The Financial Independence Retire Early (F.I.R.E.) strategy embraced by Millennials and some Gen-Xers can be rewarding in unexpected ways. Founded on principles of thrift and aggressive growth-oriented investment, FIRE is designed so that average market growth metrics will allow for retirement nest eggs to appreciate to a 7-figure target (about 25x annual expenses) that can support retirement at a 4% withdrawal rate while one is still in their 50s, or on rare occasions, in their 40s. 

Anomalous market conditions can sometimes accelerate the process.  Disruptive technologies such as Artificial Intelligence have functioned like rocket fuel for Nvidia (NASDAQ: NVDA) and the other “Magnificent 7” stocks. 

LEAPS Into the FIRE

One 34-year-old who had been actively self-managing his retirement account bought synthetic long LEAPS (Long Term Equity Appreciation Securities) calls (long-term options with up to 3  years before expiration) on NVDA for his Roth IRA that has grown into multiple 7 figures in a short period. Given that the options have appreciated to such a high level but will eventually expire, he plans to cash them out and convert them to index funds until making his next move.  As the index funds will grow to reach his F.I.R.E. target in the next 5-7 years at current rates, he is considering early retirement, but the high tax burden is a concern. 

Other than mortgage at 2.97% interest, he and his wife also have maxed IRAs, 401-Ks, HSAs, and a 529 for their son, along with emergency funds in a brokerage account. Annual income is $200,000+, and the couple would like to spend more time as a family and travel.

He posted three scenarios that came to mind on Reddit and solicited other strategies for consideration.

1. Early withdrawal with a 10% penalty and 37% tax on the remainder. Roth IRAs incur early withdrawal penalties and tax liability prior to age 59 ½. Put funds into the brokerage account to supplement income, and gradually cut workloads while still contributing to the retirement accounts.
2. Let the Roth IRA continue to grow for a more extravagant retirement, but he did not relish working at his current job for another 25 years.
3. Deploy a systematic incremental withdrawal that takes the 10% early penalty, but only limits to the next tax bracket. On the negative side, this process would take over 10 years.

Other Considerations To Bear in Mind

The poster discloses in later comments that the Roth IRA with NVDA LEAPS calls is at nearly $5 million and his F.I.R.E. target was $10 million. My own advice would be to let all of the tax-deferred accounts and the emergency fund account continue to appreciate. I would restrict a small amount to day trade (if that is a personally important hobby activity) but refrain from risking any of the other funds. I would also explore the following:

• If the employer is matching any contributions, a SEP 401-K is worth having in a portfolio. Should the poster get a promotion with a higher salary, it can offer greater flexibility, since 401-Ks can begin tax-free withdrawals at age 55. 
• Research 72t SEPP guidelines, which allows for a minimum of 5 earlier, tax-free withdrawals of equal amounts from retirement accounts.
• Discuss the tax implications with an accountant as to converting the other IRA and 401-K accounts to Roth accounts.
• Assuming that the retirement and emergency accounts are safe and appreciating at intended rates, the family can segregate annual expenses plus a 10% cushion from the $200,000+ annual income and then feel free to spend the rest on family travel. This will prevent the tax liabilities from disturbing the retirement accounts.
• Although it requires some calculation, the poster is young enough to take a loan against his 401-K and pay it back. The interest rate charged is usually prime + 1-2%. If the poster can make an investment in real estate or REITs that can pay anywhere from 7.5%-12%. A repayment plan can subsequently free up additional liquidity, after paying 1099 taxes, and still leave enough after-tax funds for other leisure activities. As long as the loan is being paid back, it is not categorized as a withdrawal, hence, no taxes or penalties on the loan. 

This article is intended to be construed solely as informational. If greater in-depth tax or retirement finance advice is warranted, a financial tax professional should be consulted.

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