5 Investment Lessons I’ve Learned In Early Retirement

Early retirement is a wonderful thing. You suddenly have time back to take care of your health, participate in kid’s activities, and pursue some work or projects that are meaningful and FUN.

There are some traps though. I went down a few too many rabbit holes over the last year and a half. Given extra time, a financially attuned brain begins to tinker with things.

I forgot that the best approach to investing is to “set and forget”. I started getting into some exotic investments. (“Exotic” in my context is anything that is not an index fund tied to the S&P 500.)

Here are some of the traps I started falling into. And thankfully got my head straight in a fairly reasonable amount of time.

Cubert’s Five Most Important Lessons Learned (So Far) In Early Retirement

1. Don’t get suckered into Dividend Investing*. It’s such a tempting thing to have a continuous flow of dividend income on a predictable schedule. The problem? Dividends (within your brokerage account anyhow) are tax-inefficient. These stocks yielding 3, 4, 5%, or more can create a real drag on your long-term investment growth. I have over $150K in SCHD plus a few random “Dividend Kings” in a brokerage account and guess what? I’ll get taxed on the $5,500 annual dividend distribution, whether I need that cash or not. Better to sell a portion of a long-term (held at least 12 months) low-dividend index fund as you need the money. The capital gains treatment is much more favorable than paying taxes on forced income. And besides, when has SCHD ever beaten VOO over the long run?
2. Get moving on Roth conversions. I covered this in detail in my last post and can’t emphasize enough how crucial this practice is, particularly if you are a 401K millionaire. The RMDs will crush you when these forced distributions come along at age 73 (or 75). On top of that, by this age, you’ll have Social Security and Medicare IRMAA fees adding to your tax burden. Better to pay Uncle Sam his share of your 401K now, than to wait for the tax hammer to drop later. Today’s tax brackets are not set in stone.
3. Avoid exotic non-qualified dividend income stocks, like JEPQ and JEPI in your brokerage (post-tax) account. Yields of 7-10% are very enticing, but they come with the added cost of being taxable as regular, ordinary income. This can compound a bad situation if you are trying to squeeze Roth conversions into a low tax bracket, or if you’re trying to maintain a subsidy on your ACA health plan. I thought the reliable income would be useful since those nice corporate paychecks stopped arriving. I’ve since become much more comfortable with the Specification Identification Method of selling specific lots of index funds to control capital gains and use tax-loss harvesting to my advantage.
4. Don’t tap into your HSA account. The triple tax advantage (tax deferred when invested, not taxed when used for medical spending, or -anything- at age 65+, and not taxed while growing) of the Health Savings Account makes the HSA the single best investment account one can have. My goof up? I spent 2024 using some of our HSA stash to pay for various out-of-pocket medical bills and braces for the kids. Why? Our cash flow was tight after some big home repair bills. I have since learned that it’s best to let the HSA grow untouched. Pay those medical bills with a point-earning credit card, save the receipts, and reimburse yourself years down the road, TAX FREE.
5. Don’t rely on just one “expert” to guide your decisions. Read from a variety of sources. If you want validation or need a skeptic’s view, check out YouTube. Just be careful not to base your most important decisions on the opinions found there. I took a little diversion into dividend funds without understanding how the taxes might affect me. It wasn’t the YouTube content creator’s fault. He was using SCHD in a tax-deferred account, which avoids ongoing tax implications. Yours truly didn’t catch this nuance, and put a lot of eggs into the SCHD (and JEPQ) basket in my brokerage account. Doh.

The Best 401K Strategy (In Retrospect)

Some of the lessons I’ve learned are sunk costs. I can’t go back in time and change my 401 (k) to a Roth 401 (k). The Roth 401 allows an employee to save post-tax dollars in an account that grows tax-free and can be tapped tax-free at age 59.5. With a Roth 401 (k), you pay taxes as you go with each contribution.

It sure doesn’t sound as good as a pre-tax 401K, where taxes are deferred. However, if you have all your retirement savings in a 401K, you might as well subtract 35% from its value. That’s how much of a share you’ll wind up paying the IRS during those RMD years. OUCH.

I’d argue that no matter your income, go Roth all the way. You’ll never pay a cent of taxes for Roth withdrawals in retirement. You’ll have an income low enough to avoid higher brackets on your Social Security and capital gains from a brokerage account or inherited IRA.

The bottom-line lesson: If you are a mega saver in your working years, do NOT assume you’ll be in a low tax bracket in your retirement years. RMDs are waiting for you…

* Caveat: I am bullish on using dividend funds like SCHD in tax-deferred accounts. My current strategy with the rollover IRA is to combine SCHD with VGT to take some volatility out of the mix. SCHD has a very strong track record of consistent growth and very little overlap with VGT.