FIRE Strategy for High Income Earners
Financial Independence Retire Early (FIRE). It seems to be everywhere these days. I just heard on a podcast that there is a movie coming out in a few months about the FIRE movement - which sounds awesome. I'm sure the general answer, as it seems to be for most things, is "it depends," but I'm curious about FIRE strategy for higher income earners specifically, for those of you who earn high incomes.
I work a W-2 position with what most would consider a higher income ($150K+/yr) than many positions. I am passionate about becoming "job optional" as soon as reasonably possible, which I estimate to be about 15 years or so. By that time, my goal is to have passive income that exceeds living expenses - which many would say is the definition of "retirement" in and of itself. I could likely do this sooner, but I feel like this is a reasonable goal.
The internal struggle that I constantly think about has to do with strategy to get there. For example, there are many people in the FIRE community that are all about pre-tax investing, maxing out 401(k) and IRAs pre-tax, and later doing Roth conversion ladders and the like in order to convert all that money to Roth and have it all become tax-free and effectively pay little, if any, tax in the process. The logic seems to be that once FI is reached and they no longer work a W-2 position or have earned income, their income will be lower which puts them in a lower bracket and allows them to take advantage of this strategy. In a way, I think it's brilliant. The flip side of that is being in a lower bracket also assumes income as a whole is significantly less. I want to "retire" on more, not less, don't you? If I am building up passive income now - investing in turnkey SFRs, multi-family syndications, international agricultural real estate, note funds, etc. - to eventually replace (and hopefully exceed) my current earned income, then would I even theoretically be able to take advantage of such a strategy? Yes, I realize there are tax benefits like depreciation shelter, not having certain payroll taxes, etc., on the investment side, but would that be enough of an offset to still allow a Roth conversion strategy?
I guess what I'm saying is that I have high goals and expectations on what I want my income to look like, both now and in the future, and while sheltering everything (retirement plan wise) pre-tax now and converting to Roth over time at little/no tax later initially sounds good, is that really an effective strategy?
I'm a big fan of Roth contributions to start with for employer-sponsored retirement plans like 401(k) (and for Roth IRA, the "back door Roth IRA" method with initial non-deductible contributions to Traditional IRA and converting to Roth IRA). My thoughts are that even though my income is "high" today, tax rates are near/at historic lows, I'd rather take the tax hit now and get all that money out tax-free with certainty later. My income hopefully continues to grow, tax rates IMO will likely go up over time, etc. I just want to make sure that me "taking the tax hit now" at a lower bracket makes sense versus sheltering as much as possible for a "gamble" that I can do Roth conversions later and pay less/no tax. Most people that are "higher income" typically favor pre-tax investments now with an expectation that their income needs will be lower later and theoretically they'll pay less in taxes later. I'm just not so sure how much I subscribe to that.
The other thing that comes up for higher income earners investing in rentals (assuming you're not a real estate professional, which I am not) is the inability to take passive losses against ordinary income once your income rises above $150K. I know that's a "good problem to have," but how are some of you higher income earners factoring that into your strategy? I know passive losses can offset passive income, which is nice, but what am I missing here?
I know this is a very long post - much longer than I initially intended for it to be - but I guess it breaks down to:
If you're a higher income individual who aspires to FIRE, what is your strategy and what adjustments might you be making versus someone who is more "median income." How do you think about pre-tax vs. Roth, passive losses now and later, income goals now and later, etc.
Thanks in advance to anyone who responds.