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Old 12-13-2018, 12:58 PM
 
Location: Denver, CO
1,700 posts, read 4,061,251 times
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Quote:
Originally Posted by eddiehaskell View Post
Possibly some luck, but mostly just embracing delayed gratification. Most teens or 20 somethings won’t have capital because they spend too much.

Then that just means their parents didn't educate them well on finances. Of course not surprising given the number of folks near retirement with $0 saved.
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Old 12-13-2018, 01:02 PM
 
7,899 posts, read 5,028,121 times
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Persons who've been making only a small income, tend to fantasize that upon finally garnering that high-paying job, they'll be able to save 70% (or whatnot) of their earnings. This is indeed a fantasy. Taxes go up nonlinearly, especially for persons who are single and have no children. Costs of various sorts also rise - and I don't mean the hedonistic treadmill.

Persons who've been earning a high income, saving considerable money and amassing a substantial portfolio, tend to fantasize that upon finally downshifting to a part-time, semi-retired state, their expenses will greatly fall. This is also a fantasy! We tend to not notice, while earning a good income, that we're paying taxes on dividends from our portfolio, out of said income. Lose the income, and the dividend-taxes don't go away (assuming a large portfolio).

The upshot is that saving money for early-retirement is harder than it looks, even if we're frugal spenders and disciplined savers. Likewise, retiring early to a low-cost lifestyle is harder than it looks, because of residual expenses such as taxes and health insurance.

To Eddie's point, having a "huge head start" at age 30 is remarkably pleasant and felicitous, but it's not enough, even for the child-free. The reason is that amassing a large portfolio, however wonderful, has its own carrying costs - and these costs never go away, short of spending-down the portfolio. Life itself has carrying costs, in particular that of health-insurance, which doesn't go away even if we're tee-totaling health-conscious exercise-freaks. Modern life is just set up for able-bodied adults of normal age to be working full-time. Getting off of the treadmill is really really hard, even if you're a rock-healthy multi-millionaire, with lots of hobbies, a paid-off house, no kids and self-sufficient habits.
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Old 12-13-2018, 02:12 PM
 
11,679 posts, read 7,041,880 times
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Quote:
Originally Posted by GeoffD View Post
Sure, but you wrote that they make $70k. You'd need extreme frugality to accumulate enough wealth to retire early on that combined income.
Extremely frugal? I live on about $10-12k/year and don’t consider myself all that frugal. Maybe $8k with someone sharing common expenses.

Going extremely frugal, the couple taking home $70k could pay off their home, try to live on $12k/year and bank nearly $60k/year. Alternatively, they could get a roommate and live almost free saving $65k+/year. Yeah, it sorta sucks having a roommate and budgets for every penny but remember...this is a struggle that pays off later.

Within ~10 years they may have around $700k saved. You’re telling me a 30 yr old couple with a home paid off and ~$700k invested isn’t on pace to retire extremely early? I’d say they’re out by their mid-late 30s if they want to be.

And being “retired” doesn’t mean you aren’t allowed to work at all. Pick up a little part time job a few days a week...quit anytime you want. Substitute teachers only make around $80/day here but it’s a job one can do a few times a month to pay a few bills/get out around people.

Last edited by eddiehaskell; 12-13-2018 at 02:24 PM..
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Old 12-13-2018, 02:22 PM
 
11,679 posts, read 7,041,880 times
Reputation: 6387
Quote:
Originally Posted by ohio_peasant View Post
Persons who've been making only a small income, tend to fantasize that upon finally garnering that high-paying job, they'll be able to save 70% (or whatnot) of their earnings. This is indeed a fantasy. Taxes go up nonlinearly, especially for persons who are single and have no children. Costs of various sorts also rise - and I don't mean the hedonistic treadmill.

Persons who've been earning a high income, saving considerable money and amassing a substantial portfolio, tend to fantasize that upon finally downshifting to a part-time, semi-retired state, their expenses will greatly fall. This is also a fantasy! We tend to not notice, while earning a good income, that we're paying taxes on dividends from our portfolio, out of said income. Lose the income, and the dividend-taxes don't go away (assuming a large portfolio).

The upshot is that saving money for early-retirement is harder than it looks, even if we're frugal spenders and disciplined savers. Likewise, retiring early to a low-cost lifestyle is harder than it looks, because of residual expenses such as taxes and health insurance.

To Eddie's point, having a "huge head start" at age 30 is remarkably pleasant and felicitous, but it's not enough, even for the child-free. The reason is that amassing a large portfolio, however wonderful, has its own carrying costs - and these costs never go away, short of spending-down the portfolio. Life itself has carrying costs, in particular that of health-insurance, which doesn't go away even if we're tee-totaling health-conscious exercise-freaks. Modern life is just set up for able-bodied adults of normal age to be working full-time. Getting off of the treadmill is really really hard, even if you're a rock-healthy multi-millionaire, with lots of hobbies, a paid-off house, no kids and self-sufficient habits.
If you play your cards right, healthcare is almost free for those that are asset rich and income poor. That knocks out the biggest hurdle to retiring early.

