So I’ve been thinking …
This was somewhat of a controversial move because traditional personal finance advice is to invest in your tax-sheltered accounts, not your taxable accounts! After all, why would you want to save your money in an account where you have to pay taxes?
But it wasn’t that simple. There were several more alluring reasons why investing in dividend stocks would make more sense:
- I was getting better returns from our dividend stocks than I was from our 403b funds. The 403b funds were only getting an average of 5 to 6% returns whereas the dividend stocks were more on par to get 8 to 9% returns.
- The dividend stocks were much cheaper. 10 transactions a year at $8 only costs $80, whereas the average expense ratio of our mutual funds is over 1%. On $100K, that’s over $1K.
- And the most important factor: The prospect of being able to retire early …
Dividend Stocks Can Help You Retire Early:
That last point was by far the most important. After working out the numbers on my early retirement financial freedom plan, I saw a BIG opportunity to increase the chances of having an adequate amount of money to bridge the years between early retirement and Age 59-1/2 (when you can access your 401k, IRA, etc). And that opportunity lied with getting more aggressive at building up my dividend stock portfolio.
The interesting thing about using dividend stocks for retirement is this:
- If you build up enough dividend funds, the 3 to 5% dividend yield you stand to make off of them could result in a steady stream of stable income.
- If you pick the right companies (the ones that haven’t decreased their dividend payments in over 25 years), then the share price becomes somewhat irrelevant. All you need to do is just hold the shares of the stock.
So ultimately I did end up lowering the amount of money we contribute to our 403b plan and diverted it over to our brokerage fund with the intentions of buying more dividend stocks. Over the course of a year, this should give me about $5,000 extra to spend when I make my next big purchase.
This brings me to my current dilemma: Should I do the same thing with my 401k fund? Should I explore more 401k alternatives that will help me retire early?
Exploring Dividend Stocks as One of My 401k Alternatives:
The pros and cons of diverting more money into my dividend stock fund instead of my 401k are not quite as clear cut as they were with the 403b. Here’s a few of the things I’ve been tossing back and forth in my head:
- By diverting even more money over to my taxable account, I’d have potentially even more money to fund my early retirement.
- But then again I’d also stand to not make as much money due to tax erosion from being in a taxable account.
- However, dividends and long-term capital gains are generally taxed at a lower rate than traditional ordinary income which is what your 401k would be taxed as. For example, I may pay only 15% as opposed to 25% or higher.
- Eventually you HAVE to pay taxes on your 401k income.
- The employer match threshold on my 401k is only up to 8%. I’m currently contributing the full $17,500 per year, so I’m a long ways away from endangering my employer match.
So let me ask you, my Readers: Who else would try this? Would you trust your 401k or put more faith in your dividend stock portfolio? What other 401k alternatives or unconventional methods have you explored to achieve your financial goals?
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