Financial expert Rachael Camp joins the podcast to discuss topics like the 4% rule, second generation FI, retirement saving, 529's, and is it too late for FI? They also cover credit card debt, maxing out 401k's, and the benefits of tax diversity in your retirement accounts.
Investing outside of a 401k can provide tax diversity and flexibility in accessing funds before retirement age.
The 4% rule is a guideline that indicates a safe withdrawal rate from a portfolio during retirement.
When it comes to 529 accounts and financial aid, it is important to understand that the assets in the 529 are considered the assets of the account owner.
Deep dives
The Importance of Investing Outside of a 401k
Investing outside of a 401k can provide tax diversity and flexibility in accessing funds before retirement age. While maximizing contributions to a 401k is often recommended, having funds in a taxable brokerage account allows for more control and options. Tax diversity, including pre-tax 401k, Roth 401k, and taxable brokerage accounts, can help optimize taxes in retirement and provide different buckets for withdrawals.
Understanding the 4% Rule and Withdrawal Rates
The 4% rule is a guideline that indicates a safe withdrawal rate from a portfolio during retirement. It is applied to the total investable net worth, including retirement accounts and taxable brokerage accounts. The 4% rule was designed to survive worst-case scenarios and factors in sequence of return risk. Relying solely on average returns or only withdrawing earnings may not be sustainable due to market volatility and uncertainty.
Considering Opportunity Costs and Risk
Investing outside of a 401k allows for opportunity to diversify investments and have greater control over taxes. It also provides flexibility to access funds before retirement age. Considerations include tax diversity, growth potential, and risk associated with conservative investment strategies like relying solely on dividends or bonds. Balancing different types of investment accounts and optimizing for tax efficiency is crucial for long-term financial success.
Retirement Calculators and Customizing Projections
Retirement calculators often assume income replacement percentages based on current income, which may not accurately reflect future expenses. Personalized projections should consider individual lifestyle goals, potential income sources (e.g., part-time work, social security, pensions), and changing expenses in retirement. Customizing calculations and using comprehensive spreadsheets can provide a more accurate and realistic estimation of retirement needs.
529s and Financial Aid
When it comes to 529 accounts and financial aid, it is important to understand that the assets in the 529 are considered the assets of the account owner. Typically, the parent is the custodian of the 529 with the child listed as the beneficiary. This is crucial because FAFSA calculates the expected family contribution differently based on whether the assets are owned by the student or the parent. If the assets are considered the student's, up to 20% can be used for college expenses, while if the assets are considered the parent's, only 5.64% can be used. Grandparents often open 529 accounts for their grandchildren to avoid having the assets impact FAFSA calculations. It's important to consult an accountant to determine the best strategy for your situation.
Benefits and Downsides of 529s
A 529 account can be a powerful tool for education savings, especially if you live in a state that offers tax credits or deductions for contributions. The money in the account can grow tax-free and be withdrawn tax-free for qualified education expenses. However, there are potential downsides to consider. If your child doesn't attend college or receives a significant scholarship, you could face penalties and taxes when withdrawing funds for non-education expenses. One strategy to mitigate this risk is to combine a 529 account with a taxable brokerage account. By using a combination of both, you can have more flexibility and control over the funds, ensuring they can be used for other purposes if necessary. It's also worth noting that the recent Roth conversion rules allow for up to $35,000 from a 529 account to be converted to a Roth IRA, offering additional benefits for future financial planning.
In this episode: the 4% rule, second generation FI, retirement saving, 529's, 401k's, and is it too late for FI?
This week we joined by Rachael Camp of Camp Wealth for another installment of Mail Bag, where we will be answering some questions sent in by our listeners. Together, we cover topics surrounding the 4 percent rule, starting the FI journey “late”, the importance of tax diversity in your retirement accounts, and the potential benefits and drawbacks to 529 plans. On the path to FI, the community this journey brings can be the best resource, and answering any questions you may have is our way to ensure you’re well on your way to FI, as well as help others in the community who may be navigating similar scenarios!
Rachael Camp offers advisory Services through Creative Financial Designs, Inc., a Registered Investment Adviser, and Securities are offered through cfd Investments, Inc., a Registered Broker/Dealer, Member FINRA & SIPC, 2704 S. Goyer Rd., Kokomo, IN 46902. 765-453-9600. Camp Wealth is not affiliated with the CFD companies.
Timestamps:
1:09 - Introduction
3:22 - Can It Be Too Late For FI?/Credit Card Debt
