When we revealed our identity last week, by far the most common question we got was, “Why would you choose to retire in California, when it’s such a high-tax state?!”
It’s interesting to me that many of our other more-expensive-than-necessary choices draw less incredulity, like paying some of the highest grocery and gas bills in the country just so we can live in a ski town.
Prices in North Tahoe last week
But of course it’s because Americans are obsessed with taxes in ways other countries are not. That’s why the false belief persists that we are the most highly taxed country on Earth, when the reality is that we’re among the lowest taxed industrial nations.
And it’s why most “best places to retire” lists focus disproportionately on income taxes, and leave out important factors like health care quality, and even other direct pocketbook issues like property and sales tax rates.
I’ve made no secret here that we are not tax avoiders, and that we like the things taxes pay for, like schools, firefighters and libraries. So it’s safe to say that tax rates weren’t even in our minds when we chose our forever home in North Lake Tahoe, California. (And we moved from Los Angeles, so the tax difference was negligible in that transaction anyway.)
But we’d argue that the value we get by living in California vastly outweighs the costs of taxes here, and that’s why the taxes weren’t a dealbreaker for us. If you dream of retiring in a high-tax state, some of our reasoning might resonate with you.
One of the most interesting things about state tax rates is that groups who study these things don’t even agree on who is the most heavily taxed. It’s easy to find lists that rank California as the worst when you look at marginal income tax rates for the very highest earners only (which does NOT apply to most people), or just out of the top quartile, or in the top quintile for income taxes but way down the list at 30th for property taxes. In general, blue states pay more taxes than red states, but even that stat is only the average, and based on a personal combo of income and property, a person could be fairly highly taxed just about anywhere. (Ask your favorite Texan about their property taxes sometime.)
But just as with health care, we think looking only or mostly at income tax rates puts the focus on the wrong things. (And yes, I’m now plugging that post for the third time because I think it’s that important: Think Health Care, Not Just Taxes and Weather, When Deciding Where to Retire)
A bigger reason not to stay in California, in our view, is the overall high cost of living. Taxes are a piece of that, but things generally cost more here than they do in the eastern half of the country, even though a lot of the stuff is grown, extracted or transited here. (We have the most produce farms, we produce oil and we have the largest ports for goods from Asia.) And if you’re trying to buy a home, say, now, you’d be right to feel discouraged about how overheated most of the real estate markets are at the moment. (I hear the word “bubble” almost every day, especially when I’m in the Bay Area.)
We count ourselves among the fortunate few who can account for these higher prices and not have to consider moving elsewhere, especially because we got super lucky in being able to buy our house near the bottom of the market in 2011. But the housing bubble is a current problem, and it’s helpful to look at the more constant factors for the sake of this discussion.
(Psst. The Frugalwoods have a post called “Why Vermont?” that answers the very similar question they got, especially because they live close to New Hampshire, a much lower tax state.)
Income Taxes Are Negligible For Most Early Retirees
While it’s true that we’ve been paying a high tax rate while in our accumulation phase, income taxes are about to get a whole lot less relevant to us as soon as we wave goodbye to our W-2 jobs. Our taxable income will be extremely low, in the zero federal income tax bracket plenty of years, especially if current proposals to raise the standard deduction proceed. Most early retirees whose finances we have a sense of are in this same boat.
We may owe state taxes some year, and will be stuck with annoying taxes like the mandatory minimum $800 tax on LLCs even if you don’t make money, but the difference between here and another state when we’re talking such low income is minimal.
Update: Plotting for Jailbreak actually did the math on California and a bunch of other states and found that, for most early retirees living on a modest income, California has zero income tax liability, making the “high tax” reputation not true at all for that particular set of folks.
Property Taxes Matter More — And California’s Are Predictable
For early retirees who own property (or who rent property and pay pass-through costs), property tax is the far more relevant cost metric, because we can’t escape that. And California is way down the list at #36 for property taxes.
Proposition 13, passed by voters more than 30 years ago, limits property tax increases to essentially 2 percent a year (it’s actually 1 percent of assessed value, but assessed value may go up 2 percent). And while that may be bad public policy, it’s excellent for budgeting purposes. We know exactly how much our property tax can go up year over year, and the highest it could possibly be when we reach our later years, which is something very few others can say. I’ll take knowable any day of the week.
Safety Nets Matter, Especially for Health Care
Given all the uncertainty in health care at the moment, living in a state that’s committed to safety nets counts for a lot. We know, for example, that the state will continue to work hard to keep big insurers in the state health care exchange, and that we are less likely to have the situation of counties with no insurers, like some redder states have. We know our leaders won’t turn down federal health care dollars that benefit the poor for purely political reasons, not reasons of good policy. And we also know that if the Affordable Care Act disappears and we lose our federally mandated health plan options, there’s a better chance here than in many other states that we’ll get a state option.
Psst. Health care open enrollment starts today. If you’re in a state with no exchange of its own, remember that open enrollment ends earlier this year, on December 15. Many but not all of the states with their own exchanges have open enrollment until January 31, but make sure you know your own state’s deadlines so you don’t miss out.
Other aspects of the state’s view on governing benefit us directly. Economic analysis shows that the “sanctuary state” approach makes California both safer and stronger economically (this appears to be true for all or most sanctuary cities), and knowing that other people have access to health care means that we don’t get stuck with those costs in other ways.
Great Weather = Easy, Free Recreation
Even though we now live in a much colder place than our former digs in West LA, we still have a bright blue, sunny sky almost every day, unless it’s dumping snow (in which case, we are usually rejoicing). And that means it’s easy to get outside for free recreation almost every day. And most of the state has little humidity, few bugs and mosquitoes, and almost no unexpected rain. While a little more rain in drought years wouldn’t be the worst thing, we enjoy an idyllic climate that boosts our lifestyle and happiness factor by about a thousand.
A Healthy Culture Matters
California is one of the healthiest states in the country in terms of both physical health and approach to public health (see safety nets above). Our obesity rates are among the very lowest, as are our smoking rates, and for those who’ve railed against paying the costs of others’ lifestyle decisions (even though many folks don’t have the same choices available to them), living in a state where we aren’t collectively paying the same costs for obesity and smoking-related care as other states should be appealing.
But beyond the costs, we value our own health more than anything, and living in a place where it’s normal to ask friends to go for a hike and less normal to ask them to sit on a couch and eat Doritos is good for all of us. And given what a huge impact our social circles have on our personal health, having a generally more health-focused culture benefits all of us.
Total Costs Matter More to Us Than Taxes
This example is super locality-specific, but the larger point applies in plenty of places. When we shared that we live on the California side of Tahoe, many folks asked why we don’t move just across the state line to Incline Village, Nevada, where there’s no personal state income tax. And the reason — beyond Nevada’s lack of commitment to the safety net, and worse health care options — is that property values there are much, much higher than where we live. Why? Because of all the people who focus solely on taxes and not on total cost, which drives up demand, which drives up prices.
To me, this is bananas. Sure, income taxes can cost a lot to high earners, but do they cost enough more to justify adding a 20, 30 or even 50 percent premium onto the price of your home? We sure as hell don’t think so. And outside of our specific example, there are plenty of places where taxes might be slightly lower, but total costs are higher, and that’s absolutely worth factoring in.
Nothing Replaces the One You Love
We have friends who love New York City and can imagine living nowhere else, despite the high cost to live there. Or San Francisco. Or Hawaii. Or Tokyo.
Expensive places are generally expensive for a reason: because they are super desirable places to live. And that’s absolutely true of both LA and Tahoe. And of virtually all of California. This state is a magical wonderland — from jaw-droppingly beautiful coastline up and down the state, to the majesty of the Sierra, the beauty of the high desert and the prehistoric grandeur of the redwoods in the far north. We have a gajillion national parks, all of them different from each other, and crazy beautiful scenery almost everywhere you look. Plus the people are generally more laid back and open-minded than in other places we’ve lived, which suits us a lot better than the high-strung east coast folks we were surrounded by back in DC.
In short, we love it here. We can’t imagine leaving by choice, and we feel grateful every day that we can afford to stay. We know California isn’t for everyone, and we’re certainly not trying to talk anyone else into moving here, but if you love it and want to retire here, don’t let the conventional wisdom talk you out of it.
Same goes for any high tax state or locality. If you love it there, and can budget to make it work, there’s no shame in staying just because taxes are technically lower somewhere else.
Reasons Not to Stay
Of course, California also has some major challenges like many places, and I have no desire to gloss over them. If we had kids, we’d seriously consider leaving, because Prop 13 which caps our property taxes has also unquestionably hurt school quality, making many public schools in the state borderline terrible. In plenty of areas, there aren’t enough health care providers that accept MediCal (our Medicaid program). And the cost of living is too high in many of the largest cities for the majority of workers to afford to live there, which adds to our massive traffic problems because people have long commutes. If we had to live in SF or LA and stare down another 30 years of a long commute, we’d for sure be looking at other options. But because commuting isn’t an issue for retirees and we don’t have kids, these downsides are not at the same level of importance to us.
Time to Chime In!
Something tells me y’all have thoughts, so let’s dig into them! I know plenty of you are Californians, so tell us — what makes you stay? What makes you consider leaving? Folks who’ve left California, what ultimately drove your decision? Folks who can’t believe we’d be okay paying the tax rates here, let’s hear from you, too. And those who want to make the case for a different high cost of living place, chime in!
Don't miss a thing! Sign up for the eNewsletter.
Subscribe to get extra content 3 or 4 times a year, with tons of behind-the-scenes info that never appears on the blog.
Categories: we've learned
I agree! You get a lot for your money in CA. On the other hand, I live in New Jersey where the state government seems to take, take, take, and provide little in return. Just about every published list has NJ as one of the least financially friendly places to live, but here I am!
And what is it that makes you stay in New Jersey? There must be something that makes it worthwhile for you. ;-)
I tell myself that Family keeps me here :)
Well that’s a pretty big reason. ;-)
I also live in NJ since proximity to friends and family is important. Even if we leave we plan to stay nearby (most likely Eastern PA). I hope to stay though since I live in a lovely part of NJ (which is not the general view of our state).
We’ve seen some beautiful places in NJ! Social circles are a huge predictor of health and longevity, so you’re smart to prioritize staying near the folks you cherish most!
I too live in NJ and have most of my life. I can get to Boston, NYC, Philadelphia, DC and many spots in between with a (relatively) short train or car trip. I live at the Jersey Shore, so I sail and enjoy that lifestyle, and have a wide circle of friends from their 30’s into their late 70’s. I have access to major airports. This is my HOME! If someone doesn’t like NJ, then please leave and stop complaining. Or, here’s something novel, get out of your comfort zone and travel around the state and learn something about it! We have history, the arts, sports, outdoor activities and much more. There are other cites and states I have seen and appreciate that they are home to others. Please do the same for me.
I’m guessing that commenter was speaking less to the state and its people and more to the state government, and I think it’s fair to be able to draw that distinction. But I get frustrated by general thinking that folks are highly taxed and get nothing in return. We have such misconceptions about taxes in this country and still pay among the least of highly industrialized nations despite spending vastly more than anyone else on the planet on our military. And as you said, the government officials and tax rates generally have little to do with other things in the state that are surely wonderful.
I’m in NJ too and counting the days to leave for SoCal. We stayed initially due to aging parents and family and working in a thriving pharmaceutical industry. Parents have passed away or grown kids have moved away and Pharma has shut down or moved out of state. But now we just have one more kid to finish college in NY and we are gone in about 500 days. Much lower property taxes, better healthcare and perfect weather are the reasons we are leaving to retire in SoCal. With a family of boaters, living on a Coast is a must
I live in New Jersey too and the property taxes are ridiculous for what you get in return. Plus we have crappy weather. We will retire in California, where our property taxes are 1/3 of what we pay in NJ PLUS the great weather.
