Strategery
A couple of years after leaving the workforce, an aggressive headhunter was trying to recruit me for a California based tech company.
Recruiter: “How much salary would you need to take on a role like this?”
Me: About $500k
Recruiter: “We were thinking more around $250k…”
Me: Oh, you were just looking for somebody part-time then…?
Obviously, I stopped receiving recruiting emails.
But, having the bizarre way of thinking about the world that I do, I invested a little time to calculate just how much income I really would need to fund our lifestyle via more traditional means.
A Rockstar Lifestyle for $210,000 per year
Over the past 7 years or so, our average cost of living has been about $75,000 per year. More some years, less others.
Sometimes we get unsolicited feedback from people we don’t know that they would never be able to enjoy life on such a lowly sum. “We enjoy the finer things in life…”
Which is weird, because designing how we live around geographic arbitrage, medical tourism, travel hacking, and global tax minimization techniques has allowed us to live a rockstar lifestyle at reasonable prices.
But what kind of job income would have been required to fund our last 7 years of life with normal employment-based revenue?
About $210,000 per year. Or more than 95% of US households.
Payday! (completely unrelated to anything but I thought it was funny)
Increased Needs
Adding a 60+ hours per week plus evenings and weekends job to my life would definitely increase our needs. My retirement wardrobe isn’t exactly suitable for an office environment, and a daily commute would probably require a motorized vehicle of some sort.
Instead of flip-flops, T-shirts, and shorts, I would be looking at an extra $1,200/year on “business casual.”
I would actively design our working lifestyle, and a bicycle commute would be ideal, but I’m older now and everyone tells me children complicate things so I would probably be driving a car daily.
The IRS estimates total transportation costs for 10,000 miles is $5,450 in 2018. That’s a big jump from our $1,223 annual budget for 188 Uber rides.
With me gone during most daylight hours, we would probably also need a second car. Jr has to get to school, soccer, drum class, roller skating, and scheduled play dates somehow. That’s another $5,450/year.
Generously assuming most other things in life are about a wash… when I compared our current housing & food costs with some California options it did come out roughly equal… (details in the post, Going back to Cali…?)
Total cost increase:
Transport: $9,700
Clothing: $1,200
Less Travel Hacking
When you work for a living, holidays and vacations are less flexible and dynamic. It’s more difficult to fly on a Wednesday afternoon and there is less award availability for peak holiday travel.
So instead of paying $200 for $7,000 worth of plane tickets, we would more likely spend $7,000. Sure, I geek out on this stuff and could still probably swing some good deals, but would I really want to invest the mental energy after a tough week at the office? Or would I rather toss a baseball with the kiddo at the park?
With a higher cost of living, in theory we could get more points than we do now, but I think this is optimistic when considering the limited point accumulation I did when I really had a job (outside of work-related travel.)
Overall, with an annual visit to Taiwan at Chinese New Year (peak!) and normal holidays, I crudely estimate we would spend $10,000/year more. We would likely choose to spend less in practice, but it isn’t the goal to reduce the quality of life outside of work hours too.
Total cost increase: $10,000
Health Insurance
Our current monthly cost for incredible full-coverage health insurance, with eye and dental care, is $25/person/month. We sometimes pay $1 here and $1 there for co-pays and deductibles, but it is mostly a rounding error on any budget. Most recently I paid $6 for a dental cleaning, for example
Since I’d be working for one of those fancy tech companies, we would have OK insurance, partially funded by the employer. But that just means my paycheck would be reduced by the cost of insurance. (Tax-free too. Employer-provided health insurance is one of the largest government subsidies in the US system.)
My estimates are based on my personal experience with my Seattle based tech employer after they transitioned to an HDHP, and quotes from Covered CA, the California based health exchange (details in this post.) With income greater than 400% FPL, the full cost of an insurance policy would be paid from our income (no ACA subsidies.)
Bronze level HDHP health plan annual cost: $11,028 (That extra $28 seems superfluous.)
Annual deductible: $6,000/person, $12,000/familiy
Estimated annual costs for medium usage (family of 3): $5,375 (assumed from HRA/FSA so also tax-free.)
From $75/month to $1,367/month is a bit of a jump…
Total cost increase: $15,500
Loss of Medical Tourism / Geographic Arbitrage
With a job, it often isn’t practical to travel to where medical care is good value. Instead, you pay whatever is required by local providers. In the US, that is messy…
Last year, Winnie and I both had root canals and crowns. Based on cost estimates from friends and Twitter followers, instead of paying about $6,000 each in the US we paid closer to $1,000 each. In the apocalypse, we can even sell one of those crowns for the gold value.
We’ve also spent quite a bit of moola on reproductive services and childbirth.
We’ve now done 3 full rounds of IVF in Taiwan at a cost of about $10,000 each time. Friends in the US paid between $40,000 and $150,000 per round.
Going with the lower end of that range (3*40k) and amortizing over the past 7 years, we get a cost increase for US services of about $13,000/year.
None of this is covered by insurance.
Then, of course, the idea with IVF is that it leads to childbirth. We paid about $1,000 for everything in Taipei. Friends in Seattle paid $18,000 with “good insurance.”
