What if somebody gave you an interest-free loan for a year? Say, the government, maybe. And then instead of requiring you pay back all of the loan, they only wanted half?
This situation actually exists within the Affordable Care Act / Obamacare in some circumstances. Throughout the year, Premium Tax Credits are paid directly to the insurance company based on our estimated income for the year. Then come tax filing season, we reconcile any differences – if our actual income is greater than estimated, we repay the excess on the advanced credits.
For the self-employed, seasonal workers, and retirees living off variable investment income, estimating income accurately can be next to impossible. As such, to provide some protection against unexpectedly large tax bills, as long as total income is less than 400% of the Federal Poverty Level (FPL) the amount of repayment is limited.
Early retirees are an interesting bunch… on the one hand, it takes a lot of audacity to leave the workforce decades early. I mean, who does that?!
On the other hand, most of us are extremely fiscally conservative. People are even competitive over who is the most risk-averse… “You go ahead and target a 3% withdrawal rate, buddy, I’m going to keep working until I can spend less than 1.76852%!”
For most people though, the debate is primarily internal and manifests itself as One More Year Syndrome. “I’ll just work one more year to cushion the portfolio a bit more, THEN I’ll quit…”
It’s a very reasonable discussion to have with yourself. But working one more year also has some costs.
In rough terms, market timing is the practice of trying to make money by predicting future market performance. It is almost universally agreed to be a poor investment practice… “time in market is more important than timing the market.”
Predicting future market performance is… difficult. Even when your hypothesis is sound the market can remain irrational much longer than you can remain solvent. Not only do you need to be correct (often twice) but taxes and fees can erode any gains you do make.
But sometimes, when the stars align, it happens accidentally.
A lot of people dream about the day they finally finish paying off the mortgage. Free and clear, baby!
What might you be willing to pay to live in this house you already own? Economists refer to this concept of a mortgage-free living space having market value as “imputed rent.” Some countries even tax it.
Beyond being a fun topic at cocktail parties, for most people imputed rent has few real-world considerations… you pay off the house and you have more $$$ every month. Good times.
But for an early retiree with a tax-minimization hobby, the choice to pay rent or imputed rent has some interesting implications.