Proximity to family is a big one, too. Even if we manage to retire by our 40th birthdays, our parents will be in their 70s by that time. I know FI would give us more time to travel and visit, but to me it’s important to not feel too far from all the ones I love – family and friends alike. The idea of moving to Thailand or somewhere because it’s cheap just never resonated with me. I’m a homebody at heart and I’d like to retire somewhere new, but familiar and not too far from our families. So we’ll base our FI numbers on living in a place we actually want to live, no just a place that makes our spreadsheets look good. :)
YES! Such an important point! The folks who seem okay moving away from everyone they’ve ever known might have no problem with living that way, but we sure would! And your last line is perfect — live somewhere you want to live, not the place that looks great on the spreadsheets. ;-)
I respectfully disagree with many items in this posting. California is widely accepted as one of the highest overall taxed states. That, along with the high cost of living should make anyone question the overall fiscal benefits of residing in that state. Here is just one very recent article from MarketWatch: https://www.marketwatch.com/story/got-1-million-to-retire-heres-how-long-it-will-last-by-us-state-2017-10-13. I understand and in some ways (okay, maybe just a few ways) applaud your support of paying taxes when necessary. That being said, the reality is that there are many beautiful locations in our country, and if you are trying to achieve FIRE, it can be very beneficial to choose one with much lower overall taxation than California.
Again, I understand you and Mark strongly support higher taxation given your political ideology – it was clearly demonstrated with Mark’s efforts in passing California’s Proposition 30 (okay to talk about now that you are both “out of the closet”). And, on a bright side, I got to meet and become friends with many people who left California (taking their businesses with them) and moved into my state after Proposition 30 passed. But, for those having a challenging time reaching FI – please run the numbers carefully when choosing your future “dream state.”
I’m sure you saw that I’m not trying to talk anyone into moving there, but it’s definitely worth looking at Justin’s comment below. The “high tax state” measures generally look at the very highest income bracket only, and don’t recognize that some states’ income tax codes are more progressive than others’. California’s is extremely progressive (using the word in the fiscal sense, not the political sense) in that low and middle income earners don’t pay a lot of income tax while high earners do. So you can actually pay significantly less at some income levels here than in other states not known for high taxes. This is an instance when painting with a broad brush is highly problematic. And if we’re talking about our efforts to pass taxes, don’t leave out *my* work on Prop 56! ;-)
I am a Californian with kids in public schools. Prop 30 was a life-saver (Prop 56 good too!). Now I am panicked that the ONLs retiring will worsen our school budget crisis and I am way less enthusiastic about this whole early retirement thing… :)
Ha — Love this comment. ;-)
I had to dig into Calfornia’s tax brackets. Given their progressive nature, they are surprisingly affordable for the typical early retiree. I would be much better off under CA’s state tax brackets that increase from 1% to 4% on the first $58,000 income compared to North Carolina’s (a pinkish blue state) flat 5.75% tax rate that gets applied on the first dollar (after a $15000 standard deduction for married filing jointly). I find myself with a zero fed tax bill but a much higher state income tax bill. And this was true while working too. Tax policy is deceiving and really comes down to the structure of one’s individual finances.
Glad you dug in! This is absolutely true. The state rankings only look at the tippy top brackets, not the fact that all the lower brackets are far less onerous, and are often even lower than in “low tax” states.
There is SO much more to it than taxes and thanks for sharing so many more of the reasons you are choosing to stay. They make a ton of sense based on what matters most to you! We live in upstate NY, so we pay plenty of taxes too. But for now, it is the home of our kids and we enjoy (for the most part) four beautiful seasons, very good schools, and the friends that make this our home. As the kids make their own homes after college, things may change though. No matter what matters – we’re happy we were here for all these years. Wouldn’t change it for a anything.
I love knowing this! And yeah, New York is often atop those “evil high tax states” lists. ;-) And yet obviously plenty of people still find it worth living there, including you guys! Loved meeting you at FinCon — hope to have more time to chat at one of these things soon!
With the low amount of earned income most retirees will have, income taxes might add a few thousand dollars at most to a high-cost versus low-cost retirement locale for most of us. Like you, I’ve never understood why taxes are considered prominent factors in those lists. Taxes matter much more when you’re working – the difference between one state and its neighbor (i.e. CA vs. NV, MN vs. SD) can easily be in the tens of thousands.
I agree you should focus more on where you will be healthy (https://www.aarp.org/home-family/friends-family/info-2017/minnesota-healthiest-states-older-adults-fd.html) and happy (https://wallethub.com/edu/happiest-states/6959/), and we happen to be in one of the best places for both!
Cheers!
-PoF
To your point about health, it’s also worth looking at the cost of that health — premiums in CA went up far less than the national average for 2018, in large part because it’s a healthier state. And premiums here are less than in many states. So health isn’t an abstract thing — some parts of it actually have a price tag attached, and that price tag might not be closely tied to cost of living in that place!
I have a friend who moved from CA to a no state income tax … he essentially caught a $50k+ raise until he retires and income goes away.
Agree, it’s your working years where state income tax plays a huge role in expenses.
Yep — I took an effective $30,000 paycut when I crossed the border from SD to MN a few years ago. It’s actually higher when you consider that state income tax isn’t deductible under the AMT.
In retirement, a few thousand in income taxes may be offset by lower property taxes. If not, no big deal. I want to be where we want to be, regardless of the tax consequences.
AMT… the bane of my existence. As much as I believe in taxes, I get frustrated when I enter our charitable contributions and then see those tax deductions get erased by the AMT. >:-( I hope that is something that can get streamlined under any tax reform. I’d rather just pay a higher rate but have that be straightforward vs. see our deductions disappear.
Not trying to sugarcoat things… we pay a lot in state tax right now! But all of that ends very soon.
AMT doesn’t limit charitable contributions.
http://programforgiving.org/charitable/pages/understandingAMTImpact.jsp
I am from Texas and I pay 3.3% on my 225k house even with “homestead exemptions” in place. It is very expensive to live close to the city so I commute via bus from the suburbs.There is a 10% cap on property tax increases, we have had capped increase every year for 4 years in a row. In fact, the tax increases have forced some lower wage earning friends out of the area already. We would actually pay less overall taxes with a state like Colorado that has a flat state income tax based on taxable income and very LOW property taxes.
Thank you for chiming in! I knew some Texas folks would come through. ;-) And y’all are usually cited as an ideal retirement state because of the lack of income tax — but as you note, there’s much more to it than that.
I know I’m a little late commenting, but in many TX suburbs, you get to pay Homeowners Association Dues. My HOA pays for things that government would normally do, like paying for swimming pools, community landscaping, and local parks. It’s over $1k per year for me.
Appreciate you adding this, V! That sounds like a hefty bill, but at least you’re getting pool and park access for it? (I don’t know if that feels like enough upside for you!) ;-)
Home is where the heart is, so to speak. I’ve never lived in California and thus would never consider retiring there. Compared to Delaware your tax bills are through the roof and arguably I have equal services. But, if your from there I could see there being no reason to move.
And I would never tell you to pick up and move here! ;-) What matters is that you are where you’re happiest, even if the “experts” would tell you it’s not an ideal retirement state!
I agree with you Tanja. We are not obsessed with taxes and aren’t tax avoiders either and this is coming from a CPA. You should live in a place that makes you happy whether it’s nice weather or proximity to family,…not because of taxes.
Also, in a VHCOL (Very High Cost Of Living) area, you are more likely to make much more money, and you can still find creative ways to be frugal and save money. That’s how we are able to live on only 15% of our income.
99to1percent recently posted…How we increased our annual income from $0 to $160K+ to $400,000+ https://99to1percent.com/increased-annual-income-0-400k/
Thanks for the CPA seal of approval! ;-) It’s generally true that you can earn much more in HCOL areas, but ski towns are a glaring exception. Most jobs here are pretty poorly paid, and it’s a hard place to live if you don’t bring your job with you, as we did. That’s something we hope to work on improving in retirement!
One word: Colorado.
One word: Ocean. ;-)
Ha! Nice!
Yes, it’s a hard choice between the ocean and the mountains. Both are beautiful in their own ways.
We’ve picked the mountains for now but get our ocean fixes on regular trips to the Caribbean (in the winter).
Ultimately the decision to live in a place is personal and as long as you can afford it, there’s really no issue, right?
But see… in CA you don’t have to choose between mountains and the ocean! ;-) You know I’m all about finding the place that speaks to your heart and figuring out how to make that place work. ;-)
Two words: Rhode Island ;-)
We met in Rhode Island! Does that count for anything? ;-)
Yes, I’ll take it. I’ve lowered the bar for all Rhode Island things. At this point, I wouldn’t be opposed to them renaming the state Amazonia to get HQ2 ;-)
Hahaha. And have you read the NYT piece on Amazon’s work culture? Not sure you actually want that.
Colorado is currently closed for business.
Tell that to the tens of thousands pouring into the state each year! ;-)
The excellent point that you are making is that there is no substitute for actually running the numbers. Basing a big life move on a stereotype or prejudice would be pretty silly. On taxes in particular, I’d suggest sitting down and pretending to file in any given state—filling out the forms is really the only way to know what you’d be paying (and what annual paperwork pain is in store for you). Then you can trade off the real tax numbers against all the other concrete costs and intangibles.
I grew up in California and can see 100% why you’d choose the extra expense to live where you do.
Great point, and so true. Just looking at some tax ranking doesn’t actually reveal much about what your own tax liability will be, and that ignores other costs that might be involved. Good to know for sure if you’re looking to base your decision on this!
Exactly! We did that for about 6 states and realized quickly that taxes were one of the least influential factors that went into our decision making.
Amen, brother!
Inspired by this, I did a quick fill of the California 540 with some reasonable numbers and found the California tax liability to be zero. By contrast, the same exercise for Colorado gives a liability of several hundred dollars. I may do this for a few more states and post the forms over on my site for general reference.
Wow, A for effort! ;-) Please let me know if you end up doing this post, and I’ll link to you.
Done! I gave it a try and got through 17 states in a reasonable amount of time. Add 7 states that have no income tax and there’s nearly half the states in the Union represented. I’ll get through the rest at some point but for now I’ve hit most everywhere of particular interest to me: http://plottingforjailbreak.com/state-taxes-for-jailbroken-living/
Amazing! Thanks for doing this!
Our decision to stay in Texas was driven by Mrs. SSC wanting to keep teaching for a few more years, and proximity to family. While we think we may have been able to convince her parents to follow us somewhere, it would be totally dependent on where we actually relocated. My biggest “ugh” moment when she pushed staying in Texas was thinking about dealing with property taxes long term. At least around Canyon Lake, our research showed that taxes and assessments leveled off and didn’t just keep climbing at the capped level mentioned by D from Texas above, and like we’ve seen living near Houston. Plus, we chose our property well in that we have plenty of reasons to debate increased assesments due to not being able to develop part of our 2.5 acres and other things. It was definitely strategic from a property tax standpoint and also happens to be beautiful and heavily treed. :)
Otherwise, early on when researching different states we were interested in like MT, ID, VA, NC, CO, OR we found out that taxes were some of the least influential factors. Having 2 kids, public education choices were huge and varied widely, health care coverage plans for kids vary widely, some states have CHIP, some don’t, and other things weere taken into account.
Ultimately, like you point out, you should look at ALL the pieces that go into your FIRE location, if you want to relocate, and not just focus on taxes. They should be a fairly minimal piece of that puzzle if you plan well.
