Welcome back for the 2nd post in our series of Go Curry Cracker Reader Financial Reviews, where we dig deep into the finances and ambitions of a lucky anonymous reader. Together, we can overcome limiting beliefs, change the rules, and exceed our goals
This month we go to Manhattan where Mr and Mrs NYC have discovered that lifestyle inflation is one of the world’s most powerful forces, second only to compound interest.
We will also learn a little about the difference between owning real estate and investing in real estate, the high tax burden of NYC, and why the Backdoor Roth is not necessarily a great investment choice.
We exchanged many emails over the past several weeks, which inspired a lot of creative thinking on both sides. Let’s see how it turned out
Hi Jeremy & Winnie,
Happy 2015! My wife and I have been following your adventures and trying to figure out how to follow a similar path. Keep making life on ~$40k/year sound sublime!
The handful of retirement calculators that we’ve tried agree we are on pace to retire in 10 years when we turn 50 (me) and 52 (my wife). We’re relatively health-conscious non-smokers so I expect to live until we’re about 85-90.
Here is our financial picture:
Assets:
$460k Taxable
$850k 401k ($150k is after-tax)
$110k Traditional IRAs
$110k Roth IRAs
$1MM home value in NY, NY with $440k owed @ 3.33%, on schedule to be paid off when I turn 50Investments:
All low-cost index funds, about 85% equityIncome:
$300k/yr combinedExpenses
$100k/yr goes for taxes (Fed + State + Local NYC)
$80k/yr goes for spending
$60k/yr towards mortgage (through 2025) & HOA
$60k/yr savings (401ks + Roth IRAs + taxable)We have planned to reduce our spending on several occasions, but because we make a comfortable living we don’t have any “gun to our head” to be disciplined, and so we get lazy and ignore our budgets. We estimate we could reduce our spending by $14k/year once we stop work, but believe we would spend all of that savings on health & life insurance and additional travel
Our NYC lives revolve around work, but we love our condo here and would like to keep it. Still we would consider selling it if it made financial sense, but would then like to buy another property in a lower cost of living area. We feel like we need some kind of “home base” to feel grounded. Most of our family is located in Texas and Florida, so maybe in one of those 2 areas. Were we to follow this path, we estimate our annual spending would decrease to $55k
We estimate we can rent our condo for $4k/month before management fees, and it would be helpful for minimizing travel expenses since we could home swap instead of paying for hotels. We also view our home as the closest thing we have to a pension, as we can use it for rental income and even sell it later in life if we need to
My questions:
- Do you agree that we’re on pace to retire in 10 years if we maintain our current spending levels?
- Should we continue to make after-tax contributions to our 401k to take advantage of the Backdoor Roth?
- At what annual spending levels would we have to reduce to in order to allow us to retire in just a couple years? If we sold our condo, could we retire earlier?
Our dream is to travel a lot more, to thrive on the stimuli of new lands and new cultures! How can we do it as soon as possible?
Mr & Mrs NYC
Hello Mr & Mrs NYC
Congratulations on your success! No doubt about it, you are at the top of the economic ladder with incredible incomes. In your early 40’s, you’ve already amassed a net worth that would put you near the top of the Ultimate List of Blogger Net Worth
You’ve done this despite high taxes, the high cost of NYC real estate, and a high cost of living. When including Mortgage Principle, your after-tax savings rate is a very respectable 50%. Well done
This level of income has afforded you a number of luxuries, such as dining in fine restaurants, the outsourcing of cleaning and laundry, personal fitness trainers, and 5-star vacations.
But… Perhaps the biggest luxury you’ve enjoyed is the luxury of inefficiency.
This is common amongst high income earners, and is even encouraged by our economic system. By focusing on career, you can maximize earnings and simply pay others to perform lower return services.
The downside of this is that cost of living inflates with income. Is it possible to reduce spending? It isn’t clear, because you’ve never had to try. Your frugality muscles are weak and flabby.
Is all of this spending making you happier? Who knows, since there is no other reference. This can make the idea of reducing costs intimidating, even terrifying, making it impossible to get off the treadmill
It’s just easier to keep working and save more, right?
Working Harder Isn’t the Answer
According to the mainstream online retirement calculators, you are on pace to retire in 10 years if you maintain your current level of spending
But 10 years is a long time. Over the coming decade:
3.5 years will be spent paying taxes
2.5 years will be spent on food, clothes, and taxis, just the price of daily living
2 years will be spent paying off the mortgage
2 years will be spent increasing your savings
At this point, your dollars are much better earners on an after-tax basis than you are. Most of your money goes to taxes and inefficient living
This brute force method is akin to using a battering ram to bash open the doors of financial independence
We could dissect your $80k annual spending, and make a significant reduction (a very worthy exercise I encourage you to do with the same discipline and energy you apply to your careers)
But what if instead we just sprinted into Financial Independence through the wide open side door?
Wealth Check
To date, you have amassed a fortune of nearly $2.1 million
The 4% Rule is a reasonable metric to use as a starting point, which would allow annual spending of ~$84k/year, $7k/month, or $229/day
It’s interesting that you opened your email by mentioning our own ridiculously extravagant lifestyle of global travel and international intrigue. To date, we have averaged less than $110/day on serious Rock Star LivingTM!
You could quit your jobs now, today, and live life on your own terms, spending twice as much as we do. All you have to do is try. If I had to double our spending tomorrow, I have absolutely no idea how I would even begin. We are already operating at maximum happiness, and spending more might even make life worse
There are just two little problems that we need to overcome first
Sell Your House and Rent It Back
Let’s assume for a second that you were currently renting, and were considering purchasing your current property in order to meet your goal of having a pension like income in retirement
Yes, you love your property. But as an investment, logic and math should prevail
Professional Real Estate investors use a metric called Cap Rate to determine if a property is worth a deeper look. In its simplest form, it is a ratio of total profit over the property value; Cap Rate = (income – expenses)/property value
I asked a very successful Real Estate Investor friend of mine what he would pay for a property with $4k/month rent and $1.1k/month HOA/Taxes/Insurance.
