The Biggest Portfolio Mistakes FIRE Investors Make

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2:27Mindy Jensen:Today, we are going to break down some of the most common portfolio mistakes people make on the path to financial independence. Of course, this is always for entertainment purposes only and isn't investing advice.

2:44Mindy Jensen:Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen. And with me as always is my has never made a mistake in his portfolio co-host, Scott Trench. Thanks, Mindy. I'm going to decline to respond to that intro here. We all make mistakes in our portfolio, myself included, but Mindy and I have observed a few newer portfolio mistakes over the last few years that we hope will be helpful to you as you think about constructing your portfolio and think about how you're finishing out your buyer journey. Okay, Scott, the first mistake that we see, especially with a lot of our Finance Friday guests, is hoarding cash without a goal for that cash, without any reason to have that cash on hand.

3:26Mindy Jensen:We have spoken with people like Farnoosh Torabi, who is a content creator in the financial independence space, who is also self-employed. And for her, I believe she said she holds 18 months of spending in liquid or cash accounts because that's what makes her comfortable. She's thought about it. She has a reason and she's doing it on purpose. We talk to a lot of people. I'll go through their financial statement. I'm like, why do you have$250 ,000 in cash? Oh, I'm going to do something with that. I'm thinking about buying a house in a few years. Well,$250 ,000 is a lot of money to just be sitting around without an actual purpose.

4:06Mindy Jensen:So don't hoard cash unless you have a reason for it. You should absolutely have an emergency fund, which should be in cash. You should absolutely have enough cash that you're comfortable, but you should also have a reason for why that number makes you comfortable. I think that the mistake is in lacking a coherent philosophy or coherent investment approach that interweaves all of these things. And so you can have a lot of cash. Warren Buffett has a tremendous amount of cash, right? There's a reason behind that. There's an investment decision being made there. But I think that hoarding cash with an impending sense of doom or just because without actually having a coherent intellectual defense of that is the mistake people are making in their portfolio, not necessarily how much cash you have.

4:52There's all sorts of reasons to have cash at any given point in time. So that's the mistake. But yes, I think we see people hoarding way too much cash without ability to deploy it because they're just waiting for something, some sign from the ether about when they're gonna deploy it.

5:07Mindy Jensen:Now, in the beginning of your FI journey, once you have your emergency fund, having a lot of cash sitting around without a purpose is not really going to benefit you. But towards the end of your FI journey, as you're moving towards your drawdown strategy, having a specific amount of cash, like Emma Von Weise was on the show a few months ago, talking about having two years of spending in cash as sort of a buffer for any sequence of returns risks. Having that much cash towards the end is a more thoughtful approach to your drawdown strategy. Again, that is something you need to come up with. This is not financial advice, but in the beginning of your investment journey, maybe having a ton of cash outside of your emergency fund isn't the best choice for you.

5:55Mindy Jensen:Again, sit down and think about why you want to have your money where it is and make sure that it's according to your investment plan. All right, Scott, what's the second mistake? Second mistake is staying in accumulation mode perpetually throughout the entire financial independence journey. I think this is a real risk to the FIRE community. I've been banging on the stump for a while now. I mean, the market keeps going up. So, you know, a good result is different from a good bet in a lot of cases here. But I think that there's effectively no research that supports a 4 % withdrawal rate in 100 % equities.

6:27So if that's your plan, something's wrong there. Now, it may not be a mistake if you're just going to stay in equities and just let your portfolio soar so far past the safe withdrawal rates that you can spend something much lower than a 4 % withdrawal rate based on the portfolio size. That's fine if you want to stay in all equities. But it is not defensible with any research that we are aware of to stay 100 % in equities and withdraw at the 4 % rule. So if that's your plan, you need to begin rebalancing your portfolio. And I think a lot of people consider themselves FI, but are entirely or almost overwhelmingly in broad-based market cap weighted index funds without any bond exposure, any insurance whatsoever against drawdown risk.

