A beginner’s guide to early retirement investing and financial independence


So you’ve paid off all your high interest debt, have a job, and know that one day you would like to either retire early and/or become financially independent.  For nearly two decades, I have been successfully saving and investing for early retirement.  So what are the next steps? It seems personal finance advice is all over the board and can be overwhelming. I am here to tell you that financial independence planning is easier than you think.

Here is your easy and comprehensive guide to early retirement investing.

Step One:

Max out your contributions to your 401(k) plan (or 403b, 457 plan).  I am not talking about maxing out your company match, which is typically capped at 6% of your income.  I am talking about contributing the IRS maximum, which is currently $18,000 per year.

Let’s talk about why we do this, prior to contributing to a traditional IRA (and definitely NOT a Roth IRA), or investing post-tax dollars. The main reason is the progressive tax code. Meaning the more you make, the more they (government) take.  The internet defines a progressive tax is:

A tax in which the tax rate increases as the taxable amount increases. The term “progressive” refers to the way the tax rate progresses from low to high, with the result that a taxpayer’s average tax rate is less than the person’s marginal tax rate.

For purposes of this article, I will assume you are in the most common federal tax bracket, which is 15%. This is not a difficult tax bracket to get into as it only requires earnings above the poverty level. For a person who is single and filing single, this is how your income is taxed in 2017:

Income amount:

$0 – 10,400

This is your free pass, it’s your 0% tax bracket.  The Federal Government taxes these amounts at 0%.

$10,401 – 19,725

These dollars are taxed at 10%.  Therefore above $19,725 for a single person, you are already in the 15% tax bracket.

$19,726 – 47,950

These next dollars get taxed at 15%.  If you have adjusted gross income above this, you are now in the 25% bracket.

The good news is that your 401(k) contributions reduce your adjusted gross income, dollar for dollar, at the HIGHEST TAX BRACKET.  Yup, you get to save taxes at the high-end of your tax bracket. And then when you retire, you are able to withdraw those dollars at the lowest end of your taxable income, which starts at 0%.  0% tax bracket = FREE RIDE ALERT.

A special note about state income taxes, or icing on the cake

In addition to federal tax savings, 41 states impose an ADDITIONAL state income tax.  Nearly all state tax codes are progressive.  In addition to federal tax savings, you will also save state income taxes.

How to calculate how much you should contribute to max out your 401(k) plan:

Simply put, the % you need to contribute to your 401(k) plan is to take $18,000 and divide that number by your estimated annual income.

Let’s assume you estimate you will earn $50,000 in salary this year.

$18,000 / $50,000 = 36%

BOOM!  36% is the percentage you will need to contribute to your 401(k) plan each paycheck to reach your year-end goal of $18,000.

To complete this step, you will need to log into your 401(k) account and change your contribution amount.  If you don’t already know how to do this contact your HR department, your boss, your colleague, whomever you need to ask to learn how to get this done.

Below is a screen shot of my work 401(k) plan which is administered by Wells Fargo.  This is where I can change my contribution.  I have a drop down box where I can pick the % I wish to elect.

An example of where you can increase your 401(k) contributions online in your work sponsored 401(k) plan

After selecting 36%, in this example, I simply click continue, and then you will typically be taken to a second screen, where you will be asked, “do you REALLY want to do this?”  Your answer is a RESOUNDING YES, I REALLY want to do this.

A note about company matches and why they don’t matter

Company matches will vary, from plan to plan and company to company.  Since you will be well over, in most cases, you will capture whatever match your company offers (for example, my current employer offers a 50% match, up to 6%, after being employed here one year).  Each employer I have ever worked for has had different 401k matching plans.  No two plans have been the same.  Even if your employer offers a plan with no match, you still need to contribute $18,000 for the tax advantages.  This step isn’t about matches, it’s about expediting and maximizing your eventual leap to early retirement.

