retirement tax strategy in action


A couple of years after leaving the workforce, an aggressive headhunter was trying to recruit me for a California based tech company.

Recruiter: “How much salary would you need to take on a role like this?”
Me: About $500k
Recruiter: “We were thinking more around $250k…”
Me: Oh, you were just looking for somebody part-time then…?

Obviously, I stopped receiving recruiting emails.

But, having the bizarre way of thinking about the world that I do, I invested a little time to calculate just how much income I really would need to fund our lifestyle via more traditional means.

A Rockstar Lifestyle for $210,000 per year

Over the past 7 years or so, our average cost of living has been about $75,000 per year. More some years, less others.

Sometimes we get unsolicited feedback from people we don’t know that they would never be able to enjoy life on such a lowly sum. “We enjoy the finer things in life…”

Which is weird, because designing how we live around geographic arbitrage, medical tourism, travel hacking, and global tax minimization techniques has allowed us to live a rockstar lifestyle at reasonable prices.

But what kind of job income would have been required to fund our last 7 years of life with normal employment-based revenue?

About $210,000 per year. Or more than 95% of US households.

Payday! (completely unrelated to anything but I thought it was funny)

Increased Needs

Adding a 60+ hours per week plus evenings and weekends job to my life would definitely increase our needs. My retirement wardrobe isn’t exactly suitable for an office environment, and a daily commute would probably require a motorized vehicle of some sort.

Instead of flip-flops, T-shirts, and shorts, I would be looking at an extra $1,200/year on “business casual.”

I would actively design our working lifestyle, and a bicycle commute would be ideal, but I’m older now and everyone tells me children complicate things so I would probably be driving a car daily.

The IRS estimates total transportation costs for 10,000 miles is $5,450 in 2018. That’s a big jump from our $1,223 annual budget for 188 Uber rides.

With me gone during most daylight hours, we would probably also need a second car. Jr has to get to school, soccer, drum class, roller skating, and scheduled play dates somehow. That’s another $5,450/year.

Generously assuming most other things in life are about a wash… when I compared our current housing & food costs with some California options it did come out roughly equal… (details in the post, Going back to Cali…?)

Total cost increase:
Transport: $9,700
Clothing: $1,200

Less Travel Hacking

When you work for a living, holidays and vacations are less flexible and dynamic. It’s more difficult to fly on a Wednesday afternoon and there is less award availability for peak holiday travel.

So instead of paying $200 for $7,000 worth of plane tickets, we would more likely spend $7,000. Sure, I geek out on this stuff and could still probably swing some good deals, but would I really want to invest the mental energy after a tough week at the office? Or would I rather toss a baseball with the kiddo at the park?

With a higher cost of living, in theory we could get more points than we do now, but I think this is optimistic when considering the limited point accumulation I did when I really had a job (outside of work-related travel.)

Overall, with an annual visit to Taiwan at Chinese New Year (peak!) and normal holidays, I crudely estimate we would spend $10,000/year more. We would likely choose to spend less in practice, but it isn’t the goal to reduce the quality of life outside of work hours too.

Total cost increase: $10,000

Health Insurance

Our current monthly cost for incredible full-coverage health insurance, with eye and dental care, is $25/person/month. We sometimes pay $1 here and $1 there for co-pays and deductibles, but it is mostly a rounding error on any budget. Most recently I paid $6 for a dental cleaning, for example

Since I’d be working for one of those fancy tech companies, we would have OK insurance, partially funded by the employer. But that just means my paycheck would be reduced by the cost of insurance. (Tax-free too. Employer-provided health insurance is one of the largest government subsidies in the US system.)

My estimates are based on my personal experience with my Seattle based tech employer after they transitioned to an HDHP, and quotes from Covered CA, the California based health exchange (details in this post.) With income greater than 400% FPL, the full cost of an insurance policy would be paid from our income (no ACA subsidies.)

Bronze level HDHP health plan annual cost: $11,028 (That extra $28 seems superfluous.)
Annual deductible: $6,000/person, $12,000/familiy
Estimated annual costs for medium usage (family of 3): $5,375 (assumed from HRA/FSA so also tax-free.)

