Aggressive Saving for (an early) Retirement

Aggressive Saving for (an early) Retirement

My wife and I are not great at aggressively limiting expenses, and we indulge in vacations and other interests. We have been fortunate to stay employed and make decent wages during our professional careers. When we first became homeowners we were more frugal. I was more of a DIY type around the house including yard work, car maintenance, etc. I actually enjoyed tasks like mowing the lawn, raking the leaves, changing the oil, spark plugs, and rotating tires for our vehicles. As our income and children grew, we had to allocate more time to their needs and activities. We had more “disposable” income to pay for automobile service and lawn care, and also the freedom to vacation at Disney and share summer rentals in Maine, RI, and Cape Cod with our extended family.

However, built into our budget are sizable retirement and investment savings that feed our nest egg with a goal to retire in the next couple of years. I know it is very difficult for many folks to save anything, let alone max out the retirement thresholds, but in this article we review what we strive for on an annual basis. Overall, saving 10% is a good initial target, but more is better. If you can’t quite save 10%, make some changes to get there. If you already save 10%, see if you can save more. The earlier you start, the better!

Traditional 401k – $39,000 contribution for 2021

My wife and I both max out our traditional 401k through our respective employers. This is the main retirement vehicle nowadays for many people. It allows Tax-Deferred contributions up to $19,500 if you are under 50. If you are 50 or older, you can contribute an additional $6500 as a catch-up.

Contributions to a traditional 401k are Pre-Tax dollars, meaning that they reduce your taxable income, which is a great benefit. For example, if you make $100,000/year and contribute the maximum of $19,500, the contribution is taken “off the top” and your taxable income starts at $81,500 before applying other deductions.

The investments in your 401k generally grow tax-free “until” you take a distribution or withdrawal. Since you never paid tax on this money, it is usually taxed as income, but since you are probably retired and no longer working, your taxable income could be less. However, it’s always important to account for tax implications in retirement and in your overall finances. Consider the account types and timing for the tax liability of capital gains and dividends.

There may be some limitations on what type of investments are available, depending on your employer’s plan. If you want to make a withdrawal from your 401k, you will be penalized 10% if you are less than 59 1/2 years old, although there are exceptions to this. My wife and I both took a Cares Act withdrawal during the pandemic in 2020, that waived the 10% penalty. We can talk about how we’re approaching this at some point too. Normally, the penalty is in addition to the taxes you need to pay. Ouch! It is also possible to take out a loan against your 401k in some cases to access the money. In another article, we review some options to tap your 401k before age 59 1/2 like the Rule of 55 or taking SEPP through 72(t), but it may be better to try other methods first (like generating passive income).

Some companies provide a match on your contributions. For example, they may match up to 5% of your salary IF you contribute at least 5% of your salary. If this is the case, please try to make this your minimum goal. Take a long hard look at your budget and see if you can make this work. In our case, both our companies provide some matching contributions regardless, but we are going for maximum contributions anyway. Depending on your tax situation, you may want to do the match percentage first, and then move onto other retirement accounts if you can get the tax deduction. For example, contribute to your 401k to get the match, then put “leftover” savings into a deductible IRA. For us, this is our main deduction since we can’t take deductions for a traditional IRA due to the income limits.

Roth IRA – $12,000 for 2021

I love many features of the Roth IRA. Unlike a traditional IRA, contributions to a Roth are made with after-tax dollars. There is no tax benefit associated with the contribution itself. Investments in a traditional IRA are treated similarly to 401k investments, they grow tax-deferred, but are taxed as income upon distribution.

On the other hand, most Roth IRA distributions are tax-exempt!

Consider this: If you have $1M in a 401k or Traditional IRA, do you really have $1M? No, because you have to pay tax on any distributions. With a Roth IRA, if you have $1M, you really have $1M to spend. The conventional wisdom is to weigh whether your tax rate will be higher in retirement or not. We don’t know what’s going to happen with tax rates in the future though. My tax rate may be lower in retirement, but the Roth offers more flexibility and some certainty regarding taxes (unless they change how Roth accounts are taxed some day….).

Another benefit of a Roth IRA is that you can withdraw your contributions at any time with no penalty or taxes. This could be very helpful, such as for college tuition, purchasing a property, medical bills, or other hardships. I consider the Roth IRA as part of my emergency fund. A best practice is to have an emergency fund with at least 3 months of expenses available in a liquid account (checking, money market, etc.). 6 months or more is better, but this can be tough to achieve. If it really is an emergency, it’s nice to have the option to use your Roth IRA contributions, but this should not be a first choice…

Our IRA accounts are with Schwab and we have a lot of options in types of investments, with more choices than most 401ks.

Note: we technically don’t qualify to make a contribution to our Roth IRAs, since we exceed the income limit. In 2021, contributions start to phase out at an Adjusted Gross Income (AGI) of $198,000, and are completely phased out at an AGI of $208,000 and above. We are using the back-door by making non-deductible contributions to traditional IRAs, then doing a rollover from the traditional IRA into our Roth. This will be the subject for a future article.

Non Tax-Sheltered Investments- $36,000 for 2021

The 401k and Roth IRA cover our tax-sheltered retirement vehicles. We can start tapping Social Security at some point, but if you want to retire earlier than 59 1/2, you may need to consider how to replace your income some other way. One part of our plan is to build our passive income in non tax-sheltered accounts. There are several options, but we are pursuing dividends through a taxable brokerage account with TD Ameritrade and investing through the Fundrise real-estate platform, which had 120K investors at the end of 2019.

I had tried real-estate “crowdfunding” over the past couple of years with another company called RealtyShares, but this was a mixed bag. Out of 6 investments, 4 exited with full principal and interest, roughly 8% return. I have two pending investments, with one at risk of 50% loss of capital. Luckily, this was “only” a $5,000 deal, but some of these deals clearly lacked adequate vetting or due diligence.

I have been more comfortable with the quality, transparency, communication, and performance of Fundrise so far. We started in Sept 2019, and as of February 2021 it is about a 5.5% return, but this has included the debacle of COVID-19. They focus on residential real-estate that has remained fairly consistent, even with all the insanity of 2020. As we add more capital and markets stabilize, we are tracking to approach the long term 9.47% return per Fundrise, which usually follows a “J-Curve” pattern like this:

We target contributions of $1,500/month to Fundrise and $1,500/month to our TD Ameritrade account. I can write more about these in future articles.


So, we are targeting $87,000/year or $7,250/month in retirement savings. After lease payments for one car, mortgage payments on our house, and tuition for our daughter’s private high school, there isn’t a lot left over. So we are almost living paycheck to paycheck, but baked into that is substantial savings that we treat like required expenses. Paying your mortgage is also contributing to your net worth. You need to “pay yourself” first. I wish I had started working on non tax-sheltered investments earlier, really only started in the past couple of years. I think this will be crucial to be able to retire soon, but we’ll see how it plays out.

InvestmentAnnual Amount
Roth (back door):$12,000
TD Ameritrade:$18,000
Grand Total:$87,000
Retirement Savings Targets 2021

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~$Retirement Nerd🤓

Disclaimer: I am not a financial planner and content on this site is meant to provide food for thought, not professional advice. I share my experiences to show what worked so far and what didn’t, YMMV. Please consult your financial advisor or tax professional as needed.

By $Retirement Nerd

$Retirement Nerd is in his late 40s and looking to retire in the next few years.

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