Very true MR SSC. I am indeed from the Houston area. The property values where I live are skyrocketing everywhere! I work in Oil and Gas so Houston is a great place to stay for now. I do love the Canyon Lake area and spend many summer days tubing down the Texas rivers. I stay put for family in the area and Energy job opportunities. I do plan to “retire” in another state ,but taxes are not major part of my decision.
I love that taxes won’t be a big consideration for you in deciding where to retire! Go where you feel most at home. :-)
You guys clearly did your homework in making your decision! And no hate for Texas — it’s just often cited as an easy top pick because of the income tax, ignoring other factors that should also be considered. And as long as you have room for us to park our future small RV, I approve of your purchase decision. ;-) (And Hi! to Prof SSC!)
Too true! When we were considering moving to Vermont, everyone we talked to in the FIRE community tried to talk us out of it. “The taxes are will bleed you dry”, they cried with the fervor of a WSJ editorial.
And yes, in these couple final years, we’re paying more in taxes than we would if we lived across the border in New Hampshire. Income taxes (0% in NH vs. a marginal rate of 6.8% in VT) do take a serious bite out of our income. Property taxes for us are comparable to what we’d pay in NH. And while vermont has a sales tax and NH doesn’t, we’re not buying much anyway!
But we’re happy to pay taxes for good services. And we feel like we get excellent roads, plowed promptly. Good schools, with free(!!) preschool. And a state that strives to have empathy for all of it’s citizens. This translates into communities that are strong and a strain of “we’re in this together” that makes 6.8% of my paycheck look like peanuts.
And AND what all the tax naysayers forget is that in retirement (aka, the next 50+ years of our life) the whole equation changes. Our income will be low, so our state income tax will be low to nonexistent. And in Vermont, your property taxes are capped at 2% (basically, sorta, it’s actually very complicated but 2% is close…) if your income is below $80k per year. So when our income is low, our property taxes will be low too!
Since we own a sizable piece of land, this progressive property tax system will be much better for us financially than in NH where income tax isn’t scaled by income.
In any case, I firmly believe that people should live where they love living and forget about the tax implications. In almost every case, either your income is low enough that you won’t pay much in taxes… or your income is high enough that you shouldn’t care if taxes take a bit of a bite.
LOL — WSJ editorial. ;-) Your NH vs VT situation is a nearly perfect parallel to our CA vs NV situation, though of course it was never even a question to us, and I don’t think it was for you. Until you told me about VT’s property tax rules, I didn’t know any states did progressive property taxes, except perhaps a few for elderly property owners. But given that, you guys clearly come out ahead in VT, a state with “ruinously high taxes.” We feel the same in CA, especially many years from now when our property taxes may have even lagged behind inflation and we’ll be paying peanuts to live in a place we love. I am totally with you — choose the place you love living and either enjoy the low taxes that often come from low retirement income… or enjoy the privilege of earning enough to pay more tax. ;-)
I agree you have to live where you like it and focus on total costs, where my dad lives there isn’t too much difference in taxes other than property tax is cheaper but groceries are crazy. I hope to relocate somewhere warmer where I can house hack till I reach FI, then I plan to travel for a few years not to save money but because I want to have a major adventure. I have no idea where I will return to but I will look at total costs and weather (I plan to work part time for insurance but will have to read your articles about healthcare for tips just in case I decide I don’t want to work part time)
Some places are definitely like where your dad lives — one cost might be low, but others are higher. So total cost matters a tons! And you know I totally endorse your plan to have a major adventure. ;-)
Thanks for “spelling out” what I consider the more nuanced issues involved in examining the costs/ benefits of living in a “high” tax state. I must have done this math with friends dozens of times. Living in the other true Northern California (Mount Shasta) provides for ongoing debates with coworkers who reside in Southern Oregon; they love to talk about the superiority of living in Southern Oregon given its lack of a state sales tax. But then there are those pesky property taxes…and those state income tax brackets…
I think it often comes down to the unquantifiable costs and benefits. I will go on paying the “mountain tax”, as we like to call it, in the form of higher gas and food prices. The trade off in lower/predictable property taxes and the priceless quality of life factors — sitting with a cup of coffee on an April morning looking at the mountain debating hitting the backcountry skiing versus a quick mountain bike ride–more than offset the need to be a careful consumer who searches out less costly creative food options.
Congratulations on “coming out” of the anonymity closet. It is great to read your posts. You look at topics from a unique perspective and add a great voice to these discussions. But, I have to admit…I’m also REALLY looking forward to reading your MLM analysis of teaching yoga!
The yoga post is coming! I just need a few real nights of sleep to write it, and haven’t gotten any of those post FinCon! ;-) And thanks for that super nice compliment. :-D
You know we feel you on the mountain tax. It’s painful sometimes, but we obviously think it’s worth it or we wouldn’t stay here. Even with those crazy gas, utilities and grocery prices. (What’s perhaps most frustrating is that our groceries cost X, but then when the trucks continue on over the hill to Reno, the groceries magically get cheaper again, despite traveling more miles. It’s a miracle!)
I’ve never lived in California. In fact I have only visited maybe once or twice that I can remember and it was nowhere near Tahoe. I would have remembered the scenery. You make it sound enticing. I’m happy you’ve found a place you enjoy and call home.
Your comments about hiking instead of sitting on a couch struck me too. I struggle with obesity – and for me it is all my fault. I have no physical ailments that would prevent me from doing anything active other than aching knees brought on by the weight. Maybe a change of locations to a more beautiful locale would get me off that couch. Although I can’t imagine leaving Texas. Maybe I can split the difference and move down to the Texas hill country around San Antonio!
Enjoy your retirement. It sure seems like you have really thought everything through.
I do enjoy your blog.
Thanks for your kind comment! Have you looked into whether your employer offers an employee assistance program with health coaching or counseling? Or anything similar through your health insurance? You seem super motivated to change your ways, and a coach our counselor might be able to offer you some supports that would help without having to pick up and move. ;-)
Health care and family will be big factors in choosing whether or not we move. We are in beautify, blue state “Taxachussets” and it cracks me up when people think of it in those terms without considering all the positives it has to offer. We are here because of the very high paying jobs, of course (and also family), but one of the reasons we are likely to stay is that, like California, we feel confident that the government will continue to be committed to health care, education, public welfare, and infrastructure. Also, gun control laws which make us safer here than states that are looser on that issue. Plus, the White Mountains of NH and the coastline of Maine are both 2 hours away!
Those are super solid reasons! And yeah, you guys led the way on universal health care, so that’s a pretty good long-term bet in terms of safety nets. I also completely appreciate your point about gun laws — and proximity to other beautiful places!
I can see why the media focuses on taxes. It’s easier than focusing on health care quality. Even then the quality may change on locality or the particular hospital.
And as for the expensive gas, isn’t that because of taxes? I read it had one of the highest gas taxes in the country. That’s not necessarily a bad thing as it may go to great roads and things like that, but it still seems to be partially about taxes.
Thanks for answering the CA/NV question. I couldn’t figure that one out. It was probably 11 years ago when I priced real estate there while passing through on our way to Silicon Valley. At that time, I looked specifically at NV because of the lack of state tax. I also presumed that the sin taxes subsidized the rest of the state. Since we don’t partake in the sins, that was fine by us. This was a very fleeting thought though.
We left California, because California to us was Silicon Valley… and Silicon Valley isn’t very affordable for military and bloggers. We were having a child (now with two) and day care was as much as I make blogging.
CA definitely has high gas taxes, but San Francisco is usually cited as the most expensive gas in the country and it’s routinely $.60 less than in Tahoe. LA is often $.80 or $.90 less. So it’s not ALL taxes. We live in a pretty libertarian county, so there aren’t many add-ons. It’s just supplyl and demand with a captive audience.
And I do not blame you guys for leaving SV. It’s madness down there.
We decided to leave because we felt that the prices were high to live in Orange County. We are bravelygo(ing) to Austin because it was a magical place and the opportunity arose. Indeed, the property taxes are so high, but I think it should balance with the lack of income tax for us.
I imagine going back to Socal one day. Skiing Squaw every week sounds like something I could retire to.
Kara will love your comment. ;-) And i don’t blame you guys for leaving OC. It’s not only an expensive place, but it’s a hard place to live frugally without constantly feeling judged. I was recently there for work and stopped into a juice bar, and definitely got looks for how I was dressed, which was 100% not name brand. (Of course, I secretly thought to myself, “If only they knew my net worth…” Hahaha.) Let us know if you guys end up back in CA and perhaps we can hit the slopes together. ;-)
If you don’t have to pay any income tax in California, sounds like a no-brainer to me!
How are is property tax is 1/3 California’s by the way.
Have you guys talked about whether you will start a family in retirement? I’d be curious to read about that if so. Thx
Sam
* Hawaii property taxes are 1/3rd California btw
That makes more sense! Ha!
Seems like a no-brainer to us, too! And we’re all in on the child-free life. ;-)
Interesting perspective! While I doubt we would be moving to CA, we are keeping our options open and considering different financial angles. We are in a no-income-tax but high-property-tax state. Don’t even get me started on the property taxes. 10% annual property tax increases for the last 3-4 years with no end to increases in sight. We paid off our mortgage several years ago but the security of owning your primary residence out right is slowly evaporating with the ever increasing property tax. The only thing that is keeping us put is the schools are good here, and we need that for a few more years.
Yeah, I can definitely see the frustration in seeing your property tax bill continue to climb — especially because, without selling, the increased value of your property isn’t something you can actually realize in liquid terms. I’m hopeful for you guys that being FI after the kids are out of school will give you lots of options, though.
Tanja – you’re smarter than me. Can you tell me why it seems (it’s probably not true but sure seems) like everyone is broke. FIRE community possibly excepted. I came across this story (https://www.city-journal.org/html/risky-revenues-15505.html) about states wanting to legalize gambling to close budget gaps. Your article here deals with high tax vs. “low” tax places but even mention recent budget cuts have hurt your schools. I know companies come and go but even the big ones always seem to be short on funds. The money can’t all be flowing to the 1% can it?
All our communities do around where I live is float bond packages to pay for this or that. Either more funding for schools or for a new stadium for some team to play in. We have a ton of toll roads around our area. I know because my credit card keeps getting hit monthly for the fees. Yet our state says that we don’t have enough money to fix bridges and do perform routine maintenance on the non toll roads.
I’m too young, but it sure seemed like at one time – maybe it was the 50’s – companies, governments, maybe even the average Joe – seemed to have more ready funds at their disposal.
Maybe I’m wrong and we never did but it sure seems like everyone now is scraping by.
Just venting – but I’d welcome an article from you on the topic.
Hi Tim — This is a pretty enormous question, and I suspect you really want more of a breakdown by a tax policy expert. As far as I understand it. The wikipedia page is helpful to see how tax rates — both corporate and individual — have generally declined since the middle of the last century: https://en.wikipedia.org/wiki/Income_tax_in_the_United_States. So though everyone feels overtaxed, we’re less taxed now than in the past. In addition, many governments at the state and local level have at least one hand tied behind their back because of debt (bond) obligations, so are definitely in the downward credit spirals of having to continue to raise new revenues just to pay for level expenses. And as the federal government abdicates more of its responsibility and forces that down onto the states, without the states being able to pass new taxes for political reasons, you see a massive compounding of shortfalls. This is a problem with many causes and no easy answers given how knee-jerk anti-tax so many Americans tend to be.