The deductible on our own insurance would cap this at $12,000. Since we are already paying $5,375/year for basic health care on top of insurance premiums, this means the actual out of pocket cost of childbirth would be only $6,625, or $5,625 more than we actually paid.
Amortizing that over 7 years increases our costs by ~$800/year.
Ouch.
Total cost increase: $17,200/year
IVF: $13k/year
Dental: $1.5k/year
Childbirth: $800/year
Lost Opportunity Cost
Each year of retirement we’ve been doing tax-free Roth conversions, capital gain harvesting, or both, not to mention the tax-free qualified dividends.
On average, each year I’ve converted $5,200 of our Traditional IRA to Roth and harvested $28,000 of long-term capital gains. This will have a significant impact on our future tax burden.
If I apply a 12% marginal tax rate to the Roth conversion and a 15% capital gain tax rate to these averages, it is roughly a $5,000/year lost opportunity. And that is ignoring California income taxes and ACA subsidy impact.
How best to incorporate this lost opportunity cost into our new productive member of society lifestyle?
What I settled on was 2-fold:
- Increase salary to pay the taxes on $20k/year of qualified dividends / long-term capital gains (~$5k for both Federal and State)
- ~1/3 – 1/4 of our current total
- Increase salary to allow for a max 401k contribution ($18,500k in 2018)
Which leads to…
Taxes
Over the past 7 years, we’ve spent pretty close to $0 on income taxes. Following my Never Pay Taxes Again strategy, many early retirees could do the same.
But as an employee, I would be paying taxes. Lots and lots of taxes.
First, we would have Federal taxes to the IRS.
And then there are the employment taxes… half paid by the employee and half by the employer (which just reduces our actual pay.)
And of course, there are also the California taxes.
To figure out the actual tax burden, I worked backward and recursively iterated through an excel tax calculator until I came to a solution. Results verified with an online tax calculator.
First, I need take-home pay of $110,400 (my paycheck):
$75,000 current cost of living
$10,000 travel increase
$9,700 commute increase
$1,200 work clothes
$1,500 dental work
$13,000 IVF
$110,400 total
Then I have several tax-free payroll deductions
Payroll deductions (tax-free)
$10,000 health insurance (increase)
$5,500 HRA contributions (medium usage of insurance policy for family of 3)
$800 HRA contributions (childbirth)
$18,500 401k contribution (subject to FICA)
$34,800 total
Now I apply the tax formulas for Federal, State, and FICA, iterating to a final answer that yields the correct take-home pay.
Taxes
$25,200 Federal tax – income
$3,000 – Federal tax – divs/capital gains
$9,425 California tax
$1,860 – California tax – divs/capital gains
$10,775 FICA tax employee
$14,841 FICA tax employer
$65,100 total (31% of total income – Fed: 13.4%, State: 5.4%, FICA: 12.1%)
Gross income: $210,300
Minus payroll deductions: $175,500
Minus taxes: $110,400
Summary
Life is expensive when you work for a living. I don’t think we could afford it. Next time I come across an aggressive recruiter or jet setting salaryman, I will have to raise my level of snark considerably.
To support the same essential quality of life that we have enjoyed these past 7 years, but doing so as an employee in the US / California, would require nearly triple the income. Taxes alone are nearly equal to our entire cost of living…
Unfortunately, the tax code is not very flexible for job-based incomes. This hypothetical scenario already includes the main tools available to an employee (HRA, 401k) so there isn’t much that can be done to reduce the tax burden. Taxes get much better in retirement.
I found the process of thinking through this enlightening and humbling. I hope y’all find it interesting.
Nice quantitative analysis…math is fun!
So you are raising a drummer, that’s awesome. It was a huge part of my life, something that I still have today. Electronic set in the “music room”.
I’ve had folks approach me about going back to MegaCorp, my price was slightly higher. My “work” now is managing my portfolio using real estate generating twice my “top floor corner office” salary. So, when asked, I start with, you won’t pay enough and if they press, I tell them it has to a million or more a year. You are correct about the hours a “career” in tech is 60+ hours, some evenings and weekends and constant education from changing languages and technologies. I simply don’t want to go back.
Before retiring we spent about $45K a year, we have had some life style inflation with travel, eating better and enjoying life more but still sitting well under $100K a year. Firecalc tells me $300K for the next almost 40 years.
Life is good!
My asking rate would be higher today. It would need to be enough to fundamentally change our lives forever, so multiple millions per year. Which I could maybe do for a year.
We were spending around $20k/year before I quit working.
Interesting analysis GCC. Having lived in a developing country spending “only” 36k/year for a top 5% lifestyle, I recently returned back to US for a senior management job. I did a similar analysis and realized I come out lot better taking the job as it pays $500k (incl $100k bonus) in a mid western state and we spend $80k a year now living well. Despite the higher living costs, saving nearly $200k/year (total, in both tax-deferred and taxable accts) is nice! I figured just a few years of this, Junior’s college fund is padded and our retirement is even more secure. So the math works for some, though it didn’t in your case. Life is good.
