If 1M is good, is 10M better?

[twinstudy]

Any thought experiment that makes 10M not a fuckload of money has to rely on "well spend $XMillion on a house or two and then..."

Look at it through a rental lens though, and you see that if you follow the "one third of income" rule on housing from 4% rule of $10M and renting a place that costs $11,000/month is comfortably within your budget. Then your "second home" problem can be considered vacation expenses, not housing costs. And even after spending $11k per month on your sick mansion or penthouse or whatever, you still have ~$267k/year of other spending money, which I think can fund some pretty sick vacations. And by not buying a vacation home in one specific location, your vacations can be more varied, and you're not paying for an empty home all year long.

The tax on $400k a year would be significant. Here in Australia on $400k in income you would be paying $160k a year in income tax, leaving you with $240k left over - a much smaller chunk. The only way to have an income source be tax free is for it to come from your superannuation which is accessible only after age 60 (so not relevant to early retirees), plus there are additional taxes on: (1) any annual contributions to superannuation above $27,500 and (2) any superannuation account balances over $3 million, so in actuality you'd be paying either income tax at a marginal rate of 47% or you'd be paying 2 lots of superannuation tax, on both contributions and gains.

Maybe the system works very differently in America but I am astounded that the ~40% or so tax burden is never accounted for.

[NorthernIkigai]

$240k per year is still a fuckload of money…

Also, I live in an extremely high tax environment, don’t know anything about tricks to lower the taxes on extremely high incomes, and even I know how to get at least 285 k€ from that 400 k€ yearly income*. I bet spending some money on a tax advisor would significantly raise that number.

Edit:
* coming from my lump sum of 10M€. Indeed, if my 400k€ is salary, I pay a loooot more taxes on it.

[Telecaster]

Maybe the system works very differently in America but I am astounded that the ~40% or so tax burden is never accounted for.

It it very different. Assuming the withdrawals are from a normal brokerage account (as opposed to an IRA, etc) and married filing taxes jointly, the first $89,250 are tax free. Zippo, no tax.  Then the next income up to $553,850 is taxed at 15%.  So taxed very lightly.  Much lower tax rate than being a school teacher or fire fighter.

The FIRE movement in the USA is highly dependent upon the fact the US tax code strongly discourages productive work.  Most people's tax bill drops enormously after quitting work. 

[RWD]

Any thought experiment that makes 10M not a fuckload of money has to rely on "well spend $XMillion on a house or two and then..."

Look at it through a rental lens though, and you see that if you follow the "one third of income" rule on housing from 4% rule of $10M and renting a place that costs $11,000/month is comfortably within your budget. Then your "second home" problem can be considered vacation expenses, not housing costs. And even after spending $11k per month on your sick mansion or penthouse or whatever, you still have ~$267k/year of other spending money, which I think can fund some pretty sick vacations. And by not buying a vacation home in one specific location, your vacations can be more varied, and you're not paying for an empty home all year long.

The tax on $400k a year would be significant. Here in Australia on $400k in income you would be paying $160k a year in income tax, leaving you with $240k left over - a much smaller chunk. The only way to have an income source be tax free is for it to come from your superannuation which is accessible only after age 60 (so not relevant to early retirees), plus there are additional taxes on: (1) any annual contributions to superannuation above $27,500 and (2) any superannuation account balances over $3 million, so in actuality you'd be paying either income tax at a marginal rate of 47% or you'd be paying 2 lots of superannuation tax, on both contributions and gains.

Maybe the system works very differently in America but I am astounded that the ~40% or so tax burden is never accounted for.

In the US you'll be paying only 15% on $400k of long term realized capital gains. State taxes vary (can be zero).

You would only pay a high percentage if it's is coming from a tax-deferred account like a 401k, but I doubt there are many of those with $10M. It's technically possible if you and your spouse maxed your respective 401k accounts for the last 40 years and put it 100% in the SP500 (but then would you really not have any savings elsewhere?).

[twinstudy]

$240k per year is still a fuckload of money…

Also, I live in an extremely high tax environment, don’t know anything about tricks to lower the taxes on extremely high incomes, and even I know how to get at least 285 k€ from that 400 k€ yearly income*. I bet spending some money on a tax advisor would significantly raise that number.

Edit:
* coming from my lump sum of 10M€. Indeed, if my 400k€ is salary, I pay a loooot more taxes on it.

It's not possible to reduce the tax on it if it is genuine income (whether earned through wages or rent). You could pay less tax if you cashed out a capital gain (i.e. selling property or shares) or if you used a discretionary trust to split the income into smaller parcels which you distribute among your family. The latter is probably the most tax efficient way to do it in a long-term, sustainable and near-automatic fashion, but you can only split to adult children without incurring a tax penalty, so even then it's fairly limited. The other way to do it is to put your FIRE stash into a business and invest in the business and use the business to generate income, which is subject to a lower business tax rate and which can easily be split. However, that clearly involves additional steps.

[twinstudy]

Maybe the system works very differently in America but I am astounded that the ~40% or so tax burden is never accounted for.

It it very different. Assuming the withdrawals are from a normal brokerage account (as opposed to an IRA, etc) and married filing taxes jointly, the first $89,250 are tax free. Zippo, no tax.  Then the next income up to $553,850 is taxed at 15%.  So taxed very lightly.  Much lower tax rate than being a school teacher or fire fighter.

The FIRE movement in the USA is highly dependent upon the fact the US tax code strongly discourages productive work.  Most people's tax bill drops enormously after quitting work.

Thanks for the explanation. That's extremely light and it explains why FIRE is so much easier in the US. Australia does have tax-free withdrawals (over most income ranges) but only for those over 60; by that time, you are only 7 years away from getting the very generous age pension, so I think that explains why FIRE is much less of a thing here in Australia.

[deborah]

Maybe the system works very differently in America but I am astounded that the ~40% or so tax burden is never accounted for.