Tanja
A hint of truth to your response. We had much higher marginal rates at a time when few actually paid them and loopholes and deductions and tax shelters kept anyone from ever really paying 70%. A better view of what all forms of government consume in terms of national income shows that we pay more as a society as a percentage of national income now than we did in those high bracket years. We may not be the highest total tax nation (having no national GST helps) but I live in California and my highest marginal tax rate on my income is over 50%. That means this time of year I don’t pay myself each week until after lunch on Wednesday. I benefit from the higher earning capability in NorCal but I also pay 30,000 a year in property taxes and state income taxes at the highest rate that proposition 13 implemented. And the 101 is still full of potholes. I ski Tahoe when I can and nothin beats a breakfast burrito at Rosie’s on a cold winters day before hitting the slopes
All things are relative of course when it comes down to high tax high COL areas – I pay my assistant six figures where in middle America she probably earns 30,000 a year, I will say this though about being out here for the past 7 years: I made more, saved more, and built more wealth than I could have anywhere else. When I take that nest egg to a lower cost state in February when I retire (notice next month) I plan to not pay income taxes for the next 18 years until when I have to take my RMD’s so I don’t look at where to live based on tax rates but I do look at it based on where family, friends and lifestyle converge at the point that brings the most joy.
To that end enjoy CA – it’s home to you, it’s not home to us and we would never think of moving anywhere just because of the tax rate FIRE means an early opportunity in life to pursue the most joy that you can – go wherever that takes you.
Congratulations again, enjoy the snow!
Phil
Hi Phil — Do you know of a good source for an analysis on tax rates vs. overall prosperity? Because, to your point, taxes now being a higher share of national income doesn’t necessarily mean that people at comparable incomes are paying higher rates — it could mean that we are overall more prosperous. But I’m saying that as a question, not as a statement, because I don’t know the answer. But theoretically, if everyone is doing better, than we should all be paying more taxes, even if the rates are lower than in the past.
As for CA, we totally agree — we’ve done super well by living here, despite the high costs. And are you willing to share what lower COL state you’re planning to move to? I love how you put it: where family, friends and lifestyle converge for the most joy. :-)
The bottom line is that EVERYTHING must be paid for. The only difference lies in HOW things are paid for. We have recently moved from the idyllic mountain environment near Boulder, CO to the idyllic water environment near Corpus Christi, TX (our next life involves boating!).
We all want nice roads, good healthcare, good schools, good public services, nice parks and other amenities, but these must all be paid for. The real question is WHO pays for these things: primarily the wealthy? everyone? our children and grandchildren (that is, through public debt financing)?
Obviously, different states and localities have developed different ideas about who pays for what public costs, but those costs must be borne by SOMEONE.
Taxes become much less of a concern when one leaves the workforce. So, overall I agree that one should just live where one wants to.
To piggy back on Andy A. comment.
To live in a developed country costs money. Infrastructure (drinking water piped to your house, waste water piped away, roads, airports, power grid, etc.) and human services (fire and police department, government officials, health services, judicial system, education system, safety net, etc.) require a fair amount of money to build/set up AND for continual maintenance and upgrades. It is no surprise to me that attractive places to live (no matter the geography) often have better infrastructure and services that are funded through relatively higher taxes.
I agree with what many have said that how the taxes are charged matters because it may change the overall amount an individual/family pays to local and federal govt based on income, property ownership, and purchasing, etc.
Taxes are only one criteria for choosing a place to live.
I would like to see some numbers from specific examples, maybe I will do that this week.
Unfortunately, we mostly underfund infrastructure everywhere, including in the “higher tax” states — just ask Angelenos about the pot holes — so I don’t want to paint an overly rosy picture of our state services. (Though watching CalTrans clear feet of Sierra snow on the interstate is truly something to behold.) And that’s exactly right that individual circumstances have a ton to do with how much you might pay in tax in any one place. Let me know if you run some numbers!
You guys have FEMA flood insurance, right?!?! Sorry… just had to be sure. ;-) (And re: children and debt financing, here’s a bunch of interesting stuff I learned when I dug into the national debt: https://ournextlife.com/2017/01/16/debt-is-a-funny-thing/. It’s not actually equivalent to consumer debt at all, and there isn’t the same need to repay it at some future generation’s expense.) Stoked for you guys that you have been able to choose to live in a place you love!
Tanja
We will be moving to St Louis Missouri next year, on balance the total tax burden is on the lower end and the region has a great medical system
A great source for all things local, state and federal in terms of taxes, spending, debt, GDP, personal income etc. is
https://www.usgovernmentspending.com
All kinds of charts, graphs, spreadsheets you name it they have it. For example here are a few charts that shows how much we pay / spend in all forms of tax as a percentage of national income
https://www.usgovernmentspending.com/spending_brief.php
I would say given that more is collected and spent and living standards have improved vastly over the past century you could assume the base is wider and more people are paying as a result, but you have to dig into the numbers to know that isn’t entirely true.
Poke around the site, it has great data
Phil
Cool — I’ve visited St. Louis a few times for work, and have found it to have some interesting culture as well. Thanks for the data links!
We just broke ground on the dream house so it’s about to get real……
How exciting!
I often feel like living in NYC and planning on staying here is the biggest obstacle holding me back from FIRE. It’s tough to leave since both my wife my families are here…our friends are here. Great points about income tax, healthcare, healthy culture and recreation. As expensive as NYC is, recreation is surprising low-cost since there are many free or cheap activities. NYC property taxes aren’t too bad compared to the suburbs surrounding it since NYC has it’s own separate income tax on top of the state tax. Housing costs are the toughest part for us since we have 2 little kids. Living in an 800 sq foot apartment and when the kids grow, it might be tough not to get a bigger place.
Yeah, you no doubt pay a premium to live where you live, though as you noted, you get a LOT in return in the way of lifestyle and services. I can see being concerned about outgrowing your place, though!
Love your perspective on this. There are some things financial independence can’t pay for, like well paved roads and shorter ER wait times. And the weather in California is always beautiful, if I didn’t live in Florida I’d say it’s worth the taxes! Also, great meeting you guys at FinCon!! So cool to see your lovely faces all over the site now!
It was awesome to meet you, Jen! :-D And you’re so right about those things FI can’t buy — only choosing the right location gets you that stuff. And I don’t mean to make CA sound perfect. We have some massive ER wait times in places, and quite alarming income inequality. It’s far from perfect. But we still love it. :-)
I lived in California for three years. I loved it, but it didn’t align with my goals – like home ownership and really exploring some specific career opportunities – long term. I have no beef with folks that choose to stay, and definitely see the appeal of staying there…IF you can make it work. Sounds like you guys can, and I see no reason to leave.
I just couldn’t make it work out there how I wanted. I’d done my time, really enjoyed living there, but yearned for more, in a place that I could get that.
We’ll likely stay in Minnesota for the long haul, but who knows…plans change.
I totally hear you! And geez… it seems like so many of you guys are clustered in MN! There’s clearly some kind of awesomeness there for FIers!
Yes. All of this. I love living in San Diego and have zero plans to leave. The public schools in my city are also underfunded, but we are committed to the public school process and my kiddo is thriving. So it’s not all bad. And if you are lucky enough to attend a school with strong fundraising efforts, a lot of gaps are filled.
I realize that it’s a privilege for my child to attend a magnet school. She got there through winning a school lottery prior to starting kindergarten. And I know that a lot of schools are a mess here in California and it is a bummer (but that’s an issue bigger than this comment box).
On the taxes/cost of living front, I don’t think that it would cost much less to live in another state with ostensibly lower tax rates as a financially independent person at all. Yes, I could sell my house, buy one for much less and increase my pile of investments total, but there are so many things so much less expensive here than elsewhere.
I think it’s a mix on expenses. Some stuff in CA costs inexplicably more than in other places (most notably groceries), some things cost more for legit reasons (higher gas taxes, higher car insurance because of all the expensive cars on the road), and a few things are in fact cheaper. But I do think we’d save a bunch moving somewhere else… but we also wouldn’t enjoy it as much. ;-)
Agreed… But in my part of CA, produce is quite reasonably priced – and the majority of our groceries are produce. Maybe it’s competition, maybe it’s proximity to organic farms, and maybe it’s because I have a lot of good choices (which is not the case in a bad ass mountain town) but I tend to shop at a local farmstand (with a super cheap rental space in a warehouse) or sprouts. Gas taxes are a lot higher, especially with the big hike this week, but as an FI person, I think you will notice you are driving a lot less! I am biking and walking to a lot of errands. I’m not super hard core (no where near MMM levels) but it makes a noticeable difference in my pocketbook and my fitness levels.
And thanks for the props on public schools. I agree with your reasoning but I do think it’s a nuanced thing and if your kid is struggling, for whatever reason, maybe it’s not the best solution. But for kids like mine who love school and have easygoing personalities, I think it’s important to commit to the process. Mine has benefited dramatically from having a super diverse student population with kids from all over San Diego and all over the socio-economic spectrum and it honestly has led to so many interesting conversations and parenting opportunities I might not run into had she attended school with a homogeneous population.
For me the only way I’d save is housing and car insurance but nearly anywhere else I’d have a lot higher heating and cooling bills and higher property taxes so I wonder if the costs would be closer than they appear on the surface!
I’m hopeful that we’ll have time in retirement to figure out the cheapest ways to get good quality produce without having to buy things in all that Costco packaging. And total kudos for committing to sending your kid to a diverse school. I understand 100% that no parents wants to send their child to a failing school, but if everyone only looks out for their own kid, the system will only continue to get worse. We need some people to commit wholeheartedly to making it better.
I so admire that you’re committing to the public schools! A lot of parents bail, and it makes the school communities worse. We need more parents like you who are willing to do your part to make public schools stronger!
Oh and I was already committed to the public school thing but after seeing the Waiting for Superman documentary, it cemented my decision.
Cost was certainly a factor for our moving from CA to Michigan… but it was not the top factor by a long shot!
Family was huge. My family in MI and Mr. AR’s family in CT caused a dilemma… having a toddler son (grandson for our parents!) meant we were spending all of our money/points and time off trying fly to each family once a year (if that!), limiting our ability to do our own travel. Being close to one family makes it easy to visit the other while still keeping time open for other adventures.
Our CA jobs were firmly located in southern CA with no option for getting north or to a less populated/more rural area. We desired the rural setting and a different lifestyle (read: no more 101 traffic hell commutes). If Tahoe was an option, we certainly would have considered it! ;)
And the area in MI we moved to is great for outdoorsy families. Lots of outdoors/activity centered adventures, four seasons, great public schools, relatively safe town and the low cost of living certainly added up to make our move a good one. Plus, now we can introduce people to one of America’s hidden gems!
Now, to plan that trip to Tahoe to hang out with some awesome people…
It seems like everything about your move was really smart… except for maybe the mosquito factor. ;-) But yeah, most of us don’t have infinite options, and in light of everything you were trying to balance, it sounds like you ended up in a great situation! (And YES! Come visit!)
Despite NH having a bunch of favorable tax policies, it is absolutely NOT why we are retiring there. From our analysis of the healthcare exchange prices, we will be just fine. Although with retiring mid year 2018, we will be searching many options for that 6-month period before we have a full ACA year in 2019.
Geography and an environment to raise kids with an abundance of outdoor options are top of our list.
I also find it interesting that real estate taxes vary markedly from county to county. In our area of the White Mountains, that is reality. We pay low RE taxes per year – one quarter of our Mass. RE taxes. Then again, compared to MA, most other state taxes are low…..
Next year you might think about rolling the dice with COBRA. If no major ACA reforms happen and pre-existing conditions coverage stays in place, your coverage gap might be small enough that you could go uninsured, kick in COBRA retroactively if something happens, and then get on an ACA plan at the start of 2019. You know I have massive love for all insurance, but I would definitely consider that option if we were quitting mid-year! Of course, having that gap in coverage is a HUGE gamble if anything in the law changes, so that’s an important consideration.
