Category Archives: Wealth

How Much Will Your Investment Be Worth?

One of the open questions I have re: investing is what – realistically – my investments will be worth after X # of years. Of course, one can estimate 3% annual return on the S&P 500 to be “conservative” and 10% to be the opposite, but in reality, what is the likely average annual return of the stock market?

While there’s no way to predict the future, lucky for us, there is a way to look at historical data to understand how we’d answer this question if we were to begin investing, say, in 1980.

According to this calculator – The S&P 500 Dividends Reinvested – we can find out that answer:

Scenerios

  • We started investing in 1990, and stopped in 2010, giving us 20 years of investment.
    • Total S&P 500 Price Return: 256.374% (inflation adjusted: 118%)
    • Annualize S&P 500 Price Return: 6.6% (inflation adjusted: 3.974%)
    • S&P 500 Return, Dividends Reinvested: 437.278% (inflation adjusted: 228%)
    • Annualized S&P 500 Return, Dividends Reinvested: 8.770% (inflation adjusted: 6.13%)
  • We started investing in 1984, and stopped in 2014, giving us 30 years of investment.
    • Total S&P 500 Price Return: 1094.274% (inflation adjusted: 427%)
    • Annualize S&P 500 Price Return: 8.6% (inflation adjusted: 5.7%)
    • S&P 500 Return, Dividends Reinvested: 2299% (inflation adjusted: 960%)
    • Annualized S&P 500 Return, Dividends Reinvested: 11.175% (inflation adjusted: 8.19%)
  • We started investing in 1974, and stopped in 2014, giving us 40 years of investment.
    • Total S&P 500 Price Return: 2829% (inflation adjusted: 538%)
    • Annualize S&P 500 Price Return: 8.8% (inflation adjusted: 4.7%)
    • S&P 500 Return, Dividends Reinvested: 1204% (inflation adjusted: 1963%)
    • Annualized S&P 500 Return, Dividends Reinvested: 12.049% (inflation adjusted: 7.8%)
  • We started investing in 1964, and stopped in 2014, giving us 40 years of investment.
    • Total S&P 500 Price Return: 2239% (inflation adjusted: 206%)
    • Annualize S&P 500 Price Return: 6.5% (inflation adjusted: 2.2%)
    • S&P 500 Return, Dividends Reinvested: 10367% (inflation adjusted: 1270%)
    • Annualized S&P 500 Return, Dividends Reinvested: 8.748% (inflation adjusted: 5.3%)
  • We started investing in 1999, and stopped in 2014, giving us 15 years of investment.
    • Total S&P 500 Price Return: 37.5% (inflation adjusted: -2.845%)
    • Annualize S&P 500 Price Return: 2.1% (inflation adjusted: -.192%)
    • S&P 500 Return, Dividends Reinvested: 81% (inflation adjusted: 28%)
    • Annualized S&P 500 Return, Dividends Reinvested: 4% (inflation adjusted: 1.6%)

Well, what this shows us is that generally investing in the S&P index over the long term works out fairly well. After inflation with dividend reinvestments 5% is a reasonable conservative estimate annual return for a long-term investment. However, if you started investing in 1999 and have invested for 15 years, you’d pretty much be at break even at this point (assuming you put all your money in up front.)

I’m still looking for a more robust calculator that enables one to input annual investments and see what these would have turned out with historic data. Do you know where one exists or care to build one I can use? 🙂

 

How to Get Rich Long

Good luck on getting rich quick. I gave up on that dream long ago. But getting rich (not super duper rich, but relatively compared to the rest of the U.S. population rich) is within reach for everyone. It really comes down to making more than you spend, spending less than you earn, earnings as much as possible when you’re as young as possible and investing that as quickly as possible into index funds.

Yes, it’s that simple.

If I could do it all over again, I’d get a job at the youngest age I legally could and start contributing as much as I could to a ROTH IRA each year. The best time to contribute to a ROTH IRA is when you’re making next to nothing. Why? ROTH IRAs are taxed up front, meaning if you’re making $10k a year you are not paying a whole lot in taxes but you’re still eligible to max out the ROTH IRA. Even the NY Times agrees with me.

