Hello all,
As I am new, I figured I would start with a bit of a background explanation to help you understand where I am and where I want to go. If you aren't interested in this but want to help anyways, feel free to skip to the questions.
Long story short, I am a 26 year old mechanical Engineer working in California. I make about 75k per year, which is likely to go to 6 digits in my early 30s (according to salary averages on salary.com) Of that, I currently spend about 12k per year on rent and utilities (California is expensive) and about 8k on everything else (car repair, deprecation, insurance, food, entertainment, gasoline, clothes, etc.) So, I have a bit of spare income. I realize many people on this site live on less, but hey, I like to splurge on some things.
Personally I don't see much way to spend any more money without getting extravagant or wasteful. I lived off 15k per year when I was back in Texas (cheep rent) and was perfectly happy with it. My idea of a enjoyable evening is reading a book, playing a strategy game, or playing D+D with friends. All of which are cheep hobbies.
I figure I might as well put that money to good use by saving for early financial independence. As for how much money I will need to retire, I would guess about 500k (after taxes). That is enough for a nice house in Texas (good quality, middle class homes are less than 100k in many areas), plus 400k left over for a 12k/year stipend. If I own a home, that should be all I need.
Now that being said, I am not desperate to quit. I personally like my job, and if I were financially independent, I would probably take a hobby in this field anyways. I personally view financial independence as more of a minimum quality of life thing. For example, my previous job was a mind numbing, soul crushing bureaucratic nightmare. I woke up Monday wondering why I should bother showing up to work, and came home Friday knowing that I accomplished nothing.
If given the option between meaningful, rewarding work, and retirement, I would rather work. But given the option between retirement and having to work at a job I hate to have food to eat, I would much rather spend my days sleeping in and doing whatever hobbies I enjoyed. So, for me retirement is a fall back position, albeit a very good one.
That being said, on to my questions:
I am looking for some advice on how to invest my money. I understand that there has been a book or 100 written about this topic. But I don't know which are any good, and which apply to this situation. Also, I am not looking to become a full time stock trader or market analyst. I already have a job, so I would probably be just looking for something safe and easy like an index fund (at least until I have more free time). What I am more interested in is the tax laws.
For example, is it a good idea to invest in my 401k? It seems like a good idea if I was going to wait till 60 to retire, but if I am going to retire in my 30s then wont I get a penalty? But is this penalty worth it? As of now, my marginal tax rate in California is close 40% after everything is included. If I retire, move to Texas, and withdraw only 12k per year, than my taxes should be lower, even with the penalty. Is this correct?
Furthermore, are there other ways I could invest my money that doesn't involve large portions going to taxes? For example, I heard people at work talking about how it is a good idea to buy more house than you need for tax reasons. But 'some guy at work' isn't exactly a reliable source. Is there any benefit to buying a large house, paying it off quickly, and then selling it?
And lastly, is there a good way to invest my money internationally? I understand I can always buy an international index fund to hedge my bets against inflation in the US, but that doesn't prevent the US government from raiding my finances via taxes.
I realize that may sound somewhat cynical, but the US is currently going downhill. Every reasonable person recognizes that we need to increase taxes and reduce spending (especially on the promised entitlements for the baby boomers) in order to keep paying the bills. But the democrats will filibuster any attempt to reduce benefits while the republicans do the same for tax increases. So, we aren't going to fix this any time soon. Meanwhile, while everybody is arguing over taxing vs spending, the quality of education being provided today is being ignored and becoming laughable (it already is in my opinion).
In 15 years, with a massive generation retiring there won't be enough trained professionals to replace them, or provide them with benefits. And when this happens, one of the first solutions is to raise taxes on those who have more than they need. And somebody in their 30s who has enough to retire on definitely has more than they need.
While I don't have any objection to being a net contributor to society, I do have a problem throwing money at a problem when the problem isn't lack of money, but instead horrible management and execution. And while I hope the US learns how to spend wisely, and balance a budget, human nature indicates that the situation is likely going to wind up more like Greece than people want to admit.
