Going back to Cali, stylin, profilin
Growlin, and smilin, while in the sun
Paying taxes and health insurance premiums
Driving to the mountains in the vintage Escort
– LL Cool J ft. GCC
We have been having the Forever Home discussion for some time now… Is there somewhere we love that would be a good place to raise a kid or two?
We have a few International destinations in mind, but several places in California rank high on our list of criteria.
I hear California is an expensive place to live, with high taxes, costly health insurance, and sky high housing prices. I figured I should at least crunch some numbers before we consider putting some California cities at the center of our radar.
Going Back to Cali
Setting up a home base in California would be a big change in our lives, no doubt. What would it look like, financially speaking? How would it impact taxes, health insurance, and overall cost of living?
California has a State income tax which treats all income types equally. Dividends, Roth IRA conversions, capital gains, and earned income are taxed exactly the same.
This means the end of tax free Roth IRA conversions and capital gain harvesting.
With taxable income for the past 5 years of our retirement and world travel of $100,000+, we have had zero Federal tax burden. At similar levels of income, California would want about $3,000/year or $250/month.
$250/month seems a small amount for a good quality of life.
(Other States for comparison – WA: $0/mo, MN: $375/mo, OR: $600/mo.)
There are 7 States without an income tax, but we would need to purchase health insurance in all 50 of them.
The ACA long ago largely killed the Roth IRA conversion pipeline for US residents (unless exempted), by implementing an income based subsidy aka a tax.
Technically, the TCJA eliminated the ACA individual mandate, so one could choose to self-insure or purchase a non-ACA compliant HDHP like we had pre-ACA. Self-insuring in a system such as exists in the US would be a losing strategy due to unpredictable and fantastical healthcare costs, and I haven’t seen good alternatives.
Therefore we would purchase an ACA health insurance policy on the California exchange, aka Covered CA.
ACA insurance premiums are a function of family size and income, so I explored the premiums for a few Bronze and Silver plans on Covered CA at different income levels. The Bronze plan qualifies as an HDHP and offers a Health Savings Account (HSA.) The Silver plans potentially have CSR subsidies (details here.) With income less than 266% FPL (~$55,000) children are covered by Medi-Cal, so prices go down and coverage goes up if our income is below that level.
$20,780 for family of 3 (2019)
|400% + $1||$83,121||$919||$1,269|
These price points are just the beginning though.
If any real issue were to come up, for the Bronze plan we would be looking at a $6000/person deductible and 40% co-insurance on everything thereafter up to an individual max of $6,550. (Family deductible of $12,000 / max of $13,300.) Covered CA estimates the total annual cost for “medium usage” to be $3,300 at 300% FPL and $5,375 at 400% FPL. This translates to an additional ~$170/month above and beyond monthly premiums, in the form of payment at the time of care.
For Silver plans, instead of an individual deductible of $6,000/person, it is $650/person at 200% FPL and $2,220/person at 250% FPL. Max out of pocket is lower and copays are much cheaper too. At higher income levels the lack of CSRs mean max out of pocket levels similar to Bronze plans with much higher premiums, so which is better really depends on how much care we would really need.
For incomes above 400% FPL + $1, the ACA subsidy cliff means premiums increase by ~$640/month.
Adding this all up, with annual income of $100k it seems like health insurance and care would run at least $1,000/month for a Bronze plan, and an extra $300/month ($3,600/year) for a Silver plan.
By comparison, we currently spend $75/month for all 3 of us for better coverage and better care (with great dental too!) via the Taiwan National Health System (like Medicare for All.) When we brought Jr to the Dr for flu-like symptoms we paid $3. When Winnie went to the emergency room we paid $30. A dental filling is $10.
Cost of Living
We have lived large across quite a few different countries, with total cost of living ranging from ~$2,000/month in places like Mexico/Thailand/Guatemala, $4,000-$6,000/month in Taiwan and the US, and $8,000/month in Europe and Japan. How would things be different with a home base in California?
Housing / Transportation / Food (aka the Big 3) are where we focused during our accumulation years, so I started looking there.
I have heard housing is expensive in California, but this is primarily in cities where we would hate to live. (Hey Bay Area, what’s up?)
I’ve been using Zillow and WalkScore to understand the housing market in a few cities we are considering, using the same process we used to find our ideal home back in Seattle.
Roughly, we can rent a 2 to 3 bedroom SFH in the 1200-1500 sq. ft range for about $2000 – $2500 per month. Some with garages, some with basements. Apartments with amenities like a pool are similarly priced. Prices drop (sometimes significantly) if we are willing to be dependent on a car, which we are not... walking to the library, grocery store, farmer’s market, coffee shops, and restaurants is important.
The same houses that rent for $2,000/month sell for around $750,000.
That is a price/rent ratio of 31. (Other data points: SF & Manhattan ~50, Austin, TX ~25, and Detroit ~6. Data from here.)
