Financial Independence: Strategies for Liquidating Investments Wisely

Smart investors should carefully consider liquidating brokerage assets for large expenses to avoid jeopardizing future financial independence.

### Smart Strategies for Liquidating Brokerage Assets for Large Expenses
* 💰  When considering how to pay for large expenses, cash is one option, but **liquidating brokerage or investment assets** can also be valuable, especially if they are **after-tax dollars** that can be accessed without waiting until **age 59 and a half**.
* 🏡  Using these assets for **significant purchases** like real estate, education expenses, or necessary car replacements can be wise, as these are **long-term investments** that contribute to your **financial growth**.
* 🎉  However, it's crucial to avoid liquidating assets for temporary expenses such as weddings or vacations, as this may jeopardize your future financial independence; "**the opportunity cost of robbing from your future self is not worth it**."
* 📊  Before liquidating, assess whether the money was originally intended for retirement, as this could **significantly impact your long-term savings goals and financial stability**.
* 💡  Consider your long-term vision and avoid justifying short-term desires as part of your future goals; **not all expenses warrant sacrificing your financial future**.
* 💸  Don't forget to account for taxes when liquidating investments, as selling assets can incur **capital gains taxes** and potentially **increase your tax liability significantly**.
* 🔄  You have two options for liquidation: selling all at once for **immediate cash** or using a dollar-cost averaging strategy to **minimize tax impacts and emotional decision-making**.
* 🕒  Planning ahead can save you from unnecessary tax burdens, as demonstrated by a personal example where **delaying a sale led to significant tax savings**, showcasing the **importance of timing in financial decisions**.

[Music] All right, Brian. So, one way that we can pay for large expenses is to pay for cash. There is another way that we think is also incredibly valuable. You know, we talk all the time about when it comes to building towards financial independence. We like to build three distinct tax buckets. We like to have our pre-tax dollars, we like to have our tax-free dollars, and then we do like to have those after-tax dollars. Well, one of the benefits of those after-tax dollars is we don't have to wait until age 59 and a half to get to them. We actually can get to them today. So, does it make sense when it comes to large expenses to consider liquidating brokerage or investment assets to do so? Yeah, this is one I, and I love the, like I said, we've got beyond cash. Now we're talking about how do you use some of the other tools in your arsenal of financial things. And you're a diligent saver investor. You have this taxable brokerage account. You can use this for what if you had the

opportunity. Lifetime on a piece of real estate. You can use this for you. Also save up for years for this goal of that your child is going to go to college. You can use this for education expenses. You have a time certain. You know when this is coming. You're going to be able to liquidate some of the assets for that. You think about a car. You know maybe this is one of those things where not only we have emergency reserves but there might just be a time where you get no more use out of a car and you say hey markets that are all-time highs. These are good good time. I could go liquidate. That's what a car is. A need and not a want right. You also may be thinking okay I'm going to do a home renovation and instead of incurring debt I want to use this for that or there are other long-term goals. Here's what we don't want you to think about liquidating brokerage assets for very temporal things. So like you think about like a wedding. Is it worth it to go sacrifice

your future financial independence for a singular party. Now, that party is special, and it's important. It would deserve some thought, but is the opportunity cost of robbing from your future self worth it? The same thing can be said for vacations or one-time experiences. While we love for you to do those, and we want you to experience those, we don't want you to experience those at the cost of being able to have future financial independence. So, you want to measure really hard before you begin liquidating brokerage to pay for those things. You said it best there, Bo, that we don't want it to be a moment in time, meaning like vacation weddings. Look, and weddings are super important, but in a lot of ways, it is a consumption of a moment in time. You get the memories, but if you had to do it on leverage or debt, it's just not worth it. And that's why, but I do think everything on the left column, you think about the real estate, the car to get to your your

