One of the benefits of writing a blog, and attracting an audience, is that I get to learn from others much smarter than me on a variety of subjects. This is one such opportunity! I am interested in doing some taxable investing because we have maximized contributions to the various retirement accounts for which we are eligible.
Most of you are probably aware that I have an interest in reaching financial independence early, and “retiring” from the traditional nine-to-five grind to pursue other things. To accomplish this goal I recognize that I need to invest outside of retirement accounts to have access to “retirement” income before reaching typical retirement age.
My problem is I’m a bit overwhelmed by all the investment choices, and their various implications for things like risk, taxes, etc. I’m a fairly conservative person, by nature, so the idea of taking a lot of risk does not appeal to me. This is especially true of money outside of retirement accounts, because I recognize these funds will have a shorter lifespan than those socked away in retirement accounts.
To guarantee, strike that – guarantee is a bad word when talking investing. To improve my chances of securing pre-retirement income from some of this money, I’m aware of several techniques and investment vehicles:
- Dividend investing
- CDs and high-yield savings accounts
- Paid-for real estate
- Some combination of all of the above
Obviously, things like taxes are one of the primary concerns when investing outside of retirement accounts. However, before I start comparing mutual fund turnover ratios at Morningstar, I need to settle on a basic strategy. Do I invest and reinvest dividends and earnings with the goal of creating the largest pile of money possible? Or, do I start to build a working capital fund that spins off dividends now that I use to supplement our lifestyle until they are large enough to live off without paid employment?
In the book Your Money or Your Life the authors advocate creating a working “cache” of money that spins off interest and dividends. Of course, this was easier to do in the 1990’s, when the book was first published, through the use of Treasuries. At the time they were yielding around 6.5%.
Unfortunately, this is no longer true, so someone seeking financial independence has to look elsewhere for higher rates (the revised edition of the book points to a couple LifeStrategy funds at Vanguard as potential candidates to house this cache of working capital).
I generally like this approach. I like the idea of knowing how much my investments are earning, and how much more we’ll need to cover our basic expenses. I do recognize, however, that by not reinvesting dividends I’m missing out on the opportunity to grow this savings balance even faster.
I’m interested to hear from others taking a similar approach to taxable investing, or planning to reach financial independence before the traditional retirement age. How are you investing your money? Do you reinvest dividends, or cash out now to supplement income? Anyone using rental income from real estate to help reach financial independence?