I’ve been doing the Mega Backdoor Roth religiously for 5 years. Should I consider prioritizing less in these accounts to increase accessibility of funds for early retirement?

The mega backdoor Roth strategy lets high earners contribute to a Roth IRA. You start by investing in a traditional IRA and then move those funds to a Roth IRA. You’ll pay taxes on the money like it’s ordinary income, but when you withdraw from a Roth IRA in the future, you won’t owe any taxes on the withdrawals. That includes capital gains and dividends that the account accumulates over time.

A 34-year-old has been using this strategy religiously for five years and hopes to retire early at 45-50 with a stay-at-home spouse. He shared some information with the Chubby FIRE Reddit community and asked if the couple is realistically on track to achieve this goal.

The couple has a $2.88 million net worth, which includes a 529 plan for their 3-year-old daughter and their real estate. He also puts 90% of his investments into a fund that tracks the S&P 500. Redditors commented on the 34-year-old’s progress and shared their suggestions.

Let Compounding Do Its Magic

One of the top comments came from a Redditor who suggested that compounding can do its magic with a $2.88 million portfolio. The commenter rounded the figure to $2.9 million for simplicity and explained that an annualized 6% return results in a $5 million portfolio after 10 years. 

It’s important not to rely on compounding alone since the cost of living also compounds over time. However, the husband earns roughly $240,000 per year in tech sales, and the wife currently earns $50,000 in take-home pay as a teacher. If the couple continues to pour their money into their portfolio, it will compound faster.

Compounding gets easier as your portfolio grows. It’s hard to turn $100,000 into $200,000, but it is very easy to turn $2.9 million into $3 million. The couple is mostly investing in a fund that uses the S&P 500 as a benchmark, so they aren’t getting greedy. Based on the S&P 500’s historical returns, an annualized 8% to 10% return seems more likely than an annualized 6% return.

The Couple Should Keep Their Expenses In Check

The same commenter who mentioned compounding returns explained that rising expenses are the couple’s biggest risk. The commenter said that the couple should be fine if expenses don’t explode, but the recent trend is worth mentioning.

The 34-year-old husband mentioned that expenses have crept up to $10,000 per month. The couple wants to trim down this number, but acknowledged that having more kids will make it more difficult to achieve that goal.

You can only have new kids for so long. If the couple wants a large family, that should be the priority. They have a large enough portfolio and sufficient earnings to support multiple children. The couple can reduce their expenses now and invest the extra money. They can prepare financially for raising additional children and adjust their budgets accordingly. 

Create A Long-Term Plan For College Tuition

College will be one of the biggest expenses, especially since the couple wants to have three children. However, you can get ahead of this expense with a few strategies. 529 accounts are a good starting point, but you can also be strategic about which colleges your children attend and scholarship applications.

If your children attend state universities and don’t live in a dorm, the couple will save a lot of money. Furthermore, they can encourage the children to submit at least five scholarship applications per week while they are still in high school. The couple is far from this step since their only child is three years old. However, planning for college costs and capitalizing on the many scholarship opportunities that are available can reduce the financial strain of a college education.