Did he offer $1 million for the property? No. He offered $250k
Now people are crazy when it comes to Real Estate in Manhattan, and will accept much lower rates of return because they expect appreciation. Maybe that will happen, maybe New York is underwater in 50 years.
From what I gather, pro investors in the NYC area may target a minimum cap rate of 3.4% to purchase an entire building. For a single condo, risk is much greater so the required cap rate would be higher. Still, a very generous investor might pay a maximum of $810k for your property.
Note that this cap rate is roughly equivalent to the rate on your mortgage. Any income would barely cover the cost of debt, and the property would be cash flow negative
This is what you are experiencing now, with annual costs $15k greater than the cost of renting. This doesn’t include the lost opportunity of your estimated $560k in equity, or consider that at this point in your amortization schedule, were it not for your ridiculously large State and City Tax bill, there is near zero tax benefit over the standard deduction
Another common Real Estate investment metric is cash on cash return, a simple evaluation of cash flow to total cash invested. If you paid off your mortgage today (which you can), you would be earning less than 3% on your investment. By contrast, Vanguard’s Real Estate Investment Trust index is paying 3.45%
Financially, perhaps the best thing you could do is sell the property and rent it back at the market rate
There are many who would agree with me. One of your neighbors, James Altucher, says he would rather shoot himself in the head than own a home. Or consider the wisdom of Jim Collins, as he explains why your home is a Terrible Investment.
As for providing an income in retirement, there are many ways to accomplish that goal. Real estate is one option, but you could find a far superior property for that goal, maybe even one that will provide the same income at 1/4 the price.
There are also many that will disagree with me, many of them almost violent in their passion. I recommend you sell the property to one of them
Leave NYC, Run Don’t Walk
Manhattan is one of the most expensive places on the planet, both in terms of cost of living and taxation. This puts New York in 1st place on Bankrate’s list of 10 Worst States for Retirement
Kiplinger’s recently reported: “Manhattan, New York City’s most expensive borough, is the only area in the country where living costs more than double the US national average. Housing costs are more than 4.5x the national average”
Your regular living expenses reflect that statement, and then some.
Taxes in New York, already amongst the highest in the nation, are even more onerous by the addition of New York City’s own income tax. For a retiree with an interest in travel in 1-6 month stretches, it is one of the worst possible choices for a home base
Most of the techniques we discuss on Go Curry Cracker for tax minimization and maximizing wealth are neutered by the effective 10%+ tax rate
Or, as stated in Forbes: “New York deserves an honorable mention in this rogues’ gallery of places not to live if you have a lot of taxable dividend income.”
The surest way to make to make an immediate 50% reduction in your cost of living, is to simply leave
When you want some Manhattan time, do what everyone else does: Go as a tourist. You could certainly afford it
But It is a Home, Not an Investment
Money isn’t everything, especially when you have a whole lot of it. Maybe your condo is a home, not an investment
In that case, you have 2 main options:
- Work up to 10 more years, per your current plan
- Let somebody else pay for it
If you were to find long term renters, you could quit your jobs and begin traveling today. Continuing to pay the mortgage would just require managing your cash flow. In other words, you would need to spend less
The combined impact of paying mortgage interest each month, along with having a large portion of your assets in your home, would reduce your sustainable budget to $4.2k/month or $140/day. This is still a 25% boost over what we have spent on our travels to date
Ideally, much as in the previous case you would establish residency in a low/no tax State. Since your home would be exclusively used for rental purposes, you could fully depreciate the property, resulting in low or no tax on the rental income. In 10 years, if you chose to return to NYC you would have a paid for home and your assets would be able to fund a similar lifestyle to the one you have today.
Home Base
But if you sell your NYC property in favor of better investments, where can you setup a home base?
We chose to skip a home base entirely, preferring the flexibility of an itinerant lifestyle. But it won’t necessarily always be this way
Were we to establish a Home Base, we would consider the following criteria:
- Easy access to an International Airport
- High Quality of Life (climate, access to outdoors, great food scene)
- Zero or Low Taxes (e.g. Texas and Florida have no State Income Tax)
- Proximity to Family
You have the option to design your ideal lifestyle, and there is no need to rush in. You might explore areas near your family, or a few international destinations that you’ve always been drawn to.
Renting in the short term is a fine option. I was always perplexed by the people that we hired into Seattle, who would immediately buy a house. Inevitably they found themselves in a job that wasn’t ideal, an unhealthy commute, a neighborhood with overbearing covenants, or a school district that wasn’t a good fit. In the rush for stability, they reduced their quality of life.
Funding Early Retirement
Assuming you fetch a cool million for your home (minus agent fees), and roll your 401k pre-tax contributions to a Traditional IRA and after-tax contributions to a Roth, you would be looking at the following arrangement:
Taxable: $960k
Traditional IRA: $810k
Roth IRA: $260k
Total: $2.03 million
The first thing to do would be establish residency in a low-tax environment. Florida or Texas would be great choices
The Taxable account, primarily invested in VTSAX / VTI, would throw off ~$20k in tax free dividends and you could harvest an additional tax-free $70k in long term capital gains when available.
Some years, this would be sufficient to fund your lifestyle, but over time you would most likely deplete the taxable account, particularly if you chose to purchase a home.
Assuming your estimated $55k/year annual spend, cFIREsim estimates an 85% chance the taxable account would carry you until Mrs NYC reaches Age 59.5, at which point you would have unrestricted access to her Traditional IRAs which have enjoyed tax-free growth over the previous 2 decades
In the off chance that you deplete your taxable accounts before Age 59.5, you could establish a SEPP to get access to Traditional IRA funds a few years earlier. Note that this is a remote possibility, in most cases your taxable accounts continue to grow. The Roth IRAs should be used last
In all years prior to formal withdrawals from the Traditional IRAs, I recommend you make annual Roth IRA Conversions (as demonstrated here) in order to minimize lifetime taxes
Even without Social Security, cFIREsim estimates a 100% success rate for a 60 year retirement based on the above plan, which would bring you to 100 years of age.
