Our Current Strategy for Financial Freedom
As we’ve discussed in our About Us, we consider ourselves to be financially free, meaning our investments make more money than we did combined in our full-time engineering jobs. Thus we became no longer strapped to those jobs and job locations. Our plan has always been to retire early. We made a lot of deliberate financial decisions to get there. We began our journey as soon as we were married, but more recently, we took significant steps by investing money in courses on financial education instead of haphazardly figuring it out on YouTube and through varying books.
‘Retiring’ in our 30s was sooner than we were planning - we were on track to be totally done in our mid-40s. We are in a situation where we may need to return to work just due to inflation and the changing economy, but we knew we had enough to enjoy this time now with our toddlers before they started school and social lives. We decided we were happy to take the risk and could figure out the rest as future Mindy and Luke problems.
We want to share with you our current financial strategy to generate the income which replaces our salaries and supports this lifestyle. The best well-rounded financial course we took is called The Perfect Portfolio, which educated us beyond conventional financial norms. This course teaches how to have a well rounded financial portfolio of brokerage investments, real estate (or other business), and insurance policies - all of which are non-correlated and have the ability to borrow money secured by your investments (called margin). We learned about good debt and the philosophy of buy, borrow, die which is used by the wealthy.
This course was created by Mark Quann who is the author of Rich Man, Poor Bank, Top 10 Ways to Avoid Taxes, and Top 25 Ways an IUL can Secure Your Financial Future. If you are interested in these books, reach out to us via email and we can coordinate sending you a few!
Here is how our strategy is setup:
Brokerage Investments
The individual brokerage investments are invested in a diverse selection of high income options traded ETFs (offset by some bonds) generating about 3% dividend income per month. We actually have these with a financial advisor through Zega Investments as these ETFs are new and constantly growing/changing - we realized we couldn’t keep up with this and enjoy time traveling with our toddlers at the same time. These are not tax friendly - our dividend income is generally taxed as ordinary income.
This brokerage has the ability to provide us about 50% margin (or cash that can be used for other investments and requires no credit check) and our advisor negotiates our margin rate (which is currently 7%). Margin is pretty complex, is dependent on the individual funds your investments are in, can be ‘called back,’ and is considered ‘risky.’ The Perfect Portfolio taught us about this in detail so we can be knowledgable and comfortable when we make decisions and take risks with our money.
Margin is the money we live off. We send ourselves a monthly allotment based on our budget and actual spending and our financial advisor manages the percent of margin we hold in our account based on our risk profile/comfort level. As needed, the margin is paid down by the dividends that are earned.
Bonus Tip:
One thing we did early on to grow our brokerage account was maximize the amount of money we sent to our brokerage accounts over maxing out 401K/IRA contributions. This is contrary to traditional financial advice. We contributed the maximum amount our company matched to our 401K as we considered it ‘free money,’ but anything above that, we sent to our brokerage. We knew we’d be taxed over the years on the money invested in our brokerage, but we also wanted to have access to it before 59-1/2 and to us, that was worth it.
Also as our retirements were in tax-deferred accounts, we knew we would still pay tax on the money when we took it out in retirement. We don’t plan on being in a lower tax bracket at retirement - we probably won’t have our primary home paid for (we move around too much), we want to pay for family vacations with our kids and grandkids, and we assume tax brackets are going to be higher by the time we retire in general because of the national debt and deficit in social security funds. While Roth’s are different and we’d be able to pay the tax now, you can’t invest in them if your Modified Adjusted Gross Income is above a certain amount (currently $230,000 for married filing jointly).
We later learned in The Perfect Portfolio that if you invest your money in either a 401K or IRA, not only can you not touch it until retirement age (without a penalty), you also can’t borrow money secured by them to use for other parts of your broader portfolio.
Real Estate (or another business)
Real estate (or a business) is another aspect of this perfect portfolio. This is where we offset some of the tax hit from the individual brokerage dividend income.
Real estate has a ton of tax benefits and we are only starting to dabble in it. Bonus - once there is equity in your home, you have the ability to borrow from it too! We are renting our current home so we can now consider it an asset. We didn’t previously call this an asset because we don’t consider things that cost us money (like our mortgage, maintenance, items in the home, etc.) an asset, we consider them liabilities. We are currently renting this home for less than our mortgage. This is because we purchased it when the market and interest rates were high (oops!) - but this was also when we had to because our jobs moved us to a new location and we didn’t care to rent at the time. We expect the area we purchased in to have high market appreciation over time.
Even though this is technically a ‘loss’ - the way we are looking at this is we are just moving some money into a different non-liquid investment which earns a different rate of return (ROR) than our brokerage and makes our overall portfolio more diverse. Through classes and mentors, we’ve learned how to calculate the ROR on real estate and while it may look like a loss every month, we are overall getting a great return on our money over time - we’ll have to do another blog on this analysis.