It it very different. Assuming the withdrawals are from a normal brokerage account (as opposed to an IRA, etc) and married filing taxes jointly, the first $89,250 are tax free. Zippo, no tax.  Then the next income up to $553,850 is taxed at 15%.  So taxed very lightly.  Much lower tax rate than being a school teacher or fire fighter.

The FIRE movement in the USA is highly dependent upon the fact the US tax code strongly discourages productive work.  Most people's tax bill drops enormously after quitting work.

Thanks for the explanation. That's extremely light and it explains why FIRE is so much easier in the US. Australia does have tax-free withdrawals (over most income ranges) but only for those over 60; by that time, you are only 7 years away from getting the very generous age pension, so I think that explains why FIRE is much less of a thing here in Australia.

I’m not at all sure that FIRE is less of a thing in Australia. Could you give me a study or something? Some years ago, I worked out that this forum had a roughly similar number of members as a percentage of the population from the US, Canada and Australia (I think they were in that order as a percentage). The UK had a much smaller percentage. I haven’t seen much change since then, although I haven’t done the figures again.

[Telecaster]

Thanks for the explanation. That's extremely light and it explains why FIRE is so much easier in the US. Australia does have tax-free withdrawals (over most income ranges) but only for those over 60; by that time, you are only 7 years away from getting the very generous age pension, so I think that explains why FIRE is much less of a thing here in Australia.

My BIL lives in Australia and retired this year.  He was here visiting just last week and I discussed this topic a bit with him.  He and his wife worked in the public sector and apparently in that case the employer contribution to superannuation is double vs the private sector (18% vs 9%).

I fully acknowledge I may not understand this correctly.

However, his monthly income is, as you put it, very generous.  They are pretty well fixed up, income wise. 

[twinstudy]

Thanks for the explanation. That's extremely light and it explains why FIRE is so much easier in the US. Australia does have tax-free withdrawals (over most income ranges) but only for those over 60; by that time, you are only 7 years away from getting the very generous age pension, so I think that explains why FIRE is much less of a thing here in Australia.

My BIL lives in Australia and retired this year.  He was here visiting just last week and I discussed this topic a bit with him.  He and his wife worked in the public sector and apparently in that case the employer contribution to superannuation is double vs the private sector (18% vs 9%).

I fully acknowledge I may not understand this correctly.

However, his monthly income is, as you put it, very generous.  They are pretty well fixed up, income wise.

Yes, many public sector workers get extra superannuation, plus some other perks (some get to pay mortgage interest with pre-tax money).

[NorthernIkigai]

$240k per year is still a fuckload of money…

Also, I live in an extremely high tax environment, don’t know anything about tricks to lower the taxes on extremely high incomes, and even I know how to get at least 285 k€ from that 400 k€ yearly income*. I bet spending some money on a tax advisor would significantly raise that number.

Edit:
* coming from my lump sum of 10M€. Indeed, if my 400k€ is salary, I pay a loooot more taxes on it.

It's not possible to reduce the tax on it if it is genuine income (whether earned through wages or rent). You could pay less tax if you cashed out a capital gain (i.e. selling property or shares) or if you used a discretionary trust to split the income into smaller parcels which you distribute among your family. The latter is probably the most tax efficient way to do it in a long-term, sustainable and near-automatic fashion, but you can only split to adult children without incurring a tax penalty, so even then it's fairly limited. The other way to do it is to put your FIRE stash into a business and invest in the business and use the business to generate income, which is subject to a lower business tax rate and which can easily be split. However, that clearly involves additional steps.

Additional steps is exactly what I’d pay the tax experts to figure out for me.I don’t see the problem with that.

Here, I could get to >285 k€ simply by investing in dividend-paying shares. The dividends are taxed less than gains from selling shares or mutual funds, because the companies pay tax as well.

[Wolfpack Mustachian]

Maybe the system works very differently in America but I am astounded that the ~40% or so tax burden is never accounted for.

It it very different. Assuming the withdrawals are from a normal brokerage account (as opposed to an IRA, etc) and married filing taxes jointly, the first $89,250 are tax free. Zippo, no tax.  Then the next income up to $553,850 is taxed at 15%.  So taxed very lightly.  Much lower tax rate than being a school teacher or fire fighter.

The FIRE movement in the USA is highly dependent upon the fact the US tax code strongly discourages productive work. Most people's tax bill drops enormously after quitting work.

I don't think this is true at all. Most FIRE people I have heard of really on 401k contributions or Roth for the majority of their expenses unless they have a pension. That's certainly my plan. The fact that money made off of after tax income in the stock market is taxed at roughly zero for a high amount of "income" for the year is a small perk, as the money I have in after tax accounts is a small percentage of my net worth. Do you have any data or other information to back this up?

[NorthernIkigai]

I’d say it’s a huge perk, not a small perk. The comparable system I’d have access to is much less favourable (lower amounts you can stash away pre-tax, much more and — crucially — ever changing rules regarding how to access the money later, higher fees,…). Which is why I haven’t bothered and instead only invest after-tax money.

[bluecollarmusician]

The FIRE movement in the USA is highly dependent upon the fact the US tax code strongly discourages productive work. Most people's tax bill drops enormously after quitting work.

I don't think this is true at all. Most FIRE people I have heard of really on 401k contributions or Roth for the majority of their expenses unless they have a pension. That's certainly my plan. The fact that money made off of after tax income in the stock market is taxed at roughly zero for a high amount of "income" for the year is a small perk, as the money I have in after tax accounts is a small percentage of my net worth. Do you have any data or other information to back this up?

Hey @Telecaster ] I wouldn't agree that the FIRE movement in the US is *dependent* on the US tax code. Although it may be a benefit relative to other developed nations.  IMHO probably more likely the US FIRE movement is dependent on things like US Dollar as world currency, US is a very rich country, etc. Lots of reasons....