But We Aren’t Ready to Quit Yet
No problem at all. Working longer has a twofold benefit. You are able to save more, and you need less savings because you have fewer years to live. Maybe working longer is more comfortable than experimenting with spending less
Because your tax rate is so high, I would continue to take advantage of your 401ks.
However, I would focus on increasing the size of your taxable Brokerage account. To do this, I would stop making after-tax contributions to the 401k and I would stop making additional principle payments on the mortgage
The Backdoor Roth
Stop making after-tax contributions to the 401k?! But isn’t the Backdoor Roth an amazing opportunity to reduce taxes and maximize wealth?
So they say. But let’s analyze the impact
In 2015, if you contribute $30k after-tax to your 401k you save $0 on taxes this year.
Depending on how you invest that $30k, you could realize a small tax savings on dividends. In a fund like VTSAX / VTI, you might realize dividends of 2% for a total of $600. These would be taxed at 15% by the IRS, and maybe 10% by the city and State of New York, for total annual tax of $150. For context, this is a mere 1/5 of what you currently spend on manicures
Were you 20 years away from retirement, this small tax savings might be appealing. Being just a few short years away, 100% unrestricted access to your savings AND earnings is far more important. And as soon as you stop working and leave NY, the tax rate on those earnings drops to zero
Conclusions and Final Recommendations
You have amassed a healthy fortune, and have a world of opportunities available. By selling your home and leaving NYC, you could retire today and live a lifestyle that would be the envy of many
While having a solid pension like income late in life is desirable, your home isn’t the ideal investment for that purpose. If you prefer to think of it as a home rather than an investment, you have a choice to make: Trade many more years of your life to pay off the mortgage, or rent it out and cut your spending significantly
Due to your high tax burden and high cost of living, increasing your net worth through work is increasingly difficult. Most of your money goes to taxes and inefficient living. Your dollars are now much better after-tax earners than you are. It’s something to consider as you plan the next 10 years of life
Were you to prefer continuing to work for a time, I would recommend focusing on increasing the size of your taxable accounts, even eliminating after-tax contributions to the 401k and additional principle payments on the mortgage.
When you do pull the plug, I would spend down the taxable account first while doing tax-free or low-tax Roth IRA Conversions. This should carry you to Age 59.5, when you would have unrestricted access to your Traditional IRAs. Spend down the Roth IRAs last
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As a random guy on the Internet, this is the actual value of the recommendations I provide 
This is for entertainment purposes only. Always consult a professional.
What would you do in Mr & Mrs NYC’s situation? Would you sell the condo and leave NYC? Would you find a long term renter and learn to love spending less? Any other ideas?
I kind of cringed when I saw the headline. NYC living might as well be living on Mars because it’s so different than living in the other 97% of the geography of the US (also excluding SF and Silicon Valley here).
Mr. and Mrs. NYC actually save less than we did (in absolute terms) on a third or a half of their salaries. Which explains why I turned down interviews for NYC jobs paying six figures and took a job in a lower COL area for half that amount. 10 minute commutes and living in the middle of a Central Park environment (sans all the people) for small fraction of the NYC COL is where it’s at. :)
If I were in their shoes, I’d be on I-95 to Florida ASAP or whatever combination of interstates lead to the Lone Star state for some lovely 0% state income taxes. We’re almost tempted to do that to avoid NC’s 5.8% tax rate but not sure it’s worth it to “only” dodge $600 to $1200 per year in income tax and possibly pay more in property tax or casualty insurance if we own elsewhere (and family is here in NC).
“It’s not what you make, it’s what you keep” Spot on
I like how the contrast: “Mr. and Mrs. NYC actually save less than we did (in absolute terms) on a third or a half of their salaries”
I’ve spent quite a bit of time in NYC, and there is a ton of free / inexpensive stuff to do, great inexpensive ethnic food, a slice of the best pizza on earth is just a couple bucks, great low cost public transit, and wonderful free outdoor spaces. Highline Park is one great example
But there is also unlimited opportunity to spend. If you’ve become accustomed to a way of life that costs an inordinate amount, moving that lifestyle to a lower cost of living area is going to be significantly easier than cutting your spending by 50-70%, especially if there are large fixed costs (e.g housing.) Old habits die hard
As an example: One of my favorite large cities has incredible art, amazing restaurants, theater, and outdoor spaces (and much better weather and friendlier locals) and is just a few hours by plane from NYC, but costs 1/3 as much. A 1-bedroom apartment in City Centre, instead of $2,700/month is a reasonable $500/month. You have to love Mexico City
Just a point, we live in Mexico City and pay around $2,700. It’s an awesome neighborhood.
I’m guessing your place would cost $10k/month in Manhattan
Mr. Curry, I have follow you since you started posting. In most of your replies you fail to take into consideration health insurance in the United States. While this may not be important for someone of you young age or in a foreign country, here in the USA health insurance is the number one factor to early retirement. In Arizona my health insurance is $30,000.00 for 2018 $21,000.00 for 2017, and $17,500.00 for 2016. This insurance is the only available insurance and it is poor insurance even at that rate. Therefore, anyone retiring early has to take this into consideration until the gov. fixes the insurance issues. For this couple to cut their spending by 50 to 70% is not possible because as soon as you early retire and loose you company insurance you will need to add this large ticket item to you budget or take a huge risk in no having insurance. I generally agree that cutting spending investing more wisely (VTI, VNQ, etc) is the way to go. As far as Mexico I had a close call in Mexico City not too many years and was lucky to escape a kidnapping attempt and a friend of my also excaped a close kidnapping attempt in Guadalajara. Every time I travel to Mexico I am told to stay in the Americana Hotels, not to take the green taxi cab, and the hotel will usually advise you that the hotel will take you where you want to go no charge.