So, sorry for going off on a tangent there, but I am looking for a way to put my money into an international account where I can invest in a variety of countries throughout the world, and move wherever I feel would be most effective. Obviously, I would have to pay taxes where I am living, but if I can switch countries without losing my savings, then I can pick one where society isn't about to implode on itself. Consider it governmental independence along with financial independence.
Anyways, if you have any words of advice, or know where I can find words of advice, let me know. I would appreciate your help.
Looking for beginer advice about taxes
I would still invest in the 401k. You can set up 72t distributions when you "retire" early and then get the money out without paying a penalty. You just have to take it out in "substantially equal distributions" but even if you retire for a couple years and live on that, then go back to work, you just continue your distributions and stick them in a regular taxable account at that point.
Thank you for making this post, Taridyn. I have some of the same questions myself, and I share some of your concerns about the medium and long term consequences of the dysfunctional government in the United States. I'm just barely into my 30's and have hit the "6 figures" number now. I'm maxing out my tax deferred 401(k) contributions. I also paid off my home (and paid off another property as an investment rental property.) Right now, I'm focusing on just stuffing my extra income into a brokerage account, where I buy large and seemingly stable companies (think PG, JNJ, VZ, T, MCD, CAT, GE, etc.) that pay dividends. One day, I aspire to live off of rental income, dividends, and perhaps early 72(t) withdrawals from my 401(k) (after rolling it over to an IRA.)
I think your concerns about the long term qualify of standard of living in the United States are valid. I'm not sure about the best way to hedge against a deteriorating USA, and how to develop a good "exit-strategy." However, I would be very interested to hear the opinions of others on this forum, on this subject. Thank you for bringing this up here
I think your concerns about the long term qualify of standard of living in the United States are valid. I'm not sure about the best way to hedge against a deteriorating USA, and how to develop a good "exit-strategy." However, I would be very interested to hear the opinions of others on this forum, on this subject. Thank you for bringing this up here
Thanks for the posts,
I was unaware of the 72(t) withdrawal method. Furthermore, I don't know a lot about Roths and other investment tools. My understanding is that it is better to max out standard 401k investments now while I make a lot of money in a high tax state, and then transfer it over to a Roth 401k after I retire and move to a low tax state, and then withdrawal it via 72(t)? As I said before, I don't know much about the tax code as it stands with retirement. Is there a good book or website which explains this all in detail. I tried looking on Google and most of what I find are just short articles which don't give much in depth analysis or details about early retirement.
Also, as to my USA fears, perhaps I should clarify a bit. I am not one of those Glenn Beck survivalist supporters who thinks that the USA is going to turn into a fascist dictatorship. I don't think that the gestapo is going to break into my house and steal my gold. I don't think that the USA is going to turn into a Mad Max style anarchy where roving street gangs battle for gasoline.
Furthermore, I am not against taxes and paying for a better society. As northern Europe (aka Sweden and others) has shown, socialist ideology and implementation can work out well if done properly.
My problem is that the USA is not following the Swedish model of wise societal investments and balanced budgets. They are instead following the Greece method of large entitlement payouts and not enough taxes to support it. Furthermore, the USA is suffering from what is known as 'brain drain', aka high skill people leaving the work force (and tax base).
http://en.wikipedia.org/wiki/Brain_drain
I know about this because I used to live on the outskirts of Detroit. That was a city destroyed by brain drain. The basic problem is that as things got worse, the people who could afford to leave Detroit did so by buying nice houses in the suburbs. As the high income people left the area, things got worse. As crime is disproportionately committed by low income people, the well educated rich people leaving caused an increase in per capita crime. As per capita crime went up, a larger per capita police force was needed. Unfortunately, the high income people who were providing the tax base to pay for the police force left, and as such the tax percentage had to be raised in order to pay for the larger police force. The higher tax rate and higher crime rate drove more people out (mainly the rich who hadn't left already), causing a spiral of more crime, less services, higher taxes, more leaving, more crime, less services, more taxes, etc.
