After posting how we got to averaging $1,000 a month in passive income, we received some comments and messages about our different account types that we leverage. A particular comment from the entertaining, yet even more enlightened, J. Money from, among others, Budgets Are Sexy and Rockstar Finance motivated me to dig into this topic even further: our use of taxable vs. non-taxable accounts as part of our respective financial picture.

When discussing taxable vs. non-taxable accounts, a key component is, you guessed it, taxes! But looking back at what contributed to our current account types, we considered (1) potential milestones we might experience in life and (2) ways to plan to potentially manage the uncertainty surrounding those milestones.

Full disclaimer, and as outlined in my disclaimer :), I am NOT a professional or expert. The following analysis is unique to our respective circumstances. Each respective individual’s goals, objectives, & needs are unique and – as always – one should consult with a professional.

Life’s (Un)known Milestones

We’ll all encounter a number of milestones throughout our lives. To understand our current approach and where we’re going, it’s useful to see where we’ve been. A few things we’ve considered:

• (1) How long we’ll live
• (2) What milestones we’ll experience
• (3) How much those milestones will cost

Each of these items brings perspective to what we want to accomplish. For most, retirement or a particular goal is not a number all by itself, but rather a process. Most tend to think of the end result or the outcome. It’s important to remember and experience the journey.

1) How Long We’ll Live

I might die tomorrow. Sorry to be so morbid, but who knows? I could. I might live to be 120, but that’s unlikely. As of today, here is the “average number of additional years” I can expect to live when I reach a specified age:

We can do various things to attempt to live as long as possible, such as (among others):

• Eat healthier
• Exercise more frequently
• Not smoke or quit smoking
• Not consume alcohol or drink less frequently (as I sip a beer writing this…)
• Sleep and rest adequately (writing this at 4:30 am…)

No one knows how long he or she will live. We do have the ability to influence and determine when we’ll be able to retire though. For what it’s worth, Suze Orman recently said 70 is the new retirement age (WTH?). No thanks.

Personal Lesson Learned: I hope we live as long as possible, and we want to enjoy the ride along the way. Some of my family likes to drink and stay up late. With the exception of my paternal grandmother who passed away in her early 80’s just over 10 years ago, all my grandparents passed away in their mid/late 60’s or early 70’s. I’d like to improve that number.

Related:

Why I Spend $2,148 A Year On Orange(s)

2) What Milestones We’ll Experience

Life is usually full of expected milestones, but they’re still not for certain. And who knows if we’ll live long enough to make them? A few of the common milestones:

• Having kids
• Grandchildren
• Marriage
• Retirement
• School / College
• Graduation / Career

There is no single or common path. Throw these in any order (well, grandchildren usually come after having children). Every respective individual is unique or different.

Personal Lesson Learned: Along the way, different goals and objectives will be fulfilled or unfilled; I’m working to prioritize and reach the most important to me. Up until a couple of years ago, I felt that I needed to accomplish or check a box by certain ages. I then realized that thinking this way and comparing myself to others didn’t make me happy.

3) How Much Those Milestones Will Cost

We’ll perhaps explore the potential costs of the milestones mentioned above in future posts. Regardless of the potential costs, there is almost always one item that will play a part: taxes.

In the US, as well as other countries, a significant portion of the government’s revenue comes from personal income taxes:

Zeroing-in just on US Federal income tax rates, the two ends of the spectrum (the highest and lowest tax brackets) – regardless of their actual percentages – have fluctuated significantly. And this doesn’t even take into account changes in the brackets in between the two extremes (or the variance within other respective brackets):

No one knows what tax rates will be in 1, 5, 10, or +20 years. But one thing is for certain: there will be taxes.

Personal Lesson Learned: While taxes can definitely play a part in our financial planning, it should not be the only or the primary focus. Perhaps the proverbial the tax tail shouldn’t wag the dog, but it’s seems true. Looking back, I often lost track of more important things because of this almost sole focus on taxes.

5 Ways to Attempt to Plan for (Un)certainty

I dated a girl in college for 2.5 years in college. Every few months, we’d visit her parents’ house and watch TV for several hours a day. It got old very quickly. Wanting to pass the time, I began reading.

Motivation

I came across Eric Tyson’s Personal Finance for Dummies. I can’t remember which version of the book, but it was around 2005. From my own self-created interpretation or takeaway, I believed, incorrectly, that paying any type of taxes that could be avoided (legally) should be the only and ultimate goal. Above all else – no matter my tax bracket (I smack the back of my head thinking of this now) – I should think of taxes first and anything else second.

Action

With a couple thousand dollars from my summer job life guarding (more to come on this in a future post), I opened up a US Federal Treasury Money Market fund that enabled me to avoid paying any taxes. Take that tax man!

The fact that I would have made more money with the higher rate of return on the “regular” money market fund while still paying the taxes didn’t present itself to me. Well, it did; I was just blinded by my obsession to not pay any taxes.

Looking back, this eventually formed part of the foundation for our current use of taxable vs. non-taxable accounts. But other events also have contributed to our respective outlook on our personal financial picture, including major public as well as major personal events.

The last 10 years have gone quickly with numerous milestones. Enough said. With this foundation in mind, here are the 5 things to consider doing to balance life’s unknown milestones.