I have earily retired, but choose to stay in the USA. But health insurance is still the number one issue. I am required to keep my income under $65,000. so that I can get a subsidy from the Gov. to keep my insurance at approximately $1,200.00 per year.
I enjoy you blog and enjoy the fiancial review of fellow readers.
>you fail to take into consideration health insurance in the United States
I beg to differ. This post is 3 years old, and Mr & Mrs NYC are enjoying early retirement in the US with reasonably priced health insurance.
re: Mexico – our year in Mexico had the opposite experience. Just today one of my favorite Mexican residents tweeted about their visit back to the US and the safety thereof.
RoG, if your only goal was accelerating achievement of FI, taking the six figure income in NYC probably would have been the better choice. As Jeremy said, this article is primarily a cautionary tale of the hazards of succumbing to lifestyle inflation, not the inherently high costs of NYC. If you pull six figures here but live like you earn a third of that (which many New Yorkers do, and they get by), you’ll still clear more than someone earning half as much in another city with a lower COL. Then, once you achieve FIRE, you can take your money and run (if you so desire).
Jeremy, that was a great post! I especially liked: “There are also many that will disagree with me, many of them almost violent in their passion. I recommend you sell the property to one of them.” Made me smile!
One minor comment: Your article doesn’t say anything about what capital gain they may have on the condo. If it is more than $500k, they may want to retire at the end of a calendar year and time the sale for the next year, to minimize the tax hit. I have no idea what the implications in NY are, but maybe there is a different rule for the state/city tax on the gain. And if there is any advantage to doing so, maybe sell it after establishing residence in a no-tax state.
I was hoping to get a few offers coming in. My standard commission much less than a typical realtor ;)
The gain will me much lower than the tax free $500k limit, and after transaction fees could even be a loss. It all depends on what the actual sale price would be.. $800k? 1 million?
I’m not aware of the NY tax law on this either, so good point to consider date and residency for choosing a closing date
I was looking forward to reading this post as a fellow New Yorker. However, Mr. and Mrs. NYC have a much higher income and assets. We seem to have a different problem…pretty strong frugality muscles, but income is good but not great. Moving out of NYC is something we haven’t seriously considered since both our families are here. If that were not the case, it would make it a much easier decision. I’m no real estate investing pro but I always hear you go for cash flow and not appreciation, which is always speculative. Although living in NYC and seeing the appreciation occur…it would be hard for me to sell even with those returns.
Andrew, do you publish your living expenses anywhere? It looks like median income in NYC is around $60k, so clearly many enjoy Manhattan living spending much less than Jamie Dimon
I live in Manhattan and track my spending very closely. My 2014 spending on everything but my apartment was $22,000.
The apartment was about $45,000. Of that, $10,000 was mortgage principal, and $23,000 is tax deductible. It’s certainly not for everyone, but there’s no where else in the world I’d rather live.
With lots of opportunities for high salaries, you can still save a lot. Counting my mortgage principal, I saved over 50% last year.
50% is awesome!
Thanks for sharing your NYC spending numbers, <$2k/month for all non-housing is great for a large city
Your analysis in these and your tax articles is very impressive. I read a lot of online finance bloggers and you do an excellent job of getting down to the nuts and bolts of a decision and breaking it down with metrics to back it up. Usually, I enjoy blogs for the voyeuristic thrill of looking into someone else’s situation and because (like everyone else) I like to hear the financial principles I believe reinforced. However, it is rare that I learn something new or am made to think in a different way, and I generally do with your posts. Long story short… I do think you have a unique voice among bloggers. Keep it up.
Kevin, thank you for that wonderful compliment and feedback! This is why I love writing this blog
Kevin pretty much just summed up everything I was going to say. You and Justin(RoG) are true inspirations!
Fantastic breakdown. Definitely need to run, not walk from NYC when your ready to retire.
And run sooner rather than later :)
Reading their asset sheet alone made my eyes bug out. I’d be FI at a 1% SWR with that.
Fantastic analysis Jeremy. I hope they listen to you. Perhaps they should read Your Money or Your Life and realize their life energy is finite. Sure, they’re selling it for a very lucrative price, but what is enough? I think they can (and should) stop yesterday and decamp, but I’m not a New Yorker, nor ever want to be one.
Exactly, this is all about life energy. More money sounds appealing until you realize you have enough and you aren’t getting any younger
Love those case studies! Can you please explain this one bit?
“The Taxable account, primarily invested in VTSAX / VTI, would throw off ~$20k in tax free dividends and you could harvest an additional tax-free $70k in long term capital gains when available.”
A married couple filing jointly can have up to ~$90k in qualified dividends and long term capital gains and pay 0 tax (assuming no Roth IRA Conversions or other “ordinary income”)
See our 2013 tax return for an example
https://gocurrycracker.com/the-go-curry-cracker-2013-taxes/
Got it! So long as you’re in the 15% marginal tax bracket, cap gains are at 0%
How close do you cut it when selling? That is, if a mutual fund churned a bit during the year, you might have some unexpected capital gains. To make sure you don’t accidentally slide into the 25% marginal bracket and have to pay 15% taxes on the all the cap gains, how much ‘wiggle room’ do you leave yourselves when selling your investments?
It is a ramp, not a wall. If you go over by $1000, you’ll owe tax on $1000 not $90k (or whatever)
Geographic arbitrage wins this one hands down.
Eeek! I dream about living in NYC but couldn’t stomach those prices.