While I have never lived in California I think there is a definite attraction to high tax states. For example, I would love to move back to my home state of Minnesota. In fact, Minnesota is one of the leading states for early retirement. Part of that is because it has some of the best health care and lifestyle in the country. So you guys should move to Minnesota. Not as many mountains and colder, but it is Minnesota :).
I grew up in Wisconsin, so feel like I’ve put in my midwest time. ;-) Can’t imagine going back to a place where the geography is… subtler. I need my mountains! But I’m learning through this just how many folks see MN as an ideal retirement spot, and I’m glad for you guys!
Interesting take ONL! Initially I wrote off moving to California after reading all the “high tax” articles, but perhaps we should reconsider.
We currently live in Washington which is a very blue state, but also one with no income tax. In return we have large sales taxes (about 9.5%) and fairly high property taxes. It seems like a cheaper state overall, but we lack your nice weather! ;)
If you’re happy in Washington, I’m not going to try to talk you into moving down here. (Except what about the megaquake?!?!?! Hahaha.) I personally couldn’t handle the rainy season, but if you’re happy with less sunshine, then great!
I’ve got family who live on the Washington side of Portland – they take advantage of WA’s lack of income taxes but do their Costco shopping across the border in OR. As a relatively high-earning family the lack of state income tax is pretty important to them, but they love the Portland culture and vibe (and getting marginally more sunshine than they would up in Seattle). I wonder how many other examples there are of this kind of super-local tax minimization opportunity in the US…
I definitely know of a few examples like this. And we benefit ourselves a bit in that we can fill up our gas tank down in Reno and save money, along with getting cheaper groceries there. But that’s more about dodging the mountain tax than it is about CA vs. NV!
We’d love to live in California when we retire. Like you said, taxes after you retire are negligible. While I wouldn’t want to be a resident there right now due to the high tax rate on my high income, after we retire we have actually thought about it numerous times!
But, we’re not done with RV life just yet!
And for you guys, with significant assets you’ve earned, the high cost of housing won’t be a problem. So I think CA is a great choice for you, once you’re ready to settle in one place. ;-)
I’ve been idly considering a move to somewhere in CA (probably not LA but I’d have to go where I could get a job, which might put me there) for years. Yeah, fairly high COL and all but I’m not unused to that in DC. I’m at the time in my life (single, no property, no kids) where it makes sense (if I’m going to do it at all) to take the huge leap of moving to the opposite coast for more or less the hell of it to try something new, even though I’ve never actually been to CA. I like what I hear about the lifestyle and the gorgeous pictures don’t lie!
Also, yes, the weather. I need sunshine and warm weather, which puts CA higher on the list than OR or WA!
I think one of the biggest things holding me back right now (besides generally not even knowing where to start when looking for another job hahaha/general scaredness) is family. Most of my family is on the east coast and I love being able to see them fairly easily. I’m five hours away from home and can drive home to see my parents on the weekend if I want to. I’ve got some extended family out on the west coast and while I love them dearly, it’s not quite the same as having parents and siblings and aunts and uncles on the same coast. Definitely things I need to think about in the next year before the inevitability of needing to re-up my lease or move.
As a person who moved from DC to LA, I can tell you that it improved my mental health a LOT to get out of that DC vibe and into the CA sun. Of course, though DC is a HCOL area, there are many costs in CA that are higher than you’d expect, and that took me by surprise. Car insurance in LA is out of control expensive, and groceries cost way more than they should considering that the produce was grown RIGHT HERE. But despite all that, it was definitely worth it to us to pay the price to live there!
I agree with you that “rankings” are pretty worthless and FIRE-d people have to do their own research when it comes to taxes and COL. What are your thoughts about CA possibly repealing Prop 13 (possibly in exchange for a lower income tax rate)? I’m a tax lawyer and have heard this floated as a possibility (especially if federal tax reform takes away the SALT deduction except leaves for the property tax deduction). There may be some grandfathering, but it seems like this would drastically increase the tax burden of an early retiree who owns their own home.
PS…nice work featuring a CA headquartered company in your gas price pic ;)
That’s just the gas station I had at my disposal! ;-)
Mark has done research in CA for years, and he would tell you with absolute certainty that Prop 13 isn’t going anywhere any time soon, despite the constant stream of proposals that continue to be floated. (We’d like to see it reformed, but there is no voter appetite for that — and it would have to be modified by voters, not the legislature.) Given our stance on taxes, we’d truly be fine paying more for property tax if we could see more funding go to schools, and given that we do plan to stay put in our house, if any grandfathering happened, we’d be in good shape there, too.
When you guys hit early retirement, can you ask Mark to do a blog post for Californians about why this is so? I live in a liberal bubble (Oakland) where Prop 13 reform seems like an obvious and politically viable solution. My kids’ low SES public school is already stretched to the bone and we’re about to take an $80k hit due to district budget crisis. My own kids will be ok, but other kids come to school with higher needs and are not being served well. I want to see a path out for us all!
We don’t think a large enough number of folks would find that post interesting, but I’ve asked Mark to reply to you here, and he will this week!
Great, thank you, I will keep checking back here. :)
Sorry — a little slow on his end! Feel free to email (msonl at our next life dot com) if you want a direct response. ;-)
This post seems to have hit a nerve! Three words: Austin, Mountains, Airstream. Wouldn’t trade any of them. Having lived in California and in Texas, I feel like it is pretty much a wash tax wise. No state income tax, but the real estate tax rates are much, much higher in Texas (on less expensive houses). A city has to get the funds to operate, so call them what you want. In the Bay Area the houses are so expensive that the combo of state income tax + the lower tax rate * a more expensive home result in a higher expense. The key thing pointed out here though is that when retired, your income tax (fed and state) can be much, much lower. Whether I work or not, I’m still going to pay for real estate taxes either way. And I’m pretty sure that for us, they are going to be similar whether in Texas or California (the out of pocket dollars). We live in Austin because we love to live in Austin. Just like we love to live in Breckenridge in the summers. Just like we love to travel in the Airstream throughout the other time. The draw to closeness to family and friends really is the reason we do what we do. I’m just happy to be able to move around the country as we see fit. So many awesome places to see and people to meet.
Ha! I love the condensed priorities! ;-) What matters is that you guys have an arrangement worked out that works for you — and yours happens to include multiple locations and a roaming home, which is awesome! We’ll add a micro RV to the mix one of these days, and then we can do our endless winter!
Another important thing to keep in mind when evaluating states’ tax affordability is to take a close look at the deductions and credits that are on the state tax return. A state that has a low tax rate might also have low deductions and in the end you are paying more in taxes than you realize. State governments know people mostly pay attention to tax rates and will manipulate the deductions and credits to raise tax revenue. Many states that are considered tax friendly do this so they can basically advertise a low tax rate but in reality the rate is much higher because you aren’t receiving as many deductions so a higher proportion of your income is taxable.
That is a GREAT point! Thank you for raising it! Definitely helpful for folks to think about that in assessing tax impact of various potential moves.
Nice article – definitely makes you think twice. I never really thought of the difference the whole “not having a job” thing would have on the decision to stay in (or move to) CA. But it makes sense that many of the arguments for not living in CA don’t apply when you have a low taxable income and don’t really have as much of a stake in things like school quality or proximity to an employer. And the picture you paint of California is beautiful. The MSW family is actually talking about heading out there next year for a vacation (while burning some of my frequent flier miles – woot!), but before we commit we’ve been trying to convince ourselves that there is enough to do to keep the whole family busy for a week. The post makes it sound more tempting!
I totally agree with you about the intense focus people tend to have on income taxes, without looking at the larger picture. You mentioned Texas – I’ve been travelling to Dallas for work for the last few months, and that experience has pretty much cured me of any thoughts I might have had about living there in retirement. Sure, there’s no income taxes. But the property taxes are absolutely insane, as are the housing prices due to the rapid (and in my opinion, poorly managed) growth in the DFW area. They also hit you constantly with toll road fees, and revenue-generating red light cameras. And don’t even get me started on the traffic, or the heat…! I know that there are people that love it there, but I am unconvinced. And from a purely financial perspective it isn’t the slam dunk you may think from listening to the news.
In our case, I live in a east-coast “blue”state with income taxes that are on the higher end of the spectrum. But my property taxes are reasonable, the roads are (generally) well-maintained, and schools for my kids are top-notch. (I wish the gun laws in this state weren’t so onerous, but hey – you can’t have everything!) Ultimately, I guess that the saying that “you get what you pay for” is true!
Your comment about not having enough to do to fill a week in California made me laugh out loud. ;-) I’ve lived in the state for 17 years total, and I have still seen a tiny fraction of it and suspect I’ll probably never see all of the awesome stuff here. And to your point about those toll roads in Dallas, that’s such an important point. Often, when comparing cost of living in different places, those rankings just account for normal things like gas, groceries and utilities, and don’t factor in local specifics like tolls or other invisible costs. So important to know that stuff before you make a big leap!
Tanja, I didn’t see you address CA state capital gains at all. What are your thoughts on that?
Excellent write up! I sent it to my wife now I’m never going to talk her out of leaving CA (down the hill in Folsom) in retirement! ;-)
Looks like we’ll be making some turns soon! Liking the forecast this weekend in the Sierra…
Great question. CA taxes capital gains as regular income, which is a big hit for folks with big gains and high incomes, but not a big deal for folks with an overall small income, which we and many early retirees will have.
Awesome to know you’re right down the hill! Are you doing your snow dance?!?!?!?!
True, I guess I have to remember that we will be living off of SUBSTANTIALLY less than what are incomes are while working. The other thing I always have to remind myself is that when we start pulling bucks from our taxable account the amount taxed is only on the gain itself, not the total amount you are selling/withdrawing. I always forget that!
My snow dance moves are so awkward (Elaine from Seinfeld material) that I may have brought on the previous 4-5 years of drought! So I’ll let you kidz with the mad skillz take care of the snow dances. I do have some old pairs of skis hanging in the garage collecting dust that would make an excellent sacrifice to Ullr though. Bring on the pow!
Gotcha! Yeah, good to remember that cash flow and income are different when selling shares. ;-) And good deal on the snow dancing — but then just think snowy thoughts! Hahahaha.
I’m in California, and the expense of housing in our area is really what prevents us from being FI at young ages. This is fine – having no real plans to retire early (and both having super short commutes), our lifestyle suites us. It is interesting to think about cashing out on the equity and abandoning, and how close we’d be to FIRE in such a case. Not even necessarily abandoning CA – South Lake Tahoe would be more affordable than here. Worth keeping in the back of your mind – you can transfer your prop 13 tax assessed value to a new property in selected counties once in your life (per spouse?), after you are age 55. I think all counties allow in-county transfers after age 55.
While more a factor for late-stage retirement, are you close to good hospitals there?
My parents (much closer to retirement) live in a red state, right near the border of a blue state. My dad has ranting for a few years about how he plans to move to the blue state when they retire, because of exactly what you mention here – social safety nets in a state are important, especially with the direction the federal government lately.
That’s how we felt when we lived in LA, but moving up to Tahoe changed that for us. Of course, we got lucky and were able to buy at essentially the bottom of the post-crash market, and that made a big difference vs. trying to buy now. But yeah, living in the big cities in CA feels like a constant cash suck in many ways. The in-country transfer is interesting, and something we hadn’t considered since we’re many years from 55. Thanks for sharing that!
And yes! We are close to a good hospital with a cancer treatment center and trauma center, and have all the medical facilities we could ever need down the hill in Reno. (This was a big criterion for us in deciding where to move! It’s part of why we didn’t end up somewhere like Mammoth.)
We are super far from 55 too (and laws may change). I had a small worry about whether we’d have the ability to move to a lower cost county in California when we are older, without increasing our property taxes significantly. Under currently law, it would be a possibility – but only once we are quite a bit older!
