An adviser to wealthy early retirees thinks why 401ks are ‘money jails’ and where he tells clients to invest them instead.

Dean doesn’t discourage saving for retirement; He believes it’s a more efficient way to save for investors, especially those interested in early retirement, more control and flexibility.

A non-traditional solution he provides for his clients is obtaining a securities-backed line of credit (SBLOC). This is a type of loan in which the investor uses their stock portfolio or other assets, including their fine art and luxury yachts, as collateral. This allows for quick access to cash without triggering capital gains tax—and the investor can pump that cash into other investments, such as starting a business or buying real estate.

“Now, your money is doing two things at the same time: it’s in the market, and it’s being used for other wealth-building tools,” Dean said.

The main risk is to withdraw too much money, and the stock market crashes, he explained: “We recommend leaving a buffer between what you approve and what is being used. I also recommend having other liquid assets or lines of credit in reserve, if the market takes an unexpected swing. But if someone has an account that is properly diversified and leave b20% on their line of credit. And unrelated assets, they should be able to weather meaningful market volatility.”

SBLOCs are popular among high-net-worth individuals. Elon Musk, for example, “used a line of credit on his Tesla stock to buy Twitter and create X,” Dean explained.

However, people with five-figure savings can also benefit, he said: “If someone has less than $50,000 to $60,000 in their investment account, we can help them set up a mortgage-backed line of credit for $35,000 to $40,000. Then they can go buy their first rental property.”

Even if you have the ability to use an SBLOC, this strategy may not be for you, he added: “First of all, figure out what your goals are. If your goal is to have a bunch of money in retirement accounts by 60 or 65, keep doing that.”

He also noted that he doesn’t advise clients who already have large nest eggs tied up in retirement accounts to cancel and pay penalties. But, if they’re looking to achieve financial independence and retire early, he generally recommends reducing their contributions to take advantage of the 401(k) match, which is essentially free money.

Another strategy he discusses with clients is self-directed IRA funding, which allows them to invest in options within their IRA.

“The younger the person, the more likely we are not to use a self-directed IRA because we don’t have their money in a ‘money jail’ and will be able to do two or more things at once with an SBLOC or a well-designed whole life policy,” he said. But for clients in their 50s or older with large sums in retirement accounts, “a self-directed IRA is a way to access unique alternative investments to help diversify their assets and create income without the need to liquidate retirement accounts and pay taxes and penalties.”

Dean understands that non-traditional planning isn’t for everyone, but investors want to understand all of their options.

“I find the conventional wisdom that ‘you should max out your 401(k) or your IRA’ is damaging,” he said. “When people come to us, and they’re like, ‘OK, I want financial freedom’, but then realize all the money they’ve worked so hard to save, they can’t access it without paying at least 10% more in taxes – that can be really frustrating.”

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