Gross income $ +500,000
Federal Income Tax $ +116,847
Social Security $ -17,739
————–
Net $ +365,413
Expenses $ -80,000
Savings $ -200,000
————–
Unaccounted $ +85,413
Just to complete your math, 70k additional is actually savings that I have earmarked for a specific purpose so I forgot to include it in the 200k. The 15k delta is due to state taxes. But you are right, the actual savings is closer to 270k. So absolutely worth it for me.
I love it! Thank you. Those on W2s earning 150-250k are definitely in what I would consider a donut hole of financial badness with our current tax and health insurance structure. Once one hits 2.5mm net worth, it’s just not worth it in many cases. You can withdraw 100k a year, and if you are earning less than 250k it’s hard to spend more than that after the taxes and other expenses you mention; only worth it if you want to save more money for specific future needs, which most of us don’t have.
Similar experiences with recruiters who love to talk about how such and such place really needs me. Well, OK, then pay me more. No? You don’t need me that much, then.
Thanks again. Excellent.
When you don’t need them is probably the only time you can get paid what you are really worth. But by then a lot of people don’t want it.
I think of working beyond the FI point like this… once you have hit 25x your desired cost of living in investments, working more just doesn’t move the bar that much unless you are saving most of your income. You need to save 2.5 years’ worth of expenses just to increase net worth 10% through contributions. It’s not worth it.
Something to think about, though – it isn’t necessarily just contributions we’d be looking at. By the time to get to “one more year” land, you also have a large stash of funds sitting in the market. So you also get the benefit of another year of your nest egg growing unencumbered. If you had retired, you’d be pulling 4% out of your retirement funds.
The point being the market dominates your portfolio value. Contributions/withdrawals are a much smaller secondary impact.
Wouldn’t health insurance, while working and covering the whole family, be pretty much comparable to what you guys pay now with ACA subsidies? It’s usually around a hundred per month deducted per month from paychecks… Not sure I followed your calculations there. But there stuff are pretty spot on. At the end of the day, it’s hard to put a price on a lot of things, such as I would value my 1 hour spent with family much greater than at my job.
We are outside the US so no ACA for us.
If you pay $100/month for insurance, your employer pays the other $1,000 per month.
If the employer didn’t provide insurance, they would just give you that $1,000.
In a zero sum game, where the employee is the game sure an employer is obliged to pay their employees more if they don’t have insurance. But in reality it doesn’t work that way.
My first “real” job out of school paid me $15/hour. They wanted to give me a “promotion” to a salaried position at $34,000. I balked. Sure I was young (this was only 6 years ago). But I knew the going rate for my field and this was about 40% of that. I even told them “I’m still on my parent’s insurance so I cost you less”. The HR director looked me in the eye and said “we don’t look at national wages, and we can’t take into consideration whether you take our insurance or not”.
Nevertheless I had a new job 2 weeks later at double their “offer”.
You got paid the market rate. The person they replaced you with got the market rate. So in reality it works that way.
Jeremy – the point I am trying to make is I did not get health insurance through my employer, even though I could have. And my salary was not increased because of that fact. If the person they replaced me with was offered the same position at the same rate and did purchase health insurance then that employee would have cost the company more. So essentially the cost of me < cost of new employee.
The only way to rationally apply your idea that "If the employer didn’t provide insurance, they would just give you that $1,000." would be in a situation where every employer dropped all health insurance across the board. In a situation like this salaries would need to go up everywhere because people would be forced to pay either A: higher taxes for health insurance, or B: purchasing their own policy. The savings employers would have form not having to pay for insurance directly would be directed into salaries in order to remain competitive.
In a situation like this your model works correctly. It does not work in the current state because of the confounding factors of family – and the ability to get on employer insurance through family. In my case, my labor cost my employer less because I was mooching off my parents insurance. And to confound things further – my fathers insurance has a single family rate – no matter how many children you have. So economically speaking, me not taking insurance through my employer reduced my cost to my employer and did not add costs to my father's employer because of the deals they have struck with their insurance provider. The net compensation is less than if I were to take my employers insurance.
Yes of course there were increased medical costs, but those were absorbed by the insurance company. You could argue that those extra costs are baked into what my fathers employer pays due to negotiations. But in a practical sense – economically speaking – staying on my parents insurance was a net reduction in compensation to my family as a whole. I could have chosen to take my employers insurance, but the net increase in compensation to my family unit would have resulted in a take home net loss due to the requirement that I now pay premiums.
In other words, the total compensation resulting from my choice to take or not take insurance through my employer is not egual as you would suggest.
It’s not anecdotal – it’s how the US system works. Can you prove to me otherwise?
Also – I appreciate the Ad hominem attack. Nice to see my superior logic has this result on you. The fact that mathematical models of economic theory don’t translate perfectly to real life must really irk you.
Also – another way to debunk your argument is to look at married couples. In the US a dual career married couple often has the ability to take insurance through either employer. Lets take a hypothetical employee we will call employee A. Employee A gets health insurance through their spouse, and does not need insurance through their employer. The employer does not know this and is legally bound to offer all employees of the same “bonafide group” the same insurance package. Sure they can offer incentives for employees to not take their insurance, but in practice almost none do.
How is that for an N > 1???
@Rafael G – Your points are good and reflect what I and those I know have experienced. Short of a nationwide change to employer healthcare, it does not seem correct to just make the blanket statement that one’s salary would be increased by the employer healthcare costs 1:1 if healthcare was not paid by the employer but employee.