I about had a stroke when I saw the tax bill of $100k/year
This is probably a better example of lifestyle inflation with high incomes than the actual cost of NYC living. There are many people living in NYC for much less
Excellent analysis. But folks shouldn’t automatically conclude that “living well for less” is not possible in NYC and comparable locales. Housing costs plummet outside trendy neighborhoods, yet you are never more than a short walk or bike-ride or subway-ride away from anywhere else in the city. And “lifestyle arbitrage” opportunities exist here that are unique to global cities–for example, I have the entire world’s diversity of food and culture outside my doorstep, and thankfully cost and quality are often inversely proportional (since the best food in the city is the authentic ethnic fare that can be found in the cheap immigrant enclaves and not the Michelin-rated tourist traps).
Excellent points! I assume you live in… Brooklyn?
Some of the best food I’ve had in NYC is also the cheapest. Cuban sandwiches, shawarma, falafel, late night offerings from a Halaal cart, doner kabobs, knish, cannolis.. the list goes on
Although to be completely honest, I’ve also had some ridiculously good food that cost the same as a fair-trade human kidney
I lived in Brooklyn for 6 years in the same apartment with my wife, had a kid, and grew my income to a level that I wouldn’t be able to achieve in lower tax parts of the country. As long as you insist on going through the (admittedly nightmarish) slog of finding a cheap apartment and you don’t eat out all the time I find NYC to be pretty affordable especially give the plethora of job opportunities. And as long as you like living in a city it offers things that other places in the US can’t hold a candle to.
That having been said I just recently orchestrated a move to a foreign country with a much lower cost of living but managed to keep my same job and work remotely. Pushing down the accelerator on FI!
Love this series by the way, have not found any blog or resource which explains FI tax details in such a thorough manner at the level you do.
NYC and SF Bay Area are great places to build wealth, as there are many high income jobs
They are also great places to leave once you have said wealth. Great move on your part! That will accelerate your savings for sure
Yep – uncanny guess! Much of today’s Brooklyn is utterly unrecognizable as compared to the Brooklyn I was born into a little over three decades ago, though.
Jeremy & Winnie,
1st-congrats on GCC Jr!
From my own haphazard research into leaving nyc (cause..oh look a squirrel).
1-no matter where you move to, any income from nyc sources (rental property) will continue to be taxed by nyc/nys (resident/non resident).
2-if you decide to stay in nyc and travel x months out of the year, anything you pull from investments will be taxed at nyc/nys resident/non resident rates.
3-all capital gains are treated as income..whether held 5 days or 5 years.
*if you decide to move base, make sure you fully cut ties with nyc otherwise they might be tempted to go after you for taxes even after you move:
“You can only have one domicile. Your New York domicile does not change until you can demonstrate that you have abandoned your New York domicile and established a new domicile outside New York State”
http://www.tax.ny.gov/pit/file/pit_definitions.htm#nonresident
the value of this possibly inept information is 0. well actually less than 0, but i rounded up to protect my ego. please check with your accountant and/or attorney.
Hi randomguy, excellent name :)
You nailed it, establishing residency means exactly that. You move somewhere else and cut ties with your old, well.. residence
This can take several months, and requires establishing a new legal address, getting new driver’s licenses, registering to vote, etc…
This is what came up first on Google:
http://pattyinglishms.hubpages.com/hub/state-residency
“But 10 years is a long time. Over the coming decade:
3.5 years will be spent paying taxes
2.5 years will be spent on food, clothes, and taxis, just the price of daily living
2 years will be spent paying off the mortgage
2 years will be spent increasing your savings”
.
I LOVE this way of looking at it. Well put Jeremy. Another great case study.
Thanks Joe!
It does make you think twice about how to spend the next 10 years.
Doubly so, when considering those 10 years will most likely be the healthiest, most vibrant years remaining
With only $960k in taxable, yielding ~$40k in income, I don’t think they are going to be able to immediately pull the plug. If it were me I would dip into the traditional IRA’s since they’ll only have a 10% “tax” since the $40k will eventually all become tax free income in a year.
I’d suggest selling the house, moving out of Manhattan (renting), keeping the jobs another 2-3 years while the taxable account gains long term/qualified status and then they’ll be in great shape.
They are in great shape now.
The $960k only needs to make it to age 59.5. They can spend all of it, not just $40k/year. And if the taxable account doesn’t make it to Age 59.5, they can have tax free and penalty free access to the Traditional IRAs via 72t withdrawals
We really enjoy your financial reviews! Excellent information and hillarous to boot!
We were wondering if you are up for a challenge? How about FI for a family on a teachers salary? Please contact us if you would entertain looking at our current situation?
Obviously Jeremy gives great advice, but give consideration to posting a case study over on the MMM forums. See here: (http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/) Lots of wise folks at all different stages of the FI journey, and all different income levels. This way you’re getting input from a huge number of eyes.
“Teacher’s salary” can mean a lot of things. I know a lot of teachers who make way more than my wife (our sole earner), and a lot who make way less. Anywho, we are ~10 years away from FI (we’ll be about 40), family of 5, and we’ve never earned more than $65K in a year.
We are a family of 4 living on a teachers salary as well. Would be curious to see if he does a study. My wife makes about 65K now, should be over 70 next year. So “teachers salary” can defintley vary. We are in the DC area which is pretty HCOL though not Manhattan obviously.
I have relatives like the case study above. Million plus paid off houses, 1-2 Million saved and “can’t” retire. My one uncle said he needs 5 million but is hoping for more. WTF, I really do not think people understand/believe the 4% rule as if they are going to actually spend the principal way down. I can’t imagine my uncle needing 200K income when retired (though he is a bit spendy nothing like that).
I plan to cover a wide variety of situations
Send me an email with your details. Even if I don’t do a full detailed post, I’ll send you some quick feedback
As David mentioned, there is a lot of great analysis and feedback going on in the MMM Forums
re: the uncle
Many people don’t have a firm grasp of their finances. People who read personal finance blogs and books are an exception. I can empathize with your Uncle… great income, followed all of the rules, maybe don’t know exactly how much you spend or have any experience spending less. In his mind, spending less might bring up images of eating ramen in a college dorm and walking miles to school uphill both ways without shoes. In that case, better to just keep working because it feels safe. But no amount of More will ease that fear
That was a great rundown of their financial situation and the options they have. Would love to see a follow up posts with what they decide to do with the advice.