Take me for example - around $20k income, home paid off and a subsidized “silver” healthcare plan. My nest egg is continually compounded and added to...never “spent down”.
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Old 12-13-2018, 02:31 PM
 
Location: Florida and New England
1,231 posts, read 1,416,145 times
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Quote:
Originally Posted by eddiehaskell View Post
If you play your cards right, healthcare is almost free for those that are asset rich and income poor. That knocks out the biggest hurdle to retiring early.

Take me for example - around $20k income, home paid off and a subsidized “silver” healthcare plan. My nest egg is continually compounded and added to...never “spent down”.
This bubble, I call it the Obamacare Early Retirement Bonus, may not be around forever. And by forever, I actually mean until the beneficiary becomes eligible for Medicare at age 65. For me that's another 16 years, so I'm not expecting to reap the bonus each and every year. But I'll take it while I can.

Eventually, Washington figures out that they are subsidizing the "wrong" people (in this case, rich but frugal people who don't need to 'realize' a lot of income to live their lives).
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Old 12-13-2018, 02:32 PM
 
7,899 posts, read 5,028,121 times
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Quote:
Originally Posted by eddiehaskell View Post
If you play your cards right, healthcare is almost free for those that are asset rich and income poor. That knocks out the biggest hurdle to retiring early.

Take me for example - around $20k income, home paid off and a subsidized “silver” healthcare plan. My nest egg is continually compounded and added to...never “spent down”.
If you accumulated your assets quickly (which is the case by definition, in early retirement), you did so largely outside of tax-favored plans, such as Roth IRA. This renders your portfolio [mostly] taxable. Even if you invest in index funds, with low turnover and thus low capital gains, you still get taxed on dividends - even in years when your portfolio declines. If you have a large portfolio invested in typical stock index funds, dividends alone will blow past the ACA income limits for a single person.

If you invest in tax-free bonds, you reduce your tax-bill, but your "modified" AGI has to include interest on those bonds. Again you've blown past the ACA income limits.

The only way to be "asset rich and income poor", for tax purposes or ACA purposes, is if your assets aren't generating income... which is the classic scenario of cutting off one's nose, to spite one's face.

As a consummately frugal person, you can most likely do just fine on $20K/year, or perhaps even $10K/year, to cover your living-expenses... food, housing, transportation, travel, even insurance and entertainment. Great! But what if you also have a $20K/year federal income tax bill (in addition to FICA on any earnings - or even worse, self-employment tax? Plus property tax on the house.). And you can't escape those federal income taxes, even if you move to a retirement-community in Mexico, or go live on a pirate-barge anchored off of the coast of Somalia.
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Old 12-13-2018, 02:43 PM
 
11,679 posts, read 7,041,880 times
Reputation: 6387
Quote:
Originally Posted by ohio_peasant View Post
If you accumulated your assets quickly (which is the case by definition, in early retirement), you did so largely outside of tax-favored plans, such as Roth IRA. This renders your portfolio [mostly] taxable. Even if you invest in index funds, with low turnover and thus low capital gains, you still get taxed on dividends - even in years when your portfolio declines. If you have a large portfolio invested in typical stock index funds, dividends alone will blow past the ACA income limits for a single person.

If you invest in tax-free bonds, you reduce your tax-bill, but your "modified" AGI has to include interest on those bonds. Again you've blown past the ACA income limits.

The only way to be "asset rich and income poor", for tax purposes or ACA purposes, is if your assets aren't generating income... which is the classic scenario of cutting off one's nose, to spite one's face.

As a consummately frugal person, you can most likely do just fine on $20K/year, or perhaps even $10K/year, to cover your living-expenses... food, housing, transportation, travel, even insurance and entertainment. Great! But what if you also have a $20K/year federal income tax bill (in addition to FICA on any earnings - or even worse, self-employment tax? Plus property tax on the house.). And you can't escape those federal income taxes, even if you move to a retirement-community in Mexico, or go live on a pirate-barge anchored off of the coast of Somalia.
The standard deduction for a couple is $24k. Your goal is to live on less than $24k/year. Can you do it in the right area with the big ticket items paid for (car/house/subsidized healthcare)? I do.
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Old 12-13-2018, 03:22 PM
 
7,899 posts, read 5,028,121 times
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Quote:
Originally Posted by eddiehaskell View Post
The standard deduction for a couple is $24k. Your goal is to live on less than $24k/year. Can you do it in the right area with the big ticket items paid for (car/house/subsidized healthcare)? I do.
Perhaps I'm garbling my message here. Yes, of course one can live tolerably well on $24K/year. This may require some compromises, but nothing untoward - barring some calamity, such as failing health.

