So far, this blog has focused mainly on the expense side of things and how we cut costs in some areas to be able to spend more freely in others. But cutting spending alone isn’t going to get us to Financial Independence in 2-3 years. Neither will the income from our jobs, unfortunately. Unless we plan on selling organs on the black market (which we don’t), the easiest and most effective way to ramp up our net worth is through investing.
Disclaimer: The opinions expressed on this blog are solely for entertainment purposes and should not be construed as legal or tax advice. I’m just a random guy documenting my financial life on the internet. Please consult a qualified professional before implementing any financial planning strategies.
General Investing Strategy
In general, I believe in getting the best return for our investment at the lowest cost of money, time, and effort to me. Enter: index investing. I’m not an expert, and there are plenty of other more qualified sources elsewhere on the internet that can explain it better than I can, but the gist of index investing is this:
An index fund is a type of mutual fund that takes investment contributions from its investors, pools them together, and purchases shares of individual stocks in proportion to whatever benchmark it is trying to emulate. For example, an S&P 500 index fund purchases shares of all 500 companies within the S&P 500 in proportion to their makeup within the S&P 500 itself – as Google’s/Facebook’s/Tesla’s market cap increases, an S&P 500 index fund will rebalance itself appropriately to mirror the makeup of the S&P 500 itself.
There are index funds out there tracking just about any type of benchmark you can think of, but the S&P 500 index and Total Stock Market index are the most popularly held, by far. (A Total Stock Market index mirrors the makeup of the entire U.S. stock market made up of 3,000+ companies instead of just the top 500 in the S&P). Remember, I’m after solid returns for the least amount of effort, so I choose to invest in S&P 500 or Total Stock Market indexes (indices?) whenever possible.
So that’s our basic investing strategy. But how much do we plan to chuck into our accounts this year? And what types of accounts are they?
Our 2021 Contributions
| TYPE OF ACCOUNT | MR. | MRS. | TOTAL |
| Our Contributions | |||
| 401k/403b | $19,500 | $19,500 | $39,000 |
| 457 | $19,500 | – | $19,500 |
| HSA | $2,100 | $3,600 | $5,700 |
| Roth IRA | $6,000 | $6,000 | $12,000 |
| Taxable Brokerage | – | – | ~$28,000 |
| Total Contributions | $47,100 | $29,100 | $104,200 |
| Employer Contributions | |||
| 401k/403b | $3,500 | ~$5,000 | ~$8,500 |
| HSA | $1,500 | – | $1,500 |
| Post-Retirement HRA | $2,500 | – | $2,500 |
| Total Employer Contributions | $7,500 | $5,000 | $12,500 |
| GRAND TOTAL | $54,600 | $34,100 | $116,700 |
401k/403b
If you’re not familiar with a 403b, it’s basically the governmental/non-profit world’s version of a 401k. We choose to contribute to these accounts up to the IRS maximum, and have done so the past couple years. This has a multi-layered benefit, as the contributions are made before taxes are taken out, and it reduces our taxable income for the year. I don’t know about you, but I’m usually in favor of paying less taxes. Of course, the IRS wants their cut at some point: contributions grow tax-free but you are taxed when you make a withdrawal down the road, and you’re penalized 10% if you withdraw before age 59 1/2.
457
Last year was the first time I contributed to a 457 account, and I will continue to max it out for the foreseeable future. This is essentially a 403b on steroids, with the same tax-deferral perks and IRS limits, except it has one major bonus: no early withdrawal penalty. I can withdraw from this account any time after separating service from my current employer, no matter my age, and pay only the taxes on that income. Pretty sweet deal for government employees.
HSA
For those enrolled in a high-deductible health plan, health savings accounts (HSA’s) are considered the most tax-effective accounts available to Americans due to their triple tax advantages: 1) contributions are made pre-tax (and even pre-FICA taxes if you’re able to set it up through payroll); 2) earnings grow tax-free over time; and 3) withdrawals are tax-free when made for qualified medical expenses. After the age of 65, you can withdraw from this account for any type of expenses and just pay your normal income tax rate at that time.
Ready for the really cool part? You don’t have to withdraw from your account in the same year that you incurred the medical expense. That means you can pay for medical expenses out of pocket, save those receipts for an indefinite period of time, and then submit them years down the road to reimburse yourself from your HSA. In hindsight, it seems like I should have discussed this account first…
Roth IRA
A Roth IRA is basically the flip side of a tax-deferred account like a 401k or 403b. You contribute after-tax dollars, and then the balance grows tax-free forever, with tax-free withdrawals – no penalty after age 59 1/2. Also, you’re able to withdraw your contributions at any time, free from penalty. For that reason, a Roth IRA can be used as a pseudo-emergency fund though I don’t recommend withdrawing from retirement accounts early if you don’t absolutely have to. We max these babies out each year to take advantage of that flexibility.
Taxable Brokerage
This is where all the leftover savings goes each month. No tax benefits here, just the sweet satisfaction of watching the balance compound over time. We plan on strategically withdrawing from this account during our first few years of retirement to take advantage of lower capital gains tax rates before accessing our other retirement accounts, but that’s a subject for another day.
Post-Retirement HRA
A health reimbursement account (HRA) allows us to submit qualified medical expenses for reimbursement later on. But there are a couple downsides here: contributions are limited to whatever my employer decides to contribute, so I can’t load this thing up myself. Also, this particular account is designated as “post-retirement,” so I can’t access it until that point. The investment options available aren’t that great, but it’s still a nice benefit.
Conclusion
It’s pretty exciting to total it all up and see over $100,000 being added to our investment accounts this year, assuming no big changes in our income levels. People can debate which accounts should be funded in what order and there are merits to each account depending on your overall tax/life strategy. I heard somewhere recently that if the IRS has a contribution limit on a type of account, you should probably contribute to it if you can – there’s a reason there’s a limit, and it probably has to do with tax advantages. All in all, you can’t really go wrong with any of these accounts because it’s better strategy than not investing at all!
What do you think of my investing strategy? Should I ditch the boring stuff and load up on bitcoin?