wealth-building tool, which is your job. That's going saving those type of things are going to be around for a long time and create a lot of value. So, that's what let's give them what are the additional things that you ought to consider when you're making this decision to liquidate. Yeah, the first one is okay. Are you liquidating money that was slotted for retirement? You know, we talk all the time about we want you saving 25% for the future, and that 25% is supposed to be for retirement, for financial independence. Well, when you think about the dollars that you're selling inside of your brokerage account to satisfy this big expense, are you actually robbing for your future self, or have you been a diligent saver who's gotten out ahead of the curve, and you've been having an additional savings rate, and those are there to be used? And if they are retirement dollars, the opportunity cost associated with using them today is incredibly significant. So, you want to make sure you recognize that, and you make a prudent decision before you

decide to spend those dollars. We already know we've done a lot of content where we show even traditional retirement accounts like 401ks. They're very leaky, meaning that when people change jobs, they have a tendency to go pull off of those assets. I worry about both taxable investment accounts, brokerage accounts, your individual and your joint investment accounts that you allocated as 25%. These things probably have a lot of temptation to them that you like, Hey, there's an easy access point to make this consumption decision now. So if the money is slotted for retirement and you're using it, this is a big red flag that maybe you need to measure twice and think about this differently. The other thing you have to consider is what's the long-term vision. You know, there's value outside of rate of return. Sometimes people will use these assets for a down payment because maybe you want to start a family and that's one of your goals and that's something that you need to be able to

like plant your flag, and that's okay. That's where the goal today might be more important than the goal in the future. So, there is value outside of strictly the wealth multiply and strictly the rate of return. What you want to do, though, is you want to make sure that you are true to yourself and you don't start convincing yourself, Oh no, no, this vacation is part of my long-term vision, or This new car, no, no, I need to be in this new car. You need to recognize that there are things that make sense to sacrifice the future for, and there are things that do not make sense. So, you have to take that into consideration, and don't forget the tax consequences. Hug, I mean, it's common, you know, if you had a need for $100,000, and you had this in an investment account, you know, that's maybe worth $200,000. Don't forget to take into account the taxes because to generate $100,000 of net proceeds after you've paid your tax next April, or you plan to pay your taxes.

you might have to sell $15,000 or at least have the $25,000 to pay the taxes 'cause you're going to have to pay ordinary income tax rates on anything that's like in fixed income. You're going to have to pay Capital Gains, assuming you owned it for at least a year, on anything that's appreciated. And then don't forget all the other components of the income and other things that were created through the time that you own these Investments. Don't forget taxes, all right? So if you are someone who's thinking about doing this, then you're going to be hit with a question, okay, how do I do it? What's the most effective way to use and to liquidate these broker assets? And there's really two options. You can either sell it all and generate the cash today, or you can dollar-cost average out of your position. And so when might it make sense to sell it all? Well, if you need the money now, if some opportunity presents

itself or some expense comes up, and you need the cash today. Well, then it might make sense to go ahead and liquidate immediately so that you can take advantage of that. Now, the downsides are: what if the market's in a bad spot? What if the market's been - what if this is a 2022 type year, and you're having to sell at a loss? That's less than ideal. Or if you have to sell today, what if this was a high-income tax year, and you have to sell, and you have a lot of big embedded gains? You might have a higher tax bill than you would have preferred. So, that's one option. But if you do have some time, I think the second option is the one that I like. Well, I was just glad like on selling it all. What I like is like if you had a purchase that you knew was coming up in, say, February, but here you are in October when you realize you might be able to sell half, you know, in October, and then another half in January.

