What Supersavers Miss
By Kevin Estes
Finanial Independence
I love the Financial Independence (FI) community!
Retirement Optional
It’s more commonly know as “Financial Independence, Retire Early” - FIRE for short. However, many in the movement focus more on financial independence than retiring early!
Solving the money problem gives people flexibility to pursue their passions. I know many work optional people and they all do something:
take care of family members,
manage real estate,
run a blog or forum,
work part-time,
run a business,
volunteer,
organize events,
host meetups…
Personal Connection
My mom’s best friend from high school got involved in the Your Money Or Your Life (YMOYL) movement in the 1990s. It was the Financial Independence community before the term existed.
Researching even more ways to save when I worked at Amazon led me to Mr. Money Mustache’s blog and later The Mad FIentist’s podcast. It also connected me to the vibrant FI community.
I’ve:
participated in countless meetups,
attended retreats, and
spent hundreds of hours in the Facebook groups.
I was energized by our discussions and decided to change careers to become a financial planner.
However, I was a bit of an outsider in both worlds. I found myself:
defending the FI community in advisor meetings and
defending financial advisors at FI meetups!
Many Benefits
Financial Independece members learn a lot of valuable information! The importance of low fees, diversification, and saving are just three examples.
Members are highly intelligent, work hard, and live below their means.
They’re refreshingly willing - even eager - to buck conventional wisdom. FI folks jettison anything that doesn’t stand up to logic. The movement’s countercultural ethos supports unconventional lives!
Many community members have been investing for decades. They often have more first-hand experience (and larger balances) than similarly-aged financial advisors.
Drawback
At times, members are uninformed. A blindspot can derail finances.
Profession
I sometimes see things like:
I don’t need a financial advisor. I max out my 401(k) and Health Savings Account.
Would that logic work for another profession?
I don’t need a dentist. I brush and floss.
Are you using the right toothbrush?
How do you remove plaque buildup?
How do you check for cavities?
What would you do with a cavity?
Do you need braces?
Would you give yourself a root canal?
This article explores opportunities often overlooked by supersavers.
No Formal Study
It’s impressive how much time people in the Financial Independence community spend optimizing their finances. However, it’s surprising how few of them formally study the subject.
Decisions are made based on third-hand sources such as:
a discussion
about an article
which reviewed a study.
Soundbites are retold - further distancing the information from its source.
Have you ever played the telephone game?
Statements morph.
Details are lost.
I’d encouarge anyone interested in personal finance to study it. Read Bill Bengen’s original article and The Trinity Study. Check out content created by Michael Kitces and other financial professionals.
The Certified Financial Planner™ coursework is wonderful. I started it in late 2019 because:
I was genuinely interested in learning more about personal finance,
a mentor convinced me my last career would be investor, and
I wanted to explore this as an encore career.
The program cost over $5,000. What I learned was worth more than that for my family’s finances - even without working in the profession.
The education helped me decenter. My experience is an n of 1. The CFP® education helped me analyze situations I hadn’t encountered.
Too Much
Cutting costs only goes so far. That’s why many people in the Financial Independence community work long hours or multiple jobs.
Working a lot may increase someone’s short-term income and beloved saving rate. However, it can be unhealthy or downright dangerous.
A career is more like a marathon than a sprint. Burning the candle at both ends can force someone into early retirement.
Breaks are crucial. Companies realize employees are healthier, happier, and more productive after they recharge.
Focus on the Known
Many people in the community view themselves as intelligent. They also like to be seen that way!
Unfortunately, that can cause them to focus on topics they already understand.
For instance:
Good fuel economy isn’t enough.
Learn how to hyper-mile!
What about insurance coverage or estate planning?
What we know won’t sink us. What we don’t know can.
Single Stock Exposure
Many in the FI community work at large tech companies. The sector has done well and driven up the value of stock from Restricted Stock Units (RSUs), Incentive Stock Options (ISOs), and Employee Stock Purchase Plans (ESPPs).
People often don’t sell it because:
it’s done well and
they don’t want to pay the tax.
Past Leaders
Past performance is no guarantee of future results.
Look at the tech leaders from a few decades ago. Do those acronyms still dominate their industries? GM, GE, IBM, AT&T…
(This isn’t a recommendation to buy or sell any of those companies.)