The USA is suffering from the same thing (albeit more slowly as it is harder to leave the US than it is to move 10 miles to the suburbs). This country used to be the primary place for the world's smartest people to come work. Our national labs and government institutions like NASA were attracting people from all over the world. Also, as we had the best health care, highest purchasing power, best education, and best quality of life, we could entice a lot of people to come work here.
Now, we are quietly dropping in per capita GDP every year. Our school systems are failing. Our average quality of life is dropping compared to other countries, and the newest, latest, and greatest science is being done in Europe and Asia (CERN, ITAR, etc.) In short, we are no longer attracting the cream of the crop we once did. Also, many of our scientists are in their 50s and 60s, and soon to retire. And our education system is not providing enough scientist and engineers to replace them in either quantity or quality.
This also coincides with business' increasing ability to offshore skilled jobs which were formally done in the USA. Previously, you might have been to outsource the low paying, menial labor tasks that didn't require any skill. This didn't hurt the US too badly as the higher paid, higher tech jobs stayed here. But given the increase in college education in places like India and China, it is becoming increasingly easy to start outsourcing the high skilled positioned such as programming, and engineering to lower cost countries. As a result, we are not only losing the highly educated people, we are also losing their jobs too. Why pay an engineer 75k per year here when you can get one in India to do the same job for half the price.
Likewise, business owners who also are high income earners are increasingly moving their business and their associated tax revenue overseas where there are more stable and favorable countries to do business in.
In short, the high skilled, high payed positions (engineers, programmers, scientists, doctors, business executives) that used to help prop up the US by providing a high income stream for the tax base are leaving or retiring faster then they are being replaced by education or immigration. The fact that I am a well payed engineer who is looking to move internationally is in and of itself evidence of that.
This is also problematic as it coincides with the massive entitlement promises for the baby boomers. And as history has shown, the federal government is very reluctant to cut benefits. If you want an example of this, look here:
http://en.wikipedia.org/wiki/Doc_fix#Impact_of_2010_SGR
If your not familiar with this story, back in the Clinton administration, a bill was based that limited medicare spending to the GDP growth of the US (a sustainable plan). But every year, rather than making the cuts as required by law, congress delayed the cuts for 1 year. And then delayed the cuts again, and again, and again, through both republican and democratic administrations. They already have the law in place. They don't even have to pass anything, they just have to stop delaying the cuts that are already scheduled to take place. But year after year, they fear for their jobs and just keep spending more to keep up with what the voters want.
So in short, brain drain + voter pandering keeps tax revenue low, and entitlements keep spending high. And it is only going to get worse as time goes by. This is only sustainable until people stop loaning us money. And the problem is that once people stop loaning us money, interest rates on bonds will have to go up to attract more buyers. This will lead to higher deficits, which leads to people being afraid of the US going belly up which will lead to less people buying bonds, which feed-backs on itself very quickly. Much like Greece, it isn't going to be a slow decay, it is going to be a very fast plummet which will require an external bail out to keep from going bankrupt.
The problem is that this external bailout isn't going to happen. Just look at all the problems Greece is having. Their GDP is only 300 billion and they share a common currency so their neighbors have a very high incentive to keep them stable. And despite the relatively low amounts, and need for a stable common currency, bailing out Greece has been a major problem. Just imagine how hard it would be to bail out the US with a GDP of 15 trillion when we have no common currency to protect. My guess is that China won't be volunteering to foot that bill, even if they could afford to do so.