But taxes are charged on progress with one's portfolio! Unless you're going to use your portfolio to pay its taxes - which, I declare, is a form of spending! - you have to earn additional money to cover the costs of the taxes on your portfolio.

This means that the richer one becomes, the higher one's tax bill... and the more one needs to earn, just to cover this tax bill, even if one spends a totality of zero on oneself, and make zero trades or withdrawals.

Illustrative example: you hold $5M in a taxable account, invested 100% in the S&P 500. I picked $5M because that's the amount frequently recommended for FIRE purposes. That $5M is going to produce $85K in dividends annually, assuming a 1.7% dividend rate, which is evidently typical for US large-caps. Subtract the standard deduction etc., and the remainder is still going to be well above the ACA subsidy-threshold. And yes, the first $36K or whatnot are taxed at 0% dividend-rate, but the remainder is taxed at 15%.

Now if you work part-time just to cover the federal income taxes on those dividends, your labor will be taxed at 15% SEP, plus 15% federal income tax, plus every dollar thus earned shifts a dollar out of the $36K 0% capital gain/dividend tax bracket... into the 15% bracket. So, effectively your income tax rate on every earned dollar - not MARGINAL rate, but actual rate - is at least 45%! And this is not including state/local income taxes. Or property taxes.

Am I making sense here? To reiterate, the asset-rich income-poor frugal FIRE-type of person needs to budget for taxes, as being the overwhelmingly dominant cost of living - not rent, not food, not even healthcare, but taxes. Yes, taxes are the price for living in a civilized society. I'm not saying that taxes are "evil" - just that they're expensive... and that in contemplating a looming early-retirement, we fail to appreciate just how expensive taxes can be!
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Old 12-13-2018, 03:27 PM
 
4,540 posts, read 4,725,830 times
Reputation: 3590
Quote:
Originally Posted by ohio_peasant View Post
If you accumulated your assets quickly (which is the case by definition, in early retirement), you did so largely outside of tax-favored plans, such as Roth IRA. This renders your portfolio [mostly] taxable. Even if you invest in index funds, with low turnover and thus low capital gains, you still get taxed on dividends - even in years when your portfolio declines. If you have a large portfolio invested in typical stock index funds, dividends alone will blow past the ACA income limits for a single person.

If you invest in tax-free bonds, you reduce your tax-bill, but your "modified" AGI has to include interest on those bonds. Again you've blown past the ACA income limits.

The only way to be "asset rich and income poor", for tax purposes or ACA purposes, is if your assets aren't generating income... which is the classic scenario of cutting off one's nose, to spite one's face.

As a consummately frugal person, you can most likely do just fine on $20K/year, or perhaps even $10K/year, to cover your living-expenses... food, housing, transportation, travel, even insurance and entertainment. Great! But what if you also have a $20K/year federal income tax bill (in addition to FICA on any earnings - or even worse, self-employment tax? Plus property tax on the house.). And you can't escape those federal income taxes, even if you move to a retirement-community in Mexico, or go live on a pirate-barge anchored off of the coast of Somalia.
long term capital gains and dividends are tax free up to the 22% tax bracket, add in the $24k standard deduction and you can make over $100k in LTCGs or dividends before you pay a dime in taxes.
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Old 12-13-2018, 03:54 PM
 
7,899 posts, read 5,028,121 times
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Quote:
Originally Posted by mizzourah2006 View Post
long term capital gains and dividends are tax free up to the 22% tax bracket, add in the $24k standard deduction and you can make over $100k in LTCGs or dividends before you pay a dime in taxes.
Alright, let's do an exercise together. Joe Taxpayer is single, with no dependents and no deductions. Joe has zero earned income, spending his days playing video games in the basement of his house, which he inherited (tax-free) from his mother. Joe's rich uncle, Uncle Joe, bequeathed to Joe $5M. Joe invests his money with Fidelity, in a taxable account, 100% in an index fund. Being a good index fund, it's turnover is nearly zero. let's say that it outright is zero. Joe makes no changes to his account - he makes no trades, redemptions, exchanges, rebalancing or withdrawals.

Joe's annual statement from Fidelity shows an income of $85K from dividends. Let's assume (not strictly true!) that these are all qualifying long-term dividends.

To summarize: Joe has $85K of qualifying dividends in 2018. That's his only income, and his only taxable activity in 2018. And just to re-emphasize: Joe is SINGLE.

What is Joe's 2018 federal income tax bill?
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