7:03Mindy Jensen:Yes. I think people should really start considering rebalancing their portfolio the closer they get to five. Within three to five years of reaching financial independence, you're not selling equities to buy bonds. You're just changing where you're putting your money. Instead of buying more equities, now you're starting to buy bonds instead. Again, this goes back to the investment plan that you have. If you are retiring based on the 4 % rule, that portfolio was a 60-40 portfolio. So make sure you're actually playing by the rules of the game that you're playing. Okay, Scott, third mistake, not optimizing for taxes to a point.

7:41Mindy Jensen:This is where a flat fee financial advisor can be hugely helpful. I know that Carl and I have made some tax mistakes just because we never got any sort of advice from somebody who really, really knows about taxes. But we have some investments in taxable accounts that shouldn't be in taxable accounts. We have investments that are in pre-tax accounts that would be a better choice for us to have in a taxable account. So when you are starting to invest right at the very beginning, this isn't such a concern. But as you get a larger amount of wealth, you need to be putting the types of investments in the right types of accounts.

8:16I think this is such a nuanced mistake because there's like the technical tax code today and how do I optimize to keep my tax bill low today. And there's the long-term tax planning strategy. And this is where I think I make some CFPs very uncomfortable because I think for the fire community, if you have a million dollars in your pre-tax 401k and you're in your 40s or 50s, that is very likely to swell to a pretty large number by the time you hit 65 or begin getting into RMD territory. It's not a normal American or median American problem. It's a fire community or a financial independence podcast listener problem that they're going to have.

8:59And so at that point, you have to make some decisions. You may be in a higher tax bracket in retirement in that particular situation. Marginally, let me get into a discussion about effective versus marginal taxes, right? Effective is what for all the income you earn, what is the average across all that that you pay? And marginal is what the taxes on the last dollar that you pay. And marginal is really where the decision is made to contribute to a 401k versus a Roth. So anyways, you have to have a strategy about how you think your tax situation is going to evolve across your life. And you have to be right, not just conservative or aggressive, but right because the stakes are pretty high here.

9:33And then when you actually begin to accumulate in early retirement, that matters because going into the next cliff is a serious opportunity cost if you don't need to do it. And today, here in 2026, the primary tax planning challenge for early retirees is staying under the MAGI cliff, the modified adjusted gross income cliff that allows you to qualify for Affordable Care Act subsidies. As preposterous as that sounds, as a multimillionaire early retiree staying below a federal poverty line cliff to qualify for healthcare subsidies, that is actually one of the fundamental constraints today in the fire community.

10:10And you want to be careful about how you're thinking about this, You want to make sure you're not over extracting ordinary income from your portfolio early in your fire journey. And you want to make sure you're realizing gains up to, but with a nice, healthy margin of safety below that that magic cliff. So anyways, I'm getting very complex here. It is complex. I don't know how to communicate it more simply than that. This is a hard, hard problem to solve. And you got to really roll up your sleeves and be a pretty sophisticated DIYer to do it. You absolutely can. But you may also want to this may be the place to hire a flat fee financial planner.

10:41Yeah.

10:41Mindy Jensen:How thick is that tax code now? Isn't it like 18 feet thick or something like that? You can't possibly know all of this. Having somebody who is an expert in tax planning look at your statements, look at your situation, and look at your goals and say, this is what you should do, can be invaluable. The money you spend on a flat fee advisor could be grossly outweighed by the money you save by making the changes now while you're still in accumulation mode, while you're still in the lower tax brackets. If you're interested in working with a flat fee financial advisor, Bigger Pockets Money has partnered with Domain Money.

11:19Mindy Jensen:To learn more about them, go to biggerpocketsmoney.com slash CFP. Again, the word optimize is so loaded because what are you optimizing for? You know, a lot of CFPs and CPAs will optimize you for today's low tax bill. That's great. I disagree with that for a big portion of the financial independence community right now because you're probably going to be wealthier than the average American when you hit traditional retirement age if historical returns are any help whatsoever over the next 20, 30 years. And that means different tax planning strategy for the long term, in my view. Okay, Scott, what's the fourth mistake?