We’re super glad that you flagged this for us! We’d love to move to the beach in our later years, but had always wondered how we’d weather a big property tax jump. Now we have a better answer! ;-)
As a current southern Californian who grew up in Chicago, I have always considered the slightly higher cost of living to be a tax that I pay in order to enjoy the outdoors 12 months out of the year (and it’s totally worth it). I liked reading your perspective on why you chose California. I’m a fan of the healthy culture. I don’t get any weird looks when I ride my bicycle everywhere, and any bigger event in my town has bicycle valet parking. It does take a little longer to reach FI due to the house prices, but I was willing to make that trade.
Ha — that’s how we think of it, too! (I’ve jokingly called it the “paradise tax.”) Like you, we knew we might have been able to hit FI a bit faster elsewhere, but the life we want to live is here, and so we were okay having to save a bit more to make that a reality.
A lifelong Californian, here.
As a taxpayer who pays in the higher tax brackets I look for tax efficiency but I’m not trying to avoid paying my fair share (and sometimes that of a dozen other people). We can bear it and it GENERALLY goes toward the common good. I do donate more toward the specific goods I think we need to support.
I’ve only ever left the state or country to travel for up to three weeks at a time because it’s hard to feel THAT restless living in easy proximity to almost everything: mountains, desert, country, chaparral, suburbs, metropolitan areas – we’ve got it all. It used to be a reasonable drive to any of those places but of course traffic now is pretty killer in the lower half of the state. And food is pretty amazing here even if pricey.
Now as homeowners we’re settled and committed to staying put. I do have regrets on the point of Prop 13 working against us since I want our tax money to go towards things like good schools and great infrastructure which can’t happen if the tax rates stay depressed for decades. The previous owner of our house managed to keep the tax down near the original assessment and never paid more than $2000 a year for multiple decades. And that wasn’t unusual. Most of the owners around here stayed put upwards of 30 years. No wonder the schools and so on don’t have much money to work with.
Before being homeowners, the big reason to stay here was proximity to family. We didn’t have much but we could eke by if we all supported one another. And it certainly was a little bit easier to support my family when I stayed home for college instead of having to pay a bigger bill and living far away. Medi-Cal really stinks in Southern Cal though so that worries me for my relatives.
+50 points for using “chaparral” in a comment! ;-) (How many non-western state residents know what that means?)
You rightly call out important problems that we need to address in CA (MediCal, prop 13, infrastructure, traffic… plus WATER. OMG water), that are all significant. So again, definitely not trying to convince anyone to move here or oversell things. But despite those problems, there are still many, many millions of us who love it here enough to pay the higher price and put up with the problems! ;-)
I lived in California for a couple years after college, and can attest to the draw-dropping beauty everywhere you turn. Now we live in New York, and are quite happy where we are. We are renting right now, but will be paying property taxes soon enough once we build our house. I will be happy to pay those taxes because that’s what pays my teaching salary (we’ll live in the same town that I teach in). I’m not sure if we’ll stay in New York after we retire, but for now, we are happy to be close to family, and love the area that we live in. You guys live in an absolutely gorgeous place!
Where did you live in CA? And that’s awesome that you are happy with where you live now. (And don’t forget — you ARE paying property taxes right now, just with your landlord as the intermediary.) ;-)
I used to live in a small town (La Honda) between Santa Cruz and San Francisco.
Nice! What a beautiful spot.
The devil is in the details. Dr. Curious at My Curiosity Lab (https://mycuriositylab.com/state-confusion-location-matter-retirement-taxes/)wrote a recent post on the subject. He made an income assumption and ran a calculator to compare states. His assumption was $70k annually income from LTCG in early retirement, not a bad assumption for those living off taxable accounts. and the results showed he could probably live in any state without too much worry about state income taxes. However, he chose not to address taxes on Roth conversions, RMDs, or Social Security. Those are important to some people in their situations and times of life. The point is to run your numbers for your own situation, which may change as your income streams change. You may find a different answer pre-55/59.5, 55-70 (or whenever you start taking SS), and 70.5+. So be flexible. Here are some more good links for this: https://www.tax-brackets.org/, http://www.tax-rates.org/income-tax-calculator/. I found the latter most helpful.
Always. ;-) Though I think $70K is probably way too high for most early retirees, at least in the FI community. (Not counting people who, say, retire early after striking it big in a startup IPO.) Mainly because income does not equal cash flow in retirement (https://ournextlife.com/2016/05/09/optimizing/), so what we actually live on will be about double our “income.” Not to say that calculation isn’t useful, because if it shows minimal taxes just about everywhere, then we can all feel good that lower income just about anywhere would net the same result. Your overall point is an important one — to run calculations based on your own specifics — or perhaps just to live where you feel most at home and find a way to make that work. ;-)
From his site, Dr. Curious is a doc, married to a doc, aspiring to FIRE. While his example was $70k in LTCG, he expects to live on $120k, the additional $50k from post-tax accounts. This budget may seem like a lot, but maybe is less than his current one. The whole issue of tax affordability depends on the income sources and how or if they are taxed. Maybe when your income comes from rental income and tax deferred accounts, you may pay more taxes, though it seems you have also prepared for it. Our situation is still TBD, but we are working on it.
That’s helpful detail to have. And we’ve certainly had times in our lives when we spent at those levels. But no longer. ;-)
i was looking at some affordability indices for individual cities not too long ago. i thought to myself, many of those places are awful, like i wouldn’t even want to drive through. so, there is that.
Hahahaahahaha. So true! While affordability is hugely important for a lot of people, one of the biggest benefits to financial independence is being able to take into account other factors, too!
We are 47 year old retiree’s in Orange County, CA (just south of LA for those not familiar). I have a pension income of $58K/year. On that 58K, I only pay $862 in tax to the state of CA, much, much less than many other “low tax” states. Less than 1.5%. CA and high taxes only apply to those that make the most money. Like Tanja said, for most early retirees, CA is actually a low tax state.
Thanks for chiming in with your specific example, J! And that pension income is a lot higher than plenty of early retirees will have because cash flow and income are different things. (When we sell shares, much of what we’re spending is cost basis, on which we’ve already been taxed, so only the gains are “income.” You know this! ;-) Just filling out the example.)
Someone said that the Dodgers lost the World Series?!?!. Well, they woke up this morning to the sun, the beach and In-n-Out burgers and beautiful California. I think they won a long time ago!
I always say there is a reason it is cheaper to live in Mississippi (where I grew up). If you want to live in paradise, you have to pay the price. You couldn’t drag me out of CA!
Hahaha — indeed! Poor Dodgers. ;-) I feel similarly about where I grew up. I am glad to have grown up there, but I’ll happily pay more to live where we live now!
Ventura California here….. for us a mild coastal town means very low utilities, which will definitely offset state tax bills when we retire. I know in the mountains during the winter months it’s a different story, but here on the coast we don’t need an air conditioner and rarely need much heat in the winter. Many places with lower taxes need AC all summer and heat all winter. Home prices are high though. For most moving from a $200k home to a $800k would mean higher property tax too. And if the-Trump tax plan eliminates the state tax deduction, then that will can the equation again. Btw surfing is one of the best retirement sports on several levels. Cheers.
Yeah, in all the time we lived in LA, we turned on our window AC unit maybe 5 times? And we never used the heat (it was super inefficient radiant coils in the ceiling — because heat isn’t something you actually need in LA). Of course, CA has water issues, so it’s not like we’re the most environmentally friendly state just because only folks in the desert need AC and only folks in the mountains need heat. (We don’t even have AC in our house now.) But yeah, that stuff is worth factoring into the total cost! Enjoy the surf! ;-)
Doesn’t the removal of the personal exemptions create a virtual wash with the increased standard deduction? It hurts those who itemize even more.
Still way too early to know for sure. What they put out will not be what passes, if something passes.
I see this tax bill (if passed) making “doubling up” deductions a very popular thing to do assuming someone’s deductions are relatively high. Year 1 pay 2 years of prop tax, 2 years of charitable contributions etc. Year 2 take the standard deduction. Year 3 double up itemized, etc. And doubling up charitable contributions is much easier if you use a Charitable acct as offered by some brokers. You can contribute appreciated shares, pay no capital gains tax, get a deduction for FMV, and then pay out contributions when you want.
…..A lot of people are already doing that because the standard deduction is more than many can itemize in a given year.
Have you seen data on what equals “a lot of people.” I’m curious.
In proportion to all Americans? You could probably round it to Zero. But many things talked about in this niche applies to more than a tiny blip of the population?
Nevertheless, it’s been talked about for years on financial blogs, forums, etc for years. All the general population hears is “sign up for that mortgage because of the tax deduction”, not understanding that there’s a floor you have to overcome for it to add to any additional savings vs. the standard deduction. That’s one reason I moved to the beach and converted my condo to a rental years ago – I wasn’t getting enough deductions to itemize, but if I rented it out, I could deduct those costs on Schedule E against rental income and still take the standard deduction against my personal income.
Let’s revisit this topic after it’s clear what’s going to shake out from the current tax reform discussions. If anything passes, rules will certainly change. ;-)
It will definitely be interesting to see what actually passes, and whether this approach will make sense in the end.
I really appreciate you saying you are not a “Tax Avoider”. One of the things that bothers me about the FI community, and especially when I’m listening to FI podcasts, is in the same conversation about tax optimization, and tax avoidance there is a conversation about some need for socialized Health Care. You can’t avoid taxes and have socialized health care. Thank you for being a lone voice in the conversation about paying taxes.
As another commenter points out, anyone who takes advantage of any retirement account, pretax dollars paying for health insurance, etc., is a tax avoider, and that includes us. But we think it’s important not to take that stuff too far, particularly if we’re going to be taking subsidized health insurance. It’s honestly not our preference to do that (we’re rather just pay rack rate in a system with costs under control), but until we can have a bigger discussion about actually delivering better care for less money, then we think it’s essential to pay things forward a bit!
To all my fellow FIRE community members:
It is important for us as a community to acknowledge that we are all tax avoiders. Hold on – before you jump out of your chairs and begin to vehemently protest – have you ever:
• Contributed money into a 457, 401K, IRA, SEP or similar tax deferred vehicle?
• Contributed money into a VEBA, HRA, HSA, Section 529 plan, Section 125 flex plan, or similar tax exempt vehicle?
• Contributed money into a Roth IRA, or participated in a Roth conversion ladder?
• Chosen to itemize deductions rather than taking the standard deduction?
• Reported your qualified charitable contributions on your tax return?
• Taken advantage of tax credits such as the American Opportunity Tax Credit, Lifetime Learning Credit or Earned Income Credit?
• Held off on selling an item in order to qualify for a longer term lower capital gains rate?
• Purchased municipal bonds to help avoid state taxes on interest?
• Taken strategic steps to avoid paying taxes on dividend income?
• Intentionally minimized (or plan to minimize) your income to take full advantage of available tax credits with the ACA (even though you may be a net worth multi-millionaire)?
I better stop there, because the list would go on and on.
OF COURSE you have done at least one of the above. If you are a member of our small but ever growing community, you have likely done many of these and more. And in doing so, you are taking steps to avoid taxes.
That’s okay, you should do so (as long as it is legal). I certainly do. If you didn’t, you would seriously hinder your chances of achieving your FIRE goals.
There have been many FIRE blog posts and reader comments where some have suggested they do not avoid taxes (i.e. “We are not obsessed with taxes and aren’t tax avoiders either…”). Keeping in mind the above, these comments come across as being a bit disingenuous.
Nothing wrong with avoiding taxes as so eloquently stated by Justice Learned Hand:
Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes. Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934)
Amen to that!