From $75/month to $1,367/month is a bit of a jump…

Total cost increase: $15,500

Loss of Medical Tourism / Geographic Arbitrage

With a job, it often isn’t practical to travel to where medical care is good value. Instead, you pay whatever is required by local providers. In the US, that is messy…

Last year, Winnie and I both had root canals and crowns. Based on cost estimates from friends and Twitter followers, instead of paying about $6,000 each in the US we paid closer to $1,000 each. In the apocalypse, we can even sell one of those crowns for the gold value.

We’ve also spent quite a bit of moola on reproductive services and childbirth.

We’ve now done 3 full rounds of IVF in Taiwan at a cost of about $10,000 each time. Friends in the US paid between $40,000 and $150,000 per round.

Going with the lower end of that range (3*40k) and amortizing over the past 7 years, we get a cost increase for US services of about $13,000/year.

None of this is covered by insurance.

Then, of course, the idea with IVF is that it leads to childbirth. We paid about $1,000 for everything in Taipei. Friends in Seattle paid $18,000 with “good insurance.”

The deductible on our own insurance would cap this at $12,000. Since we are already paying $5,375/year for basic health care on top of insurance premiums, this means the actual out of pocket cost of childbirth would be only $6,625, or $5,625 more than we actually paid.

Amortizing that over 7 years increases our costs by ~$800/year.


Total cost increase: $17,200/year
IVF: $13k/year
Dental: $1.5k/year
Childbirth: $800/year

Lost Opportunity Cost

Each year of retirement we’ve been doing tax-free Roth conversions, capital gain harvesting, or both, not to mention the tax-free qualified dividends.

On average, each year I’ve converted $5,200 of our Traditional IRA to Roth and harvested $28,000 of long-term capital gains. This will have a significant impact on our future tax burden.

If I apply a 12% marginal tax rate to the Roth conversion and a 15% capital gain tax rate to these averages, it is roughly a $5,000/year lost opportunity. And that is ignoring California income taxes and ACA subsidy impact.

How best to incorporate this lost opportunity cost into our new productive member of society lifestyle?

What I settled on was 2-fold:

  • Increase salary to pay the taxes on $20k/year of qualified dividends / long-term capital gains (~$5k for both Federal and State)
    • ~1/3 – 1/4 of our current total
  • Increase salary to allow for a max 401k contribution ($18,500k in 2018)

Which leads to…


Over the past 7 years, we’ve spent pretty close to $0 on income taxes. Following my Never Pay Taxes Again strategy, many early retirees could do the same.

But as an employee, I would be paying taxes. Lots and lots of taxes.

First, we would have Federal taxes to the IRS.
And then there are the employment taxes… half paid by the employee and half by the employer (which just reduces our actual pay.)
And of course, there are also the California taxes.

To figure out the actual tax burden, I worked backward and recursively iterated through an excel tax calculator until I came to a solution. Results verified with an online tax calculator.

First, I need take-home pay of $110,400 (my paycheck):

$75,000 current cost of living
$10,000 travel increase
$9,700 commute increase
$1,200 work clothes
$1,500 dental work
$13,000 IVF
$110,400 total

Then I have several tax-free payroll deductions

Payroll deductions (tax-free)
$10,000 health insurance (increase)
$5,500 HRA contributions (medium usage of insurance policy for family of 3)
$800 HRA contributions (childbirth)
$18,500 401k contribution (subject to FICA)
$34,800 total

Now I apply the tax formulas for Federal, State, and FICA, iterating to a final answer that yields the correct take-home pay.

$25,200 Federal tax – income
$3,000 – Federal tax – divs/capital gains
$9,425 California tax
$1,860 – California tax – divs/capital gains
$10,775 FICA tax employee
$14,841 FICA tax employer
$65,100 total (31% of total income – Fed: 13.4%, State: 5.4%, FICA: 12.1%)

Gross income: $210,300
Minus payroll deductions: $175,500
Minus taxes: $110,400


Life is expensive when you work for a living. I don’t think we could afford it. Next time I come across an aggressive recruiter or jet setting salaryman, I will have to raise my level of snark considerably.

To support the same essential quality of life that we have enjoyed these past 7 years, but doing so as an employee in the US / California, would require nearly triple the income. Taxes alone are nearly equal to our entire cost of living…

Unfortunately, the tax code is not very flexible for job-based incomes. This hypothetical scenario already includes the main tools available to an employee (HRA, 401k) so there isn’t much that can be done to reduce the tax burden. Taxes get much better in retirement.

I found the process of thinking through this enlightening and humbling. I hope y’all find it interesting.