How to Know When Retirement Accounts Aren’t Enough

Beyond Retirement Accounts: Building a Flexible Financial Future

In this episode of The Retire Early Retire Now podcast, host Hunter Kelly, a certified financial planner, discusses why traditional retirement accounts like 401ks and IRAs may not be enough for achieving financial freedom. He outlines the limitations of these accounts including contribution caps, early withdrawal penalties, and required minimum distributions. Hunter emphasizes the importance of financial tools like brokerage accounts, HSAs, and real estate for flexibility and tax advantages. He introduces strategies such as the three-bucket approach for optimal asset allocation and tax diversification. The episode also covers creating a balanced financial strategy to ensure both liquidity and growth, helping listeners build wealth beyond traditional retirement accounts.

00:00 Introduction and Today's Topic
01:39 Limits of Retirement Accounts
02:57 Liquidity Issues and Tax Implications
06:12 Life Situations Where Retirement Accounts Fall Short
11:44 Building Wealth Beyond Retirement Accounts
18:21 The Three Bucket Strategy
21:59 Conclusion and Call to Action

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Transcript

0:00

And welcome back to The Retire Early Retire Now podcast. I'm your host, hunter Kelly, certified financial planner and founder of Palm Valley Wealth Management. Here's the question for today. What happens when retirement accounts just aren't enough? Most people think if they're maxing out their 401k or IRA, they're set for life. But the truth is those accounts, while powerful come with limits. Contribution caps early withdrawal penalties and required minimum distributions down the road can all make them less flexible than you think. In this episode, we're going to talk about the signs that retirement accounts might not be enough on their own when you might need to look beyond those accounts and what other tools like brokerage accounts. HSAs and even potentially real estate can give you flexibility, tax advantages. And freedom you're actually gonna need in retirement. So whether you're a high income earner trying to save more than the capital owls, or you've got big goals for financial freedom before 59 and a half, today's conversation is going to help you see the full picture. But before we get started, go ahead and leave a five star review on your favorite podcasting app. And if you know someone that would. Find this episode useful or helpful, go ahead and share that with them as well. This helps the podcast grow tremendously, and my goal is to help as many people as possible retire early and become financially free so they can do the things that they love with the people that they enjoy doing those things with. Let's jump in. I think the first part, or the first thing I want to talk about is the limits of those retirement accounts. If you're talking 4 0 1 Ks, 4 0 3 Bs, four 50 sevens, generally speaking. You have about$23,000 that you can put away into these accounts, and if you're lucky, you'll receive a match from your employer. Your IRAs have about$7,000 or have seven,$7,000 limit. high income earners saving 50 to a hundred thousand dollars annually can really start to outgrow these accounts quickly. So if you are. Calculating that you need to save 15, 20, 25, maybe 30% of your income, and you start to realize that, hey, that's 50, maybe a hundred thousand dollars,$150,000. Well, these retirement accounts start to cap out at a very small. Portion of what you actually need to save or want to save. So a physician earning$400,000 a year maxing, their accounts can still save an extra$60,000. But the question is, where should that money go? Right? The other thing is liquidity issues. If you're putting all of this money into your 401k or your IRAs access before 59 and a half often becomes difficult because of 10% penalties from the IRS. Even with exceptions of the rule of 55 or 7 72 T, there are restrictions, and they can be difficult on your tax return. it's like storing your food in a freezer. You'll be well fed later, but you can't cook dinner tonight without falling it out. we've all been there, right? We think about what we want for dinner. We get busy with the day and we go, Hey, we want burgers. We have ground beef in, the freezer, but it's five o'clock and we have not taken it out the freezer. So we either need to go to the store to get fresh meat, or we may not be eating till, later than we want to. Right. Or maybe we need just need to cook something else. in our family, we probably will just go out to eat. So you can put in, money into these accounts, but again, you have liquidity issues there if you're not 59 and a half. So tax implications, right? So that's the next piece of this RMDs. forced withdrawals. So while you may be in your thirties or forties, this is something that you should, think about at least periodically Are these RMDs because, if you're maxing out, these accounts, larger largely pre-tax wise, so if you're, if you're putting in your$23,000 a year and that is going in pre-tax and you're deferring that tax for later. This can create a large taxable income in retirement. And so one of the things that you can do to mitigate that, is, something called Roth conversions. We've talked about this on the podcast, previously, in other episodes, I have not talked about it in a while, so it might be something I can bring up here, shortly in the next, few episodes or next few months. But, You can do this through creating a brokerage account that we'll talk about