How to Achieve Early Retirement with a Taxable Brokerage Account

Investing in a 401(k) or an IRA is one of the best ways to save for retirement. What if, however, you wanted to save for retirement while maintaining access to your invested capital? Perhaps you are building toward an early career exit or simply want flexibility in your lifestyle ahead of traditional retirement. What might this look like?

Enlightened investors online often discuss a preference for investing in a way that doesn’t restrict access to their funds for decades. Often, they contribute enough to their 401(k) to receive the company match and invest the rest in a taxable brokerage account. At some point in my investing journey – almost instinctively – I gravitated toward this path.

The Power of the Taxable Brokerage Account

In addition to unrestricted access to the principal, dividends and income produced by investments in a taxable account, you also have nearly unlimited investing options that you don’t have with a 401(k).

While the IRA provides you with similar if not equal optionality, it still does not provide unfettered access like the taxable account.

One common strategy is to build a portfolio designed to maximize dividends. As the dividends are reinvested and you purchase more shares each month, the principal grows, and compounding takes effect. Eventually, after years of diligence, the dividends partially or fully supplement the income earned from working a job.

When you make as much or more money from investments as you do from active employment, work becomes optional. You are free to say ‘no’ to things you don’t find meaningful, and ‘yes’ to the work, relationships, and experiences that you do.

Dividend investing is not the only way to get there. You could optimize growth in the early years by building a core portfolio of index funds tracking the S&P 500, Nasdaq, or specific sectors that tend to have higher appreciation (like technology). Along the way, you could add higher dividend and income producers – Dividend ETFs, REITs, and Bonds — to supplement the core.

My personal strategy more closely resembles the second one. The point is that you have options; how you get there is up to you.

Things to Consider

Whatever dividends and income are produced in a taxable account, they are – not surprisingly – taxable. As these balances grow, so does your tax liability.

Ultimately, dividends may be subject to more favorable tax treatment than what you pay on the income earned from your job.

Additionally, if you decide on a growth strategy early that leads to a pivot toward dividend or income later, that rotation may involve selling assets to purchase new ones. This would incur capital gains tax for any year you do this.