However, when I read your posts I feel that they have gone from logical arguments to aggressive, angry, and rude. Consider the possibility that perhaps your points would be better made and thought about more logically if they were written with a tad less negativity. The former does not require the latter.
I got the same vibe.
But as a plus, I’ve never heard anybody use the phrase “my superior logic” unironically before.
@Dave
My original responses were pretty well thought out and not aggressive in any way. There was nothing aggressive about my super long post at 5:53 a.m. Which was a pretty good argument. One would think Jeremy could respond to that in a comprehensive way but instead he chooses to commit a logical fallacy and just attack me – by posting an image implying that I don’t know what I’m talking about.
Look, I’ve been a reader of this blog for many, many years. This blog is partly what got me into FIRE. And one thing I have noticed is that Jeremy really, really like to be right. Rarely have I ever seen him change his mid about something due to challenge from a poster – and he often devolves into snarky posts just like here. Of course he is not wrong often, but even when he is, or at least not right 100% of the time (like this example) he pushes back and accuses the commented of being stupid. That, my friend, is the definition of angry, aggressive, and rude. And just as you say, a well informed debate does not require it.
I’m sorry I offended you.
However, I decline to continue this conversation.
I have to agree with Rafael on this one. GoCurryCracker’s theory works if we had an efficient employment market and and efficient health care market. But we don’t. The health care market is highly uncompetitive and inefficient (hence high prices and lousy care), and this spills over to create inefficiencies in the employment market as well, since employers are heavily involved in providing health insurance for employees.
I loved your snarky comment, Classic.
I’m not sure what our American family pays in taxes and never did try to calculate it. I do think that we pay less in taxes than Europe. But we also don’t get anything for it ( as in healthcare, child care, etc.) What’s that old saying..Something to the tune of ” the only certainties in life are death and taxes.” But I’ll be honest and say that I don’t mind not getting stuff for the tax money. Probably because I don’t need some of it (like child care) and for what I do need, I can shop around (health care now has online help to see what your plan pays for different health care issues. Like surgery. I can look online and see what my plan will pay for surgery at each facility I plug into the computer. Cool, right?)
For Americans, when including the cost of health insurance, most of us pay more tax than our European counterparts with worse outcomes (socially, financially, life expectancy.)
Belguans like me pay a lot of more tax than Americans. If I get 100€ before taxes, my employer pays 130€. From the 100€ before tax, I get 50€ as net income. Less than 40% remains of the total cost. We pay 21% tax on all we buy. If we die up to 65% can be confiscated by the government
What do you pay for higher education and health insurance/care?
Including VAT? Wow.
Income and social taxes plus health insurance/basic care, in the math above I’d be paying ~40% of gross income. If I also had student loans to pay vs a ~free OECD university degree…
OECD VATs are higher than US sales taxes, but we’d also have to compare property taxes, cost of childcare, quality/cost of public transit (need for car), cost of renewing a driver’s license, etc…
You actually are working, you have a blog, and it brings in self-employed business income.
But the flexibility of this type of self-employed work can’t be matched by a job offer that a headhunter was offering you.
My 4-hour per week hobby is pretty flexible
Also, I really hope someday you will do personal tax-optimization consultations for the ER set. Would be great.
I can do some consulting. Hours are limited.
Love this post! When I ran my numbers, without earned income in the 22% tax bracket, for a single person, I can live comfortably with $45k a year. That’s a lot less than what my current gross income is.
And if I’m willing to do some geographical arbitrage, that cost can go down even more. I can tell my kids (by the time i retire, they will be grown), that family get together will be overseas in Asia! Since I speak Chinese, there are quite a few places I could live comfortably without language barrier.
The world is your oyster.
Even just a year or two of low-cost travel is a good way to kickstart a US-based retirement.
Great thought starter, we are about 5 yrs into our 10 year path to FIRE and healthcare is probably the biggest wildcard. I’d love to hear how much other people spend/plan to spend for a family of 3 or 4 once they are retired in the United States.
Any one care to share their actual costs for US healthcare an an early retiree?
I recently crowd sourced this question in Choose FI Facebook page, and the current early retirees gave me a range b/t $250 to $2100 per month depending on your taxable income for living in the US, and $200-$300 per month for international. It varies a lot depending on taxable income and your location. This is also my greatest variable for RE.
The ACA makes this the same for everybody as long as income is less than 400% FPL. (~$83k for family of 3)
Your health insurance cost is limited to 9.5% of income, but could be substantially less. Check out the details on Obamacare optimization.
Don’t live in CA, live in no income tax states, that will save you 10k, haha
So only $200k instead of $210k. Doesn’t change the math much.
The job would be in California, so not much flexibility there.
I’ve heard it called the weather tax.
I like the way you make it so funny.. Very creative.. and informative.
thanks! :)
The WSJ has an article this week on income disparity by former Sen Phil Gramm – my takeaway was that the second and middle quintiles take home only a little more money each year but spend more than twice as much time on labor as the bottom quintile. While money is limited, it is not as limited as time. I’m tired of being a wage sucker and am ready to transition to a lower tax, higher value existence.