At that point, I am not sure what will happen. My guess is that the US will default, our currency will go belly up, unemployment will hit 20+ percentile, and senior citizens (or EREs) will lose most of their life's savings to the resultant inflation and devaluation. Not to mention, there could very well be a high tax on current assets to help the government make ends meet (which would take a large portion of your already depreciated savings). And for those who say the government can't tax you based on the value of your savings, look up property taxes or estate taxes. The government has the capability to levy any kinda of tax it wants. And when the country is going bankrupt, taking money from people who have a lot of it saved up is going to be very appealing to both the federal government and the majority of the voting public who at this point wont have much savings left to tax.
We will eventually recover, just as Greece will, but it will take us decades and force many people to live through very tough times. And you can bet that we will never be the superpower we once were. Even with our large land reserves, we don't have the population to keep up with places like India, China, or the EU. At best, we will be about even with Canada in terms of quality of life and global power.
Now I can talk about ways to fix this. Such as voting reform to remove the money and decisiveness from politics and let stuff get done. We also need education reform, and not just a band-aid like 'no child left behind' or 'race to the top'. I mean actual reform from the ground up. We need to curb medicare, medicaid, military, and social security spending. And we need shift from a high business tax to a higher income tax in order to attract businesses. Unfortunately, our political system is set up in such a way that compromise and progress is seen as failure by the voters. So, while I hope for the best, I fear the worst.
As such, I am looking for any advice, or insight as to how I can move my savings into overseas accounts. I figure I can max out my 401k as the tax savings could help potentially offset the risk of loses, but for my after tax savings, I see no reason not to invest them in stable offshore countries like Switzerland or New Zealand. If the US stabilizes, then I can bring the money back in on the next Tax holiday. Otherwise, I will be able to move to a more stable country when the time comes and have some money to do so.
I was unaware of the 72(t) withdrawal method. Furthermore, I don't know a lot about Roths and other investment tools. My understanding is that it is better to max out standard 401k investments now while I make a lot of money in a high tax state, and then transfer it over to a Roth 401k after I retire and move to a low tax state, and then withdrawal it via 72(t)? As I said before, I don't know much about the tax code as it stands with retirement. Is there a good book or website which explains this all in detail. I tried looking on Google and most of what I find are just short articles which don't give much in depth analysis or details about early retirement.
Also, as to my USA fears, perhaps I should clarify a bit. I am not one of those Glenn Beck survivalist supporters who thinks that the USA is going to turn into a fascist dictatorship. I don't think that the gestapo is going to break into my house and steal my gold. I don't think that the USA is going to turn into a Mad Max style anarchy where roving street gangs battle for gasoline.
Furthermore, I am not against taxes and paying for a better society. As northern Europe (aka Sweden and others) has shown, socialist ideology and implementation can work out well if done properly.
My problem is that the USA is not following the Swedish model of wise societal investments and balanced budgets. They are instead following the Greece method of large entitlement payouts and not enough taxes to support it. Furthermore, the USA is suffering from what is known as 'brain drain', aka high skill people leaving the work force (and tax base).
http://en.wikipedia.org/wiki/Brain_drain
I know about this because I used to live on the outskirts of Detroit. That was a city destroyed by brain drain. The basic problem is that as things got worse, the people who could afford to leave Detroit did so by buying nice houses in the suburbs. As the high income people left the area, things got worse. As crime is disproportionately committed by low income people, the well educated rich people leaving caused an increase in per capita crime. As per capita crime went up, a larger per capita police force was needed. Unfortunately, the high income people who were providing the tax base to pay for the police force left, and as such the tax percentage had to be raised in order to pay for the larger police force. The higher tax rate and higher crime rate drove more people out (mainly the rich who hadn't left already), causing a spiral of more crime, less services, higher taxes, more leaving, more crime, less services, more taxes, etc.
The USA is suffering from the same thing (albeit more slowly as it is harder to leave the US than it is to move 10 miles to the suburbs). This country used to be the primary place for the world's smartest people to come work. Our national labs and government institutions like NASA were attracting people from all over the world. Also, as we had the best health care, highest purchasing power, best education, and best quality of life, we could entice a lot of people to come work here.