here in a little bit. getting your income down on paper and then maybe doing some conversions to, offset some of these RMDs as you grow older and the require and the government requires you to start taking money out of these accounts, right? And so that's, that's the issue here. Right. You, you max these out, you get these accounts nice and healthy. Million, 2 million, potentially$3 million in there. If you've been maxing it out for 20, 30 years, you retire, you turn 75, and the IRA or the IRS is going to say, Hey, you need to start taking require. Minimum distributions, maybe you don't need that, all of that income and now you're getting pushed up into tax brackets that, potentially were unnecessary, right? So that's a little bit into the weeds, but, something that you do need to consider as you're contributing to these accounts, long term. So if all of your money is put into pre-tax accounts. future tax brackets become unpredictable, right? that's why we want to utilize Roth and these brokerage accounts so that you have more flexibility tax wise, long term. life situations where retirement accounts are just not enough. So we talked about this briefly in the intro. you may be a physician or, you may be working, making three, four or five,$600,000 a year or more. and so putting, saving$23,000, while it is a nice chunk of change. May not be percentage wise what you should be saving if you want to retire early or even retire, at a normal retirement age, right? Because$23,000 may be a very small percentage of your income. And so what are some situations where retirement accounts are just not enough? So I mentioned it, and this is a topic that we've been talking about the last handful of weeks, and that is either retiring early or if you're wanting to participate. Or have this idea of coast fire, right? So you want to be able to work on your own terms, but not have to save like crazy. You wanna have your retirement accounts take over and be there, for when you're 65, but maybe you cut back on work or do something else that you're, that will be more fulfilling, based off your values and things of that nature. And so people who want freedom in their forties and fifties need access to cash or money. Earlier, and so a couple hitting their coast fire number at 50 cannot touch retirement accounts, without penalties. There's some very minor things that you can do, but overwhelmingly, if you're gonna need your IRAs or 4 0 1 Ks to bridge that gap between age 50 and age 59 and a half, there's likely going to be a 10% penalty, associated with those withdrawals. we need to make sure that. If you still have time, to work and, and things of that nature. building a brokerage account, can be that bridge from age 50 in this, in this case from age 50 to 59 and a half. And so how do we bridge that gap? Right? Using a brokerage account can do that. Another situation is you have a high income lifestyle, right? And so families making three or four or$500,000 a year or more, and they often spend more than retirement accounts alone will cover, right? So what I mean by that is that yes, you could be maxing out your 401k, but your level of spending, that you will. that you're doing currently and that you will continue doing because that's just your lifestyle. you may need to save more than$23,000 a year to cover that when you want to retire, right? And so the only other way to do that is to open up a brokerage account where you can invest and allocate some of that money for later on down the road. Now, is it as tax efficient as a Roth IRA or a 401k? Likely not. Right. but you still need to plan long term for, that account, right? So that you have enough put away so that you can continue having, that lifestyle that you're used to and accustomed to. So retirement accounts are just only a part of your cash flow in this situation, right? The next thing is. Unexpected life events. So health issues, supporting kids, aging parents, aging parents is a big thing, right? as your parents age, maybe they did not do, a well enough job of saving. And this is what is motivating you to listen to podcasts like mine and make sure that, when you're older, your kids are not having to financially take care of you. This can be unexpected, right? Mom and dad, have health issues, that are unexpected, and so now you're having to take care of them. So whether that's you taking time off work and not making the income that you're accustomed to or having to help them, fund care or other things of that nature because of, just their age and things of that nature. next thing is the tax diversification gap. So, overreliance, and we kind of mentioned this just a second ago, but overreliance on pre-tax accounts, it potentially will push you in a future tax trap, right? So for Overreliant on maybe potentially SEP IRAs, if you're business owners, 4 0 1 Ks, four 50 sevens, all of these, different accounts if we're over reliant. On that, then you're gonna have less control over your tax bracket later on down the road. And so we want to have diversity, what we call in the business. We wanna have, good tax location, right? So we wanna diversify, throughout Roth taxable and pre-tax accounts, so that we can be flexible in how we are taxed over time. And use that to our advantage to keep our ta our lifetime, tax liability as low as possible, right? And so I say this over and over. If you've been listening for a long time on this podcast, your taxes are likely going to be the largest expense that you ever have. This can be a great way to preserve and build wealth is to lower your overall tax