Step Two:

It is important to utilize tax-deductible vehicles, such as a traditional IRA, to fund early retirement

Contribute to a Traditional IRA.  Do not contribute to a Roth IRA.  I repeat, whatever you do, don’t contribute to a Roth IRA or you will end up regretting this, later on, like we did.  The ability to make tax-deductible contributions, to a traditional IRA, depends upon your adjusted gross income.  Since you already maxed out your 401(k) plan, in step one, you have decreased your adjusted gross income by $18,000 and likely have significantly increased your ability to make tax-deductible traditional IRA contributions.  Congratulations!

If you don’t already have a traditional IRA open, I suggest you open one here using this link.  Skip step one of the advice on the link, you have already decided you will open up a traditional IRA.  If you can’t decide which fund to select, I suggest you put your investment into an ETF with a ticker symbol VTI, which is a total stock market index fund.  Essentially, for a very low-cost, you are buying the entire stock market.

Below is a screen shot of the link that will allow you to open up a traditional IRA at Vanguard.

Instructions on how to open up a traditional IRA at Vanguard investments

April 15th tip

The IRS allows you and your spouse to contribute to a traditional IRA for the prior tax year, up to April 15th of the following year and take the tax deduction for the prior tax year.  For example, if you haven’t yet filed your taxes for 2016, you can log into your tax software, such as taxact.com or ask your tax preparer to determine if you’re eligible to contribute to a traditional IRA.  

Below is a snap shot, from taxact.com, that shows our eligibility to contribute to a traditional IRA for 2016, Note that since my wife is a stay-at-home mom, she is not covered by a work retirement plan and can contribute the max ($5,500) to a traditional IRA.

Taxact.com analysis of my traditional IRA deduction eligibility;


Your traditional IRA deductible contribution limit: 

Mr Finance Patriot (FP)

$3,410

Mrs. FP

$5,500


As you can see above, since my adjusted gross income is within the phase out range, I can only contribute $3,410 to a tax-deductible traditional IRA.  However, my wife can contribute $5,500 to a spousal IRA.  Making such a contribution will increase your refund for the current tax year and allow you to invest more in taxable accounts in step three, below.

Step Three:

Invest your remaining surplus funds in a taxable brokerage account.  Since we already discussed, in step two above, that the only IRA that works for an early retiree is a good, old-fashioned, TRADITIONAL IRA, we now move on to the next step for your surplus funds.

Vanguard is a good place to set up your first taxable brokerage account.  I suggest you open one here using this link.  Please keep in mind that, while you’ll need a minimum of $3,000 to invest in most Vanguard mutual funds, this requirement does not apply to shares of ETF’s, such as VTI.  To buy one share of VTI, for example, you only need enough money in the account for that one share.  Conclusion, invest away, invest often.  Vanguard does not charge fees to buy shares in their own ETF’s, such as VTI.

If you can’t decide which fund to pick, I suggest you put all your investment into an ETF with ticker symbol VTI, which is a total stock market index fund.  Essentially, for a very low-cost, you are buying the entire stock market.

Below is a screen shot, of the first two steps, of how to open up a Vanguard taxable account.

Steps 3 & 4, not listed above, are funding your account and signing (electronically) your application.

Single or Joint?

I don’t want you to be confused with which type of account is taxable and which one isn’t.  Both types of accounts, single and joint, are taxable.  If you are single, your choice is easy.  Open up a “single” account.  If you are married, you have the choice of opening up a single or joint account.  Most married couples are probably better off opening up a joint account, since in the case of an unfortunate death, the other spouse will be able to easily access those funds without having to do any additional paperwork.

What are the advantages of a taxable investment account?

Numerous; let’s list some, shall we?

  1. Flexibility.  At any time, you can sell your investments and have cash deposited into your bank account (assuming you set up a link).  There is no 10% tax penalty, to sell investments in a taxable brokerage accounts.  For both a traditional and Roth IRA, you are hit with a 10% penalty, for withdrawing prior to age 59.5 (principal withdrawals of Roth contributions are not taxable).
  2. Preferential tax treatment of dividends and capital gains.  Once upon a time, everyone was taxed on dividends received, and capital gains from investments that were sold.  Beginning in tax year 2008, those in the glorious 15% federal income tax bracket no longer pay ANY taxes on qualified dividends or capital gains.  As someone who has a high pre-tax savings rate, you’ll most likely fall into this 15% federal tax bracket, and you will have the same advantages of a Roth IRA, without onerous age restrictions or penalties for early withdrawals.
  3. Additional tax deductions, also known as tax loss selling.  If you sell stocks, mutual funds or ETF’s at a loss, you can deduct these tax losses against your ordinary income (wage income).  With that additional refund from tax loss selling, you can then turn around and invest even more, for early retirement, in your taxable investment account.