Taxes
After Restricted Stock Units vest, they can be sold with little or no additional tax impact.
Also, the 15% long-term capital gains tax bracket is wide. It’s possible the only tax saved by waiting to sell would be the 3.8% Net Investment Income Tax (NIIT) for higher earners.
Doubling Down
It gets worse!
An employee might buy an index that includes their employer’s stock. They may inadvertently buy more!
Diversification
A stock’s meteoric rise could build wealth yet fail to keep it.
Getting rich and staying wealthy are two different things.
Imbalanced Portfolio
Many supersavers own an interesting set of investments.
Single Stock
Their employer’s stock may have appreciated.
Lowering single stock exposure could be a step in the right direction.
Allocation
A bigger imbalance may be caused by:
neither having a target
nor checking their current allocation!
Knowing is half the battle.
Fortunately, many people save into retirement funds. Those accounts can usually be rebalanced without an immediate tax impact.
Discipline
Rebalancing is the first step. However, it needs to be done regularly.
People in the Financial Independence community are famous for their disciplined spending. Their portfolios could use more attention.
Insufficient Emergency Fund
Investing every dollar can be a mistake.
That may not leave enough for:
home repairs,
insurance deductibles, or
unique opportunities.
The psychology is also important. Even the wealthy can slip into a scarcity mindset without ready access to funds.
The opposite could be true. Someone might hold too much cash.
Asset Mislocation
Some investors have taken diversification too far.
Each account might be balanced! That can be very tax inefficient.
A portfolio needs to be diversified. Each account does not.
For instance, it could make sense to invest accounts which might never be taxed again more aggressively. Money which will be used soon may need to be invested conservatively.
Each account needs a purpose and timeline. Those factors drive its allocation. Just one investment might work!
Think of it like a symphony. Each musician plays one instrument at a time in harmony with the rest of the orchestra.
Diversifying each account is like hiring a bunch of one-man bands to play together. Chaos!
Annual Tax Focus
A retiree may have years of low income - especially if they retire early. The progressive tax system lends itself to tax planning.
Default Taxation
Without planning, someone might pay:
a high tax rate while working,
a low tax rate in early retirement, and
a high tax rate once they start Required Minimum Distributions (RMDs).
They may be able to minimize lifetime taxes by:
lowering income in high-income years and
raising it in low-income years.
Less Income
Many supersavers are already taking some of these steps!
Opportunities include:
pre-tax retirement plans,
Health Savings Accounts (HSAs), and
Flexible Spending Accounts (FSAs).
However, it may make sense for someone to contribute to a Roth or After-Tax account. They might forego the HSA contribution to benefit from a lower deductible health plan.
It may also make sense for someone to harvest tax gains. That could be especially helpful if they owe an Alternative Minimum Tax (AMT).
More Income
It’s psychologically harder for someone to raise income in low-income years. However, it might be the right move!
Doing so could reduce future Required Minimum Distributions (RMDs). Pre-tax distributions, Roth conversions, and part-time work are just three options to explore.
Higher Expenses
However, higher income could:
raise taxes,
lower financial aid for higher education, and
increase healthcare premiums through the Affordable Care Act exchange or Medicare’s Income-Related Monthly Adjustment Amount (IRMAA).
Cautionary Tale
An early retiree got the message that Roth conversions can help lower taxes. They converted a pre-tax account to a Roth account.
The problem? The account had a balance of about $500,000!
That unusually high income was nearly taxed at a very high rate. Fortunately, their advisor was able to educate their client and help reverse the massive Roth conversion.
Tax Penalties
Penalties are often avoidable.
Estimated Payments
Someone who owes when they file their return may also have to pay an underpayment penalty and interest.
They might want to make estimated tax payments once a quarter.
That’s especially common:
for self-employed individuals,
after the sale of appreciated assets, and
when too little tax is withheld for stock compensation.
The IRS has an online payment option. A taxpayer would need to validate their information, make a payment, and save the receipt.
Increase Withholding
If someone owes taxes with their return, they could increase their withholding. Spreading out the tax payment could ease the burden and avoid penalties.
They would update their Form W-4 to:
reduce the number of dependents,
make extra withholdings, or
both.
Non-Qualified Distributions
The government encourages long-term saving. That’s why there’s a penalty for withdrawing retirement funds before age 59.5.