Even with no mortgage, property taxes and home maintenance would still be $1,000+/month. Imputed rent helps a small amount with cash flow, but I could get better ROI in my savings account. Buying a home in this environment would definitely be a luxury purchase / lifestyle choice, probably because we deserve it. Fortunately, we avoid the whole mess by being Renters for Life.
Overall this is a about a wash compared to our current rental in Taipei.
Car / Transportation
For easy access to outdoor adventure like National Parks we would probably get a vehicle.
A shiny new Tesla X would set us back around $150,000. Good times. But we would just pick up an used Ford Escort or similar for $10k or less, and drive it one day per week or so.
A few bicycles and shoes would be our other major transport expenses, along with the occasional Uber. Guesstimate: $250/month.
Farm to table restaurants and great farmer’s markets are our life blood, and eating well is one of our core values. As such, we end up spending roughly $1,000/month on food.
This summer we spent a few days in a nice town in California and visited a couple farmer’s markets. We scored some great deals on produce, including a small flat of figs for $3. A week later we bought a smaller amount of figs at a farmer’s market in Seattle for $8. Being near where the food is grown reduces costs and improves quality.
I wouldn’t be surprised if moving closer to the food epicenter reduced our total food spending, but since it has been consistent across several years and numerous countries, I’ll go with $1k for margin.
|Cost of Living||Monthly||Annual|
|Rent & Utilities||$2,500||$30,000|
|Taiwan (annual trip)||$250||$3,000|
Without taxes or health insurance, we could potentially spend $69,000/year or $5,750/month. This includes summers abroad and annual visits to Taiwan to see family. We often fly for free so some or all of this $9,000 travel budget could be zero.
With annual income of $100,000, Health insurance/care and California income tax would add $15,000/year, bringing the total to ~$84,000. That is only 4x what we used to spend in Seattle.
But wait a second… if we are spending so little (relatively speaking) why do we need this much income in the first place?
Income & The Downward Spiral
Since we don’t need to save for retirement or pay off debt, with a total cost of living of $84,000 we only need an income of $84,000. Seems legit.
But, if we just dropped income by $880/year to $83,120 (exactly 400% of FPL) then we are on the more budget friendly side of the ACA subsidy cliff and our expenses drop $7,700/year. (That is a nice 870% tax rate.)
Roughly $40,000 of our annual income is from dividends and interest. With blog income equivalent to 2017, I could shelter 98% of it in 401k/IRA/HSA. I could get another $40,000/year by selling some stock, after which we have $80k to cover our cost of living and then some.
This isn’t income though. If I sell $40,000 worth of stock, and that stock has doubled since I bought it, then only $20,000 of the sale is actually income (a capital gain.) The other $20,000 is a return of basis.
Between dividends and stock sales we now have $80,000 in cash, but only $60,000 in income (~300% FPL.) With lower taxable income, health insurance premiums drop by another $2,000 and CA Income tax drops by $1,000, bringing total cost of living to ~$73,000.
But we can do better. I could instead sell stock at full basis (zero capital gain), withdraw some contributions (or aged conversions) from our Roth IRAs, or use some of our existing cash. None of these count as income, so we can cover the full $73,000 budget with only $40,000 of taxable income (~200% FPL.)
Now CA income tax drops by an additional $500 to a measly $12.5/month ($150/year.) We also have a free Bronze health plan or a great Silver plan with $600/deductible for $184/month ($2,200/year.)
Now subtract the $2,000 Child Tax Credit from the IRS and $500 or so of Foreign Tax Credit from our international stocks, and we effectively have free health insurance and zero tax burden (State + Federal + ACA = $0.)
Total cost of living: ~$70,000.
Thanks to years of boosting basis in our stock holdings and building our tax free Roth IRA Conversion pipeline, about $250k total, we are able to strategically source spending money without generating significant taxable income. And we still have a year or two before we would possibly return to the US.
This is something any early retiree could implement – retire, travel the world for a year or more, harvest capital gains, convert some Roths… and then return to the US if you so desire. (Alternative option: opt out of the ACA and live in a no-tax State.)
To answer my original question: Would returning to the US have a significant impact in terms of taxes and health insurance?
hmm, I don’t think so.
How is y’alls life in Cali?
Question Rant: “It’s people like you that are the problem with this country, taking these government subsidies when they were supposed to be only for poor people.”
Polite response: This is a false premise. Subsidies were intended for households up to 400% FPL, which is ~60% of all households, because an insurance system with full enrollment means lower costs for all. If Congress wanted to add an asset test, it is easy to implement (See EITC.)
Less polite response: It’s fine to attack me, I already forgot all about it. But instead, maybe you could be a great role model. Please give up your subsides, which are some of the biggest tax breaks for the wealthy (5x the cost of ACA subsidies.) Add to that Medicare and tax deductions on your house and 401k. Deal?