Unfortunately, when I was 14 I had no idea what a ROTH IRA was, nor did I understand the magic of compound interest in terms of how it applies to personal finance over the years.

Let’s say a 14 year old contributes the maximum to her ROTH IRA (just $5500 a year) from age 14 through retirement. This smart gal wants to retire at 75. If she begins investing $5500 a year at 14 for 50 years, she will have $1,272,055 in retirement. That’s a lot, and should be enough to inspire kids to start saving young. But that’s with 5% ROI compounding annually. What if the stock market performs even better? Say, over 50 years the stock market is up 10% YoY on average? That same investment will be worth $7,687,296 at retirement.

Forget about inheritances, there is nothing more helpful for your children then to support them in maxing out their Roth IRA from the youngest possible legal age.

While it’s not possible for every family, offering your teenager a match on their earnings as long as they commit to putting what they actually earned into a Roth IRA, up to $5500, is a good way to start. If not possible to do a full match, think about what you can afford to match (50%?) to encourage them to save. Also, create charts which show them how much their dollar today will be worth in 50 years. While teens want to spend now more than later and aren’t thinking about their golden years yet, letting them know that your help could turn them into a millionaire in retirement by saving just $5500 a year will go a long way.

I wish the government would offer this program for youth — you earn $5500 and we’ll match it by putting $5500 into your retirement account. I guess that’s social security, but it’s not a 1 for 1 match. This should be a program for people under the age of 21 to teach them about the value of savings and give everyone a head start for retirement. I don’t know how that would work, but it would certainly help out families that cannot afford to match their children’s contributions.

Even if your kids can put away just $1000 per year in a Vanguard STAR fund, this will go a long way in retirement (though I recommend maxing out the Roth IRA every year from age 14 on.)

So you didn’t start a Roth IRA at 14?

Investing ASAP, whenever that is, will help you get to wealth. For better or worse our economy is set up where riches only come with some risk. If you don’t take risks, you may very well lead a comfortable life, but it’s unlikely you’ll be rich (unless you have a trust fund.)

If you give yourself 40 years until retirement at a 5% YoY return rate, you’ll have $736k when you retire at 65 (and start investing at 25.) A 10% YoY return rate will give you a nice $2.9M in retirement. Given that today people should try to reach $2M before retiring, starting investing at 25 at the latest is an ideal move.

Ultimately, if you wait longer to invest, you have to invest more per year in order to catch up. That can be very hard when you’re not earning a lot in your 20s and then if/when you have kids and find it harder to save in your 30s. Starting early when you are supported by your parents but can still earn and invest the best way to prepare for retirement, so you don’t even have to think about it beyond the $5.5k annual contribution throughout your life. You can also start to max out your 401k if you have access to one ($17.5k) at some point, but there will be less pressure on doing this and you can enjoy your money when you’re still young enough to travel and have a very active life.

Rich, IMO, is not about the $ amount you have in the bank, but about the financial security you have so you feel comfortable spending money NOW to enjoy life. This is not the same as wasting money on frivolous luxury items (though if this makes you happy and you have saved for retirement and your other basic needs, then go for it) but this means being able to afford a house, a car, family vacations, dining out every once in a while, and the lifestyle YOU want. That’s what “rich” is. Working towards reasonably hitting $2M in retirement (which again, is very possible if you start at age 14 – 20), will make you rich.

Offsetting Capital Gains with Tax Loss Harvesting

This year in order to afford a few items, such as my used car purchase, I sold a bit of stock. What I Wasn’t considering at the time was the amount of capital gains tax I’d have to pay come April. So now I’m trying to quickly offset my capital gains with losses (which for better or worse are starting to appear in my portfolio due to the stock market pullback as of late.)