This is not a perfect situation and we’d prefer to own real estate solely for rental purposes for greater tax benefits which we are working on.
Another great way to offset taxes is by creating a business. The Perfect Portfolio course provides you with lots of business ideas.
Be sure to find a brilliant CPA to help with this part of your portfolio in general. Our CPA was previously in finance and went to be a CPA to legally avoid taxes as much as he can - and he is helping us to do the same. If you need a recommendation, send us an email!
Life Insurance
We always thought it was important to have a life insurance policy but when we took The Perfect Portfolio we learned so much more about the benefits of these policies beyond just providing a death benefit to your heirs. Our focus quickly narrowed in on Indexed Universal Life (IUL) insurance. While these are complex life insurance policies, they serve a purpose in our strategy as a non-correlated asset which overall make our portfolio more diverse.
IULs are five things. They are permanent life insurance, long term care, tax efficient, a non-correlated asset, and you can borrow from them.
Life Insurance
This goes without saying. IULs are a permanent life insurance policy and will pay a death benefit to your beneficiaries. While there are other permanent life insurance options, we went with an IUL over others, like whole life, because you know exactly what premium you are paying in the policy and it is generally less expensive if you want long term care.
Long Term Care
Long term care is important to us as we’ve recently seen our grandmother deteriorate in a state run facility. She was there for rehab, but it was a small town, and therefore it was attached to the long term care facility. We want to ensure we have money for in home long term care and also so there is no burden on our children to take care of us when they are also taking care of their own families.
Also, many states are currently considering a long term care tax which would be similar to social security and taxed on everyone’s payroll. To date, Washington has implemented this at 0.58%, but California, New York and Pennsylvania (amongst other states), are not far behind in implementing this. If you have a life insurance policy with long term care, you will be exempt from this but only if you purchase it in advance of the long term care tax being implemented in your state. Some policies have long term care riders, but will not be qualified as exempt from this tax so be sure you have a policy in place that your state will accept for the tax exemption.
Tax Benefits
IULs are considered triple tax protected. You are not taxed on their growth or distribution and they are free from the death tax.
Non-correlated Asset
IULs grow without risk meaning their value never goes down. Every year their value is locked in. If the market takes a 20% dip one year, they remain the same value. If then the next year, the market has a 20% gain, your account grows from its baseline value and doesn’t need to recover from the 20% dip. We use ours an emergency savings for this reason.
IULs also have really great investment options within them. While the insurance industry is only able to say these make about 7% in their illustrations, the expected earnings in these investment strategies are far greater.
Borrowing Ability
We always ensure our portfolio provides us with means of borrowing if possible. Our IUL provides us the ability borrow secured by our investments, similar to our brokerage. This means we have access to money in a non-market correlated asset that doesn’t require a credit check to use. We can use this as our emergency savings. If the stock market tanks, we can borrow from this and buy more shares to earn even more when it goes up. If the housing market tanks, we can use this money to purchase a home to have greater appreciation when the market recovers. Our margin rate on this remains lower than our brokerage (currently at 5%) and you have the ability to borrow from it after month 13.
Our Choice
We decided to go with Nationwide for our IUL. We like that Nationwide is a mutual company and therefore is not publicly traded so there is no fiduciary responsibility to shareholders. Their long term care policies are approved in all 50 states so we knew we’d be covered as nomads. They also have really great investment options within the IUL and the margin interest rate loans are very competitive.
In addition to permanent life insurance, we purchased term insurance. Ensure you select a term policy that is terminal, chronic, critical AND convertible.
If you are interested in discussing life insurance options in more detail, please email us and we can help you find a solution that meets your needs!
Bonus
One last point we wanted to share is how we are investing our IRAs. While we aren’t using the money in them right now, we obviously want them to grow as much as possible! Ours are currently invested with M1 Finance. We really like M1 because you build what is called a pie - certain percentages of specific funds which each make a piece of your literal pie chart. As those stocks grow or you earn dividends, the pie continually rebalances to the the percentages of the pie you build. The Perfect Portfolio guys keep up on the latest investment funds and can provide great suggestions for how to setup this fund.
M1 also has a 4.5% high yield cash account which is another great option we considered for our emergency savings in lieu of our IUL.
This concludes the high level summary of our current financial strategy to support this full time RV lifestyle things with toddlers!
If you are interested in The Perfect Portfolio course we took, we have a couple links for you!
This link gives you $300 off the price of the live course which is always FULL of the latest information!
This link gives you pre-recorded sessions for nearly 50% off!
Disclaimer: This is not tax, legal or financial advice. It is simply us sharing how we do it. Always consult your professionals.
Drop us a comment for anything else!
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