11:55Is ignoring estate planning. So this is a check the box item that I think needs to be checked for many families. And you just got to update it and do the work. Beneficiary designations, a dead box where your loved ones can access all of your accounts in those areas. I think that one thing that's overblown, and maybe somebody who's a very sophisticated estate planner can challenge me, is thinking about things like irrevocable trusts and gifting to get under the estate tax exclusion. For all but a small portion of the fire community or the financial independence community, this will not be an issue, at least not yet, not today, because those estate tax gift exclusions are so large, like$15 million per person.

12:33So I think that unless you're really starting to get into that number or think you're going to blow past it in your lifetime, that's not something I am worried about personally right now. But may, you know, if things go ridiculously well over the next 20, 30 years, and I begin to have that problem, maybe then that's the time to start thinking about that. But a basic estate plan with revocable trusts and clear designations about what's going to happen in the event of your passing, those matter greatly.

12:57Mindy Jensen:Yeah, you already have an estate plan, even if you don't. It's the intestacy laws of your state, and they are not what you want your money to do. So you need to speak with an estate planning attorney. If you visit LegalTeaPodcast.com slash C resources, S-E-E resources, there is a list of elder law and estate planning attorneys in all 50 states that my friend Jenny Roselle has put together. She hosts the Legal Tea Podcast talking about the different issues that can come up during estate planning. Carl and I, I am kind of embarrassed to say Carl and I just did our first estate plan this year. It's 2026.

13:40Mindy Jensen:We were very remiss in not doing this ahead of time. I'm so thankful that something didn't happen to one of us because that would have been a whole mess to kind of unwind legally if one of us would have died with no will. So now we're all taken care of. We're actually going to have a conversation with our estate planning attorney to talk about all the things that could have gone wrong and talk about all the things that we did in our estate plan. It is so important. And even if you're at the very beginning of your journey, you need to have something in place, something written down and signed, and this is your estate plan.

14:18Mindy Jensen:And as you go, you can always make changes to it. But if you have nothing, you die, it's called dying intestate, and you are subject to the intestacy laws of your state, and they're not fun. Yeah, no one likes the word intestacies. That's for sure. And I'll say that this is not a very fun exercise. You're going to spend several hundred or several thousand dollars, depending on how big your portfolio is, how complex your situation is. You got to go through every account and name a beneficiary. You need to separate out property that's yours, your spouse's, marital property, those types of things.

14:49You need to decide what you're gonna do in the event that you pass, what happens with your kids, what happens with your kids if you pass and the person that you just designated to watch over your kids passes as well and down that line. These are hard conversations. This is not a fun exercise. We did this when our firstborn child was born. We're very glad we did. And I'll also say you have to revisit this every once in a while. So Mindy, I've had this in place since shortly after the birth of my oldest daughter. But things have drifted in the last year, too. And I have to update some of those things.

15:16And I haven't got around to it. So it's important to keep things up to date and revisit this periodically.

15:22Mindy Jensen:Yeah. And Scott, you are way ahead of the curve, or you are way ahead of me. My oldest daughter is 19 and a half. And I just did it this year. So don't be like me. Be like Scott. I do think that there's a case to be made that you do not need to hire an expensive estate planning attorney and do all of this work necessarily, depending on your portfolio size, the complexity of your situation, and whether you are married and have children. There's levels of this that are appropriate. So this is not a spend several thousand dollars on a first-class estate planning attorney until it's time to do that in your situation.

15:55There are plenty of cheaper ways to do that online that you can get this done passably in the early stages of your wealth journey.

16:01Mindy Jensen:Yes, definitely. I had to spend several thousand dollars and it was money well spent. He asked me a lot of really great questions and I had to think about a lot of things before we were able to put everything down on paper. Also, I think this is an evolution thing over time, because again, you have to make decisions that are philosophical and your lawyer should not be giving you that philosophy. They'll give you a little bit, but I think there's decisions like, for example, I might make a different decision about how and when my daughters get access to the estate if I were to pass away when they're three and one right now, right?

