Tax Deferred Accounts vs Taxable accounts

I wanted to share some of my thoughts and insights on the subject of tax deferred vs individual brokerage accounts. Specifically, I wanted to relate these to someone who is wanting to retire earlier then the penalty free age of 59 and a half. I really wanted to cover this subject because everyone has different goals and situations in life.

for awhile, I was stuck in the thought trap of adding as much to my 401k as I possibly could when I was younger. My thinking was that I could have the power of time on my side and be able to snowball my funds so they would be able to work harder for me down the road. Now, I'm not saying that this thinking was wrong at all because most of us know that the sooner we get our money into the market, the more time we have to grow our nest egg to it's full potential.

The current minimum age someone is allowed to withdraw from their 401K without receiving a penalty is 59 1/2. Now I don't know about some of you but, that number is really far away from me and I would really like to retire sooner then that.

I always knew that I wanted more for my life then working till the day I died. I see it every day, countless people come into my work to grab a cup of coffee in an attempt to survive the rest of the day. Americans are overworked and stressed out about almost all aspects of their life. That to me is not the way I want to live my life. I will gladly make sacrifices at a younger age if that means the quality of life I achieve when I'm older is better then most. I really love this quote by Dave Ramsey.

“If you will live like no one else, later you can live like no one else.”


― Dave Ramsey

I have already chosen to live my life by this quote without even realizing it. I had my own mini lawn care business when I was fourteen, I got my first job right when I turned sixteen and later got a job at Starbucks Coffee Corporation right when I turned eighteen. I have since worked my way up in the company and have been super fortunate to be in a management position for the past 4 years. I have already done more then most people my age. Today people my age are just graduating college saddled with astronomical proportions of debt that most will not payoff in till their 30's. I have chosen to live my life differently, I bring my own meal to work everyday, I don't go to the bar every weekend, I don't go out to eat more then four times a month and I don't indulge in unnecessary things like most Americans do on a day to day basis. More is less to me and that is just fine. 

Because I have lived my life unlike most, I was able to purchase my first home at the young age of 21. This has always been one of the financially defining factors In my life I have been most proud of. I started contributing to my 401k when I turned 19 and was adding 10% of my pay plus my 5% match that Starbucks offered me. I always felt like I was doing the right thing till I calculated how much I would need to retire. I freaked out because I always wanted to hit that million dollar milestone. So I upped my contribution by another 10% . for the past few years I thought this was the right thing to do until this year when I discovered the power of dividends. 

Since I discovered dividends and truly did more research into 401ks I realized that the path I was taking was not the one I truly wanted to based on my own personnel goals in life. Some things that truly made me question the 401k was an article I read about on how the money in our 401k is not truly ours until we choose to take it out. That was a scary thought to me and I since then have read about countries that have dipped into it's own citizens retirement funds to fuel the operations they deemed necessary. This scared me even more and made me do a ton of research on how I would be able to have more financial control of my funds. The more research I did the more and more I realized that the route I was taking with my finances was locking me into a life of working for the man till I was able to hit that ripe old age the government deemed necessary to remove my own money. 

This obviously was not what I wanted for my life and I immediately cut my 401k contributions to the company match of just 5%. I still participate in my 401k contributions since the company offers me 5% back on my own contributions. This is like free money and I feel everyone should make the minimum contributions they need to insure that they receive the company match. This is free money that is left on the table if you don't choose to take it. Since I will eventually hit that age that I will be able to remove that money tax free I have chosen to keep this match going but not invest any more of my money into it. 

I now am completely in control of my finances! When I truly think about this it makes me very happy. Yes, the money is in the stock market and it is not as liquid as lets say a savings account. But my money is growing at a current dividend yield rate of 4%. This is not an astronomical number but it is guaranteed growth and I have very little worry about this number going south since all the companies I'm investing into are solid companies with great track records.  Another thought that really allows me to push my self with my aggressive savings is that if for some reason I was not able to cover my bills in any given month I would be able to sell some shares and withdraw the money necessary to cover my expenses. Although that is not an ideal situation that I ever want to happen, things happen in life and it's nice to know I have that as a back up option. 

One of my favorite aspects of dividend investing is that every time I invest more money into the market, i'm essentially giving myself a pay raise! I'm pretty sure everyone likes getting pay raises and I for one love being in control of this! It's truly an odd thing to think about but it makes so much sense. Due to the fact that I have contributed $16,000 into the market this year I have given myself a pay raise of almost $700 a year. Whats even better is that this is money that I will receive for nothing but simply being a share holder! It's basically like free money if you ask me. 

If I continue my trend of aggressive savings, combined with market growth and dividend growth, I project I will hit a major milestone of having $100,000 in my Freedom Fund in 3 years!  (It could even be sooner) Hopefully sooner. As long as my percentage stays close to 4% I will be making $4,000 a year in free money for simply being a share holder. This is money I can remove at given minute and wire to my bank account in cold hard cash! That kind of money is truly altering towards off setting some of my month to month bills! 

I hope I was able to inspire and share some of my thoughts and insight into why I choose to invest the way I do. If anyone has any questions feel free to hit me up in an email or in the comment section below. 

 

Author Kevin Dolan

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