But I do agree with you in principle that in the US unearned income is taxed much more favorably than earned income. Rents, cap gains, dividends etc I pay less taxes than I do on any kind of earned income, especially Self-employee type income.  @Wolfpack Mustachian I am not sure that is what telecaster meant- but I kind of agree with that sentiment.  At this point in life I have to "earn" 2 dollars for the same amount of money to stay in my pocket as 1 dollar of unearned income.

Maybe the system works very differently in America but I am astounded that the ~40% or so tax burden is never accounted for.

Hi @twinstudy you are right that people tend to gloss over taxes in these kinds of discussions, but I also think that much is overdone about them as well.  As @NorthernIkigai pointed out a good tax advisor could surely give you lots of ideas about how to reduce your tax burden.  I don't think you argument is made in bad faith, but we certainly would not be talking about 400k of "earned" income by a salary man.  Income derived from 10M or more in assets would be coming from a variety of sources.

I don't know Australian tax law- just suggesting that there are loopholes the rich exploit everywhere.
Based on the "internet"
400k in pure capital gains (with no other income) in OZ would yield a 66k tax bill.
A more realistic scenario-
A 200k purchased asset sold for 400k (200k capital gains) with no other income would yield a 23k tax bill- a good amount of money for sure, but a far cry from 160k

Just thinking out loud.

[mistymoney]

I’d say it’s a huge perk, not a small perk. The comparable system I’d have access to is much less favourable (lower amounts you can stash away pre-tax, much more and — crucially — ever changing rules regarding how to access the money later, higher fees,…). Which is why I haven’t bothered and instead only invest after-tax money.

The vast majority of my money is in 401k, so I'll be paying the regular tax rates. Will be reserving my small amount of roth and taxable money for irregular expenses so I don't have larger tax years. Will see how long they last though!

I won't be retiring super early, maybe 58/9, so will have access to 401k without penalty. Still, tall taxes!

[NorthernIkigai]

I’d say it’s a huge perk, not a small perk. The comparable system I’d have access to is much less favourable (lower amounts you can stash away pre-tax, much more and — crucially — ever changing rules regarding how to access the money later, higher fees,…). Which is why I haven’t bothered and instead only invest after-tax money.

The vast majority of my money is in 401k, so I'll be paying the regular tax rates. Will be reserving my small amount of roth and taxable money for irregular expenses so I don't have larger tax years. Will see how long they last though!

I won't be retiring super early, maybe 58/9, so will have access to 401k without penalty. Still, tall taxes!

But you got to save the money in that 401k pre-tax, right? That’s a huge advantage.

I would only be able to save 5000 € per year pre-tax into the crappy equivalent we have here, and then there are a lot of rules about how to access it (much higher age, you can’t get a lump sum, age may still change, etc.). Unsurprisingly, these have become much less popular as people have realised what a crappy deal they are.

[Telecaster]

Hey @Telecaster ] I wouldn't agree that the FIRE movement in the US is *dependent* on the US tax code. Although it may be a benefit relative to other developed nations.  IMHO probably more likely the US FIRE movement is dependent on things like US Dollar as world currency, US is a very rich country, etc. Lots of reasons....

But I do agree with you in principle that in the US unearned income is taxed much more favorably than earned income. Rents, cap gains, dividends etc I pay less taxes than I do on any kind of earned income, especially Self-employee type income.

I thought about the word choice of "dependent"  but it was late and I couldn't think of something better.  In hindsight, I should have said "greatly facilitated by."    Take the humble 401(k) for example.   The deduction comes at the top marginal rate, so the higher your top marginal rate, the more benefit you receive.   That's great if you are on the FIRE track, but not so great for the general public.

Similar issues with the IRA.   It was originally designed to help lower and middle income people save, hence the contribution limits and caps on deductible income.  So why does the backdoor Roth exist?   That helps high income people save.   Congress could fix that tomorrow if they wanted.   Same with the mega backdoor.   

And the capital gains issue as discussed early.   You can take a lot of capital gains tax free, which again mostly benefits rich people.

We in the MMM community are in the weird space where by optimizing spending and emphasizing savings, we get to take advantage of portions of the tax code that were designed to mostly benefit high income/high net worth individuals.   

[Telecaster]

I don't think this is true at all. Most FIRE people I have heard of really on 401k contributions or Roth for the majority of their expenses unless they have a pension. That's certainly my plan. The fact that money made off of after tax income in the stock market is taxed at roughly zero for a high amount of "income" for the year is a small perk, as the money I have in after tax accounts is a small percentage of my net worth. Do you have any data or other information to back this up?

First, I probably should have said "facilitated" instead of "dependent" but in the case of the 401K, the deduction occurs at the top marginal rate, but the withdrawals occur at the effective tax rate.  So, say working and married filing jointly with an income of $150K, your deduction would be the top rate of 22%.   Let's say in retirement your spending is $75K. Your effective rate would be 11.2% (10% of the first $23,200 and 12% on the next $51,800).   So you income tax rate is cut in half.   Even if you spent the full $150,000 you'd still be under 12%. 

Of course in retirement, FICA goes away too.  I was self-employed most of my career so I paid both halves.   I don't have any data, but suspect most or at least many here have at least some capital gains in retirement simply because 401(k) contribution limits aren't high enough to get to FIRE very early.   Of course, the tax rate for those can be as low as zero.   

So get rid of FICA, cut your income tax rate in half, maybe more than that thanks to capital gains, and your tax bill goes way down in retirement, even if your spending remains the same. 

[bluecollarmusician]

I thought about the word choice of "dependent"  but it was late and I couldn't think of something better.  In hindsight, I should have said "greatly facilitated by."   

Lol- sorry wasn't trying to be the Internet word-choice police.  I mostly just wanted to make sure I understood what you mean, and I agree with you wholeheartedly about the advantages available.

We in the MMM community are in the weird space where by optimizing spending and emphasizing savings, we get to take advantage of portions of the tax code that were designed to mostly benefit high income/high net worth individuals.   

