I WAS SCROLLING through social media recently and saw somebody dismiss retirement accounts as “paper wealth.” The argument was familiar: Your money is locked away and you’re waiting for permission to access it.

There’s a grain of truth here. Retirement accounts do come with rules. But much of the discussion online ignores how flexible these accounts actually are. More important, it ignores the enormous tax advantages.

Most people today will likely live well beyond age 59½. Many will spend two or three decades in retirement. Even if somebody retires early, they’ll still need assets later in life.

That’s why ignoring retirement accounts at age 30 often isn’t wise. You could end up giving away 30 or 40 years of tax-advantaged compounding.

It also isn’t an all-or-nothing decision. We can use taxable brokerage accounts, Roth IRAs and 401(k)s together. Each account serves a different purpose.

Retirement accounts also provide rebalancing flexibility that taxable accounts don’t.

Inside a Traditional or Roth IRA, investors can rebalance portfolios without triggering capital gains taxes. Somebody who wants less stock market exposure can freely sell shares and buy bonds, Treasurys or other funds without generating an immediate tax bill. That matters over long periods of time.

The other misconception is that retirement accounts are completely inaccessible until age 59½. 

Let's talk about Rule 72(t), also called Substantially Equal Periodic Payments, or SEPP. This IRS rule allows penalty-free withdrawals before age 59½ if specific requirements are followed.

Using online 72(t) calculators, a $500,000 retirement account could potentially generate annual withdrawals of roughly $30,000 while avoiding the normal 10% early-withdrawal penalty:

The payments must continue for a required period and the IRS rules are strict. Still, the broader point remains: There are legal ways to access retirement funds earlier than many people realize.

The Rule of 55 is another example.

If you leave your employer during or after the year you turn 55, you can often withdraw money from that employer’s 401(k) without the normal 10% penalty. Again, the money is not completely locked away until 60.

Roth IRAs may also be flexible. Contributions can be withdrawn anytime tax- and penalty-free because taxes were already paid before the money went into the account.

That doesn’t mean people should tap retirement accounts early. But accessibility is very different from impossibility.

Roth IRAs also happen to be among the most powerful wealth building tools available.

Qualified withdrawals are tax-free. Dividends compound without yearly tax bills. Investors can buy and sell investments inside the account without triggering taxable events.

You may remember a famous example about Peter Thiel. According to reporting by ProPublica, Thiel reportedly grew a Roth IRA from $2,000 to more than $5 billion between 1999 and now. He turns 59½ in 2027, meaning those withdrawals could potentially be tax-free. Imagine if he had decided to skip retirement accounts because he wanted to “live now.”

Employer matches are another point often ignored online. Skipping a 401(k) match can be one of the costliest financial mistakes people make.

Suppose an employer offers a dollar-for-dollar match on the first 3% of salary contributed to a 401(k). Before the investments even grow, that’s effectively an immediate 100% return.

Very few opportunities offer that kind of risk-adjusted benefit.

In fact, somebody could theoretically contribute, collect the employer match, later withdraw the money, pay ordinary income taxes plus the 10% penalty, and still potentially come out ahead versus investing only through a taxable brokerage account with no match.

The tax advantages extend beyond employer matches.

Inside retirement accounts:

• Dividends can compound without annual tax drag
• Investors can rebalance without triggering taxable events
• Capital gains taxes are deferred or eliminated, depending on the account type

Compare that with a taxable brokerage account, where dividends may create yearly tax bills and selling appreciated shares can trigger capital gains taxes.

Retirement accounts can also create opportunities for tax arbitrage.

Somebody contributing while in the 22% or 24% marginal federal tax bracket today might eventually withdraw money while in the 10% or 12% bracket during retirement.

State taxes can widen the advantage even more. Some states provide tax deductions on retirement contributions while later taxing retirement withdrawals lightly or not at all.

Early retirees often use Roth conversion ladders as well.

