How to Retire Better, From Retirees Who Learned the Hard Way

Lots of comments to this WSJ article. Here’s mine:

{{Once I understood the arithmetic of the Reagan Revolution in the 1980’s that jacked up taxes on working people and gave the wealthy leisure class close to a free ride, I shifted my focus from working overtime in pursuit of pay raises and promotions to managing my then meager stock portfolio and the newly invented 401k. The time I spent “working my stocks” we’re by far the most highly-compensated hours of my engineering career.

From 1984 to today, the median US income has increased by only 35% (adjusted for inflation) while the S&P 500 with dividends reinvested has grown almost 20-fold (an inflation-adjusted 1,951%.)

And once you leave the work force, Reagan’s gifts just kept coming.

Case in point: a married couple with a $100,000 annual wage & salary income, taking the $24,000 Standard Deduction, would pay $8,722 in Federal Income Taxes for 2021, plus another $7,650 in FICA. A neighbor couple with a multi-million dollar investment portfolio might decide that working made little sense. Instead they draw $100,000/yr in qualified dividends and capital gains from their portfolio. Their Federal income tax liability? Zero . (See IRS Income Tax Tables)

When I quit my high salary engineering job back in 1994, I was astonished at how little I paid in taxes on the same level of spending. You almost had to volunteer to pay any taxes by selling something. The dumbest thing you can do in America, tax-wise, is to work for wage & salary income.

Reagan of course was adept at dog whistling the idea that the “blacks and browns were holding the working man down” and the workers just ate it up while his polices picked their pockets clean. You can’t blame others for your poor life choices. Follow the money and figure out who’s screwing you.}}



Meanwhile elsewhere people are talking about their modest $5MM real estate in California.

The message seems to be buy a house as soon as you can. They seem to be a pretty reliable investment.

Those home owners might have to move some place more economical, but I suspect they can easily retire whenever they want.

Actually not. Economist Robert Shiller points out that the average home in the US has appreciated about 1% per year after inflation over the past 100 years while the stock market averages inflation plus 6% to 7% per year. The person sitting in a $5 MM California home bought for $50,000 40 years earlier is the equivalent of someone who bought DELL computer in the early 1990’s. It’s not average US homeowner’s experience.

But anyone can opt to put less of their money in housing and more in an S&P 500 index fund, no matter where they live.



The bad thing is, I’m starting to learn, is that the bulk of my retirement money won’t be much different, since it is in tax-delayed accounts like a 401k and an IRA. :(. Its almost like I’m destined to pay income tax forever.


That’s an economist I would fire.

We certainly know that house prices are cyclical. And do much better in areas of high growth.

I have lived in the rust belt where selling your house at a profit is a challenge.

Location, location, location. It does matter. National averages are worthless for planning.

1 Like

Correct. That’s why everyone should be doing a rent vs. buy analysis to inform their housing decisions. Somebody owns all this real estate with the 1% real rate of appreciation or less. Try not to make it be you.

Houston was a great place to earn a living, and offered inexpensive, resort-style apartment complexes in the wealthier parts of town with palm trees, pools and tennis courts. But it tended to be a terrible place to own a home vs. putting your 20% down payment in the stock market.

The rent vs. buy calculation didn’t turn positive for me until 2012 at the tail end of the mortgage default crisis when I bought a home in a Portland OR suburb for 70%-off its 2008 value. It almost quadrupled in value over the next 10 years, outpacing the S&P 500. That’s the kind of unicorn I need to find before I’m willing to accept the burdens and hassles of owning a home. Otherwise, I’m a renter.



So are 100 year averages.


I guarantee the day will come when you no longer pay income tax. Of course, then there are estate taxes…



Do you really owe the estate taxes though if you’re already gone when the bill is due? The exemption is so high that it probably won’t affect most people. :slight_smile:


Of course it is your estate and your heirs who pay estate tax.

And note, yes the number is large enough for many at $12.9mm for singles and easily doubled for couples. That law expires in 2025. I’m told it returns to $6MM unless Congress acts. But the limit has been as low as $600K in recent memory. And last year there were plans to make capital gains (over $1MM) taxable as part of your estate rather than present stepped up basis (meaning your heirs don’t pay income taxes on your gains).

Estate tax gives Congress much potential for mischief when things come up for a vote. And who knows who will be in power then and what their priorities will be?

1 Like

For Federal Estate Tax, that’s true (current exemption $12.92 MM for singles, double that for a couple). But some states have inheritance taxes that kick in on fairly small sums, like a few thousand dollars.



Under current law, it’s scheduled to drop back to ~$6MM per person in 2026 (depends on inflation adjustments.)

I would point out that states have enacted 2 different types of death taxes:

  • inheritance taxes, which are paid by the beneficiary
  • estate taxes, which are paid by the decedent’s estate

Each state that has enacted these laws has different rules for what values are subject to the taxes, and what can be exempted. And yes, some of these laws have pretty low values, so it’s best that anyone who is doing estate planning and/or is the beneficiary of an estate understand state laws for both parties so they will not have a rude surprise.



There are more states that don’t have inheritance tax or an estate tax than those who do: Inheritance Tax: Who Pays & Which States in 2022 - NerdWallet - Sucks to live in Maryland with Maryland heirs, you get the double whammy. Estate: WA, OR, MN, IL, NY, VT ME, MA,CT, RI, MD, HI. Inheritance: MD, NJ, PA, KY, IA, NE.

1 Like