Exceptions to the 10% penalty depend on the account type and situation. If no exception applies, it may be better to take out a loan.
Other account distributions may be penalized if not used as intended:
20% penalty for Health Savings Account (HSA) distributions not used for qualified medical expenses and
10% penalty for 529 Plan or Coverdell ESA distributions not used for qualified education expenses.
Real Estate Exemption
Real estate enjoys many tax benefits, including the ability to exclude a portion of the gain from a home sale.
The taxpayer(s) would need to own and live in the property for:
at least two (2)
of the last five (5) years.
The excluded gain can be up to:
$250,000 single and
$500,000 married, filing jointly.
The tax break may sway the decision to sell or rent after a move.
An owner might even do both by:
renting it for a few years
and moving back into the property before selling it.
Home Receipts
Another opportunity takes little effort.
Saving home improvement receipts could:
increase depreciation expenses,
lower the taxable gain on a sale, or
both.
The home investments would either need to add value or extend its life. Save a copy digitally!
Personal Real Estate
Many supersavers own investment real estate. However, they often don’t keep it in a business entity - such as an LLC.
That may be an unnecessary risk.
One highly intelligent individual said something like:
Since someone could pierce the corporate veil anyway, I might as well save the hassle and legal fees.
This isn’t legal advice. However, the topic came up at a conference.
An attorney on a panel mentioned that how a business is run matters. Running it as a business means doing things like:
keeping personal and business expenses separate,
using a business email and mailing address,
maintaining good books and records, etc.
Running it professionally may lower the risk of a lawsuit reaching the owner’s personal assets.
Why ride a motorcycle without a helmet?
Underperforming Real Estate
Many people love real estate. Unfortunately, it doesn’t always love them back.
Interesting Dynamics
There seems to be a selection bias toward real estate in the Financial Independence community. Those who bought real estate during the Great Recession - including my family - enjoyed a strong recovery.
Also, real estate is highly leveraged. A 20% downpayment is 5:1 at the time of purchase! Gains and losses are multiplied.
The wealthiest Americans own relatively little real estate. It falls as a percentage of net worth.
Cash Flow Negative
There’s more to investment real estate than the rent and mortgage:
vacancy,
repair & maintenance,
insurance,
property tax,
Home Owner Association (HOA) fees,
management fees, etc.
Many properties are cash flow negative. The owner has to feed the rental every month!
Solution
The fix could be as simple as charging market rent.
With a cash flow negative property, the owner is betting on appreciation. That feels more like speculating than investing.
Spousal IRA
Many married couples overlook a key opportunity.
If one spouse works and the other does not, the spouse without earned income could contribute to their own retirement account. Contributions may even lower the household’s taxable income!
Whether they can be deducted depends on:
the couple’s tax filing status (file jointly),
whether the spouse without income is covered by a workplace retirement plan (rare), and
College Financial Aid
Many savers assume they won’t qualify for financial aid.
That may be a mistake!
Need Aid
Financial need aid depends more on income than assets.
Also, the Free Application for Student Aid® excludes:
retirement accounts,
home equity, and
other items.
Colleges and universities use their own processes to award financial aid. However, they’re required to post a Net Price Calculator (NPC) on their website as long as they participate in federal student aid programs.
The NPC results can be surprising:
Financial aid may be offered to higher income families, especially at expensive private schools.
An Ivy League school may be less expensive than an in-state public university for lower income families!
Consider filling out the Net Price Calculator carefully before applying. Save the results. It should give the family a good sense of the cost.
If not, the results could be grounds for an appeal to the college for professional judgment. That’s especially true if the student wouldn’t have applied without that NPC estimate.
Merit Aid
There’s another option for families who don’t receive financial aid.
A student may be a good candidate for merit aid if their statistics are in the top quartile (25%) for the school:
Grade Point Average (GPA) and
standardized test scores (PSAT, SAT, ACT).
Applying to target and safety schools can increase the odds of receiving merit aid packages. However, read the fine print! Many packages require a student to maintain a high GPA in college.
Low Insurance Coverage
Some people save at all cost. Skimping on insurance is risky.
Auto Insurance
I’ve seen coverages like $10,000 and $50,000. Those may an order of magnitude too low!
Injuries
People often think of their vehicle when they think of auto insurance. However, causing an injury or death could be devastating.