At the moment I have $3792.71 in long term gains and $256.95 in capital losses. (This doesn’t include dividends which are starting to add up, and I really need some advice on dividend strategy since I’m might — if i’m lucky — hit Obamacare fines in 2015 (if I make $200k, which is possible due to my bonus structure, we’ll see… still a stretch goal but more possible then ever before.)

Therefore I need to offset 3535.05 in capital gains or I’ll have to pay approximately $883 in tax come April. That’s a bit of a pain because I know I have a pending loss of a whole chunk of money in my former employer that will likely go under in the next few years, but I can’t sell that stock as a loss yet. So I’m left with $3535 to deal with or else I have to pay an extra $900 in April.

I guess you can say that it is silly to *try* to find $3535 in losses to offset a $900 tax. However if the losses exist anyway it makes sense to take them (i.e. sell the stocks) and then immediately reinvest them in a potentially better performing alternative.

It’s also not so silly because I happen to live in the second highest place in the WORLD for capital gains taxes. That’s right, California has the highest U.S. capital gains rate and the second highest internationally, with a top rate of 37.1%

Since selling anything from my Sharebuilder account costs $8 per fund, I started clearing out in my Vanguard fund, which allows free trades between funds.

Thus, the other day I took a $419.08 capital loss on two funds that had shot down due to the stock market corrections…

That leaves me with $3116 (or $779 in tax) to deal with in the next two months.

I think I may have some rollover capital losses that I need to deal with from 2012 and 2013… but that would only be at max $1000… still need to find $2000 in losses to tax harvest these gains away.

While my IRA accounts are performing poorly that doesn’t help. My Sharebuilder individual taxed stocks and ETFs are actually doing fairly well. Boeing (BA) is down a bit so I might sell that, but waiting on it to either go down enough where it seems to make sense to just sell it for the loss (i.e. $200 loss or $50 savings doesn’t seem to make sense, though I would just have to sell it and wait a month to buy the same stock back so I could take the loss, not a big deal. The question is will the stock go up more than $50 in a month to make the point of selling it moot. Who knows, but $50 isn’t much in terms of the market so I’ll prob just continue to hold. In reality I should probably buy more now, not sell it.

Ok, so it looks like I’ll probably just have to deal with paying an extra $900 in taxes this year. At least I’m not dealing with AMT in 2014 and taxed an extra 5% on my capital gains. Next year I just need to remind myself not to sell any of my investments in case I happen to hit AMT and the Obamacare tax. I can sell my stocks when I’m retired. Only PITA side of the equation is that since all my money is tied up in stocks I won’t ever have a downpayment for a house. Kind of sucks but at least I should be ok in retirement.

Anyway, it’s been a rough money financially. Just due to stock market plus not having job I’m down about $20k. I still have high hopes for hitting my $300k goal this year but the stretch goal of $325k is probably not going to happen. If the stock market keeps kicking my ass I may be able to save $900 in capital gains tax but I won’t get to $300k, which would make me sad. That said, I’m fixated on breaking $400k by 2016 (and the big $500k by 2017) so… I’ve got a lot of work cut out for me. If the markets don’t cooperate then I guess… no matter how much work I cut I won’t actually hit my goals.

Update: Tax Benefits only the Rich Enjoy

One of my readers, Jake, posted a thoughtful response to my post 10 Tax Breaks Only the Rich Enjoy noting that my explanations were factually inaccurate. I thought he had some really good points, so I wanted to address each below. I also want to clarify that I do not necessarily have anything against rich individuals who worked their way up to obtain wealth. The problem is that once a family has money they can maintain that money within their family for generations, with many “trust-fund babies” not having to earn their wealth. Also, I have a problem with tax loopholes that are designed to only benefit the wealthy yet that are useless to the middle class.

(Side note: I think that federal and state income tax should be adjusted for cost of living per county. It is obscene that a San Francisco household should have to pay the same effective tax rate to someone in Fresno where cost of living is much lower. $300k in AGI for a married couple is a lot in many regions of the country and in others it is squarely in the middle class. Thus, income tax brackets should be adjusted for cost of living. I’m not sure if this could work, but it would make a lot more sense then the current tax system.)