Cheers!
One other more accurate way to calculate cap rate, we should use the initial investment if it’s an investment property. Or if the property hasn’t been paid off, you can use the amount invested up to that point you start renting your property.
If one is investing real estate and wants to be precise, by all means do some serious analysis and figure it out
But be wary of paralysis of analysis, and calculating with bad input (would the property really rent for $4k/month, or is that just a projection, i.e. a wild guess)
At the end of the day, if my Body Mass Index is 39 or 39.1 or 39.15 is irrelevant. The fact of the matter is I’m obese. Just like a 3.x% cap rate is not a great investment
say you put down $100k in a 400K property, rent for $48k/yr – expense $20k, cap is you use 100K is 28% compare to 4% … if it’s the matter of decimal place, one wouldn’t care. That’s why people who purely invest in the stock market, think real estate doesn’t make money considering all the landlording hassle. Anyhow, just a thought.
Would you buy this property?
Jeremy, another great financial review! It truly is a valuable service you give your readers. You prove that you can be really good AND cheap. :)
It’s very interesting to understand the financial situations that others are experiencing on their way to financial independence. If we were in their shoes, I would get out of the old neighborhood asap and find a cheaper area to live and start socking away the excess. It sounds like they are in great shape today even if they would chose to trade a bit less of a salary for a cheaper area to live and save more.
One of these days I’m going to convince you that you shouldn’t save anymore. You have enough :)
And so do Mr and Mrs NYC
Hello everyone, yes, it’s Mr & Mrs NYC in the (virtual) flesh!
We can’t thank GoCurryCracker enough for showing us possibilities that we had never considered. We cannot imagine the hours he must have spent producing such a personalized plan for us and thoroughly answering our many questions along the way. We’re so lucky he selected our story for his second Reader Financial Review!
We thought we’d share where our heads are at today regarding our early retirements. The decision that is most firm in our minds is to cancel our retire-in-10-years-when-our-mortgage-is-paid-off plan. But the replacement plan is still being formed. We have some lingering anxiety about whether we really have enough money to last through potential tough times, where we’d live, how soon we can cut ties with NYC and our personal connections in the area, how our cats will respond to the moves, what we’d do in our post-work lives… but those anxieties are trumped by our anticipation that we may soon get to say goodbye to our jobs.
Here’s where we’re leaning today: After particularly brutal week of work, Mrs NYC is aiming to call it quits in the next year, and one of her first retirement todos will likely be to put in motion “Sell Your House and Rent It Back”. While still on good employer health care, we’ll be sure to get thorough checkups and tests this year. We’ll shut off our 401k after-tax elections and will focus on further building up our taxable assets. Mr NYC will likely work 1-2 more years and then we’ll leave NY for a low/no tax state shortly after that. We expect to try a few cities and neighborhoods before settling down in a new home base, and from there visiting family, friends, and doing long-term home rentals overseas to sample other cultures.
We are excited to design the next chapter of our lives. After our first 21 years of life spent in our education phase, followed by our next 21 years in our accumulation phase, what will our next 21+ years bring? We’ll check back in with this comments section to provide updates on our progress.
Thanks again for your help, GoCurryCracker!
When I retired I wasn’t sure what I wanted to do in the next phase of my life. But, I figured I could figure that out faster if I could work on the problem full time than part time! I took a year to decompress, then started developing annual goals and plans as I had done while working, but now focused on what I wanted to do. Longer term plans are still being developed. I’m only 3 years into this retirement thing and not feeling in much of a hurry. :-)
It took me at least 6 months before I stopped thinking about work, and we had the help of traveling full time
then we flipped into baby mode, and are still there.
Long term plans are still not clear, as we don’t know where we will be in 6 months. Definitely, no need to hurry :)
I think this is an excellent plan. There is no rush
This one did take a lot out of me, I went through this many different ways. So no more posts until Monday :)
Have a great weekend
Apropos in light of this discussion….
http://www.msn.com/en-us/money/taxes/how-new-york-hunts-down-tax-refugees/ar-BBhXPO7
I had a similar experience with the State of California.
NYC does not have to be as expensive as people make it out to be. I live in NYC and while some expenses went up, so did my income, and at the same time many expenses went down. I sold my car and am able to walk to work now so my transportation costs decreased dramatically. I also don’t live in a fancy $1m apartment, but share an apartment with 2 other roommates. Grocery costs have shot up, but there is a Trader Joe’s 20 blocks away where costs are somewhat back to reality. I never take cabs (unless its for work – hence I don’t pay). I also eat out at nice restaurants when traveling for work, so don’t feel the need to go out to nice restaurants on my own and pay. I mean everyone’s situations are different, but my savings have increased significantly since moving to NYC.
Great dissection of their personal finances GCR! I hope I have their same problem in the future – problem of high net worth, not high spending :)
Very nice. If you can keep a similar cost of living as pay increases, you’ll be FI in no time
Nice review! At several points, I thought you were talking to me. We also had this lifestyle inflation where we pay people to do our yard work, cleaning, cooking, and babysitting, because we are too busy at work. We made choices that lead to the lifestyle inflation, but after we are adapted to the inflated lifestyle, we forgot we actually have choices to unwind them. We don’t have to work for the inflated life! On a remotely related note, a guy in NPR this morning said “Sitting is the new smoking”, referring to the importance of incorporating exercising into our busy working life. Doing the housework ourselves is both a health booster and a wallet booster.