bill every single year. And that doesn't mean, getting the biggest deduction every year. That just means making sure that you're planning and making decisions over the long term that will lower that overall tax bill, over your lifetime. Right? And so what do we do beyond retirement accounts? Okay. We've done a good job of understanding hey. We can only put$23,000 as it stands right now into our 401k. We can do a backdoor Roth, so we can put another 7,000 maybe in a Roth, IRA, and so now we have$30,000, but I make five,$600,000. So that's just not enough, for me to save and, support the lifestyle that I want to have when I'm age 50 or 55 or 60, whatever that may be. Right? And so where do I start? The whole premise of this, this podcast episode, taxable brokerage account. So the beautiful thing about a taxable brokerage account is there are no contribution limit. So if you're the next Elon Musk or Bill Gates or whoever, and you have a billion dollars, you can put that into your taxable brokerage account, right? and you can invest that money. now the good thing is. you're not necessarily going to get the, the tax advantages of a Roth IRA or a traditional IRA, but you are going to get favorable long-term capital gains treatment. So as long as you're holding these investments for longer than than a year. Then you're likely going to get a favorable long-term capital gains rate, so you're not gonna pay your ordinary income. So if you're in a 24 or higher percent rate, you're likely going to pay either 15 or 20% depending on your income. on those gains. So you put a hundred thousand dollars in there, it grows to 150. It's been longer than a year. Then you'll either pay, 15% on that$50,000 of gain, or 20% depending on your income. And so the next thing, and the biggest thing is that this account is going to provide you liquidity and flexibility. It is, to me this is the most, valuable aspect of having a brokerage account, even if you don't even want to retire early, right? if you. just want flexibility and freedom and you have some extra cash flow and you just don't know what to do with it. Maybe you've already paid down debt. you don't have a lot of debt that needs to be paid down, or you have no debt at all. you just have extra cash flow instead of. Putting it into a bank account. I mean, no interest. You can put this thing into a brokerage account, you can invest it, and we can talk about investments later, but you can invest it. You still have access to it, right? Yeah. Maybe it's going to fluctuate day to day, on those investments, but no matter what, you can sell those investments. You can get that money outta there assuming that those investments have grown, or have not gone to zero. Right? You can get that money out, and you can use it for whatever you want. and there's no penalties associated with it. there's no 59 and a half rules. it is, it is going to give you the best liquidity, outside of a checking account. and it's going to give you flexibility, and then obviously you're gonna be able to grow that money over time through investments that you pick. using a brokerage account can fund kids college without locking it into a 5, 2, 9. It can bridge your gap between age 50 to 59 and a half. this is, again, I use this example, or still this example all the time. This is, what some, some of my colleagues in the business called the superhero account because. it really is so flexible and can be that superhero from age 50 to, to 59 and a half because, you're not having to finagle things with your retirement accounts, to try to avoid penalties and things of that nature. the other thing, the other couple ways, that you can start to think about how to build wealth outside of your traditional retirement accounts. That I'll touch on here is, uh, HSA account. So if you are in a place where you don't have a lot of medical bills and you can max out your HSA account, your family, contribution limits are at about$8,500 per year. That'll continue to go up with inflation, numbers and things of that nature. but. You. And if you're not using that money, you can get the tax deduction now. It'll grow tax deferred so you can invest it. fidelity is a big carrier or custodian that does the HSAs. and then you can invest that money. Let's say you don't use that money at all. For medical expenses.'cause you maybe you just didn't have a lot of medical expenses, whatever the case may be. at 65, you can use that for retirement, right? So that's just another way to shove some money away. get that deduction, and increase your limits to be able to save, right? The other thing is looking at maybe starting a business or getting into real estate, uh, because there are all obviously some tax advantages to that as well with the write offs and things of that nature that you can do with businesses. And then depreciation of al income and. The business itself of, uh, owning a rent and owning rental income. so there's some tax things that you can do there and that'll allow you to build wealth, right? So if you own a business, you're gonna have equity in that business if the, the value of the business grows or, the revenue. and ultimately the income that it brings you grows. that's. That's obviously going to be, a way to build wealth. And then same thing with real estate, right? You'll have that asset that would theoretically appreciate over time you're, you're generating income. and then ultimately you would be able to sell that asset later on down the road and reap the benefits of that as well. those are. Five different ways that, we can kind of contribute