Agree absolutely *100*- following a strategy of spending like you are "poor" and earning like you are "rich" creates unique ways to maximize value in the  inherit inequities in a system that is large and complex. 

I learned early on when I was earning maybe 30k a year (but receiving many benefits like travel, housing, and food) it was far better than earning 100k a year and being required to purchase all those things myself.  My wife and I lived very "rich" - and did it much more efficiently that if we were *actually* rich. 

[bluecollarmusician]

So get rid of FICA, cut your income tax rate in half, maybe more than that thanks to capital gains, and your tax bill goes way down in retirement, even if your spending remains the same.

Yes FICA is huge, and agree the 401k is a boon to savers.  There are lots of options available- between the Roth and pre-tax options if you are smart you can reduce your tax liability considerably.  And of course- the worst case (one we have run into) is that you end up paying more taxes that anticipated because you have way more money than you ever planned on.

[mistymoney]

I’d say it’s a huge perk, not a small perk. The comparable system I’d have access to is much less favourable (lower amounts you can stash away pre-tax, much more and — crucially — ever changing rules regarding how to access the money later, higher fees,…). Which is why I haven’t bothered and instead only invest after-tax money.

The vast majority of my money is in 401k, so I'll be paying the regular tax rates. Will be reserving my small amount of roth and taxable money for irregular expenses so I don't have larger tax years. Will see how long they last though!

I won't be retiring super early, maybe 58/9, so will have access to 401k without penalty. Still, tall taxes!

But you got to save the money in that 401k pre-tax, right? That’s a huge advantage.

I would only be able to save 5000 € per year pre-tax into the crappy equivalent we have here, and then there are a lot of rules about how to access it (much higher age, you can’t get a lump sum, age may still change, etc.). Unsurprisingly, these have become much less popular as people have realised what a crappy deal they are.

I was just dispelling the idea the everyone in the us has practically no taxes in retirement.

[jeroly]

I’d say it’s a huge perk, not a small perk. The comparable system I’d have access to is much less favourable (lower amounts you can stash away pre-tax, much more and — crucially — ever changing rules regarding how to access the money later, higher fees,…). Which is why I haven’t bothered and instead only invest after-tax money.

Whilst you have more restrictive access to your superannuation account balances, you also have your employer throwing in a mandatory 11.5% of your pay, going up to 12% next year, so you have much less need to make a pretax contribution - that contribution, on its own right, should come close to funding your 'regular' retirement at say age 67 onward.  So, you can focus putting your other savings in aftertax vehicles for your earlier (pre-67) costs. Moreover, Aussies don't need to deal with the potential for major healthcare / insurance costs during FIRE (at least not compared to the US costs), making FIRE easier from that perspective.  Overall, I'd say it's close to a wash.

[Ron Scott]

I was just dispelling the idea the everyone in the us has practically no taxes in retirement.

Americans, including retirees, are subject to sales tax, property tax, inheritance tax, gift tax, income taxes at 2-3 levels of government, tax on gains from sales of equities, interest and dividends taxes, taxes on stuff you bought outside the US, a slew of local taxes, a slew of excise taxes—-and this is not to mention the HUGE shitload of “fees” levied by governments at all levels when you have the audacity to ask to take advantage of things government is paying for with your taxes.

In addition to all the above, it costs me more than $30 in tolls to drive from NY to Philly IF I use their toll tracking device they charge even more for. Of course you will scream when you understand the additional taxes on phone and internet service. And the list goes on.

What the fuck are you talking about???

[bluecollarmusician]

What the fuck are you talking about???

He was talking about taxes on income @Ron Scott. 
The point was made upthread that there may be a perception that people in RE in the US managed to pay very low or no taxes on income in retirement.

Unearned income is treated much more favorably than earned income from a tax standpoint in the US.

[Ron Scott]

What the fuck are you talking about???

He was talking about taxes on income @Ron Scott. 
The point was made upthread that there may be a perception that people in RE in the US managed to pay very low or no taxes on income in retirement.

Unearned income is treated much more favorably than earned income from a tax standpoint in the US.

Federal? State?  40-50% of retirees pay federal income tax.

[bluecollarmusician]

Federal? State?  40-50% of retirees pay federal income tax.

Or put another way according to your numbers, 50-60% of retirees pay no Federal Income Tax. 


I am not arguing with anyone here about whether (income) tax rates aid/hinder FIRE type folks in the US (although I think they do help, but just one of many contributors) I merely was answering the question you asked previously.

[Wolfpack Mustachian]

I’d say it’s a huge perk, not a small perk. The comparable system I’d have access to is much less favourable (lower amounts you can stash away pre-tax, much more and — crucially — ever changing rules regarding how to access the money later, higher fees,…). Which is why I haven’t bothered and instead only invest after-tax money.

I mean, the benefit with after tax money is certainly nice. I would say a significant portion (speculating a solid majority) of American FIRE people have their 401k as a means of primary investment compared to after tax investment. If that's the case, I would say that although it's a nice perk, it's still a small perk when it comes to facilitating FIRE, although I may be wrong with that speculation.

[Wolfpack Mustachian]

The FIRE movement in the USA is highly dependent upon the fact the US tax code strongly discourages productive work. Most people's tax bill drops enormously after quitting work.

I don't think this is true at all. Most FIRE people I have heard of really on 401k contributions or Roth for the majority of their expenses unless they have a pension. That's certainly my plan. The fact that money made off of after tax income in the stock market is taxed at roughly zero for a high amount of "income" for the year is a small perk, as the money I have in after tax accounts is a small percentage of my net worth. Do you have any data or other information to back this up?

Hey @Telecaster ] I wouldn't agree that the FIRE movement in the US is *dependent* on the US tax code. Although it may be a benefit relative to other developed nations.  IMHO probably more likely the US FIRE movement is dependent on things like US Dollar as world currency, US is a very rich country, etc. Lots of reasons....