We still hire help to do the housework
That is a good time to go for a bike ride :)
I really hope they retire now after reading this post. Move to Texas, enjoy no taxes on the dividends, and start enjoying life. If you still want to work still find something in Austin, Houston, or Dallas. I’m sure you could do anything for work with the investment totals you currently have. You could even live in other rural parts of Texas for 1/2 or less of the housing cost as the major cities, which would free you up to travel and still have a purchased home. Good luck.
Mr and Mrs NYC have agreed to check in from time to time to keep us in the loop on their plans
They’ve accelerated their “retire in 10 years” plan by at least 70%, which is awesome
I’ll be interested to see what happens next too
Amazing how many people stay in New York. almost every decision we’ve made about FIRE has been oriented towards tax efficiency. With a military pension of $~5K/month, $3300 is already fed. and state tax free. The other $1700 is only taxed at the federal level (with deductions and credits this will be $0). My wife’s $40K/year in self employment is almost entirely shielded from tax by putting it into a solo 401k. the little self employment tax there is, is offset by the earned income tax credit, saver’s credit etc. dividends are tax free at the 15% level (as you mention so often). I even get a veteran’s full property tax exemption.
So with comparatively less overall assets than this couple (about $400k in retirement accounts + a paid off house worth about $200K), we’re pulling the trigger on FIRE this summer at 36 and 34 years so we can spend as much time with our 6 and 3 year old kids traveling and exploring as we want. Icing on the cake is that we can take military planes for free from the East Coast to Europe and West Coast to Asia and anywhere else they fly in the US. What kid doesn’t enjoy flying on a C-17? First class is rolling out your sleeping bag on the floor next to a Humvee. It took me several months too long to realize that we could easily live well on much less than the $90K-$100K/year of income we will receive in early/semi retirement. The taxes in Virginia made working (even with a six figure salary on top) a losing proposition over the long term.
Fantastic post that I could not have read at a more perfect time. I currently live in Manhattan and am planning to move to Seattle actually – I’m telling my boss next week. We’re leaving for a lot of reasons (despite my partner’s family being nearby), but the cost of living in NYC mixed with the high taxes were a large factor. it’s really eye opening to see all of this in one post. Thank you!
Any Reader Review opportunities were someone is making 30k or less and spending ~10k?
Definitely. Read through the submission guidelines and submit your request
Hello everyone, it’s Mr & Mrs NYC again!
Go Curry Cracker had asked that we provide updates as our decision-making progresses and so here is Update #2. In looking back at our Update #1 on February 25th, we’re reminded that a lot has progressed since then, especially our mental states: we’re going all-in.
We’ve decided that Mrs NYC would call it quits right away, we decided to put our NYC apartment on the market to see if we were made an offer we couldn’t refuse, and we decided that Mr NYC would work a little longer to practice living on just one income and for him to strategize the most likely route to getting laid off for the severance he’d be due – which is 1 year’s pay. So far so good on executing that plan!
March: We shut off our after-tax contribution setting in our 401ks to help build up our taxable accounts this year
Early May: Mrs NYC gave 4 weeks notice at her job
Mid May: We put our NYC apartment on the market
Early June: Mrs NYC had her last day of work and her first week of “retirement”
Mid June: We received a great offer on our NYC apartment from a buyer
It’s still early, but Mrs NYC is loving retirement so far. She has found some volunteering opportunities that she’s enjoyed and the days and weeks fly by more quickly than we had assumed and the lingering work stress has started to slowly melt away.
The buyer is an investor who wants to rent the apartment out. So we’ve written into the contract that we will rent it back from her for at least 6 months. So we’re going to be literally allowed to do what Go Curry Cracker recommended: “Sell Your House and Rent it Back”!
Mr NYC is currently planning to make his pitch to his bosses late in 2015 in his attempt to get laid off from Mega Corp sometime in early 2016. If the lay-off scenario doesn’t look possible, Mr NYC will resign in mid-2016.
Shortly after Mr NYC stops working, we plan to leave NY for a low/no tax state. We expect to try a few cities and neighborhoods before settling down in a new home base, and from there visiting family, friends, and doing long-term home rentals overseas to sample other cultures.
That’s our update, and we are also looking for some advice today.
Question #1. After the apartment sale closing, we will be getting a deposit of hundreds of thousands of dollars in our bank account. Any advice on how and when to deploy it?
HOW: We currently have our taxable dollars distributed across Vanguard index mutual funds at an aggressive allocation that we’re comfortable with. Should we simply invest more in the same funds? Or should we take it and send it somewhere else, like a robo-advisor ala Betterment or Wealthfront? The advantage I see with a robo-advisor is the auto-rebalancing and the auto tax loss harvesting. But tax loss harvesting doesn’t really benefit early retirees since we’re not depositing money regularly at different prices, right? Tax gain harvesting seems to better fit an early retiree, but it doesn’t look like any of the robo-advisors have figured that out yet.
WHEN: From what I’ve read, history says to invest a windfall all at once instead of dollar-cost averaging. Anyone suggest anything different?
Question #2. Our budget will allow us to spend about $80k/year from our taxable assets. Any advice on how to generate that kind of cash flow? Turn off dividend reinvestments on all taxable mutual funds – that will generate about $24k/year – then also sell funds quarterly or annually and park the spending money in cash to make up the difference?
Thanks again for your help, Go Curry Cracker!
Awesome news! Congratulations to both of you for taking action. And an extra big congrats to Mrs NYC for finding a more enjoyable use of her days
That you are able to sell your house and rent it back is the most hilarious thing to me. In emails, I learned that the rental price is less than Mr & Mrs NYC are currently paying for mortgage, taxes, and homeowner’s dues. Nice!
This not only improves cash flow, but also frees up all of the equity which can be put to better use
On to your questions:
How to use the equity – this partially depends on if/when you plan to buy another property. If you are considering buying a property in a no/low tax state in the near future, I would keep at least the down payment portion in short term investments. See what is currently going on in the Chinese stock market for why (down 30% in a short period of time.)