The process generally works like this:

• Move money from a Traditional IRA or 401(k) into a Roth IRA
• Pay taxes on the converted amount
• Wait five years
• Withdraw the converted funds penalty-free

Like Rule 72(t), there are strict rules involved. But these strategies exist because retirement accounts were never designed to be prison cells.

The larger point is that retirement planning should involve multiple tools working together. Taxable brokerage accounts provide flexibility. Roth IRAs provide tax-free growth. Traditional retirement accounts can reduce taxes during high-earning years.

None of these accounts are perfect by themselves. Together, however, they can create an extremely efficient system for building long-term wealth.

That’s why describing retirement accounts as “paper wealth” misses the bigger picture.

 

Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.  

I'M ALL IN FAVOR of striving. But I’ve also belatedly come to see the appeal of acceptance. Should we strive for more, or should we accept what we currently have and what’s currently on offer? As I’ve noted in earlier articles, there’s great pleasure in striving. We love the feeling of making progress, even if our achievements don’t make us happy for long. It’s an instinct we no doubt inherited from our hunter-gatherer ancestors. Their striving is the reason they were able to survive and reproduce, and hence the reason we’re here today. Despite my terminal cancer diagnosis, I continue to set goals and strive toward them. Each day, I put in hours keeping HumbleDollar chugging along, trying to stay in shape and working on various writing projects. Still, striving in some areas of our life doesn’t preclude acceptance in others. We should accept the limits of our talents. We’re told that if we work hard, we can achieve anything we set our sights on. Really? We all know that’s not true of athletic and artistic endeavors. No matter how hard I worked, I simply never had the talent to be, say, a pro athlete or a concert pianist. Sometimes, gauging our talent is trickier. It took a while, but eventually I discovered during my career that I wasn’t an especially good manager and that my efforts to write about topics other than personal finance never turned out quite as well as I’d hoped. To be sure, some folks are more successful than their talents would suggest. Hard work may have played a role. But there was likely also an element of luck. That’s great—but it hardly seems like something we should bank on. We should accept that we’ll never be fully satisfied. We imagine that our next accomplishment will leave us happy forever, but then we end up moving the goal posts and targeting some new achievement. That’s just the way we humans are: We love to strive. But we should also accept that this striving will never leave us with that ultimate sense of accomplishment that we crave. That doesn’t mean we should stop striving. But we should accept that it’s the journey we enjoy, and the destination won’t leave us permanently happier. We should accept that we’re unlikely to outpace the market averages. Want to outperform most other investors? The surest way is not to try—by simply buying index funds and collecting the performance of the market averages. Because of fund expenses and trading costs, index funds typically trail behind their benchmark index. But that’s better than most active investors, who lag by even more. We should accept that there are things we can’t control. We might be able to control our own behavior, though even that can be a struggle. What if we try to control the behavior of others? Life can get awfully frustrating awfully fast. This is crystal clear in the world of investing. We can control how much risk we take, the investment costs we incur, and our own buying and selling. But we can’t control the behavior of other investors, as reflected in ever-fluctuating stock and bond prices. Instead, we need an investment strategy that doesn’t depend on others behaving the way we want, at least in the short-term. Got just a few years to invest? Don’t count on other investors acting on your wishes and bidding up the price of the stocks you own. We should accept our own mortality. We may continue to strive every day. But this can’t go on forever and, in my case, probably not for much longer. When do I stop striving and accept the inevitable? I don’t have the answer, but I suspect the question will be answered for me. With each passing month, I move more slowly and I have less energy. I haven’t chosen to strive less, but it seems I am. As I observe what’s happening to me, I imagine that I’m aging, like so many before me, but for me it’s happening over months, rather than decades. I’m not saying this slowing down is enjoyable. But it also isn’t so terrible—because I feel like it’s helping me to accept what’s to come. Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier posts. [xyz-ihs snippet="Donate"]