But I do agree with you in principle that in the US unearned income is taxed much more favorably than earned income. Rents, cap gains, dividends etc I pay less taxes than I do on any kind of earned income, especially Self-employee type income.  @Wolfpack Mustachian I am not sure that is what telecaster meant- but I kind of agree with that sentiment.  At this point in life I have to "earn" 2 dollars for the same amount of money to stay in my pocket as 1 dollar of unearned income.

I definitely agree that US unearned income is taxed much easier than earned income. I just think that for most FIRE people, that is not a huge impact on their FIRE schedule compared to, for example, simple growth in the stock market. Overall, though, yes, I 100% agree that taxing unearned income favorably is extremely nice and is helpful.

[Wolfpack Mustachian]

Hey @Telecaster ] I wouldn't agree that the FIRE movement in the US is *dependent* on the US tax code. Although it may be a benefit relative to other developed nations.  IMHO probably more likely the US FIRE movement is dependent on things like US Dollar as world currency, US is a very rich country, etc. Lots of reasons....

But I do agree with you in principle that in the US unearned income is taxed much more favorably than earned income. Rents, cap gains, dividends etc I pay less taxes than I do on any kind of earned income, especially Self-employee type income.

I thought about the word choice of "dependent"  but it was late and I couldn't think of something better.  In hindsight, I should have said "greatly facilitated by."    Take the humble 401(k) for example.   The deduction comes at the top marginal rate, so the higher your top marginal rate, the more benefit you receive.   That's great if you are on the FIRE track, but not so great for the general public.

Similar issues with the IRA.   It was originally designed to help lower and middle income people save, hence the contribution limits and caps on deductible income.  So why does the backdoor Roth exist?   That helps high income people save.   Congress could fix that tomorrow if they wanted.   Same with the mega backdoor.   

And the capital gains issue as discussed early.   You can take a lot of capital gains tax free, which again mostly benefits rich people.

We in the MMM community are in the weird space where by optimizing spending and emphasizing savings, we get to take advantage of portions of the tax code that were designed to mostly benefit high income/high net worth individuals.

I did not know you were referring to the 401k. Your initial post highlighted the concept of tax laws that discourage productive work. The 401k, as I see it, is primarily a promoter of savings - granted that benefits wealthy people more than poorer people. I suppose if you think that savings so that people can retire early is discouraging productive work then, I guess I can see that angle, but it's a stretch - or maybe I'm misunderstanding.

You also mentioned in your initial post about how your tax bill will likely go down considerably when you retire. That's 100% true, but without doing the math (again speculating) I feel like the majority of why that goes down for that for FIRE people is due to the progressive tax rate, not on tax benefits designed to favor unproductive work. My tax bill is going to go down not because of weird tax laws but because when I withdraw only a percentage of our current earned income in retirement, I'll be in a lower tax bracket, paying less tax. I just don't see the fact that there are US laws favoring lower taxes for unearned income as being a huge benefit towards people that use stock market investing for early retirement. I can't speak to real estate early retirement, but I'm just not seeing it a whole lot in my situation.

[mistymoney]

I was just dispelling the idea the everyone in the us has practically no taxes in retirement.

Americans, including retirees, are subject to sales tax, property tax, inheritance tax, gift tax, income taxes at 2-3 levels of government, tax on gains from sales of equities, interest and dividends taxes, taxes on stuff you bought outside the US, a slew of local taxes, a slew of excise taxes—-and this is not to mention the HUGE shitload of “fees” levied by governments at all levels when you have the audacity to ask to take advantage of things government is paying for with your taxes.

In addition to all the above, it costs me more than $30 in tolls to drive from NY to Philly IF I use their toll tracking device they charge even more for. Of course you will scream when you understand the additional taxes on phone and internet service. And the list goes on.

What the fuck are you talking about???

Who the fuck are you talking to???

[NorthernIkigai]

I’d say it’s a huge perk, not a small perk. The comparable system I’d have access to is much less favourable (lower amounts you can stash away pre-tax, much more and — crucially — ever changing rules regarding how to access the money later, higher fees,…). Which is why I haven’t bothered and instead only invest after-tax money.

Whilst you have more restrictive access to your superannuation account balances, you also have your employer throwing in a mandatory 11.5% of your pay, going up to 12% next year, so you have much less need to make a pretax contribution - that contribution, on its own right, should come close to funding your 'regular' retirement at say age 67 onward.  So, you can focus putting your other savings in aftertax vehicles for your earlier (pre-67) costs. Moreover, Aussies don't need to deal with the potential for major healthcare / insurance costs during FIRE (at least not compared to the US costs), making FIRE easier from that perspective.  Overall, I'd say it's close to a wash.

I was comparing the US vs my own Northern European situation.

I don’t think there’s a widespread idea that US retirees pay no (income) taxes. But even the figures Ron Scott mentions show than many don’t. Here, everyone, even the poorest pensioners with the lowest incomes pay (in their case of course very little) taxes, and median income people of course more. And everyone pays value added tax and local taxes and all those other normal things as well that Ron Scott seems to think are squarely aimed at him.

However, I still think the main difference in FIRE possibilities here and in the US is not tax systems nor even health care but that normal professional jobs can pay a lot more in the US. I of course understand this varies a lot by sector and geographical area, but no one here earns 200 k€ for a “normal job”, which I see routinely in the case studies and elsewhere online. It’s rare to even get to 100 k€ per year, although some of my mid-career lawyer and doctor friends earn that (all salaries are public here). You’d have to be a CEO of a large company or alternatively start your own company to get to figures like 200 and above. Of course many people have FIREd on much lower salaries, but I’m pretty sure the structure of the salary distribution plays an important role here.