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Jake wrote: “Sorry, but most of this applies to the 0.01% of income earners, not the 1%. Additionally, a lot of what you outline is misleading. I’ll address each section.”

While many of these tax breaks are most beneficial for the .01%, the .05% and yes even the 1% get more out of many of these tax breaks than people with middle class incomes. The super, super rich get the best tax breaks of all.

RE: The Rich paying 0% on Capital Gains Tax

Jake: I don’t know how you got 0% capital gains tax. Not only do the rich have to pay capital gains tax, but they pay it at a higher rate because of their income.

The really rich do not pay capital gains tax at a higher rate. How can this be? Most people who aren’t extremely wealthy have to work and work for pay. When we work, we generate income. This income is what defines our capital gains tax rate. The top capital gains rate for the wealthy is 20%. So how are some getting away with not paying any capital gains tax?

The super rich do not need to generate income. If an investor is in the 10% and 15% tax bracket for income, then s/he pays 0% in capital gains tax. This means that if someone has enough money to sustain them via investment growth and dividends, s/he never has to earn income and can stay in the lowest income tax bracket, thus withdrawing any dividends and gains on investments at a 0% capital gains tax rate.

Thus, my point is that capital gains tax rate should be the same for everyone, not based on income levels, so that way no one can cheat the system.

RE: Mitt Romney paid just 15% federal income taxes despite making way more money than someone in the top brackets

Jake: Yes, Mitt Romney paid 15% in federal income taxes, but most Americans making 50-75k paid 7.8%. Someone that makes 100-200 paid 12.1%. The kicker? The bottom 50% of income earners paid 0% in income taxes. It puts Romney’s 15% in context. These are facts.

This isn’t about the bottom 50%. Yes, in our society people who make money pay tax to support services for people who are unable to make enough money to live, true. But the actual problem here is not about the bottom 50%. It’s the fact that the middle class is disappearing due to loopholes like this only available to the super rich. If you make $100,000 a year (single filer) you will pay 21.18% of all of your income to federal tax. If you make $200k, you’ll pay 24.93% of your income to federal tax. At $300k a year, that’s 27.62% to federal taxes. But if you’re super rich and in one of these jobs where the loopholes are available, you can pay much less while earning much more.

RE: Home deduction tax benefit is much better for the rich than the middle class

Jake: “Yes, the rich enjoy the home interest deduction along with 67% of America. The rest of Americans can also deduct the full amount, while the PEASE limitation reduces the amount that the rich can deduct.”

True. However, the way taxes work, the wealthy are getting a much bigger benefit to purchase property over the middle class. If the wealthy haven’t taken advantage of the former loopholes, basic math tells us that the deduction for the rich is going to be greater than that for the middle class. “One of the unfortunate and largely unintended effects of structuring tax benefits as deductions or exclusions is that they tend to provide much bigger tax benefits to those in the highest tax brackets. For a wealthy taxpayer in the highest tax bracket—now 39.6 percent—a $10,000 itemized deduction, such as one for mortgage interest, results in $3,960 in tax savings. For a taxpayer in the 15 percent bracket, however, that same deduction is worth only $1,500.” (source) Yes, the PEASE limitation is helping this a bit, but the mortgage interest deduction still percentage-wise much greater benefits the wealthy over the average middle class person.

RE: Giving to charity to preserve family wealth

Jake: “This just doesn’t make sense. How can you knock giving to charity?”

Answer: Because “giving to charity” is not always actually giving to charity. For example, the Walton family, heirs and heiresses to the Walmart fortune, are using this loophole very smartly to preserve their wealth over generations. With a fortune worth $115.7B, the family is set for at least a few generations, and tax laws help them ensure this.