Within reason, but it’s worth looking at your total lifetime trajectory and whether you expect to take more than you contribute. As a higher than average earner, you have a responsibility to contribute more than you take, to cover some for those who are not as lucky as you’ve been in your life.
I’m sure it’s obvious that I disagree. ;-) The wealthy are generally the best at avoiding taxes, meaning that folks like Warren Buffett’s secretary, as he often cites, pays a much higher effective tax rate than Mr. Buffett himself. That’s neither fair nor the correct way to fund a country.
In a technical and semantic sense, you are absolutely correct. The importance lies, as usual, in the gray area. Certainly we all take advantage of some forms of tax avoidance, but the difference is whether you avoid as many taxes as possible, or do only a few of these things. NOT doing a 401(k) often means turning down an employer match, and retirement savings are generally good for society because they prevent old age poverty for which society often picks up the tab. And certain itemized deductions like charitable giving are specifically meant to incentivize social good, which is the same idea behind the mortgage interest deduction, that it is good for us all collectively if more people own homes. There is no social good in timing realization of capital gains or dividends, etc., or in claiming a home office deduction when you do not need more money. And while I’ll not criticize those practices, as they are entirely legal, for those who *also* plan to receive subsidized health insurance, I’d argue strongly that you have a responsibility not to max out your tax avoidance while working, but instead to pay it forward a bit. Very few things are all or nothing, and this is absolutely one of those instances.
It’s similar to here in Québec.
We’re alwasy being told we’re the most taxed in North America (which is probably true), but if you are an early retiree with not much net income it’s almost ridiculously golden.
Let’s say you have 3 kids and you have a net income of 2x $15,000 = $30,000 in your household : you pay no income taxe and governments will give you about $20,000 for family support.
Kindergarden is $7 per day, school is free up to University and University costs about $1,500 per semester (including world reknowed McGill).
Oh and yeah healthcare costs are covered by government !
And yes, we’re the most taxed region of the continent !
Thanks for sharing that! So interesting to learn examples from other countries and specific provinces within our neighbor to the north. Your situation is, of course, much more generous than ours — we’re still in the wild west when it comes to health care, as well as to child care, higher ed, etc.
I hear you! We live in Norway, so I pay 31% income tax even being on the lower end of the income average, and I don’t mind it one bit. I still have more than enough to both live and save.
I have several friends with various chronic conditions who live on social security, and I do not begrudge them a single penny. They deserve to have an independent and fulfilled existence as much as the next person.
Hi Kristine — Of course, it doesn’t surprise me to know that Norway has a more enlightened view of the value of taxation, unlike here where you can’t even have the conversation without someone quickly derailing things with talk of theft and socialism. And your generosity with regard to your friends with chronic illness is truly admirable. I wish we could embrace a bit more of that empathy over here!
Yet *another* Minnesotan here (FIRE next year!). First, I am shocked to hear I’ll be paying more in state taxes than a Californian in my (retired) bracket would! Second, the best thing about the current tax plan proposal is getting rid of that AMT, which has affected our returns greatly the past few years (so frustrating!).
When we retire, we plan to hit the road and travel America by RV. Our initial plan including selling all of our property/belongings and declaring domicile in a tax friendlier state. Then I ran the math and we found that even though we’ll be taxed at the state level, it should only work out to a hundreds of dollars a year and not thousands. And Minnesota has decent health care options, especially with subsidies. Minnesota had public healthcare as an option before Obamacare/ACA came along, so I think this will remain a priority for our state. Based on the healthcare options and the negligible tax impact (along with a few other things), we decided to keep our home and will now split time between RV’ing and spending time here in MN with our family.
Holla to the Minnesotans!!
(wait, did I pull off the “holla”?? don’t tell me if I didn’t…)
:::gasp!::: more Minnesota FIRErs… I feel like I’ve just discovered a whole secret community that I had no idea existed. ;-) That’s interesting that you’ve modified your original plan for health care purposes! It bums me out that that’s necessary, and that we can’t just commit as a country to ensuring everyone can get care. But good for you for taking a clear-eyed look at it all and making a smart decision. Holla!
Thank you for highlighting the beauty and positives of California! I have lived in So. Cal. all my life and can’t imagine living anywhere else, for me, the weather can’t be beat! We purchased a 1 million dollar home (it was a bargain), have amazing neighbors who have potluck gatherings and are kind and considerate. We are still on track to retire by 45 and while we have great income, it’s never gone over 250K but we are able to save over 40% :). It can be done!
I coughed a bit at the thought of a million dollar house, but the only thing that matters is that that was the right choice for you guys! ;-) It sounds like you have a pretty sweet gig, and a pretty incredible trajectory. Congrats!
Mrs. ONL, I want to thank you for solving a dilemma we have had for quite a while. Where to retire? We are in our early 60’s, so we’re at typical retirement age, not FIRE by any means. But we own a business and are financially comfortable. However, we kept thinking that we need to move somewhere cheaper, warmer, etc. when we retire and we go round and round as to where. We currently live in Vermont, so no need to tell you the expenses here. However, we kept focusing on the tax thing. And the answer finally came to me (after years of deliberating and reading your article). Just retire where we want to, where we will thrive and be happy. And just make sure we save enough to be able to live there comfortably, which we are able to do. And that “there” is New England, either Vermont, Maine, or New Hampshire. My husband has lived here all of his life, and we both love it here…the mountains, the ocean, even the snow and crappy weather! It really is a light bulb moment, and I thank you for opening my mind and helping me see the answer. I feel silly even typing this because it shows how close-minded we can be in life, just follow the herd wherever it goes…off the cliff!! Thank you for your well-written article and congrats to both of you on your achievement. It is nothing short of astounding!
Aww, how cool, Bev! So glad this post helped you. :-) And you are not close-minded at all — the retirement literature is SOOOOO single-minded in focusing on taxes above all else, so if that’s all you hear, that’s where your brain focuses! (And it’s why everywhere feels they MUST retire to Florida!) ;-) Thanks for the congrats — and congrats to you on making such a big life decision!
We also love California and can’t imagine leaving. We looked at Southern Oregon a bit, but decided to buy our retirement home in Northern California. This state has unsurpassed beauty, and, after living here for 20 years and still saving a lot of money, I think we have mentally factored in the taxes.
“There is science, logic, reason; there is thought verified by experience. And then there is California. ”
– Edward Abbey
I’m sure the folks in Southern Oregon are glad not to have another set of Californians moving in! ;-) And what a perfect Abbey quote. He knew what’s up. ;-) Hahaha.
I have to keep reminding myself that in a lot of ways each state is a country unto itself, because I cannot get my head around how different each is for tax when you’re all the same country. Drives me nuts that things aren’t open and honest but you have to keep adding percentages, whether sales tax or tipping. Just state the price! I go to buy something in a shop or restaurant and think ok, this is the price, then the bill comes and everything costs more! Here we have a sales tax but every price already includes it so you don’t have to add it to every price label in your head before deciding if you can afford something. And don’t get me started on tipping. To me it feels like paying your general contractor for all the work, then having to pay your trades as well.
The thing that drives ME crazy about tipping is that the restaurants are essentially not paying their staff, and that’s perfectly legal. They can tell them when and where to show up, treat them poorly if they want to, and in the end not pay them. Then it’s completely discretionary whether the customer actually tips. That’s bananas, and we don’t impose that kind of uncertainty on any other profession. But then people complain about bad service without considering that perhaps it’s because we make tip-based jobs so unappealing to people who’d do them well.
Overall, good post. I’m a lawyer who specializes in state and local taxes. For 99% of FIRE folks, this is spot on. Just live where you want to live—as long as you can afford to FIRE there, don’t get caught up on saving $800 a year or something on state taxes. The two biggest determinants of your satisfaction with a place are (1) having friends and/or family around that you get to see often; and (2) the place you live supporting your preferred lifestyle (ski bums shouldn’t move to Miami). For most FIRE people, taxes are unlikely to move the needle much. HCOL, that’s a different story, and HCOL and high taxes often go hand-in-hand, but separating the two is important conceptually.
I would like to point out that there is essentially no evidence that higher funding for education has any appreciable, long-term effect on student achievement. Once you spend over a minimum threshold (and every in the U.S. more than meets this threshold), it’s mostly a function of how smart the individual students are and how committed the families of the students are to education. I’m sure Liberia isn’t spending enough on education. California is probably spending too much already. Higher spending on education is really just a transfer of money from taxpayers to teacher’s unions (which includes lots of useless administrators). It is also often a transfer to politically-connected contractors who build, often needlessly, fancy new additions on to schools at jacked up prices. My wife is a teacher; not everyone could do the job, and it’s an important job. But spending more won’t help turn dunces into geniuses.
Also, while I agree that the Nevada side of Tahoe seems to have upped its prices to account for the lower taxes and overall lower COL, one thing lacking in your analysis is the fiscal sustainability of CA. A number of states, (IL, NJ, and CA especially) have massively underfunded public pension systems, and are basically doing nothing about it. This is partially because the problem of uncontrolled spending/promising has gone on for so long that there are really no acceptable measures left to solve the problem. Eventually, there will be a reckoning, and some or all of these states will default in some major way on their debts. Chaos might ensue. You could expect services to be cut big time, real estate values to plummet as people flee the state, etc. Nevada is a lot more fiscally sustainable than CA. That’s something to think about as an early retiree—not taxes per se, but the fiscal sustainability of state.
But all that being said, I would also consider retiring to CA—I lived there for 3 years and it’s my favorite state from a weather and landscape standpoint. It fits my preferred lifestyle, and I also have some friends there.
I won’t go point by point through this, but I’m intrigued that your wife is a teacher and you still don’t believe that teachers deserve to be paid more as befits their importance to society. I’m sure you have good reasons, but I’m curious what they are. And as for state fiscal sustainability, Nevada’s sustaintainability is built largely on taxing two social ills: gambling and mining. I don’t actually consider that sustainable. California certainly has some various serious debt obligations to deal with, but it also has many of the richest tax payers in the country, most of whom are progressive and not attempting to avoid all their taxes, and it has a strong economy and resilient workforce, as well as an immigration-friendly climate that studies show benefit our economy long-term. In terms of which state is better equipped to adapt long-term and make changes necessary to deal with future challenges, we feel good about our choice.
Thanks, for a great article. I’ve never really dug into the math, because for me when I moved to California 20 years ago, I couldn’t imagine living in another place. We have visited quite a few. When we found Nevada City CA we found a community of people that were interested in creating and maintaining community. We found beautiful river Canyons, acess to the ocean and the range of light. I came to California with nothing financially, less than nothing if you count what I owed the banks. Eventually decided to start a business when news headlines we’re all about business leaving California because it was too expensive. I’ve found that there is a culture of innovation and a desire to try new things that has helped my business grow and thrive. As magic as the setting is, the real reason I will never move elsewhere (except for some long slow travel) is that I love the mindset here. It’s not just the people who were born here, it’s everyone who has come here seeking something new and different. The things you wrote about all ring true to me. I love that there are lots of great recreation opportunities that don’t require spending a lot. When we do spend money it’s often to hear amazing musicians in small local venues or peoples homes. A backyard barbeque and campfire in the middle of winter. For me there are a million reasons to stay, and not many compelling to leave. I’d rather spend my money and early retirement here. Glad to know your nearby, keep us posted on community gatherings, it would be fun to meet up.