[Telecaster]

However, I still think the main difference in FIRE possibilities here and in the US is not tax systems nor even health care but that normal professional jobs can pay a lot more in the US. I of course understand this varies a lot by sector and geographical area, but no one here earns 200 k€ for a “normal job”, which I see routinely in the case studies and elsewhere online. It’s rare to even get to 100 k€ per year, although some of my mid-career lawyer and doctor friends earn that (all salaries are public here). You’d have to be a CEO of a large company or alternatively start your own company to get to figures like 200 and above. Of course many people have FIREd on much lower salaries, but I’m pretty sure the structure of the salary distribution plays an important role here.

I think there is some merit to this.  My wife used to work for an international company and salary and bonuses were definitely lower in Europe for the exact same position. 

[Redherring]

I’d say it’s a huge perk, not a small perk. The comparable system I’d have access to is much less favourable (lower amounts you can stash away pre-tax, much more and — crucially — ever changing rules regarding how to access the money later, higher fees,…). Which is why I haven’t bothered and instead only invest after-tax money.

Whilst you have more restrictive access to your superannuation account balances, you also have your employer throwing in a mandatory 11.5% of your pay, going up to 12% next year, so you have much less need to make a pretax contribution - that contribution, on its own right, should come close to funding your 'regular' retirement at say age 67 onward.  So, you can focus putting your other savings in aftertax vehicles for your earlier (pre-67) costs. Moreover, Aussies don't need to deal with the potential for major healthcare / insurance costs during FIRE (at least not compared to the US costs), making FIRE easier from that perspective.  Overall, I'd say it's close to a wash.

I was comparing the US vs my own Northern European situation.

I don’t think there’s a widespread idea that US retirees pay no (income) taxes. But even the figures Ron Scott mentions show than many don’t. Here, everyone, even the poorest pensioners with the lowest incomes pay (in their case of course very little) taxes, and median income people of course more. And everyone pays value added tax and local taxes and all those other normal things as well that Ron Scott seems to think are squarely aimed at him.

However, I still think the main difference in FIRE possibilities here and in the US is not tax systems nor even health care but that normal professional jobs can pay a lot more in the US. I of course understand this varies a lot by sector and geographical area, but no one here earns 200 k€ for a “normal job”, which I see routinely in the case studies and elsewhere online. It’s rare to even get to 100 k€ per year, although some of my mid-career lawyer and doctor friends earn that (all salaries are public here). You’d have to be a CEO of a large company or alternatively start your own company to get to figures like 200 and above. Of course many people have FIREd on much lower salaries, but I’m pretty sure the structure of the salary distribution plays an important role here.

You are in the Nordics you write, from what I have learned about taxation and salary structure in this part of the world, yes you have crazy high taxes, but the real killer is actually the compressed salary structure. Effective tax rate in Nordics can climb above 50 percent, but in US, esp CA, you get also effective tax rates above 40 on very high compensations. Now, the issue is really elsewhere imv. Blue collar jobs in US are relatively poorly compensated compared to the Nordics, and opposite holds true for executive jobs. As you write 200k in Nordics is hard to come by as an executive. But also true is that a carpenter in Nordics can often break 100k. Minimum salaries too are higher than in US. So from a FIRE perspective, Nordics are actually potentially more accessible to a wider part of the population I would think, esp when factoring in free health care, education and a state pension for all. From the people I know in the Nordics their mindset is far from FIRE, like most in the US. Quite free spenders, what comes in goes out, multiple vacations per year, design furniture and clothes etc etc. The have massive car loans, mortgages and are pretty much in a completely different world from me. But as a system to achieve FIRE in I think the potential is there and even is better for the lower paid 75 pct of the population compared to US.

[twinstudy]

I agree with the above. A lot of the European countries (and also Australia; the UK is much less so) have higher wages at the low end, lower wages at the top end, and heavier personal income tax burdens. I use the example here in Australia - a top tier lawyer/investment banking grad will start his or her career on around $150k AUD ($100k USD) which is about 3.5x minimum wage. Even if we impute a $15 minimum wage to the US, a junior banker or lawyer there will easily be paid 6x that on graduation.

So in Nordic countries and Australia, normal FIRE is a lot more accessible, FatFIRE is less accessible due to more progressive taxes, and lean FIRE is normal living - that is, here in Australia, our welfare safety net is so comprehensive it's incredibly easy to get by.

[jeroly]

I’d say it’s a huge perk, not a small perk. The comparable system I’d have access to is much less favourable (lower amounts you can stash away pre-tax, much more and — crucially — ever changing rules regarding how to access the money later, higher fees,…). Which is why I haven’t bothered and instead only invest after-tax money.

Whilst you have more restrictive access to your superannuation account balances, you also have your employer throwing in a mandatory 11.5% of your pay, going up to 12% next year, so you have much less need to make a pretax contribution - that contribution, on its own right, should come close to funding your 'regular' retirement at say age 67 onward.  So, you can focus putting your other savings in aftertax vehicles for your earlier (pre-67) costs. Moreover, Aussies don't need to deal with the potential for major healthcare / insurance costs during FIRE (at least not compared to the US costs), making FIRE easier from that perspective.  Overall, I'd say it's close to a wash.

I was comparing the US vs my own Northern European situation.

I don’t think there’s a widespread idea that US retirees pay no (income) taxes. But even the figures Ron Scott mentions show than many don’t. Here, everyone, even the poorest pensioners with the lowest incomes pay (in their case of course very little) taxes, and median income people of course more. And everyone pays value added tax and local taxes and all those other normal things as well that Ron Scott seems to think are squarely aimed at him.

However, I still think the main difference in FIRE possibilities here and in the US is not tax systems nor even health care but that normal professional jobs can pay a lot more in the US. I of course understand this varies a lot by sector and geographical area, but no one here earns 200 k€ for a “normal job”, which I see routinely in the case studies and elsewhere online. It’s rare to even get to 100 k€ per year, although some of my mid-career lawyer and doctor friends earn that (all salaries are public here). You’d have to be a CEO of a large company or alternatively start your own company to get to figures like 200 and above. Of course many people have FIREd on much lower salaries, but I’m pretty sure the structure of the salary distribution plays an important role here.