Now, we are quietly dropping in per capita GDP every year. Our school systems are failing. Our average quality of life is dropping compared to other countries, and the newest, latest, and greatest science is being done in Europe and Asia (CERN, ITAR, etc.) In short, we are no longer attracting the cream of the crop we once did. Also, many of our scientists are in their 50s and 60s, and soon to retire. And our education system is not providing enough scientist and engineers to replace them in either quantity or quality.
This also coincides with business' increasing ability to offshore skilled jobs which were formally done in the USA. Previously, you might have been to outsource the low paying, menial labor tasks that didn't require any skill. This didn't hurt the US too badly as the higher paid, higher tech jobs stayed here. But given the increase in college education in places like India and China, it is becoming increasingly easy to start outsourcing the high skilled positioned such as programming, and engineering to lower cost countries. As a result, we are not only losing the highly educated people, we are also losing their jobs too. Why pay an engineer 75k per year here when you can get one in India to do the same job for half the price.
Likewise, business owners who also are high income earners are increasingly moving their business and their associated tax revenue overseas where there are more stable and favorable countries to do business in.
In short, the high skilled, high payed positions (engineers, programmers, scientists, doctors, business executives) that used to help prop up the US by providing a high income stream for the tax base are leaving or retiring faster then they are being replaced by education or immigration. The fact that I am a well payed engineer who is looking to move internationally is in and of itself evidence of that.
This is also problematic as it coincides with the massive entitlement promises for the baby boomers. And as history has shown, the federal government is very reluctant to cut benefits. If you want an example of this, look here:
http://en.wikipedia.org/wiki/Doc_fix#Impact_of_2010_SGR
If your not familiar with this story, back in the Clinton administration, a bill was based that limited medicare spending to the GDP growth of the US (a sustainable plan). But every year, rather than making the cuts as required by law, congress delayed the cuts for 1 year. And then delayed the cuts again, and again, and again, through both republican and democratic administrations. They already have the law in place. They don't even have to pass anything, they just have to stop delaying the cuts that are already scheduled to take place. But year after year, they fear for their jobs and just keep spending more to keep up with what the voters want.
So in short, brain drain + voter pandering keeps tax revenue low, and entitlements keep spending high. And it is only going to get worse as time goes by. This is only sustainable until people stop loaning us money. And the problem is that once people stop loaning us money, interest rates on bonds will have to go up to attract more buyers. This will lead to higher deficits, which leads to people being afraid of the US going belly up which will lead to less people buying bonds, which feed-backs on itself very quickly. Much like Greece, it isn't going to be a slow decay, it is going to be a very fast plummet which will require an external bail out to keep from going bankrupt.
The problem is that this external bailout isn't going to happen. Just look at all the problems Greece is having. Their GDP is only 300 billion and they share a common currency so their neighbors have a very high incentive to keep them stable. And despite the relatively low amounts, and need for a stable common currency, bailing out Greece has been a major problem. Just imagine how hard it would be to bail out the US with a GDP of 15 trillion when we have no common currency to protect. My guess is that China won't be volunteering to foot that bill, even if they could afford to do so.
At that point, I am not sure what will happen. My guess is that the US will default, our currency will go belly up, unemployment will hit 20+ percentile, and senior citizens (or EREs) will lose most of their life's savings to the resultant inflation and devaluation. Not to mention, there could very well be a high tax on current assets to help the government make ends meet (which would take a large portion of your already depreciated savings). And for those who say the government can't tax you based on the value of your savings, look up property taxes or estate taxes. The government has the capability to levy any kinda of tax it wants. And when the country is going bankrupt, taking money from people who have a lot of it saved up is going to be very appealing to both the federal government and the majority of the voting public who at this point wont have much savings left to tax.
We will eventually recover, just as Greece will, but it will take us decades and force many people to live through very tough times. And you can bet that we will never be the superpower we once were. Even with our large land reserves, we don't have the population to keep up with places like India, China, or the EU. At best, we will be about even with Canada in terms of quality of life and global power.