1) Focus with the End in Mind

Aside from taxes, I also evaluated behaviors or actions that can also have a direct impact on our happiness and progress toward meeting our goals. While certain circumstances enable access to funds in retirement accounts without penalty, I review these as “long-term” funds that I (hopefully) won’t need to touch until “traditional” retirement age.

I plan to let compound interest work its magic as long as possible in the following accounts (highlighted):

Personal Lesson Learned: As mentioned above, I graduated in 2007 (33 now at the time of this writing) right before the market crash. After multiple rounds of structured lay-offs in several months, I managed to stay employed. With the markets at such lows and realizing I was just starting my career, I went “all out” toward retirement savings and neglected other areas (emergency fund? what’s that? = not such a good idea looking back).

Related: Conducting You Own Risk Control Self-Assessment (RCSA) – Part 1

2) Seek Variety and Diversification

To reduce our taxable income from our relatively high New York City salaries, I initially focused on traditional pre-tax retirement contributions. As Roth options became available at our employers (in addition to our Roth IRAs), I began experimenting with different combinations of pre-tax and Roth contributions due to the benefits offered by both account types:

Personal Lesson Learned: There are plenty of other articles and resources highlighting the advantages and disadvantages of utilizing traditional pre-tax vs. Roth accounts, but I figured why not use both? Overall, I focused on both types of retirement accounts and prioritized retirement savings above all else in order to maximize the amount of time for compounding.

3) Work Toward a Balanced Equilibrium

Besides short-term / emergency savings or a “down payment” fund, the idea of a middle of the road investment bucket came to me from The Ultimate Financial Plan: Balancing Your Money and Life by Jim Stovall & Tim Maurer. This book is dense. It has an enormous amount of detail around the intersection of money and life.

A lot of ground is covered: saving, investing, and insurance, as well as various details on different accounts, products, and strategies. I found it very useful after establishing a foundation from some of the other materials I’ve read first.

Personal Lesson Learned: With an aggressive launch into our retirement accounts first, I’m now looking backward from traditional retirement age to today and thinking “damn…there’s nothing in between now and then.” So while early retirement account efforts work their magic, I’m doing a short-term sprint in non-retirement accounts (though still contributing to retirement accounts via dollar cost averaging (DCA) for full matches and lump sum investments during bonus times to lower the higher tax bill).

Related: FTW! Is it Possible to Invest for Today AND Tomorrow?

4) Adjust Pace to Sustain Progress

Life’s a marathon, right? I guess so, but I found running 26.2 miles to be painful as hell (half marathons are much better). Regardless of the distance, I’ve found it unusual to keep the same exact pace down to the second. And what is a perfect pace any way?

Borrowing a bit from Orangetheory Fitness, I’ve reconfirmed my belief that life may be a marathon (or hopefully an ultra marathon), but it’s composed of various paces:

• The Walk (or Recovery pace)
• The Jog (or Base pace)
• The Run (or Push pace)
• The Sprint (or All-Out pace)

We certainly feel our lives move at different paces depending on the hour, day, month, or year. We’ll cover this in more detail in a future post, but maintaining progress is key. It doesn’t matter how fast you’re going as long as you’re moving forward and making progress.

Personal Lesson Learned: I’ve needed to adjust my savings rate at different times over the last 10 years. When I switched jobs and realized I had very little cushion, I focused on building my emergency fund. Overall, when times are good, I save or invest at a faster pace; I do the opposite when necessary.

Related: Orangetheory Fitness: How to Win (Your Personal) Dri-Tri

5) Anticipate (and Take) Detours Along the Way

Related to sustaining progress, we covered some of the Balanced Dividends lifestyles in our prior post. If you take the All-In Approach to the extreme, you might accomplish your respective goals sooner but be miserable along the way. The Screw The World Approach to the extreme might be a lot of fund but leave you with some regrets (or maybe not).

Personal Lesson Learned: I’ve found the Moderate Approach and leaning toward the All-In approach at times to works the best for me. It’s necessary – and enjoyable – to spend to help fulfill our goals on life’s detours. In the interim, our retirement accounts are like snow balls rolling down a hill. Little by little, they get larger and larger whether or not we contribute additional capital.

Wrapping It Up

I’m still new to the FIRE world (it’s HOT by the way!), but I’m still assessing what it will take to FIRE by a certain age.

Having funds in 3 types of accounts might be helpful to one’s respective needs in the future:

• Pre-Tax Traditional Retirement Accounts = currently at ordinary income tax rates for qualified withdrawals
• Roth Retirement Accounts= currently tax-free for qualified withdrawals
• Taxable Accounts = currently taxed depending on asset type, duration of investment, etc.

Throw in Health Savings Accounts (HSAs) and other account types, and you can have quite the mix for your respective needs. Balancing a mix of account types provides some flexibility to us in the event our plans change. This will most likely be the case as we experience life’s (un)known milestones.

Looking Back and – More Importantly – Ahead

No one knows what will happen in life; we do our best to prepare for the future. Focusing on a few key things is better than focusing on nothing at all.

And it’s always ongoing as we continue to find our balance.

Readers, are there any past events that have contributed to your current or future strategies? What milestones are you planning for now? Anything that you’d suggest to potentially consider doing?

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Related:

FTW! Is it Possible to Invest for Today AND Tomorrow?

How We Got To Averaging +$1,000 a Month In Passive Income

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