Trading hours for dollars has one hell of a headwind.
I assume to break into the upper 2 quintiles requires business or investment income
When I first retired five year ago I thought seriously about continuing work since I had some companies reach out to me. But I looked at our finances (which included no debt of any kind) and estimated our investments could safely kick out 100-150K per year. Together with SS that I started at 63 I actually only need $40K or so per year to fund our lifestyle that includes 4-5 months of travel per year. Nah, work doesn’t have a shyteload of appeal anymore.
#truth
You could pay me a lot to show up at a job, but I don’t think any amount of money would make me care.
It is even worse, California taxes interest and dividends as normal income, no break like the Feds…..
I kinda included that in the lost opportunity cost section, assuming we would pay Fed/State tax on $20k/year in divs/cap gains. Interest is taxed fully by both.
((((AAGH))))
“not to mention the tax-free qualified dividends”:
USA has tax free dividends but no tax free profits. Gross dividends (profits) are taxed at a minimum of 21% before being paid as (net of tax) dividends to shareholders. Qualified dividends are taxed again – at a rate of 0%. That is double taxation of shareholders share of profits.
That is similar to taxes on wages being withheld by an employer and paid to government without the withheld tax being credited by government to the employee.
Australia single taxes gross dividends (profits) by crediting company tax (‘franking credits’) to the dividend recipient and taxing the gross amount (franking credit + dividend) at the same rates as all other income.
Minimum tax rate is 0% for gross income, including gross dividends (profits) less than $20,542 or $29,608 for a senior individual. The tax rate on the equivalent of $USA101,200 ($A148,823) for a senior couple is 22.43%.
Comparing taxes on share of profits:
—–
USA couple tax on $101,200 net dividends:
Gross dividends (profits) = ($101,200 / (1 – 21%)) = $128,101
Tax = 21% * $128,101 = $26,901.
Aus equivalent gross dividends = ($USA128,101 / 0.69) = $A185,654
Tax: $A46,424.
Tax rate: =($A46,424 / $A185,654) = 25.01%
—–
Aus senior couple 2 * $A29,608 = $A59,216
Tax rate: 0%
Tax: $A0.
USA equivalent gross dividends = 0.69 * $A59,216 = $USA40,859
Tax rate: 21%
Tax: =21% * $USA40,859 = $USA8,580.
USA federal tax on $201,250 gross wages results $164,517.58 net wages = 21% tax.
https://us.thetaxcalculator.net/
So… same.
“So… same.”:
USA taxes on small business owners & shareholders share of profits is larger than on small to medium wages. Less tax if company earnings (pre-tax profit) is paid in wages?
USA Long term capital gains $0 to $78,750 – tax rate 0%. Less tax if company earnings is distributed as capital gain.
Aus: tax the same on share of company earnings paid as dividends or wages. Retained (after tax) profit comes with tax credits when distributed as dividends. This allows tax to be reduced by paying the business owner or shareholder a modest dividend or wage when profits are large and a tax efficient dividend or wage when profits are small.
I applaud your dive into the tax rate of dividends in the U.S. but to be honest I personally feel that it’s a little ridiculous to say an individual paying 0% on dividends is “paying” 21% in taxes at the corporate level.
A dividend is free money for owning shares of stock, you didn’t work for it, the company generated it with their employees. If the company didn’t pay out a dividend that money would get re-invested in the company, sit out as cash, pay down debt, or lots of other things that do turn into shareholder value but it’s not a 1:1.
If a strong company, keeping everything equal, chose to stop paying a $0.50 cent quarterly dividend would your shares be worth $2 more at the end of a year? Maybe, maybe not. The market is inherently speculative and true value with individual stocks is a moving target.
Therefore, in my opinion, dividends are an act of the company returning value in the most concrete way they can – actual cash – and inherently worth more valuable than if they chose to do something else with the money.
You get 21% fewer dividends because they are paid with after-tax profits. Math > feelings.
Companies are free to choose how much of a dividend to pay. Look at the reductions in the corporate tax in the U.S. Did some companies raise dividends? Sure? Did every company raise dividends by a proportionate reduction in corporate taxes. No. Do stock buybacks increase the price of socks – sure – is that increase exactly proportional to the buyback and the subsequent loss in shares – No.
In the words of Freakenomics authors people/companies/the stock market are not homo economicus – they are actors who don’t follow rational mathematical models to a T. It’s not feelings, it’s real life.
“A dividend is free money for owning shares of stock, you didn’t work for it”:
The shareholder earned a return on their equity – on their investment and time. Just as workers earned a return on the investment in their upbringing, education and time. Without such returns there would be no such investments.
An employer withholds wages tax, pays it to government, it is credited by government to the wage earner against the worker’s tax assessment.
Good enough for workers, why not for shareholders?
USA: A company withholds company tax, pays it to government and then – nothing. Minimum tax 21%.
Aus: A company withholds company tax, pays it to government and then it is credited by government to the dividend recipient against the recipient’s tax assessment. Minimum tax 0%.
https://en.wikipedia.org/wiki/Dividend_imputation
I’m not arguing that taxes are not being paid. I am arguing that, in the US system the tax effect of dividend vs no dividends is essentially the same on the individual shareholder. It is then my opinion that in general dividends have advantages over non dividends.