Sorry, somehow I got the impression that you were writing about Australian conditions, somehow I must have gotten threads crossed in my mixed-up brain.

It's definitely the case that high salaries make FIRE easier if you manage to avoid lifestyle creep.

It's also the case that high salaries like those you mention are not as commonplace in the US as you might get the impression after spending time here or, say, Bogleheads.  That's because, I think, (a) there's a strong correlation with financial sophistication and having a skill set that brings in a high salary, (b) these forums tend to attract people closer to FIRE rather than at the very start of their careers (not that there aren't any folks here like that, just that they're rarer) and those people are at later career stages, at the higher end of the earning spectrum, (c) people like to brag so you'll probably find a higher percentage of the 200k earners here mention their salary than the percentage of 50k earners that do, so the distribution you see here gets skewed.

[twinstudy]

High American salaries aren't just a matter of selection bias on these forums - though that might play a part, it is not a uniquely American phenomenon - the salary data are easily understood via statistics. In Australia, 99th percentile income is a bit over $250k AUD; 90th percentile is a bit of $130k AUD. Those stats are now 4 years old, so with wage growth at around 20% since then, top 1% today would come to $300k ($200k USD) and top 10% at $160k ($110k USD).

Meanwhile, US top 1% is $683,000 and top 10% is $170,000. Note these are thresholds, not averages within the band.

So US top 10% income is around 50% higher than Aus, and top 1% income is around 3 to 3.5x higher in Aus. Note also in Australia we have a marginal tax rate of 47% from $190k onwards.

It's pretty plain to anyone who has lived in both places that the top 1-5% of earners get a huge amount more in the U.S., whether you are a surgeon, banker, lawyer, engineer, software engineer, quant, etc.

Australian stats:
https://www.afr.com/politics/how-wealthy-are-you-compared-to-everyone-else-in-eight-charts-20221214-p5c6a8

American stats:
https://www.investopedia.com/personal-finance/how-much-income-puts-you-top-1-5-10/

[Gremlin]

Any thought experiment that makes 10M not a fuckload of money has to rely on "well spend $XMillion on a house or two and then..."

Look at it through a rental lens though, and you see that if you follow the "one third of income" rule on housing from 4% rule of $10M and renting a place that costs $11,000/month is comfortably within your budget. Then your "second home" problem can be considered vacation expenses, not housing costs. And even after spending $11k per month on your sick mansion or penthouse or whatever, you still have ~$267k/year of other spending money, which I think can fund some pretty sick vacations. And by not buying a vacation home in one specific location, your vacations can be more varied, and you're not paying for an empty home all year long.

The tax on $400k a year would be significant. Here in Australia on $400k in income you would be paying $160k a year in income tax, leaving you with $240k left over - a much smaller chunk. The only way to have an income source be tax free is for it to come from your superannuation which is accessible only after age 60 (so not relevant to early retirees), plus there are additional taxes on: (1) any annual contributions to superannuation above $27,500 and (2) any superannuation account balances over $3 million, so in actuality you'd be paying either income tax at a marginal rate of 47% or you'd be paying 2 lots of superannuation tax, on both contributions and gains.

Maybe the system works very differently in America but I am astounded that the ~40% or so tax burden is never accounted for.

See, it's posts like this that had me question whether you're a troll in another thread.

Aussie here.  FIREd for seven years.  Gross passive income near enough to $400k to be relevant.  Tax waaaaaay less than the $160k you quote.  Still a dozen years away from being able to access superannuation, at which point gross income will increase whilst total tax will decrease.

How your income and tax affairs are structured is a choice YOU make.  And, in Australia, the more disciplined you are with your money, the greater the range of choices you have.  It's like choosing to work as a mechanic or an investment banker or a lawyer or a plumber.  Or choosing an investment plan.  Or choosing a spouse or whether to have kids.  Your language is very absolutist, yet there's plenty of examples of people succeeding where you're potentially falling behind, due, in part, to the lifestyle choices it appears that you are making.

I'm very much enjoying my Australian FatFIRE.  I know plenty of others who do as well.  You come across as someone making excuses for why others are achieving something that you claim to want, but don't have the discipline to achieve. 

[twinstudy]

Other than income splitting via family trust (which doesn't work anyway if your spouse's tax rate is also in the top band and if you have no adult dependants), or using business structures (which doesn't work if you're still working and earning PSI income), or using franking credits on dividends (a roundabout way to do it and constantly under political threat), what other options are available?

And what lifestyle choices are you referring to, exactly? If you are going to suggest I'm a troll and criticise my posts, the least you can do is be helpful about it.  In particular, claiming I lack 'discipline' and attacking my posts without any sort of constructive feedback is poor conduct. 

[NorthernIkigai]

"Compressed salary structure" -- thanks Redherring, that's what I was trying to express but didn't find the term for!

But I'm afraid some of the other stuff you mention is true for some parts of the Nordics but not for all of the region... The bit about very high mortgages, car loans, and exotic holidays. I know in Sweden it used to be unusual to even pay down your mortgage, people just paid interest and waited for the value of the property to go up. Nowadays I think you have to pay your mortgage until you get to 50% of the value, and then you can start just paying interest. Crazy! And not possible in the whole region, at all (neither by the law or by the banks).

The same goes for the salaries across this region: I don't actually know any carpenters but find it hard to believe a carpenter here could earn 100+ k€ without either a) working an illegal amount of overtime or b) having their own business. The median yearly salary for a carpenter here is 32,400 €, and only 10% of carpenters earn 42,500 € or above. This is about 36,000 and 47,000 in USD.

twinstudy inspired me to look into the stats for incomes in general here: In 2021 you made it into the highest 10% of salaried people here if you earned just over 75 k in USD. And you reach 50%+ marginal tax rates already at 64 k in USD, so net incomes are a lot lower.

