Retirement And Beyond: Exploring The Benefits Of Investing Outside Your Nest Egg

Investing outside of retirement is a great way to diversify your portfolio and gain access to a wider range of investment options. While retirement accounts such as 401(k)s and IRAs are popular due to their tax advantages and employer matching contributions, there are several reasons to consider investing outside of these accounts. Firstly, investing outside of retirement accounts allows you to choose from a broader range of investments, such as stocks, bonds, mutual funds, and real estate. Secondly, you can gain more control over your investments and potentially achieve better returns. Additionally, investing outside of retirement accounts can provide different tax advantages, such as the ability to take tax-free withdrawals or avoid required minimum distributions. It is important to carefully consider your financial situation and goals before deciding to invest outside of retirement, as there are also drawbacks and tax implications to consider.

Taxable brokerage accounts

A taxable brokerage account is a versatile investment option that offers flexibility and control to investors. While these accounts don't provide immediate tax benefits like retirement accounts, they are a powerful tool for those looking to diversify their investment portfolio.

No Contribution Limits

There are no restrictions on how much you can contribute to a taxable brokerage account each year, making it an attractive option for those with a significant capacity to save. This is in contrast to retirement accounts, which have annual contribution limits.

Accessibility and Liquidity

Funds in a taxable brokerage account can be accessed at any time without incurring early withdrawal penalties. This provides investors with greater liquidity and the ability to use their investments for short-term financial goals or unexpected expenses.

Investment Selection

Estate Planning

Tax-Loss Harvesting

When considering a taxable brokerage account, it's important to weigh the pros and cons carefully and consult with a financial advisor to ensure it aligns with your investment goals and tax situation. While these accounts offer flexibility and accessibility, they may result in a larger tax burden compared to tax-advantaged retirement accounts.

Health Savings Accounts (HSAs)

• Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
• HSA contributions carry over from year to year and have no "use-it-or-lose-it" rule, unlike Flexible Spending Accounts (FSAs).
• If you withdraw money from an HSA for non-medical expenses before the age of 65, you will be subject to a 20% tax penalty and regular income tax. After turning 65, you can take money out for any reason, but you will still pay ordinary income tax on those distributions.
• You can put your HSA money into a Cash Account, which grows interest like a savings account, or an Investment Account, which functions like an IRA.
• The contribution limits for HSAs are adjusted annually. In 2024, the limits are $4,150 for individuals and $8,300 for families. If you are 55 or older, you can make an extra catch-up contribution of $1,000 per year.
• It is recommended to treat your HSA as an investment tool for retirement and hold off on spending your contributions during your working years to maximize the benefits.
• You can use your HSA funds to pay for a variety of qualified medical expenses, including office-visit copayments, health insurance deductibles, vision care, prescription drugs, and long-term care services.
• You can also use your HSA to reimburse yourself for medical expenses incurred after establishing the account. Keep your receipts for all healthcare expenses paid out of pocket.
• When choosing a beneficiary for your HSA, it is generally best to choose your spouse, as they can inherit the balance tax-free.

In summary, HSAs offer a tax-efficient way to save for future health care costs and can also be used to boost your retirement savings. By maximizing your contributions and taking advantage of the tax benefits, you can effectively plan for both short-term and long-term financial goals.

Real estate

One of the key benefits of investing in real estate for retirement is the potential for high returns. Rental properties can provide a steady stream of income, helping to cover expenses and generate profits. Well-located properties tend to increase in value over time, offering the possibility of substantial capital gains. Additionally, real estate investments often come with tax advantages, such as deductions for expenses related to owning and maintaining investment properties.

There are several ways to invest in real estate for retirement, each with its own advantages and risks. Here are some common options:

• Rental properties: Investing in residential or commercial properties and renting them out can provide steady cash flow and the potential for long-term appreciation.
• Real Estate Investment Trusts (REITs): REITs are publicly traded companies that invest in a diversified portfolio of income-producing properties. They offer an attractive passive investment option, as they distribute a significant portion of their income as dividends.
• Real estate crowdfunding: Online platforms allow individuals to invest in real estate projects with other investors, providing diversification without the responsibility of property management.
• Fix-and-flip properties: Buying distressed properties, renovating them, and selling them for a profit can be lucrative but also carries more significant risks.
• Short-term rentals: Utilizing platforms like Airbnb can provide higher rental income but may require more active management and compliance with local regulations.
• Real estate partnerships: Joining forces with others to invest in real estate can reduce the financial burden and risk.
• Real estate notes: Investing in mortgage notes is a passive way to earn interest income by becoming the lender and receiving regular payments from borrowers.
• Self-directed retirement accounts: These accounts allow individuals to invest in a variety of alternative assets, including real estate, outside of the typical stocks, bonds, and mutual funds.

However, it is important to consider the potential challenges and risks of investing in real estate. Market volatility, property management issues, unexpected costs, and the illiquid nature of real estate investments can pose challenges. Additionally, financing real estate investments can be complex, and high-interest rates can impact returns.

In conclusion, investing in real estate outside of retirement can be a smart strategy to secure a steady income stream and diversify your portfolio. However, careful planning, research, and a long-term commitment are necessary to navigate the risks and challenges successfully.

College fund

If you're a parent, you may want to start putting money away for your child's college fund. This can be done through a 529 plan or another education savings account. However, if you don't have the funds to do this, you may consider using your retirement funds to pay for college.