Useful Link:  Tax loss selling

Step Four:

Track your net worth in a spreadsheet.  This step is more of a motivational step than it is a practical step.  Since at least age 23, I have had an excel spreadsheet that lists all of my liabilities (generally loans outstanding) and assets (generally investments and now a home equity as well).  Here is a sample of a spreadsheet format you could use to track your net worth.

Sample format of Excel net worth spreadsheet


It has been my experience, over many years, that as the numbers move in your favor you will be even MORE motivated to save and invest for retirement.  You will see progress and that will make you a better saver and investor.

Your older self will thank your younger self for the big money hook up

One day, you’re older self will thank your younger self, for the incredible gift of income generating assets that you have been provided.  Bye bye work world.

A special note about Personal Capital

I don’t recommend Personal Capital because I have never used that software.  Many bloggers recommend this, primarily due to the referral fees that company pays bloggers for people who sign up through their links.  As far as I know, this is a fine option.  Do what works for you.  

The final word

Early retirement dream beach

Early retirement investing doesn’t have to be complicated. By following this step-by-step guide, you should be off to a fantastic start towards your goal of financial freedom.   I have provided you with links to get you started and moving in the right direction. Remember, you can always tweak your plans as you learn even more about taxes and investing.  One day, with the one-two punch of tax savings and returns from compound investing, you will have more than enough funds available to enjoy all that early retirement has to offer.

You will never regret properly planning and investing for financial freedom, so why not get started today?

What steps are you taking to save and invest for early retirement? If you had to go back and review what you have done so far to prepare for FI, what would you have done differently? What motivates you to achieve financial freedom?

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13 comments

  1. Great call adding the selling costs of your house into the equation. Most people happily sail over that detail.

    I’ve used mint & personal capital (have not received money from either) both helped me out a lot with the automatic tracking of my finances. It is something I SHOULD have done myself but would never get around to. Fortunately it’s done automatically. They both provide similar snapshots of your fiscal health, but I’ve enjoyed PC’s phone interface more. This significantly affects my choice between the two as I live off my phone.

    On a side note: this is how anyone can tell the difference between a patrol cop and a detective. Ask anyone seated at a computer a question requiring research. The detective logs into the computer. The patrol cop reaches for their phone and ignores the big screen right in front of them.

    1. Thanks for the information regarding Personal Capital. I may just sign up one day, but some of my spreadsheets are complicated and on the fringe of extreme nerd-ery. So they are hard to give up.

      I like the phone/desktop analogy. I’d imagine my personality would fit more of a detective than a beat cop, if that were my field.

      1. It’s not a bad thing. I was on loan to the detectives for the day and was looking around suspiciously as they all laughed. They had to explain it to me twice.

        “Oh, use the COMPUTER. Got it.”

    1. I have considered it, but I find the math to be a little better doing a mix of taxable sales, along with about $28,000 in IRA penalized withdrawals, offset by my $2000 in child tax credits.

      There are many, many different scenarios I considered, and all are rather unique.

        1. Sure, send me an email. It would probably be a separate post entirely if I wrote it here. Also, my situation I have two kids and two tax credits, so apples to apples we would have to have the same family size.

  2. This is a great guide!!! As someone who uses Personal Capital and have never been paid by them I can tell you it’s amazing. I love the investment analysis that they do. They run monte carlo simulations on your portfolio let you know how your goals are coming along. I love it 🙂

  3. For my day job I run a small hedge fund that’s not open to outside money.I thought about taking on some outside investors, but ultimately decided that it just wasn’t worth the hassle. The problem is that investors are just so impatient. They demand that you make money quarter after quarter consistently. That’s just not how the market works. You gotta think more medium-long term.

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