Now I can talk about ways to fix this. Such as voting reform to remove the money and decisiveness from politics and let stuff get done. We also need education reform, and not just a band-aid like 'no child left behind' or 'race to the top'. I mean actual reform from the ground up. We need to curb medicare, medicaid, military, and social security spending. And we need shift from a high business tax to a higher income tax in order to attract businesses. Unfortunately, our political system is set up in such a way that compromise and progress is seen as failure by the voters. So, while I hope for the best, I fear the worst.
As such, I am looking for any advice, or insight as to how I can move my savings into overseas accounts. I figure I can max out my 401k as the tax savings could help potentially offset the risk of loses, but for my after tax savings, I see no reason not to invest them in stable offshore countries like Switzerland or New Zealand. If the US stabilizes, then I can bring the money back in on the next Tax holiday. Otherwise, I will be able to move to a more stable country when the time comes and have some money to do so.
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sheepstache
- Posts: 19
- Joined: Fri Nov 02, 2012 2:39 am
Taridyn I appreciate to learn your analyses of US finances and political situation. There is perhaps also to say something about the lack of quality of your electric grid system and perhaps several other not so maintained public infrastructures.
What of the often mentioned resilience of Americans?
For tax, you will know that taxation follows Americans also if they live abroad. Here in Europe taxation is related to the country where you live, that is the main rule. But if you become to live say somewhere in Europe there is the possibility of a taxation agreement between US and that country in which some income items are excluded. I cannot help you further.
But in the end, when financials melt, you are there with your brain and two hands; therefore is the ere advise allways: learn as many skills as you can possibly can get, not only brain skills but above all hands on skills.
What of the often mentioned resilience of Americans?
For tax, you will know that taxation follows Americans also if they live abroad. Here in Europe taxation is related to the country where you live, that is the main rule. But if you become to live say somewhere in Europe there is the possibility of a taxation agreement between US and that country in which some income items are excluded. I cannot help you further.
But in the end, when financials melt, you are there with your brain and two hands; therefore is the ere advise allways: learn as many skills as you can possibly can get, not only brain skills but above all hands on skills.
Well the first thing to do is max out the 401k...it might even drop you to a lower bracket.
Point of interest as I live in a State Income Tax Free state...are 401k contributions exempt from state income tax as well...???
When you move back to Texas the 401k becomes exempt from California State Income Taxes when you start to withdraw it as you are no longer a resident of California...however you still owe Federal.
Next you want to max out a Roth IRA because all the earnings are tax free upon withdrawal...at least at this point in time..I still worry a bit about an Argentina or Hungarian scenario where everyones retirement accounts were siezed by the government or they decide that what the hell make Roth IRA's taxable too..we need the money.
Next I would probably divide the leftovers among a growth mutual fund and a Californian Tax Free Municipal Bond fund.
I think dividend stocks are about to become hard to find and if you live in a state with State Income Tax usually only the Bonds issued by municipalities in your state are exempt from State Income Tax...you still have to pay tax on income from other states.
Point of interest as I live in a State Income Tax Free state...are 401k contributions exempt from state income tax as well...???
When you move back to Texas the 401k becomes exempt from California State Income Taxes when you start to withdraw it as you are no longer a resident of California...however you still owe Federal.
Next you want to max out a Roth IRA because all the earnings are tax free upon withdrawal...at least at this point in time..I still worry a bit about an Argentina or Hungarian scenario where everyones retirement accounts were siezed by the government or they decide that what the hell make Roth IRA's taxable too..we need the money.
Next I would probably divide the leftovers among a growth mutual fund and a Californian Tax Free Municipal Bond fund.
I think dividend stocks are about to become hard to find and if you live in a state with State Income Tax usually only the Bonds issued by municipalities in your state are exempt from State Income Tax...you still have to pay tax on income from other states.