How is this possible? The Waltons and many other super rich families use a charitable trust that allows the donor to pass money on to heirs after an extended period of time without having to pay estate tax! If a donor locks up assets in charity  trusts (CLATs) for a long period of time an amount set by the donor is giving away each year but whatever is left goes to a beneficiary TAX FREE. Just one of the charitable trusts would result in $2.2B for Walton heirs, without owing any tax on it. (source). While most people won’t have to pay estate tax anyway (your estate needs to be worth more than $1M before estate taxes begin to be levied), it is the super rich that the estate tax is designed for – to ensure that people aren’t just living off their family’s wealth and never paying a cent to support the government or working a day in their lives.

RE: Deduction for private jets

Jake: ‘Not many 1%’ers own private jets. That’s for corporate CEOs, professional atheletes and entertainers….many of the 0.01%”

True. This is probably relevant only to the top elite only. Nonetheless, it’s still a tax break the super rich enjoy.

RE: Fake-Out Agricultural Tax Credits

Jake: Anyone who owns a home can do this (67% of America), not just the 1%

Each state has its own rules on how individuals who own property can take tax credits for agricultural use. The point is not whether anyone who owns a home can take these credits, but how the credits are much more valuable for people who own expensive homes and properties. Another example of this – in NJ, fake farmers are costing the state millions of dollars. The Farmland Assessment Act of 1964, intended to preserve agriculture in NJ, is being used by millionaires, developers and anyone with at least five acres of land to slash their farmland tax bills by 98% — all they need to do is produce $500 in goods per year to qualify for tax breaks. For instance, one person used a cow to eat the home’s front lawn for a few months and then sold the animal, enabling the individual to take the tax break on their five acres.  Even Bruce Springsteen takes this tax credit. While he pays $138k a year in taxes on his own home, he owns an additional 200 acres which he has a farmer come and grow a few tomatoes so he doesn’t have to pay a lot of tax on this land (only $4639 per year.) (source)

Thus this tax loophole doesn’t benefit 67% of America who own property, but only the super wealthy who own more than five acres of property (rules vary per state but generally this is designed to help the super rich fake farmers only.)

RE: Rental Property Tax Benefits

Jake: Anyone with a rental property can do this type of exchange, not just 1 percenters.

Again, you’re spot on Jake. Anyone can take advantage of the tax loophole which enables them to purchase rental property and do a like kind exchange to trade it for property worth the same or more without paying taxes. Now, only the rich can afford to do this enough for it to make a big difference. For example, as someone with $300,000 networth, I invest in real estate via REITs. When I sell a REIT I must pay capital gains tax on this REIT, even if I want to purchase another REIT. I cannot just trade this without paying any tax. Also, I could own rental property and do a like kind exchange, but with $300,000 total in networth I’m not going to be able to purchase enough property for this to really help. Since wealthy real estate investors can do this over and over again (there is no limit for how many times they can trade property without paying tax and taking deductions for depreciation of their owned properties on sale) in the long run they will only pay capital gains rates on the property sold last.

But if you’re really rich, you never have to sell this property when you’re alive! You can pass this on to your children tax free. The basis which your children will pay tax on upon sale of the asset is determined not by how much you paid for the property in the first place, but instead how much it was worth on the day you die. Assuming you were a very smart investor and used like-kind trades throughout your life, you could have significantly grown your real estate value over time, enjoyed depreciation deductions, and then pass on the property tax free to heirs who can sell it for the amount it’s worth on the day of your passing. Most people cannot afford to keep so much of their networth locked up in investment property, but the super rich can.

So, Jake, as you see, much of my points have to do with how these tax benefits mostly help the super rich. This may not be the 1% but at 1% you start to experience some of these benefits. Once you have a certain amount of money in your family, though, you can maintain it for many, many generations through these loopholes.

 

10 Tax Breaks That Only The Rich Enjoy

Ahh, what’s that smell? American Greed?