BACK IN 2010, at the Berkshire Hathaway annual meeting, a shareholder challenged Warren Buffett. Noting that shares of motorcycle maker Harley-Davidson had nearly tripled over the prior year, he asked Buffett why he had chosen to buy the company’s bonds rather than its stock. Buffett’s reply was a two-minute masterclass in how to think about investments. It’s worth walking through it point by point. To start, Buffett acknowledged that hindsight can be cruel. “I might have asked the same question,” he said. But then he reminded the investor that we should never judge an investment decision solely based on its result. Instead, he emphasized the importance of a sound decision-making process. He then detailed how he thought about the Harley decision at the time. Buffett started at a high level, with a discussion of asset allocation, and here he made a counterintuitive argument. Many of Berkshire Hathaway’s liabilities extended out more than 50 years, he said, and with such a long time horizon, it might seem like the company could afford to take an almost unlimited amount of risk in the stock market. Buffett acknowledged that was indeed the case. But, he said, “we would never have all our money in stocks,” even if, on paper, it seemed like the best choice. Buffett and his partner, Charlie Munger, still chose to hold substantial amounts in bonds, even if that meant giving up potential gains. Why? Buffett went on to explain why holding bonds made sense even in the absence of any clear need. For starters, bonds provide flexibility during stock market downturns. And since bear markets always arrive without notice, and can last multiple years, it makes sense to hold bonds, more or less, at all times. Perhaps not surprisingly, Buffett once mentioned that a trust he’d established for his family was similarly structured, with 10% in bonds, even though it had a long time horizon and could theoretically afford to be entirely in stocks. Coming back to the Harley-Davidson decision, Buffett referenced his mentor, Benjamin Graham. In his book Security Analysis, he had explained the relative benefits of “junior” and “senior” securities. “Junior securities,” Buffett said, “usually do better, but you’re going to sleep better with the senior securities.” What did he mean by junior and senior? In a typical corporate structure, where a company has issued both bonds and stocks, bondholders would have first claim on the company’s assets if it went into distress. Stockholders, on the other hand, would be further back in line. For that reason, bonds are said to be senior, while stocks are junior. It’s an important distinction. Because of this structure, bonds are inherently more secure than stocks. They are essentially IOUs. But also because of that structure, bonds will normally have lower returns than stocks. Companies know they don’t have to offer as much in the way of interest to bondholders because of their more senior position. This is the technical reason why, all things being equal, bonds offer both lower risk and lower returns than stocks. Buffett acknowledged that Harley-Davidson was a beloved company. “I kind of like a company where your customers tattoo your name on their chest.” Still, Buffett said, there were no guarantees. Even great companies can run into trouble. It was for this reason, Buffett said, that buying Harley-Davidson’s bonds was a relatively easy decision. “I knew enough to lend them money. I didn’t know enough to buy [the stock].” That’s because buying the stock would have required a much more detailed analysis of the motorcycle market, including an understanding of consumer trends and the effects of competition on Harley’s profit margins. Buying the company’s bonds, on the other hand, “was a very simple decision. It was just a question of, are they going to go broke or not?”  When we choose to buy bonds, in other words, we’re intentionally choosing the slow lane, but it’s for a reason: because bonds offer a level of certainty that stocks can never provide. And because of that certainty, we shouldn’t feel badly when bonds deliver meager returns. It’s by design. Buffett wrapped up the discussion acknowledging that if he’d opted for Harley’s stock, he would have made far more money for Berkshire shareholders. But that wasn’t the right yardstick, he argued. “We are running this place so that it can stand anything.” That, I think, is the most important thing we can take away from this story. The investment industry spends a lot of time talking about performance—and specifically, about outperformance. Of course, we all want to see our investments grow, but what’s most important, in my view, is that your portfolio be resilient enough to “stand anything.” One of the benefits of stock market downturns is that they give us an opportunity to stress test our emotional response to the market. After a roughly 10% downturn earlier this year, stocks are back at all-time highs, so this is a good time to take the temperature of your portfolio. If you lost some sleep during the downturn this spring, or the one we experienced last spring, this might be a good time to shift some of your portfolio to more senior, more secure, securities. If, on the other hand, you barely even noticed these downturns, that’s important information as well. Investing, in other words, isn’t just about numbers. Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.