First point: A company’s profits are taxed before dividends are paid, so, whether or not a company pays a divided a 21% tax is being paid. The shareholder is not experiencing an extra 21% tax on the dividend because that tax would be paid regardless. This is a fact.
Second point: I feel that dividends give the shareholder the option to choose to re-invest in the company by buying more shares, or investing that dividend elsewhere – the dividend is more liquid than shares (fact), and so it is my opinion that having a greater amount of liquidity is an advantage to the shareholder (opinion).
I’m not arguing about taxes being paid, if taxes are less in Australia GREAT. I am arguing that the next effect of taxes, in the us system, with or without dividends, is the same – with the caveat that it is my opinion that given the net tax effect is similar the extra liquidity of dividends is often preferential.
“The shareholder is not experiencing an extra 21% tax on the dividend”:
Correct. The USA shareholder is taxed 21% of their share of company earnings (pre-tax profit) and is not credited with that tax. Whereas that tax can be avoided, on modest amounts, by paying earnings as wages or capital gains rather than as dividends. Taxation of non-qualified dividends results in clear cut double taxation – after tax income being taxed. USA earnings tax is a regressive tax on small investor shareholders and a heavier tax on large shareholders – more than =(1 – (1 – 21%) * (1 – 37%)) = 50.23%.
“net effect of taxes, in the us system, with or without dividends, is the same”:
Incorrect.
Interesting read. We sat down last week with a close friend who also happens to be a financial adviser. He had offered to do an analysis of our current investments in comparison to our retirement goals. He was *very* concerned about the fact that we had not accounted nearly enough for health care costs, and advised us that health premiums will only continue to rise over the next 5-10 years.. Yet, as evidenced by your breakdown here, it seems to me that even if health care costs were to increase for us (I currently pay nothing with my employer), there’s so many different areas where costs would be slashed that I think we would still end up ahead. He certainly wasn’t considering geographic arbitrage either. I’ll be curious to show him your breakdown and see what he thinks.
That is pretty great that your employer pays your premiums in full. I am yet to have an employer do that. I currently pay about 22% of the full premium and my employer picks up the other 78% (family plan). Family HDHP is over $20,000 in total premiums which is pretty eye opening. Like Jeremy said, a lot of that is sheltered from FICA/Federal taxes. After all that, we are still stuck with a deductible.
Max
Do you know what your employer is paying for insurance? My old company used to give us a breakdown. Technically, you pay what they pay, because without the insurance they would just give you the cash.
With the ACA, if your income is less than 400% FPL the cost of insurance is irrelevant. What you pay is based on your income (9.5% max.)
Yes, my current employer gives us the breakdown to the dollar. In CY20 it is going up to $22,427 (full price) for the HDHP family package, with a max out-of-pocket of $6,600. We will throw in about 5k of those premiums. My old employers actually never shared this information, we only knew our piece of it.
I would totally take the 20k in lieu of insurance but they don’t offer us any incentive not to take it. My wife gets a nominal payment every two weeks to stay off her company insurance. I agree, certainly coming out of our wages though and causing some stagnation there. I need to re-read your ACA articles, they are really well done. We have some “certified” Patient Navigators that help patients with that program. I should have them read your articles – but I don’t need them reading about early retirement all day!
Max
Whatever. I made about $200k working full time at a tech company in the DC area. I raised two kids, rode a bike to work, paid off the house, never spent more than $500 per year on clothing and socked away the max in my 401k plan. We had two old cars and I guarantee that we spent way, way less than your estimated $10,900 for transportation. I had 30 days of vacation and excellent family healthcare. I was also recalled to the military for a year during that time and we didn’t even notice the change in pay.
You are mixing two messages in your post in order to try to prove your point. You can’t quote inflated retail prices and unnecessary expenses in order to show that a $200k job is the same as making $75k. It isn’t. Making $200k just means that I can save a whole lot more money than someone making $75k. Getting a high-paying job does not necessitate reckless spending and lifestyle inflation.
I’ve already inflated my lifestyle and am spending $75k per year plus about $10k/year in travel hacking. To have an equivalent lifestyle requires a $210k job income. I’ll replace the IRS travel estimate with yours and reduce that to $205k.
Sure, I could deflate my lifestyle. We were spending $20k/year in Seattle while I was making $135k, so it could be done. But I won’t.
Yes you could spend a lot less and save a lot more with a 200K salary but that’s not the point. The point is to see how much it would cost for Jeremy to live the way he does now with a full time job. The major increases in cost are:
Health Care: No debate here, health care costs much more in the US than it does in Tiawan, end of story.
Travel: Not much to debate here either, it costs much less to travel slowly, and to travel during off times (not weekends or holidays)
Child Care: Jeremy does not go into it as much as some of the other details but raising a child in the US either requires a stay at home parent, a very nice family member, or a lot of money in daycare. I’m not sure which option your family went with but all of them are costly – especially when you consider the opportunity cost to a stay at home spouse.
The point is, that to live the way Jeremy is living, on $75,000, would require a lot more in the US as an employee due to some of the higher costs.
Sure he could not travel internationally, live in a cheaper apartment, or something similar, but that is not the point.