We 99%ers love to call out the 1%. Some get to the 1% with hard work and luck, but many are placed there due to being born into privilege and likely a sizable inheritance. Others weasel their way into wealth. Few can get there in a way that wouldn’t make some “kooobaya-type god”scream mercy. Regardless of how the 1% made it to the top of the fiscal food chain, they can enjoy a whole host of benefits staying there — private jets, beautiful women, more beautiful women, houses, yachts, and — last but not least — some really tricky tax breaks so they can just keep accumulating more and more wealth!

Here are 10 tax breaks that only the super rich enjoy. Read ’em and weep.

  1. Income Tax, Smincome Tax
    The rich don’t need your stinkin’ income. CEOs can come out and say they’re going to take a $1 salary and the masses think that they’re being just so damn humble and giving. Not so. While us lowly folk have to work and get paid salary to do things like eat and have a roof over our heads and pay for our kids piano lessons, the rich can take their heaping savings and put it into investments that compound over time. Good thing these folks are not actually earning any income because that means they can enjoy 0% tax rates on all of their capital gains. The best us lowly folk can do is attempt to put together an investment plan that eventually provides us with enough dividends and capital gains to also take out our money tax free, even if we never have an army of beautiful girls/men and/or private jets (source)
  2. Taxes Are for Losers (AKA Poor People)
    Some rich folk work in fields like investment banking, private equity management, or real estate partnerships. Not only do they get paid a lot off the bat for these roles in terms of total compensation, their pay is not in the form of that same lowly income you and I see deposited into our bank accounts every few weeks. These modern-day royals get to be paid in a “carried interest” which is – somehow – usually taxed as a capital gain instead of ordinary income. That means these richies are paying 20% taxes to the federal government on all of their earnings. Even Mitt Romney managed to pay 15% taxes for his great service to our country as head of Bain Capital (yea, aren’t you glad he didn’t become our president?) (source)
  3. Home is Where the Cash Is
    The government wants to encourage home ownership because this means the country is more stable, generally speaking. Thus, big brother provides tax incentives for home owners of all wealth levels (as long as you can afford a house.) However, the best writeoffs go to the super rich. The mortgage interest deduction lets taxpayers who itemize deduct the interest they pay on their home mortgages. The way the program is set up, the more expensive the home and the higher the homeowner’s tax bracket, the bigger that subsidy is. (source)”Less than one-third of taxpayers are able to take advantage of the deduction—it is restricted to those who itemize their deductions, a group that skews toward the upper end of the income distribution. Also, the benefit is tied to the marginal tax rate of the taxpayer and so has higher value to those with higher income. For households making above $200,000 a year, the average benefit is $1,784 a year in tax savings. For households earning $65,000 a year, the deduction generally yields less than $200 in tax savings.”  (source)
  4. That Foggy Definition of Charity the Rich Love
    Oh, what wonder, a 1%-er is donating something to charity. That’s great, if genuinely done to help an organization, but often the reason for donation is not exactly out of good will. It’s horrible to say but many charities are corporate scams. Seriously. Let’s take a look at Walmart. The Waltons, owners of Walmart, are using “Jackie O” trusts to both give money to charity AND pass on money to future generations without paying estate taxes. Oh, and did I mention they’re doing this all through their own charity, The Walton Family Foundation? This is perhaps more disturbing than the other tax loopholes because wealth dynasties are why inequality is cemented into American culture. (source)What’s more, “generally, you can deduct the fair market value of property you donate to charity if you’ve owned it for more than one year and the property is used to further the charity’s tax-exempt function. Thus, the appreciation in value is untaxed forever. The tax law limits the annual deduction for gifts of appreciated property to 30 percent of AGI, but that still provides a gaping tax loophole.” (source)
  5. Beam Me Up and Around and Around Scotty
    Geez, private jets are just so damn expensive. But how else are the rich supposed to get from point A to point B? Not with the underlings, by god. There is a special subsidy for corporate jets which cost taxpayers $3 billion a year. Yes, a common tax trick and CEO perk is to pay for private jets under the guise of security (because what if a poor average flight attendant accidentally spilled coffee on their Prada suit during a turbulent flight???) If a benefit is classified as for security purposes the CEO will pay a reduced tax bill or no tax at all on the bene. (source)
  6. Mooooooooooooooooooooooooooooo. Mooo. Mooooney
    I feel like we should just let this tax write off slide for the sheer fact of it being so ridiculous. JK. This will make you want to go tip some cows. In states like New Jersey, Florida, Texas, Iowa, Colorado, Alabama and more, farmers can take a tax deduction for their service feeding our great nation. That is, even farmers that aren’t farmers at all. According to an article in The Nation, that’s what Michael Dell did with his second home—a suburban ranch in Austin. Because he hunted there periodically and maintained a “well-managed deer herd,” he was able to reduce the property’s 2005 market value from $71.4 million to an agricultural value of $290,000. That saved Dell—but cost Texas—$1.2 million. Florida has a well-known “rent a cow” program (I kid you not.) What is this cow business? To qualify for the tax writeoff, Florida requires a couple of cows or a herd of goats, which don’t have to be on the property all the time. So you have wealthy people paying next to nothing on property tax because they own lots of acres and can afford to rent a few cows.  (source)
  7. John Edwards and Newt Gingrich Walked into a Bar (and didn’t pay any tax)
    This one is a doosey and surprise surprise it involves politicians again. Slime of the earth. Payroll taxes are supposed to be paid on income from work, with social security payroll tax paid on the first $113k in earnings (as of 2013) and medicare payroll tax paid on all earnings. Except S corporations, which are made up of a partnership of self-employed type folks, don’t need to qualify all their earnings as payroll, and thus it doesn’t need to be taxed. This one gets a bit complicated to explain, so just check out this writeup to get the full picture of how dishonest richies can get away with legal tax loopholes that only benefit the 1% (source)

