I was contributing most of my income to it (I worked very part-time, so the total contribution was small, but the percentage was pretty sweet!). When we moved and I left that job, I rolled that account over into my IRA as well.
Four years ago, we opened SEP IRAs and our business has been funding them ever since, contributing the maximum amount (25% of our salaries). Around the same time, we got a credit card that gives us 2% rewards, deposited directly into an IRA.
All in all, retirement savings have always been a focus for us. And the tax advantages of retirement accounts are pretty sweet. Neither of us has ever received any sort of employer match though – everything we have saved in retirement accounts has been our own money (the SEP IRAs are technically employer-funded… but we’re the sole owners of our s-corp, so it’s our money either way. If we didn’t take money from the s-corp and send it to the SEP IRAs, we’d receive higher salaries and dividends instead). If an employer-match is part of the deal, a retirement account – maxxed out at least as much as necessary to get the full match – is a no-brainer, because otherwise you’re leaving free money on the table.
But in our case, it’s always been our own money, with no employer match. And we’re starting to question whether we should back off a little from the tax-advantaged retirement accounts and focus more on our taxable account instead.
Bear with me, because I know that sounds like crazy talk. But we’re starting to set our sights a little higher. Our retirement accounts can’t be accessed (without a penalty) until we’re at least 59 and a half. For my husband, that’s still 21 years away – and a little longer for me.
But we don’t want to still have to be working full time to cover our expenses 20 years from now. I love the fact that we have a decent retirement nest egg that can continue to grow for the next couple decades. But ideally, I’d like it if we could have a significant gap between when we’re able to stop working and when we’re able to start drawing money from our retirement accounts. And although we don’t have a Stormy Simon level income, we’ve done a good job of keeping our expenses relatively low, even as our income has grown over the years. So the two main things we have going for us in terms of early retirement are a high savings rate and low annual expenses. The Minimalist Mom posted an article today about how small luxuries are better than big ones, and how beneficial it is to keep housing and transportation costs as low as possible. It inspired me to crunch our numbers, and we’re currently spending about 14% of our take-home pay on housing and transportation, including mortgage, property tax, home and auto insurance, and gasoline/vehicle maintenance. We spend a lot on food, because it’s important to us that our food be sustainable, as local as possible, organic, grass-fed, etc. But we get pretty much everything else we need from thrift stores, Craigslist, or garage sales, and we tend to opt for the DIY route when it comes to most of our projects and tasks. The end result is that we’re able to live very comfortably on a whole lot less than we earn. And that means two things: We can save a lot, and we’d don’t need to save millions of dollars in order to be able to maintain our lifestyle and income in retirement (here’s a good explanation of how these this translates into reducing the number of years you still have to work for money).
About four years ago (apparently, we made a lot of money changes at that time) we started contributing to a taxable account that was earmarked as a mortgage payoff fund. We’ve accumulated more money in that account than we owe on our house, but we’re waiting until 2018 to pay off the mortgage, simply because we earn more in bond dividends from that money than we pay in mortgage interest (the mortgage resets in 2018, and will probably go as high as 4.88% – at that point, we’ll pay it off because it will no longer make sense to keep the money in the bond fund). Initially, we had planned to just save up enough to pay off the house. But that was before we set our sights on not having to continue to work full time for the next 20 or 30 years.
Once we had enough in the bond fund to cover our mortgage, we added a stock fund in the taxable account and started putting money aside with longer-term goals in mind. We’ve kept the mortgage payoff money in the bond fund because we need it in just a few years and want it to be in a pretty safe investment. But for money that we’ll need 15 years down the road, we’re happy to invest mostly in stocks for now (in an index fund, of course). And although we’ve been very aggressive in terms of how much we’re putting in that account, it’s still relatively new to us, so the balance isn’t that impressive. But what if we were to back off from the IRAs and SEP IRAs and instead put as much of our money as possible into the taxable account? Yes, we’d lose the tax advantages we get with the retirement contributions. But if we could set ourselves up to be financially independent a decade from now, wouldn’t that be a worthwhile trade-off? Once we reach a point where our investments earn enough money to fund our lifestyle, that should continue to be the case forever (including in the traditional retirement years), as long as we don’t exceed the 4% rule (or 3%, if you have a more doom-and-gloom outlook…). And of course, the retirement funds we’ve already put aside should continue to grow and be there for us to tap into three decades from now – which will add to whatever we’re able to save in our taxable account.
It’s not something we’re acting on right away. We’ve already maxxed out our IRAs for 2014, and our s-corp is still making monthly contributions to our SEP IRAs. For now, we’re not going to change that. But we might not automatically continue to just max out our retirement accounts in the future. This seems like a radical idea to me, as I’ve always taken it as a given that retirement accounts should be a top financial priority. But for people who would rather transition to part-time work (or no paid work at all) long before age 65, should taxable accounts be a higher priority instead?
What do you think? Any early retirees (or hopefuls!) out there want to weigh in on this?