A word about health insurance: I don’t know who your provider is, but I’m assuming your premiums are low because you’re young & healthy and outside the US. Our experience as expats is that premiums ramp up steeply at age 65, and you are basically uninsurable at 74 if you’re not with a company guaranteeing lifetime coverage.
It’s a Medicare for All type national health system. It’s fantastic.
Per your previous comment, yes, healthcare in the US is bloated and overpriced. That having been said (and I can’t speak to Taiwan), the quality of care in many countries is just not as high as the US (Oz, UK, NZ, and Canada). Population-based studies on life expectancy have little correlation with the quality of actual care for sick individuals; they are more indicative of vaccination rates, air and water quality, educational achievement, violent crime levels etc. Despite what the press says, outcomes for actually sick, insured patients are generally better here. And sometimes much better.
But you have the best of both worlds, of course, since you can come back to the US for many things and get an ACA plan or even Medicaid. Just don’t have a heart attack in Britain or let them do your appendix open in Finland.
“quality of care in many countries is just not as high as the US (Oz, UK, NZ, and Canada)”:
healthsystemtracker.org: ‘How does the quality of the U.S. healthcare system compare to other countries?’
Because they learn from each other, they are all close in outcomes to each other except in one – USA costs roughly twice as much as, for example, Aus. This shows clearly and obviously in the cost of travel insurance. We pay ~$A2,000 for Medibank hospital insurance and nothing for GP; dental costs ‘a bomb’ so is done in SE Asia. The Pharmaceutical Benefits Scheme (PBS) results in much smaller costs.
getting the bill for a US heart attack would give me another heart attack
Sure. But you can negotiate a bill. You can’t negotiate once you are dead.
When I see the crap that passes for medical care in other countries I’m frequently shocked. Not saying there aren’t issues here, but people frequently overestimate the quality of care outside the US.
To each his own, but caveat emptor. The good news is it’s pretty easy to come back to the US for nonemergent care
“the crap that passes for medical care”:
A lot of the causes of disease in USA can be laid at the door of ‘the crap that passes for food’ consumed by the poorer resulting in obesity resulting in diseases such as diabetes and knee replacements etc.
USA is a ‘Dollarocracy’ – the rich can afford good food and health care, the poor are uneducated in how to look after themselves, their ignorance being exploited for the benefit of the rich who are not inclined to see the poor enlightened.
To live healthily in USA means either self education or earning and paying heaps.
Then there is the STRESS of the US healthcare system! What if I make a mistake and go to the wrong facility “out of network” and end up with thousands in medical bills not covered? Or in my case, as an outpatient, one of the doctors was not in my network! First I have to think to ask if they are “in network” then what do I say, “withhold treatment I might need because your not on my insurance company’s list?”!!! Just in the last few months I have received over $2,300 in medical bills that so far, after calling the insurance company, $900 has been corrected, $1,400 is still in limbo! The STRESS of opening a letter and finding massive bills is not fun! The cost and the STRESS of US medical is the main reason I’ll be moving back to Australia in about 8 years. The ability to go to any doctor and know up front what the cost will be (and seek a lower cost doctor if you so desire) is priceless!
Then there is open enrollment. Trying to guess your 2020 medical needs on November 20, 2019… Argggh!
[Now I need to go to my in network doctor and get some happy pills…] ;)
Terrific post.. and it has helped me to feel even more confident leaving my multiple six-figure income to take a few (or the rest of my) years off from work. I live in NYC, make a lot of money, but am on a high income-high cost of living treadmill. Just moving back to the midwest, and stepping out of the senior executive lifestyle lane will enable us to live roughly the same lifestyle—minus some rather ridiculous luxuries that I won’t detail due to the snark I would deservedly receive. I advise everyone to do a serious review of what it actually costs for them to live their life and how much working actually costs.. Admittedly, we’re older than many of your readers, in our early 50’s and kids are already through college and launched—but I think your math works for way more folks—if they really embrace it. Love the blog, keep it up, inspiring to even us (nearly) senior citizens..
Very relevant. I will say there are some golden unicorn jobs that would be exceptions instead of the rule. I was happily FIRE in the US living off a modest military pension and some investments. The opportunity to work as a federal civilian came up last year in a nice western European town on a limited 2 year term contract and I decided to go back to work.
By the numbers, the compensation and benefits look something like this.
$72,000 taxable base + 5% 401k match
$5000 taxable overtime/differential etc
$35,000 tax free living (rent or mortgage allowance, electricity, water, gas firewood etc.)
$17,000 tax free cost of living adustment
—————-
~$131,000 gross comp
$5000/year tax free foreign language tutoring reimbursement
$20,000/year/kid tax free educational stipend for local or international schools
mileage allowance for taking kids to school
4 weeks paid vacation/year
2 weeks sick leave/year
10 paid federal holidays
3 hours of paid physical fitness time/week
2 weeks paid vacation after completing 2 years + 4 plane tickets back to the US for extending a year
What do the taxes look like for an early retiree who returns to work for a couple years and then goes back to early retirement
72,000-19000 (401K) – 12000 (IRA)- 24000 (standard deduction) = 19000 taxable income …didn’t bother to calculate FICA etc.