    • Newt Gingrich: In 2010, Gingrich Holdings, Inc and Gingrich Productions paid Newt Gingrich$444,327 in wage income while declaring $2.4 million as profits of the S corp. This allowed Speaker Gingrich to avoid $69,000 in Medicare payroll taxes. [Wall Street Journal Market Watch, 1/23/2012]
    • John Edwards: Senator Edwards earned $26.9 million from his work as a trial lawyer in 1995. He paid himself a salary of $360,000 each year for four years and took the rest as distributions from his S corp. This saved Senator Edwards an estimated $600,000 in payroll taxes. [New York Times, 7/10/2004]
  8. Selling a House and Paying Taxes?  Yea, Right.
    Even average American homeowners can take $250,000 of their home price increase tax free ($500,000 for married homeowners) which is a pretty good deal after years of fixing broken air conditioning systems and having termite genocide parties. But the real tax benefit for housing is only available to the super rich (surprise!) A 1031 Exchange, also called a like-kind exchange, enables real estate investors to trade the equity in one property to another property of equal or more value without having to pay taxes (yes, you heard me right.) The taxes will need to be paid eventually, but the investor, in the meantime, gets to reallocate their portfolio and you can still take a depreciation tax write-off on your properties that are being exchanged. There’s no limit to how many times you can do a 1031 exchange. Since the rich are doing this with their real estate investment property (you can’t do this with personal property, sorry 99%), when they do sell it eventually they’ll sell at the capital gains rate. (source)
  9. Tax Breaks (i.e. Itemization) Seriously Favors the Rich
    There are many different tax deductions available to take. But, of course, in order to take a deduction, you must itemize your taxes. While itemizing makes financial sense for high-income Americans, it does not for low ones. This means that deductions are mostly utilized by the rich. Only about one-third of Americans itemize their deductions, and they are mostly the well off. In 2010, only 29.3% of those making between $30,000 and $50,000 itemized, but 96.8% of those making $250,000-plus did. (source)
  10. One Home is Just Not Enough
    Speaking of itemized deductions, owners of two homes get to write the mortgage of their second one off as well, as long as they itemize. It turns out this tax benefit isn’t for folks who own tiny little vacation bungalows by the shore or middle-class lakeside cabins. Nope, the main benefactors are the super wealthy. Just to rub salt in the wound of us reg’ies, rich folk can DEDUCT THE INTEREST PAID ON THEIR LUXURY YACHTS (fyi that clink-clanking you hear is the sound of me kicking all the buckets in the world.) As long as these boats are equipped with sleeping quarters, a kitchen and a toliet they can deduct the mortgage debt on these “homes.” (source)