Insurance is for what can’t be replaced. It’s not for ongoing expenses.
Premium Savings
Many people haven’t shopped their insurance in years.
They may be able to increase their coverage limits and lower their premiums by:
shopping around,
increasing deductibles, and
paying in advance.
Some insurers offer big discounts for high deductibles and paying early! Whether those options make sense depends on their situation.
No Umbrella Insurance
Umbrella insurance sits on top of other policies like home and auto. It’s designed to pay claims above other policy limits.
Umbrella generally requires higher limits on other insurance policies. Since it rarely pays claims, umbrella insurance can be quite affordable:
$1 million might only cost $200 a year.
$2 million might only cost $400 a year.
A general guideline is $1 million in umbrella insurance for every $1 million in net worth. Again, it depends on someone’s situation.
Life and Disability
Many people have too little life and disability insurance.
Young Families
Newer families are especially prone to underinsurance.
They may not understand the risk.
They might not have much cash for premiums.
However, their children could need decades of support.
Many employers offer affordable coverage. It may be as simple as clicking a box during open enrollment.
Tragedy
Another advisor tells a story about his neighbors. The husband earned a few hundred thousand dollars a year.
The father and his son were driving down the highway when a semi-truck jumped the median and collided with them. Both the father and son died at the scene.
Unfortunately, the husband didn’t have enough life insurance. His surviving wife and daughter were ruined financially.
The life insurance premium may have only been a fraction of the husband’s income.
Disability Insurance
Disability could be worse than death financially.
Someone might:
lose their income,
have significant medical expenses, and
require additional family support.
Many employers provide some disability insurance by default.
However, is it enough?
Mega Roth
Many employers added a benefit over the last few years.
Some employees missed the update.
After-Tax
Contributions to an after-tax 401(k) are made from income that’s already been taxed.
It works like a Roth 401(k) with three major differences:
contributions generally don’t receive employer matching,
it has a different contribution limit, and
the investment growth may be taxed.
The after-tax limit for 2025 is $70,000 less other employee and employer contributions for the year.
Say an unmarried 35-year-old earns $200,000 between salary and bonus. They contribute the maximum $23,500 to their pre-tax 401(k). Their employer matches another $8,000.
The employee could contribute $38,500 in 2025 to their after-tax 401(k):
$70,000 - employee contribution - employer contribution = after-tax max
$70,000 - $23,500 - $8,000 = $38,500
Mega Roth Steps
The after-tax plan may allow an employee to withdraw funds while still working for the employer. That’s called an in-service distribution.
The in-service feature may let them move contributions to a Roth 401(k) or IRA. The benefit of the extra move is to avoid tax on the growth.
Investment growth in an after-tax 401(k) is taxable. Therefore, it may be best to quickly move contributions to a Roth account.
Some custodians will automatically sweep after-tax contributions at the employee’s request. Setting that up may take a phone call to the custodian (Fidelity, Vanguard, etc.)
This process is called a few thiings, including Mega:
Roth,
Backdoor Roth, and
Two-Step Roth.
It’s a legal way to save more for retirement. Also, the funds might never be taxed again.
Roth accounts are especially helpful for heirs. If they inherit a pre-tax account, the withdrawals would be subject to income taxes. Withdrawals from a Roth account generally aren’t!
Someone may have already reached the limits on their:
Health Savings Account (HSA),
pre-tax 401(k), and
Employee Stock Purchase Plan (ESPP).
Contributions to an after-tax account could make sense. However, it depends on many factors.
No Social Security
Some people assume Social Security will go bankrupt before they receive benefits.
I feel that’s unlikely.
Funding Status
The Social Security Act was passed in 1935 - 90 years ago!
The Old-Age and Survivors Insurance Trust Fund is forecasted to be depleted in 2033. That assumes no major changes to the program.
The income is then is expected to fund 79% of scheduled benefits.
The total income and cost were close in 2023:
income of $1.351 trillion and
cost of $1.392 trillion.
The projected depletion was extended a year in the 2024 report primarily due to growth in the economy.
Tax Rate Changes
The payroll tax both employees and employers pay for the Old-Age, Survivors, and Disability Insurance (OASDI) has risen over time:
from 1% in 1937
to 6.2% since 1990.