February you could do it in a way. This is a great segue into why dollar cost averaging out works, but if you had to sell it all at once, it does really push up that tax bill. So, but walk them through because I think a lot of people don't think in these terms. You've even been a great coach to me, and I'll share an example in a minute. Just like you can dollar cost average into your investments, there's nothing wrong with using this as a tool to go dollar cost average out of your investments. Yeah, for example, let's say that you know you're going to need these dollars in the next 3 to 5 years. Rather than selling everything today and just having it sit in cash, there's nothing wrong with beginning to slowly move it to cash over time. Just like you buy into the market, you can sell out of the market on an unemotional, systematic basis. Now, the downside is it requires planning ahead. You have to be able to think through this purchase, and it has to be far enough

out that it justifies a dollar cost averaging strategy, and if the market continues to go up, you might miss out on some gains, or if the market goes down, you might participate in those losses. What we like about dollar cost averaging, though, is it removes the likelihood that you're either going to be 100% right or 100% wrong when you sell it all. You might time it perfectly, or you might do it at the world's worst time. Dollar cost averaging, in our opinion, removes some of the emotion, and whenever we can remove emotion from financial decisions, oftentimes that's a big win also. But I want to give you credit; this is a financial mutant tip. Whether it's sell it all at once or even dollar cost averaging, I'll give you a personal share. I had a piece of property that came available in the State of Florida that I wanted to buy, and I immediately did the math like a good financial mutant was, and I said, Hey, the closing is going to be in 3 months. I immediately figured out I'm

going to need this sum of money from my portfolio. Um, so I don't drain my cash all the way down for emergency reserves and so forth. But I came and talked to you, and you said, Hey, wait a minute. I think you might be falling into a little bit of a trap. Is that you're accounting for you need this money tomorrow, and you're going to raise your tax liability by selling it all right now. You're like, 'Aren't you going to be able to save some money to maybe lower how much money is needed for that purchase?' And I was like, 'You know what? You're right. That 3 months, I bet I could save this sum of money.' And I was able to minimize and lower the tax bill. I still had to sell some, you know. I did the prudent thing because I wanted to make sure the money was there, and I didn't want to have the fluctuations of the market in that three-month period. But I was able to probably save myself $155,000 worth of taxes because I... I... I...

basically led the ball to where I was going to be and saved during that period. So, that's a powerful financial mutant tip that I think a lot of people don't pay attention to: the timing. A lot of us skip that, immediately think, Hey, I'm going to need this money right now. Don't forget that you might have some time that has value for saving and other purposes as well.

Why Using Brokerage Assets for Big Expenses Is the Best of Everything

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Using After-Tax Dollars for Large Expenses

After-tax dollars from brokerage or investment assets can be accessed before age 59 and a half, making them valuable for large expenses.

These funds can be used for long-term goals like real estate, education, or car purchases.

However, it's important to avoid liquidating assets for temporary expenses like weddings or vacations, as it may sacrifice future financial independence.

Considerations Before Liquidating Investments

When deciding to liquidate investments, it's important to consider if the money was intended for retirement, as using those funds can have significant opportunity costs.

Additionally, having a long-term vision and recognizing the value outside of strict wealth multiplication is crucial, as some goals may justify sacrificing future savings.

Lastly, it's essential to factor in the tax consequences of liquidating investments, as the net proceeds needed may be higher due to tax obligations.

Liquidating Broker Assets: Key Considerations

Selling broker assets requires careful consideration of taxes, including ordinary income and capital gains.

Two options for liquidation are selling everything for immediate cash or dollar-cost averaging out of the position.

The choice depends on the urgency for cash and market conditions, with a staggered approach potentially offering a better tax outcome.

The Benefits of Dollar Cost Averaging Out of Investments

Dollar cost averaging out of investments can help manage tax implications and reduce the emotional strain of selling all at once.

This strategy involves gradually moving funds to cash over time, especially when anticipating a need for the money in the next 3 to 5 years.

While it requires planning and may result in missed gains or participation in losses, it removes the pressure of trying to time the market perfectly.

The Importance of Timing in Financial Decisions

The speaker needed money from their portfolio but was advised against selling everything at once due to the tax liability.

By saving money over three months, they were able to lower their tax bill and minimize the amount needed to sell.

This strategic timing saved them $155,000 in taxes, highlighting the value of considering time for saving and financial planning.