471 | Mailbag: Inflation and FI, ACA Subsidies, Roth vs. Trad and More | Cody Garrett
Jan 8, 2024
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In this episode, Cody Garrett, Founder of Measure Twice Money, joins the hosts to answer listener questions on topics such as inflation and financial independence, ACA subsidies for early retirees, Roth 401k vs. Roth IRA, and diversifying a concentrated portfolio. They discuss the importance of accounting for inflation when calculating the FI number, maximizing ACA subsidies through strategic withdrawals, and strategies for reducing concentration risk in investments. A valuable episode for those interested in early retirement planning and optimizing their financial strategy.
Inflation-adjusted future expenses should be considered when determining the FI number.
Careful distribution planning can optimize ACA subsidies while planning for early retirement withdrawals.
Understanding the taxability of different income sources is crucial for accurately calculating future retirement tax liability.
Deep dives
Understanding inflation and its impact on FI number
In this episode, Wilson asks about the impact of inflation on the FI number. He clarifies that using a 7% return rate already accounts for inflation. However, he wonders if annual spending should also be inflated for future costs. Cody clarifies that the 7% return rate reflects the real return after adjusting for inflation. He explains that the 4% rule already accounts for inflation in retirement distributions, but not on the path to retirement. Cody recommends considering inflation-adjusted future expenses and understanding the different calculations involved in determining cost FI adjusted for inflation.
Maximizing ACA subsidies and planning for strategic withdrawals
Jennifer seeks advice on optimizing ACA subsidies while planning for early retirement withdrawals. She wonders if contributions to pre-tax and Roth accounts may impact eligibility for ACA subsidies. Cody explains that eligibility for premium tax credits depends on family size, age, income, and location. He suggests managing modified adjusted gross income (MAGI) through careful distribution planning. By balancing income from different accounts, like checking, savings, taxable brokerage, pre-tax retirement accounts, and Roth conversions, one can increase income for subsidies while minimizing taxes and reducing the tax liability.
Calculating retirement tax liability with multiple sources of income
Josh has questions about accurately calculating future retirement tax liability when considering multiple sources of income, such as a military pension, rental property, and taxable brokerage accounts. Cody explains that taxable income is determined by adding up income sources, subtracting adjustments, and applying deductions. He highlights the importance of understanding the taxability of each income source and the difference between ordinary income and capital gains tax rates. Cody recommends using the framework of ability to maintain lifestyle, diversification, and tax optimization to prioritize investments and determine tax liability while ensuring financial goals are met.
Diversifying a high concentration in tech stocks
Bill is concerned about the high concentration of tech stocks in his portfolio and seeks advice on how to diversify while limiting tax implications. Cody emphasizes prioritizing the ability to maintain the desired lifestyle when deciding which investments to sell. He recommends considering diversification to avoid company and sector-specific risks. Cody suggests using a framework focusing on ability to maintain lifestyle, diversification, and tax optimization. He encourages Bill not to let tax implications dictate decisions and to celebrate the wins while ensuring his portfolio is aligned with his financial goals.
Understanding Roth and 401(k) contributions
Julia is confused about Roth and 401(k) contributions. She wonders why there are limitations on the combined contributions to a Roth and regular 401(k). Cody clarifies that Roth and traditional contributions have separate limits within their respective account types. The combined limit for 401(k) contributions is independent of the limit for IRA contributions. Cody emphasizes the importance of understanding the contribution rules and limits for each account type and recommends prioritizing contributions based on individual financial goals and circumstances.
In this episode: inflation, coast FI, early retirement planning, future tax liability, IRA's and 401k's, and diversification.
This week we are rejoined by founder ofMeasure Twice Money Cody Garrett for another installment of the Mail Bag, where we will be talking through questions from our listeners covering topics ranging from inflation and its implications on your FI number, ACA subsidies and early retirement, as well as the similarities and differences with Roth accounts and future retirement tax liabilities. Listen along while we dip into the listener mailbag this week and discuss topics chosen from YOU the listener!
