Early retirement is great. You suddenly have more time to focus on your health, join your kids’ activities, and dive into work or projects that feel meaningful and fun.
But there are traps. Over the past year and a half I chased a few too many rabbit holes. With extra time, my money-focused mind started tinkering. I forgot that the best investing approach is often “set and forget” and began exploring exotic options. (For me, “exotic” means anything other than an S&P 500 index fund.)
Here are some of the pitfalls I ran into — and how I managed to straighten things out fairly quickly.
Some lessons are sunk costs. I can’t go back and change past 401(k) contributions into a Roth 401(k). A Roth 401(k) uses post-tax dollars, grows tax-free, and can be withdrawn tax-free at 59½. That sounds less attractive than a pre-tax 401(k), where taxes are deferred, but if all your retirement savings live in a traditional 401(k), you may end up paying a big chunk to the IRS during RMD years — roughly 35% in my example. OUCH.
My view now: no matter your income, favor Roth accounts when you can. Roth withdrawals in retirement are tax-free, and you’ll likely have lower taxable income overall, which helps with Social Security taxation and capital gains from brokerage accounts or inherited IRAs.
Bottom line: if you’re a big saver while working, don’t assume you’ll be in a low tax bracket in retirement — RMDs will be waiting.
Caveat: I’m positive about holding dividend funds like SCHD inside tax-deferred accounts. My current plan in the rollover IRA pairs SCHD with VGT to reduce volatility. SCHD has a strong record of steady growth and overlaps little with VGT.