Glad you enjoyed this! It’s funny because the other part of me that wanted to just say, “If you know and love California, then you know you’ll do whatever you need to do to be able to stay here, and all the rest is irrelevant.” Hahahaa. But of course that’s no way to write a post. ;-)
First of all, congratulations on all your articles, awards, giving notice, etc. of the past weeks! It’s been exciting to watch. :) I’m another person who lives in NJ, but work brought my husband and me here, and we have no family in state. Given that, property tax is a big issue as we contemplate FI. We have a smaller than average house (but on 1/3 acre) and are nearing $10K/year in property tax. That would be a good chunk of our projected FI budget, so we are contemplating leaving. Interestingly, I just fell into a second career opportunity which has many location options, so we will see where that takes us! In addition, I’m grateful for the new opportunity as it alleviates the health care uncertainty of these days. Thanks for all your good work, and I’m already looking forward to the NYC meetup in 2018! :)
Thanks so much, Kathy! Yeah, that’s a big enough property tax bill that I can see why you guys are hesitating! Given that and the health care abyss, I don’t blame you at all for exploring a second career opportunity — I hope it works out well for you! And see you in NYC soon! :-)
I’d much rather live in a low-tax state with great finances, like here in Indiana. High taxes and high debt are a recipe for future tax hikes. The cost of doing everything is so much more when taxes are high, because those “rich” businesses pass the taxes to the consumer. And then many of those businesses move to where it’s cheaper to do business.
So even if your state income tax is low for the “less rich,” those citizens pay more for everyday expenses to make up for it.
Give me a low cost of living, low taxes, and a financially stable state ANY DAY!
BTW, I don’t mind paying taxes for necessary community services, like some mentioned in the article, plus military protection. Sadly, too much of our tax money is just plain wasted on bureaucracy and handouts, with the government picking winners and losers based on their personal preferences (taking their massive cut along the way).
I’d much rather have a lean and mean government running my state (and the country for that matter), with major incentives to give some of our excess directly to those who legitimately have trouble making ends meet for reasons outside their own control. This would reduce the need and scope of government and decrease the “need” for high taxes.
The handouts conversation is an interesting one. Virtually all welfare programs of the past are now gone (and have been for 20+ years), and a huge chunk of government welfare now goes to corporations and the rich (https://www.economist.com/blogs/freeexchange/2010/08/money_and_banking). I’m totally with you in wishing we could prioritize helping those who truly need it, but it needs to start with a true understanding of the value of government in our lives, which is not widely understood in this era.
I agree with every part of that except the “welfare programs of the past are gone,” which is definitely not true.
But the importance of government would be an interesting debate, if it weren’t dominated by those on the extremes, who preach that government cures all, or government does nothing right.
Very few of us are in the middle, acknowledging that government can serve a positive purpose, but economically we’re better off when government just steps aside and lets the free market take care of things. And that stepping aside would include stopping subsidies, AND reducing regulations.
Re: “welfare,” most people who use the term are talking about people getting money when they are not working, and there is, in fact, incredibly little money going to folks who fit that description, compared to the AFDC days of the past. The best a non-working person can do is receive food stamps (currently $33/week), SSI (varies, but small), Medicaid (no cash benefit, only healthcare that varies widely in quality), and TANF for at most two years (varies widely by state, but no one is getting rich on it — https://fas.org/sgp/crs/misc/R43634.pdf). A disabled vet might also qualify for a VA pension, but I hope we can all agree that that person clearly deserves that money, even if someone argues that others don’t “deserve” the paltry sum they are receiving. And the food stamps only last three months unless there are also kids in the home or the person is permanently disabled. Section 8 housing subsidies may be available, but anyone who thinks that is something that anyone would aspire to has never seen Section 8 housing. The bulk of aid is now tied directly to work, and the most generous program of all, the earned income tax credit (EITC), is only available to those who work very close to full time.
As for stopping “subsidies,” it’s a term that should be used more honestly. A lot of things that benefit wealthy people are deliberately NOT called subsidies even though that’s exactly what they are. And without subsidies (both called that and not), my life would have looked very different: https://ournextlife.com/2016/11/16/subsidized/.
What matters is that we each live where we’re happiest. And if you’re happy in Indiana, that’s wonderful! (But we’ll still happily pay more to live in the mountains not too far from the ocean.) ;-)
I agree with this, although Indiana probably isn’t where we will retire. Economics will play a role in where we retire, but being in the right community is probably the #1 consideration, including being close to our children and (hopefully) grandchildren.
Good luck figuring out where that place is! There are a ton of important factors that go into “the right community,” as you know!
You make some great points throughout your post. I’d agree wholeheartedly that many people get way too wrapped around the axle on taxes. For instance, my father in law who is currently in the process of downsizing. After paying high taxes in NY his whole life, all he can think about is moving somewhere with low taxes, like Delaware. The problem of course, is that he doesn’t know anybody in Delaware, nor does he particularly like anything the state has to offer. Hopefully he’ll smarten up, but so far he seems very focused on only reducing his (property) tax bill and nothing else.
Please send your dad research on how social circles impact your happiness, health and longevity! Moving cold to a brand new place just for the sake of taxes seems like an overly narrow view on how to make that decision.
I’m with y’all and would rather pay taxes. I want robust social services and roads etc. I will likely stay where I am in DC because I do not have to drive anywhere. This contributes so much to my quality of life. I get lots of exercise walking around. We’ve got free museums and some nice trails. Interesting folks and talks come here all the time. When I’m broke, I can enjoy myself in so many different ways. I also look super great in a suit ;) For me, this city is nice because everyone who comes here cares so much. I don’t stand out as the weirdo who keeps learning things and is fascinated by the world. I’m average here and that is incredible after a lifetime of being a sore-thumb. I like that I can easily get to other cities and have my choice of trains and airports and buses.
It doesn’t surprise me at all to know you’re of a similar mind as we are on this. ;-) And you should probably never move here — if you wore a suit, everyone would look at you funny. Hahaha
I would love to visit California sometime (with a driving friend), but I definitely think it is not the place for me. I look so great in my suit. So so great. ;)
I get to find out for myself soon! :-D
I can wear a suit to the meet up, but I have other lovely clothes as well
I wouldn’t doubt that for a second!
:)
Hello from Florida (I just read 207 comments and only saw 1 from here). I love my weather, proximity to the beach, and plentiful golf courses. We have no state income tax, and my property tax bill was $198 this year.
Downsides: hurricanes and snowbirds. Seemingly everyone’s grandma comes to Florida for the winter and clogs our roads. Fresh water is going to be a problem for us in the future due to salt water intrusion into groundwater supplies.
PS: you tickled my fancy by mentioning flood insurance in the comment to the Corpus Christi commenter! I’m a Certified Floodplain Manager, working in Emergency Management, and I cannot get that message out enough! Homeowner’s insurance doesn’t cover flood!!!
PPS: Yes, I know you hate Florida. There’s plenty here to hate. But there’s an awful lot to love, too! I regularly see dolphins, we have fresh seafood, reasonable electric rates…
If I could get past the humidity, I would totally spend more time in South Florida — I’ve enjoyed that much more than Central Florida. But you (purposely?) neglected to mention all the many varieties of reptile! ;-)
Ah, yes. Another reason to hate Floriduh! All of the man-made disasters, such as attempts to drain the Everglades. We have all sorts of invasive exotic Flora and Fauna. Little geckos aren’t too bad, but massive boas with no natural enemies are wrecking the ecosystem of the ‘glades.
Oh man, I was just starting to soften my stance until you talked about GIANT MANEATING SNAKES RUNNING WILD. ;-)
Just found you and I’m late to the party! We are strongly considering early retirement to the Tahoe area (actually have a trip planned next month to check it out) and have been strongly considering Reno because of the NV state tax issue, but your post is giving me some serious pause.
I did some back of the envelope calculations, because we plan to be living on the high end of things in early retirement. Here’s what I came up with comparing retirement in Incline Village, VA vs. Kings Beach, CA.
Assume I purchase a home in Kings Beach for $700k, and using your assumption that homes are 30% more expensive in Incline Village, that’s $910k. Property tax rates in Kings Beach are about 0.75%, and in Inclince Village closer to 2.5%. So that is $5250 vs. $22,750 property taxes/year. State income tax: I anticipate our income in “retirement” via pension and some side gigs will be around $200,000. That puts us in the 9.3% tax bracket, but using an online calculator effective state tax rate of 6.28% or $12,561 vs. $0 in NV. So total: $17,811 Cali vs. $22,750 NV. Looked up sales tax rates which look to be equally high in both areas (around 6-7% state + 1-2% county taxes).
Another aside: If you’re wrong about homes being 20, 30 or 50% more expensive in NV – and instead I assume the house costs $700k in both locations – it’s actually a wash. Total tax liability (income + property): $17,811 Cali vs. $17,500 NV.
Some very interesting food for thought. We do have kids (who will be high schoolers at our planned retirement age) so something else to consider. Thanks!
I love seeing how you crunched out the numbers! Property values are typically higher in IV, but that only takes into account averages, and not inventory at the time you’re looking, so your experience could go either way. And are you sure that’s the right *starting* tax figure for KB property tax? I don’t know of anywhere in the state that’s lower than 1% at the time of purchase, however the rate may go down over time because of Prop 13’s cap on property tax increases while market value can continue to increase at a faster rate. (This is a good explainer: http://homeguides.sfgate.com/average-property-tax-rates-california-51758.html.) Plus, rural counties tend to have several bond repayment line items on property taxes, so it’s worth finding out specifics on KB or any other CA community before buying in. Just adding some more food for thought. ;-)
Thanks, Tanja! I sat down with my husband and looked through this in more detail. It appears the assessment increases on properties in NV are capped, and all the properties I viewed are very underappraised. So while the property tax rate in IV is listed at 2.5% a home currently on the market for $900k is assessed at only $177k, so taxes are only $6700/year (at least according to the MLS data from RedFin on this example property: https://www.redfin.com/NV/Incline-Village/725-Tyner-Way-89451/home/68065431)
In terms of cost of living, that makes the pendulum swing back in the direction of Nevada. Bottom line I guess is you really have to figure out your personal situation and run the numbers on it. Thanks for all the great content!
They’re not underappraised, it’s just the weird NV assessment formula. (Our rental looks similarly skewed but we’ve been assured that’s “normal.”) ;-) But YES, you need to both run your own numbers and feel out what feels most like home. (That last part has HUGE value, it’s just a little harder to put a price tag on.) ;-)
Such excellent points re: low income tax for most FIRE folks. I’m reading this while visiting my family, currently at my brother’s home in to-die-for downtown Orange and have been wondering HOW I could ever make it work to live out here. You’ve given me hope that maybe someday I could (and not feel it was an imprudent financial decision.) Thank you for a fresh perspective.
The taxes might be low but retirees don’t get a discount on property prices! ;-) So that would be the tough part: paying for a home there. But if you can swing it and especially if you can pay it off before you retire, then you can definitely live more cheaply in retirement than most people imagine!
Thank you for this! We are having similar discussions about where to live while we are still working toward financial independence. LA certainly has a high cost of living (beyond taxes) but we can’t seem to bring ourselves to leave! Did you have similar thoughts leading up to your early retirement?
If we didn’t love the mountains so much, we 100% would have stayed in LA! I think you can save money everywhere if you just make it a priority and surround yourself with like-minded people who aren’t going to pressure you to spend. That was really our biggest challenge in LA — all of our social gatherings involved going out to new restaurants, which added up fast! ;-)
Great article and I agree even for a regular old retiree you can’t beat California!
Agree, agree, agree. I live in Pasadena,a ten minute walk from a Vromans, and i worked late and didn’t make it to your presentation. My last full day of employment is Friday and everyone asks me where I will move. I’m staying here, in paradise. My property tax is low, tax basis of $400,000 on a condo worth $750,000. 1%. I love California, despite growing up in Maine.
There I’d a paradise tax, but today we went to the Huntington, you can’t do that in Texas!