In this investing series, I’m going to be transparent and use our own money as an example. We’re not giving financial advice. We’re just guinea pigs so you can see what we’re doing, start to finish.
If I sound like a total noob, it’s because I am. It seems that FIRE bloggers either get it and their blog posts are mostly ticker symbols or they’re investing in real estate…and we’re neither. 🙂
Time to choose our investments! We want to start with the cash we have and not go into debt. We are a little open to risk, but not so much that we’ll put $100,000 into shares of one company. We like the risk mitigation of index funds, but we refuse to take money out of our tax-advantaged and tax-deferred retirement accounts.
So…how do we get the risk mitigation of index funds and then get money out of this investment when we want to without paying penalties or taxes?
OK. Maybe I’m asking too much. Maybe.
It’s time to do what I do best and find the expert in the FIRE community who lives on dividends.
With respect to our personal finance situation, we stand on the shoulders of giants. It’s because of personal finance books, blog posts, and podcasts that we’ve come this far. I know there are resources out there to help us achieve our last goal, too.
However, I struggle to locate this expert. If you know of someone we should be following who FIRE’d and invests for dividends, please let us know!
To achieve what we want, build our dividend nest egg for FIRE while we’re actively increasing our income, we need to reinvest our dividends and also work to minimize our tax burden.
Fortunately, Vanguard understands the need to reinvest, so they have a program that clearly outlines how anything we might gain from our brokerage account (i.e. dividends) can be reinvested automatically so long as we choose index funds; dividends from ETFs can’t be automatically reinvested, so that’s a little bit of work there to make that happen.
Even though we will reinvest our dividends, we’re subject to taxes, hence the reason why I plan to double down on learning more about the tax code to reduce our tax burden.
Should we sell our investment, we would be subject to even more tax, but I don’t see that happening in the near future since we plan to be invested for years, not weeks or months.
Let’s get to the meat and potatoes. What exactly will we invest in?
VYM is one of the ETFs worth considering. With Vanguard, we can purchase an ETF commission free, so that’s a game-changer. Also, we can get started today with the purchase of just one share (and possibly the $20 annual account fee, but we’ll see if we can get that waived).
Regarding index funds, VFIAX invests in 500 different companies whereas VTSAX is the total stock market index. How about that for risk mitigation? Either option would be great, but these require $10,000 minimum to invest. Fortunately, investing $10,000 means we get to avoid the $20 annual fee that comes with having a Vanguard brokerage account.
For every $10,000 invested in VFIAX, we’ll see about 1.9% in dividends. In order for this one fund to be able to cover our expenses, we’ll need around $1.3 million invested.
For every $10,000 invested in VTSAX, we’ll see about 1.8% in dividends. In order for this one fund to be able to cover our expenses, we’ll need nearly $1.4 million invested.
With VYM, the minimum for investing is much lower, just the cost of one share. The expense ratio for VYM is higher, but the dividends are much higher at around 2.99% today. In order for us to cover our expenses, we’ll need about $836,000 invested, so it would be quicker for us to hit our passive income goal.
It appears that the only real downside of investing this way today is that dividends will be taxed at 15%. *womp womp*
Once we’ve FIRE’d, our lower income will be within 10-15% tax bracket, which means our dividends would be taxed at 0%.
Since we seek to increase our biz revenue now, and subsequently our income in 2018, we plan to open our joint taxable account at the end of the year and start investing by way of VYM. Look for celebratory tweets when we do. 😉
For those who are worried with our high-yield selection, don’t fret! We’ll diversify. Each of us will open our own individual taxable accounts in the future and we’ll buy one of the aforementioned index funds with the required $10k (or perhaps another fund, pending additional research into investing). VYM is a start, but not the finish.
“Why invest in something that will be taxed while you increase your income?”
For a few reasons…
- We don’t have vast sums of money we plan to transfer at the moment, so we’re talking about taxes on a small sum. (Can’t let a nickel hold up a dollar.)
- Increasing our income means our money needs a new home. Our retirement accounts are maxed (see the first part of this investing series).
- We’re moving to another state in the future, so our tax burden will be lower than it is today in PA.
There you have it — the start of our investing for FIRE plan, but not the finish. 😉