Otherwise, I would invest it per your target asset allocation.
When: Whether to do this all at once or over time is a matter of perspective. If you think the market is due for a correction, you’ll want to do it over time. If you think the opposite, you’ll want to do it all at once. Your guessing either way, so just make your best guess
Q2, cash flow management. See this post for how we do it.
https://gocurrycracker.com/cash-flow-management-early-retirement/
Mathematically, spending dividends and spending capital gains are equivalent. So use your 24k in investment income, and then sell appreciating assets to provide the rest. It’s a bit like adjusting your asset allocation, but without reinvesting the sales proceeds
Personally, were we in your situation, I would not buy a new property (unless it was a multi-unit rental), would invest the big check all at once, and would sell assets monthly or quarterly for cash flow needs. This keeps your assets invested fully invested for the longest time possible
For perspective, take one last look at the ideas for increasing portfolio longevity in my post on the 4% rule, and also look at the ideas for flexibility in the worst retirement ever scenario.
https://gocurrycracker.com/what-is-your-retirement-number-the-4-rule/
https://gocurrycracker.com/the-worst-retirement-ever/
Enjoy your retirement! And maybe let us know how things are going in a few years too
Jeremy
It really is our inability to imagine doing things differently that limits us. I had their mindset and habits. It took 6 years and many small steps to lead me closer to a frugal lifestyle. I could never have believed I would not miss any of the “trappings” of that lifestyle and I certainly never would have believed I would be happier. Freedom feels better than anything else. The world looks like a totally different place. I can have anything I want, but what I value most is time. What I wish to do with my time is spend it with the people I value most and experience new places.
Hi, Mr & Mrs NYC here again. As a new year dawns, we thought we’d update everyone on what’s happened since our last update in June 2015 when Mrs NYC quit her full-time job.
July 2015: We closed on the sale of our NYC apartment – producing $750k of investable assets – and started renting it back from the new owners on a 9 month lease (at $4,000 a month as compared to our previous $5,100 per month carrying costs).
September: Mr NYC informed his bosses of his intention to leave Mega Corp and asked them to lay him off in order to get severance (after 19 years of service, he was eligible for a full year’s salary).
September-May: Mr NYC received varying degrees of confidence that his bosses would play along. It was stressful!
Winter 2015/2016: We decided that we would make Chicago our first home post-retirement. It offers a lot of the same cultural and entertainment opportunities as NYC so there wouldn’t be lifestyle shock, it has excellent public transportation (we wanted to remain car-free), it is centrally located and has an international airport, and Mrs NYC has friends in Chicago since she lived there after college. And since Chicago is not considered a truly low cost of living location, we thought if we could make it (our annual budget) there, we could make it anywhere!
March 2016: we found and signed a lease starting May 1st on a 2 BR rental in a great neighborhood on the north side of Chicago for $1,450/mo including heat and laundry. Yes, that’s a 71% reduction from our previous monthly housing costs in NYC. Mr NYC also got the okay from his bosses that he could work remotely after he moves to Chicago as we wait for a layoff opportunity.
end of April: we packed up our NYC apartment and drove our rental truck west to Chicago, where we moved into our Chicago apartment, with Mr NYC working remotely.
mid May: Mr NYC was officially notified that he would be laid off with full severance including health insurance, with a last day in early June – a nice golden parachute into retirement!
June: Mr NYC had his last day of work and his first day of retirement!
June-December: Mrs NYC has found two volunteer opportunities in Chicago and is working 2-to-3 shifts per week. Mr NYC has found a volunteer opportunity with 1 shift per week, and he got hired as an usher for the Chicago Bears. He found a way to be paid to see his favorite NFL team play in person! The ushering gig is only about 6-hour shifts every other week for four months, so he still considers himself very much retired. He also spends time assisting three friends who have asked for his advice to invest better for their retirement. Mr and Mrs NYC have used their freedom to take a 2 week road trip to see family and friends in New York state, another 1 1/2 week trip to see family and friends in Texas, and shorter trips to Wisconsin, Michigan, Nashville, Tulum, Las Vegas, and back to New York. The big trip of early 2017 will be 2 weeks in Athens, Santorini, Madrid, and Barcelona. Mr NYC uses some of his free time to maximize travel dollars and miles by hunting for low airfares, car rentals, and hotels.
After having spent about $140k/yr in NYC ($60k of that was housing), we’ve been on an $85k/yr all-in budget here in Chicago. After eight months of living that budget, we’ve managed to stay within it. Three years living expenses (about $250k) from the sale of the NYC apartment have been invested in short-term instruments while the remaining apartment proceeds (about $500k) joined the rest of our assets in diversified Vanguard stock mutual funds. Starting January 2017, we’re switching our health insurance to an insurance company on the healthcare.gov marketplace and we’ll be getting a $424/mo subsidy to make it very affordable. We’ll enjoy the subsidies while Obamacare is still around (at the cost of not converting more each year from Traditional IRAs to Roth IRAs), and will adapt to future health care legislation.
After 6 and 18 months of retirement, respectively, both Mr and Mrs NYC are enjoying the reduced stress, the increased freedom, and the greater ability to help the charitable causes that we care about. Thanks again, Go Curry Cracker!
Thank you for the update! I enjoyed following your story and Jeremy’s analysis as well as the comments here. Good point on the healthcare subsidy. That was one of my questions to consider when FI.
If Mr NYC enjoys travel planning then he should do travel hacking. Jeremy has a post on how they got $10K in free travel. I do follow “the points guy” usually. But there are many sites to learn the nuts and bolts. We’ve been travel hacking for 10+ yes and personally I enjoy it more for the idea of miles/points as savings accounts lol.
We’d love to have another update for 2021 to see how you’re doing! Thanks!
Check out this one!
Mr & Mrs NYC Take On the World
That’s AMAZING!!! Congratulations and thanks so much for the update. Enjoy your retirement :).