Tax owed is $1900 in the 10% bracket; subtract credits for 2 kids ($4000) and maybe retirement savers and the refund is about $2000 with no payroll deductions for federal or state tax all year.
healthcare is largely subsidized by the host country for its residents. Even without the national health card, dental is 25€ for teeth cleaning, routine minor surgeries are 50€, doctors visit is 25€. with my retired military private insurance, I rarely pay more than $300/year out of pocket for my family of 4. If I had to purchase it through my current employer, it would be around $6000/year with basic copays.
Fuel definitely costs more, but most everything else can be found for about what it is in the US. Everything here is smaller, closer and more convenient so I bike or walk almost everywhere in town. My beater diesel vehicle gets about 55mpg so we roadtrip to many great cities and towns and we get to drink some pretty great wines for bargain prices. I get paid in $ and spend mostly in € so with geoarbitrage and a fantastic exchange rate, everything is much cheaper than it was. Just an example where it wouldn’t take $210K.
Wow, that is a unicorn job. The key is all the tax free compensation keeping your taxable income low which is allowing you to dump even more money in an IRA thus saving you more in taxes. If you were to make all things equal and “gross up” your tax free earnings your total compensation would likely be well over $200,000 thus making you pay more in taxes and negating your ability to fund an IRA.
Having all the tax free compensation is really quite remarkable to a savings strategy. Where can I get a job like this!?
Sounds like a sweet gig. Congrats.
If you make deductible 401k/IRA contributions now, you are saving 12% on taxes. With a pension and SS, that may be the lowest tax rate you will ever pay so Roth contributions could be better?
My contract ends in January 2021 after I sign my one year extension this month. In year 2021, I hope to earn just enough to take advantage of EITC and retirement savers credits. Thanks to your previous articles, years 2021-2031+ will take advantage of 0 tax liability roth conversions at about $13000/year from my 401k turned tIRA. Otherwise, yes, it would make sense to take advantage of Roth 401k contributions now.by paying the 12% rate I think? I’m mainly doing this for liquidity reasons and to have some flexibility with RMD requirements later on down the road and not because I think I’ll be in a substantially high tax bracket later in life.
It would look something like this.
Total passive monthly income in 2021:. $1750 military pension (taxable) + 3550 VA compensionsation (non-taxable) $5300 total/month + $250/month in dividends/interest + $5550/month
Annual federal taxable income = $24,000; annual non-taxable $42,600 = $66,600
What do the taxes look like in early retirement once I’m done with this job?
$24.000 in taxable income
-$24800 standard deduction (2020)
————-
-800
$2800 of new tax credit is refundable so I’m looking to convert about $1200 credit worth of tax liability in roth conversion or $12,800/year. The income rates/brackets are already looking a little different, but this is close.
Total passive is $66,600 + $2800 in refundable child tax credit or $69400. I’ll supplement it with savings when needed and keep the slow pipeline of Roth conversion going. Could do 72t withdrawals to increase yearly passive to $80000 using the RMD method on a balance of $450K or so, but I honestly don’t think I need it at this point and it seems a little complicated and overly restrictive. There are certainly worse problems to have. Keep the great content coming–I definitely find it worthwhile.
Nice article! This is how I feel about having kids in the U.S. while employed at a “regular” job. While staying at home to raise a child is relatively inexpensive even in the U.S (minus the opportunity cost of working + loss of social security wages) it becomes exponentially more expensive if both parents have to work. But the sad fact is, during the accumulation phase the opportunity cost of not working + loss in social security credits is too much to bear to have one parent stay at home – thus necessitating the need for both parents to have high paying, busy, demanding careers.
For those with FIRE in mind child rearing during the accumulation phase is like trying to fit a square peg in a round hole. My heart goes out to all the FIRE parents out there. It’s a tough slog.
Hi GCC,
Loved the article, I think this is spot on! However, I disagree with the health premiums and a few other charges. IVF and work clothes, while expensive, are non-recurring charges so this wouldn’t tally up every year and would be a one time thing.
Also, health insurance per paycheck (as long as you don’t work for a startup) ranges from $50-100 per paycheck. And the High deductible health plan for most companies in tech (I have worked at a few) is almost always the standard $1500 personal/$3000 family deductible. Add this to incentives that the company provides (HSA contributions by employer), 401k match, etc. and your actual paycheck value will be less. Most employees also get to expense meals or gas for customer visits (if applicable) on occasion, so this doesn’t add, but it also doesn’t detract from your take-home income. I agree that not all employees have this perk though. Dental insurance is also a thing, but considering the deductible and your estimated expenses of ~$1500 above, we can consider this a wash.
Now, with all this being said you can now calculate a paycheck value being less than expected for what is needed to maintain your cost of living. This means you will also be taxed less too.
A scenario where you lived in a state income tax free state would be even better.
-Sean
Do you wear the same clothes for life?
IVF costs are my actual expenses. It doesn’t matter that they are non-recurring, I would have had to pay them.
If your employer subsidizes your health insurance so you only pay $100/paycheck, then your salary is reduced by the amount they pay.
Nice study. With this attitude and calculations they sure will never come back. Let’s just hope you never need a job again in your life
Retirement Has Completely Ruined Me