Since we're fighting misinformation here, health care is not free here. It's not prohibitively and unendingly expensive, either, but even the basic level you get from the public service providers does have a price tag for the patient, and many people have private or employer insurance to get a better level of service. And the state pension for all is very, very low, not much more than what our family of four pays for groceries. The main part of the old age provision comes from money you and your employer pay into a pension insurance scheme throughout your career, so it works a bit like a tax on your salary and your employer's bottom line and you can't influence how those funds are invested. Still, it's very much dependent on your salary across your career, not at all something that's paid to everyone. Since we're living longer and there are fewer paying into the system, the age when you can get either of these pensions keeps creeping up and is now close to 70 for people in their 30s. But yeah, most of education is free (for now).

[obstinate]

You are in the Nordics you write, from what I have learned about taxation and salary structure in this part of the world, yes you have crazy high taxes, but the real killer is actually the compressed salary structure. Effective tax rate in Nordics can climb above 50 percent, but in US, esp CA, you get also effective tax rates above 40 on very high compensations.

FWIW, the tax rate in CA + NY can actually get closer to fifty percent on the last marginal dollar. On an income of $1.2M (don't cry too hard for us) Federal: 37% + FICA: 2.35% + State: 6.85% + Local: 3.88% = 50.08%. Average tax closer to 40% after all the basic deduction type thingies, contributing to 401k, etc.

In a European country, our taxes would probably be closer to 60% and we might be paying a wealth tax too, but the real problem in Europe is that there are just not as many highly productive knowledge-based enterprises, which limits how much companies can compete for talent. So it's much more rare to have a gross salary this high in Europe. (Or at any salary level.)

[Telecaster]

FWIW, the tax rate in CA + NY can actually get closer to fifty percent on the last marginal dollar. On an income of $1.2M (don't cry too hard for us) Federal: 37% + FICA: 2.35% + State: 6.85% + Local: 3.88% = 50.08%. Average tax closer to 40% after all the basic deduction type thingies, contributing to 401k, etc.

Last marginal dollar is the key part.  But you're still double counting a few things.    You're not paying FICA on that whole $1.2 million (side note:  Holy shit! that's a lot of money).    And of course, you're not paying 37% on the whole amount (which you acknowledged) and then state and local taxes are deductible on the federal.   

[Morning Glory]

FWIW, the tax rate in CA + NY can actually get closer to fifty percent on the last marginal dollar. On an income of $1.2M (don't cry too hard for us) Federal: 37% + FICA: 2.35% + State: 6.85% + Local: 3.88% = 50.08%. Average tax closer to 40% after all the basic deduction type thingies, contributing to 401k, etc.

Last marginal dollar is the key part.  But you're still double counting a few things.    You're not paying FICA on that whole $1.2 million (side note:  Holy shit! that's a lot of money).    And of course, you're not paying 37% on the whole amount (which you acknowledged) and then state and local taxes are deductible on the federal.

And poorer people tend to pay a higher percentage of their income on things like sales tax and property tax, so you are getting a deal there.
https://itep.org/whopays-7th-edition/

[obstinate]

Last marginal dollar is the key part.  But you're still double counting a few things.    You're not paying FICA on that whole $1.2 million (side note:  Holy shit! that's a lot of money).   

It's true that you're not paying all parts of FICA on all the money. You pay a larger amount on the first 150k or so, then: "The Additional Medicare Tax rate is 0.90% and it applies to the wages, salaries and tips of certain employees and self-employed workers. So any part of your income that exceeds a certain amount gets taxed for Medicare at a total rate of 2.35% (1.45% + 0.90%)". That doesn't have an upper limit on when you pay it, which is why I included it in my tabulation of the charges on the last dollar.

State and local taxes are deductible on the federal.

Not since Trump! Only the first $10k, so it doesn't apply to the marginal dollar, and it is already fully utilized by our property tax bill anyway. One of 45's better policies from a social justice perspective. The SALT deduction was a huge giveaway to families like ours.

[J.P. MoreGains]

For a guy like me I kind of think the 1mil milestone would feel better than the 10mil. I think hitting the 1mil mark would be a huge accomplishment - hope to get there one day.

[mistymoney]

For a guy like me I kind of think the 1mil milestone would feel better than the 10mil. I think hitting the 1mil mark would be a huge accomplishment - hope to get there one day.

10 million is the new 1 million.

Value of $1,000,000 from 1966 to 2024
$1,000,000 in 1966 is equivalent in purchasing power to about $9,708,024.69 today, an increase of $8,708,024.69 over 58 years. The dollar had an average inflation rate of 4.00% per year between 1966 and today, producing a cumulative price increase of 870.80%.

https://www.in2013dollars.com/us/inflation/1966?amount=1000000

leastwise from when I was born and thinking about playing monopoly!

[Telecaster]

For a guy like me I kind of think the 1mil milestone would feel better than the 10mil. I think hitting the 1mil mark would be a huge accomplishment - hope to get there one day.

There has been a lot of discussion lately about when you really notice the power of compounding taking off.   I think for most people you start noticing it after it already has happened.  That's because we think linearly where compounding is exponential. 

For example, getting to $1 million takes most people many years.   But in a not bad-ish market you can go from $3 million to $4 million in four or five years without any additional contributions.  In a good market you can go from $9 to $10 million in one year.   

To your point, the first million is by far the hardest and takes the longest.  The next millions are easier and faster. 

[NorthernIkigai]

But the first million is also a lot more useful to you than the second million. Not to mention the difference between the ninth and the tenth.

[Telecaster]

^ Totally agree. 

[Ron Scott]

^ but the difference between 1st and 10th is clearly more significant.

[EscapeVelocity2020]

That’s also why it’s much easier to spend when you get over the four and five million mark (which is where Pete and Mr.1500Days are)…. At 1 and 2 M, you are still spending carefully to preserve the principal.

[obstinate]

That's certainly been my experienced. We recently passed the point where WR on current spending would be <2%. This has led to us saying yes to luxuries that add value but which we would have been reluctant to splurge on when we were above that number.