16:32Then I might make a different decision when they're 18, depending on how things go. So there will be things that will be revisited over time. And I'm not ready to say I'm committed to a lifelong approach for how to distribute funds to my daughters, who I'm just starting to get to know what their personalities will be like and how they'll handle things as they grow up.

16:50Mindy Jensen:Yep. It's absolutely more of a fluid document than you think it is, but it does need to be written down. All right, Scott, what is mistake number five? The fifth mistake is not having a clear withdrawal strategy. So how are you going to actually access these funds, right? This starts complex and gets harder depending on how things go, right? So if you are a very simple index fund investor and you have some money in your 401k, some money in your Roth IRA, some money in your after-tax brokerage account, and some money in your HSA, which is kind of like a textbook-ish fire accumulation portfolio, you know, end result, then how you withdraw matters, right, from those portfolios for the tax reasons we talked about.

17:30And there's an order of operations. I think, again, we go back to the tax planning to and through early retirement from Sean Mullaney and Cody Garrett. But it may look something like this. I'm going to use up the$32 ,200 standard deduction for a couple married filing jointly. And I'm going to use up the entirety of the long-term capital gains tax bracket, which can be up to like$98 ,000 plus for a couple of married filing jointly. And then from there, I'm going to say, how close am I or am I pushing to the Affordable Care Act MAGI cliff, which is 80 % of the federal poverty line? And I'm going to stop maybe before I get to the full 0 % long-term capital gains tax bracket to make sure I don't go over that cliff.

18:08Or maybe I'm going to push through that and actually go to the next layer and begin doing Roth conversions. This is a challenging exercise, right? It's part and parcel to our tax optimization strategy. And you've got to have a strategy to deal with this if you want to make the most of your situation. That's the beginning of the complexity. It gets more complex if you have rental real estate or a pension or some other form of income or alternative investments that are going to produce unpredictable or even forecastable tax impacts. So that's all really important to determine how much and when you're going to withdraw your money from your portfolio.

18:39Mindy Jensen:And I can hear people saying, oh, I don't need that because I'm at the beginning of my journey. No, you need that at the beginning of your journey so that you know where to put your funds. If you're planning on retiring at age 40, putting all of your money in your 401k is going to sign you up for either 10 % penalties or 72Ts. And your 72T has to be taken until you turn 59 and a half or for five years, whichever is longer. So you're signing yourself up for 19 years of 72T withdrawals from your 401k, or you can think about it differently and start putting some in your after-tax brokerage or some in your Roth IRA.

19:18Mindy Jensen:Or you decide that, yes, I am going to have 19 years worth of 72T withdrawals, but at least you're doing it on purpose. So start thinking about your withdrawal strategy as soon as you start investing. This is going to be a loaded word to call it a mistake. But I would even say a base case for a fire accumulation journey is max out the 401k and HSA for most of your working career, right? And then you retire early. The problem with that is that that really leaves you with one option, which is finish this play and then stop working. And you may find, and we find here at BiggerPocketsMoney, that life doesn't bend quite perfectly to this fictional, pure fire journey.

20:02Many people on the road to fire find that they get married after, you know, five, 10 years into their journey and their spouse continues to work. Well, now you have income of some sort. And that money in the 401k is very unattractive to withdraw at that point in time, right? That's a good problem on there, but that may not actually solve your needs. So I think that the right approach, the one that I would bias you towards is to balance this accumulation to have some in the 401k, some in the after-tax brokerage account, some in the Roth, and some in the HSA. And I think that if you can get to the end state and have your portfolio balanced about a third, a third, a third, and pre-tax, post-tax, and Roth, deciding which third is going to be the biggest based on reasonable sets of circumstances.

20:45You're in a high income tax bracket while you're working. Maybe you make the big third your 401k. That's great, your pre-tax 401k. That's really an ideal circumstance because you want this complexity, this optionality, I think, in early retirement to have multiple places to draw from. You don't want it all in one bucket. That really limits your options. I think the pursuit of FIRE and And then actually achieving financial independence is all about options.