Pros of Using Retirement Funds for College:

• You may be able to avoid an early withdrawal penalty if you withdraw funds from an IRA to pay for qualified higher education expenses.
• You can also borrow from your 401(k) without incurring an early withdrawal penalty, and the interest you pay goes back into your retirement account.
• Withdrawing from a Roth IRA to pay for college can be tax and penalty-free if you only withdraw up to the amount you've contributed over the years.
• Borrowing from a retirement plan won't impact eligibility for need-based financial aid.

Cons of Using Retirement Funds for College:

• Withdrawing money from a retirement account means you're using up your retirement savings, which may have grown over time due to compounding interest.
• If you take out a large loan from your 401(k) and then leave your job, you may be required to pay back the loan immediately. If you can't repay it, it will likely be considered an early withdrawal and be subject to income tax and a penalty.
• The money you borrow from your retirement fund is no longer invested and earning returns, and you're losing the benefit of the retirement plan as a tax shelter.
• Withdrawing from a retirement account may affect eligibility for need-based financial aid in the following year, as the withdrawn amount may count as income.

Alternatives to Using Retirement Funds for College:

• Scholarships and grants: Check with the school your child plans to attend to see what types of scholarships and grants are available, and have your child fill out the Free Application for Federal Student Aid (FAFSA).
• Federal student loans: Filling out the FAFSA will give your child an opportunity to qualify for federal student loans, which have low-fixed interest rates and special benefits such as loan forgiveness programs and income-driven repayment plans.
• Private student loans: If your child can't get federal student loans or has maxed out their loans, private student loans may be an option, but they typically don't offer income-driven repayment plans or loan forgiveness programs.

Tips for College Students Looking to Invest:

• Start with a high-yield savings account or CDs: These accounts offer higher interest rates than traditional savings accounts and provide a safe place to park your money.
• Use a free or low-cost broker: Fidelity Investments and Charles Schwab offer free stock and ETF trades, while Robinhood offers completely free trading.
• Invest a little each month: With commission-free brokers, you can invest modest amounts each month without fees eating into your capital.
• Buy an S&P 500 index fund: Index funds are highly diversified and offer less volatile returns than individual stocks, making them a great long-term investment.
• Sign up for a robo-advisor: Robo-advisors create a portfolio for you based on your time horizon and risk tolerance, and you can get started with a small amount of money.
• Open a Roth IRA: With a Roth IRA, you can defer taxes on profits and dividends, and your withdrawals in retirement will be tax-free.

Paying off mortgage

Paying off your mortgage before retirement can be a great stress reliever. It can save you thousands of dollars in interest, depending on the current size of your debt, and give you peace of mind that no matter what happens in the future, you own your home. However, it is important to consider your individual situation and financial goals when deciding whether to prioritise paying off your mortgage or investing for retirement. Here are some things to keep in mind:

Reasons to Pay Off Your Mortgage Early:

• Reduce baseline expenses: If your monthly mortgage payment is a significant portion of your expenses, getting rid of that payment will allow you to live on less, which can be beneficial if you have a limited income during retirement.
• Save on interest payments: Depending on the size, interest rate, and term of your home loan, you could end up paying hundreds of thousands of dollars in interest over time. Paying off your mortgage early frees up that money for other uses.
• Mortgage rate is higher than risk-free returns: If your mortgage rate is higher than the after-tax rate of return on a low-risk investment with a similar term, such as a high-quality, tax-free municipal bond, paying off the mortgage may be more beneficial.
• Peace of mind: Paying off your mortgage can reduce worries and increase flexibility in retirement, especially if you are not comfortable carrying debt into retirement.

Reasons Not to Prioritise Paying Off Your Mortgage Early:

• Retirement savings: If you are not contributing enough to your retirement accounts, increasing those contributions should be a priority. The power of compound interest means that the earlier you start saving for retirement, the more your savings will grow over time.
• Low cash reserves: It is important to maintain a cash reserve of three to six months' worth of living expenses in case of emergencies. Paying off your mortgage at the expense of having sufficient cash reserves may not be wise.
• Higher-interest debt: It is generally recommended to prioritise paying off any higher-interest loans, especially nondeductible debt from sources like credit cards, before focusing on your mortgage.
• Potential investment returns: If your mortgage rate is lower than what you could earn by investing in low-risk options, you may consider keeping the mortgage and investing any extra funds. This is especially relevant if you have secured a low mortgage rate before the recent rise in interest rates.

Other Considerations:

• Tax implications: Paying off your mortgage may impact your tax deductions and potentially raise your effective tax rate. Consult a tax advisor to understand how your tax situation may be affected.
• Liquidity: Paying off your mortgage reduces liquidity, as the money is essentially locked up in your home and cannot be easily accessed unless you sell your home or tap into your home equity.
• Retirement account withdrawals: Using funds from a retirement account, such as a 401(k) or IRA, to pay off your mortgage early can incur taxes and early-payment penalties if withdrawn before the age of 59½. This could significantly reduce your retirement income and push you into a higher tax bracket.

Remember, the decision to pay off your mortgage or invest outside of retirement depends on your specific circumstances and financial goals. Consult a financial advisor to help you make the choice that best aligns with your short-term and long-term goals.

Frequently asked questions