and build wealth outside of just retirement accounts. And so think of retirement accounts as a foundation of your financial house, solid, stable and necessary, but a house with just a foundation. Isn't livable, right? You need walls, a roof, maybe a few extra rooms. That's where a brokerage account, HSA, real estate and business ownership come in. It really puts the house together, and allows you to kind of customize it the way you would want to have it, right? And so now that we know how, or. What we can do with, with our money outside of retirement accounts, we've been maxing out retirement accounts. Where do we go next? how do we start building a balanced strategy? Right? We don't want to go all brokerage account. We don't want to go all retirement account. so how do we make that that mix? And I talk about this, a lot, but, The best way that I have found is through what's called the three bucket strategy. And so you have your short term bucket, right? You have cash and your emergency savings. So generally this is going to be a checking account, a savings account, or a high yield savings account. and so you can earn a little bit of interest, but it is there when you need it immediately, right? That cash is there. You have your midterm bucket, and this is where your brokerage account is gonna come into play. Because it is going to be flexible. It's going to be liquid, but we're just not gonna touch it, and liquidate it all the time, right? It's more of a, a five year play or a 10 year play or a before I'm 59 and a half play, right? And so it gives you that flexibility, but you can go ahead and invest in, equities, fixed income, mutual funds, ETFs, whatever that may be that fits your situation. And allow that. That money to grow, to help build that wealth, but also give you that flexibility. And then you have your long-term bucket, which would be those retirement accounts, your 4 0 1 ks, 4 0 3 Bs, four 50 sevens, Roth IRAs, traditional IRAs, all those sorts of things. And we want to balance this, to make sure that we're maximizing our situation so early on, your short term bucket. when you just start building wealth is going to be, very, very important so that, you don't get off track. it'll become less important as you start to build bro out your brokerage account, and things of that nature, and it will, and that short term bucket will become, smaller and smaller of a percentage of your overall. Wealth and then eventually that midterm and that long-term bucket will overwhelmingly be a large portion of your long-term wealth, right? over your overall wealth. And so this ensures that money is always accessible at any stage of life, whether that's emergencies, whether that's planned, whether that's retirement, whatever that is, having this three bucket strategy really covers, Most situations that you will encounter in your life where, money is needed, right? the other thing is through we wanna think about is. again, fancy term in the business asset location, or tax diversification. having the three bucket strategy is really going to allow you to have a mixture of pre-tax, Roth money, and taxable money. And this is going to allow you to be able to plan, for taxes and lower your lifetime tax bill. because that is going to be the game changer, the x factor on you building wealth ever a long time. Again, taxes are not cheap, they're expensive. They're going to be your most expensive bill. And if you do not plan for taxes, then You're doing yourself a, disservice on, building the most wealth possible, right? I've never heard anybody. complain about not giving the IRSA tip, right? nobody's running to, to write the IRS another check or send them more money. the vast majority of people, 99.999% of people are, trying to reduce their tax bill. And so. One way to do that is to have a three bucket strategy where you have some pre-tax money, you have some Roth money, you have some taxable money. So that can give you flexibility on how you can deal with taxes over the long term. the biggest, I guess example is once you retire, then you have these buckets that you can blend and pull from each to help minimize taxes. And so maybe you're confused about, how to go about doing this. the good news is I have created, a process and this process is called the Palm Valley Pathway. I help clients, start building out plans. I help them get organized, help them optimize, help them plan, and then also help them take action to implement these strategies, with, financial planning and hopefully getting them, to retirement early, so that they can do the things that they enjoy doing with the people that they love. if you're unsure about your situation, if you want help, if you want some clarity, I would be happy to have a conversation with you. And the best way to do that is to go to Palm Valley wm.com. You can press on that Palm Valley Pathway button. Look at my process. This is, again, the best way that I have found to help clients, with their situation. it is not cookie cutter, it is just a process. that I use to help, clients is the most efficient way to do that. again, I appreciate everyone listening. I hope this was helpful. If you know someone that might find this helpful, go ahead and share this with'em. Leave a five star review on your favorite podcast in app, and, we'll see you in the next one. This podcast is for educational purposes only. It's not meant to be financial or investment advice. Please do not make decisions about your situation solely based on this podcast alone. Please seek professional help when considering your own situation.