Normal Retirement Age
Congress passed a law in 1983 to delay the normal - or full - retirement age from 65 to 67.
The law passed over 40 years ago and still hasn’t fully taken effect.
If history is a guide, Social Security benefit changes will likely be communicated well in advance.
Political Nightmare
Americans feel they have a right to benefit from the system they funded. Cutting benefits for retirees would be a political nightmare.
Assuming no Social Security benefits seems overly pessimistic to me.
Claiming Strategy
Knowing how Social Security works may help a couple decide who works when.
Also, it matters when someone starts taking benefits:
Starting Social Security benefits at age 62 instead of 67 could lower benefits 30% every year for life.
Delaying Social Security benefits beyond full retirement age increases the monthly benefit 8% each year, up to age 70.
State Estate Tax
Few things are more certain than death and taxes. However, the combination is less clear!
What Is Estate Tax?
It’s basically a tax on those who - according to state and federal government - accumulated too much wealth by the end of their lives. The estate and/or inheritance tax is paid after death.
There are exemptions! However, the exemptions are subject to change and vary by state.
Current Federal Exemption
For 2025, the federal estate tax exemption is $13.99 million.
Married couples can double it with the Deceased Spouse Unused Exemption Amount.
A married couple can combine their exemptions to $27.98 million if conditions are met.
Past Exemptions and Rates
The federal exemption has grown quickly:
$650,000 in 1999,
$5 million in 2011, and
Also, the top-end federal estate tax rate has fallen:
55% in 1999,
45% in 2009, and
The Tax Cuts and Jobs Act of 2017 raised the exemption to $11.18 million. The amount has grown with inflation.
However, the higher exemption only goes through the end of this year. It’s scheduled to fall back to $5 million plus inflation since 2011 at the start of 2026.
State Estate and Inheritance Taxes
As of 2024, 18 states had an estate tax, inheritance tax, or both.
Here in the Pacific Northwest, estate taxes start at:
High Tax Rate
In Washington, the highest estate tax rates are:
40% federal plus
20% state.
Those exclude probate fees.
Estate Minimization
There are many ways for someone to lower estate taxes, including:
contributing to a 529 plan,
withdrawing pre-tax retirement funds,
funding a trust,
giving to charity,
performing Roth conversions, and
using the Deceased Spouse Unused Exemption Amount.
It can help to plan ahead.
Step-Up in Basis
There’s an often overlooked estate benefit.
Someone who inherits a taxable account, real estate investment, or similar asset may receive a step-up in basis.
Say someone:
bought a home for $300,000
which grew in value to $1 million and
owned it the rest of their life.
An heir who receives the home would likely have their basis “stepped up” to $1 million. It’s as if they paid $1 million for the home.
Neither the heir nor the deceased paid tax on the $700,000 gain!
Someone nearing the end of their life might want to hold onto an appreciated asset. It depends on their situation and goals.
Charitable Giving
Many people are charitably inclined. However, giving cash is often a bad idea.
Appreciated Assets
Nonprofits don’t pay income taxes!
It hurts to see someone sell an asset which has risen in value only to give cash to charity. The taxpayer likely paid tax the nonprofit wouldn’t!
A donor could instead give the appreciated asset directly to charity.
Doing so could help the:
charity receive a larger donation,
donor avoid taxes, or
both!
Bunched Donations
Donations might not lower taxes.
A strategy called bunching could help.
Instead of giving every year, someone could give double one year and nothing the next. This process could grow itemized deductions and lower taxes.
Contributing to a Donor-Advised Fund (DAF) could combine both of these techniques in a powerful way. A sizable contribution can be especially effective in a year with high income or just before retirement.
Pre-Tax Accounts
Distributions from a traditional retirement account typically cause income taxes for the year.
If someone’s planning to donate the account, it may make sense to spend other funds. Roth conversions likely wouldn’t make sense!
There’s even an opportunity to avoid taxes on Required Minimum Distributions (RMDs). Someone could donate their RMDs directly to charity. Those are called Qualified Charitable Distributions (QCDs).
QCDs could have an even bigger effect. They may also lower the Income-Related Monthly Adjustment Amount (IRMAA) for Medicare.
Disclaimer
In addition to the usual disclaimers, neither this post nor these images include any financial, tax, insurance, or legal advice.