 

The Valley Between Wealth and Regular

For many people I know, wealth isn’t something they ever experience. Growing up in a suburban, middle-class town on the east coast, no one just had millions of dollars in the bank. If they did, they wouldn’t have chosen to live here.

But life on the other coast is far more steeped in the upper echelons of society. However, the millionaires and billionaires are mixed in with the rest of us. My former managers, likely already millionaires, have gone on to obtain even higher paying positions. Yes, they’re good at what they do. But there remains this great divide between the ridge I’m on and the ridge they’re on. Even colleagues who were my equals at one point have gone on to surely earn way more than I’ll ever be able to make. I’m torn on whether or not I actually care.

The idea of being on a career path where I could earn $200k+ a year is tantalizing, in a way, as that kind of income would provide an awful lot of cash to stock away into savings and investments. I just am not a leader in the same way they are. Yes, all of these people that come to mind are male, but they are just good at seemingly like they have their shit together and managing teams of people. What am I good at? Being creative. Editing. Anything other than managing.

It is just so crazy to me how close I am to all this wealth. I’m also close to people who probably have $1M – $2M in the bank, who want to be multi-millionaires. I’m pretty sure if I ever hit $2M I’d quit my day job and do something completely unrelated. I wish I could move up the ladder more quickly, but I also can’t figure out how to. In the opportunities I have to really lead I seem to do poorly because I always get stuck on the details. For example, directing a corporate video voiceover track down to the intention in each line because, god, it was just sounding like Siri on cocaine. I just need to learn to stop caring so much about the details and focus on “more is more.” And promoting all of the work even if I know it’s not perfect. That certainly doesn’t come natural to me.

 

Networth IQ Series: How Did You Save?

Since 2007 in addition to keeping a personal finance-ish blog, I’ve also obsessively updated my networth on the NetworthIQ site (my profile here). While the site itself hasn’t been updated in years, what it does have is a very interesting community of people who track their networth on a monthly basis. While there are some outliers of people who seem to like to pretend to have millions of dollars when they clearly do not, most of the profiles are legit, and some are very impressive. This led me to wondering – who are the people behind NetworthIQ, and how did they save their money? The great news is that everyone has been so wonderful about sharing their stories when I reached out.

To kick off the series, I interview Jonathan, a 31 year old in Arizona with no formal education who has amassed $943k in networth as of October 2013. This year, he is set to gross over $350k per year. What does Jon do for a living, you ask? He’s a programmer, which explains the sky-high salary. But he’s also a self-made man. And he’s expecting his first child with his wife this January, so we’ll have to check back in with him once he’s buying diapers. That said, having nearly a million in networth at 31 is nothing to shake a stick at. So, other than being an engineer, how did Jon do it, and what advice does he have for the rest of us? Continue reading

Two Months to a Quarter Million Dollars?

In 2007 I started tracking my networth when it was at about $25k. While that seemed like a lot at the time (my income was about $50k) the concept of saving anything substantial, like more than six figures, still felt so foreign. Six years later, I’m actually about to hit the quarter-million mark in networth.

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Even a year ago, it didn’t seem possible. Even now, it doesn’t. I’m at $244k as of Nov 1, which is still 6 months to my goal of $250k before 2014. But if the stock market / my individual stocks keep moving up, it is possible. What’s crazier to me is that if, somehow, next year, I can make a 10% return on my portfolio that is $25k in growth JUST from having $250k invested. Of course, 10% is not a sure thing and I could just as easily lose 10%, so I need to be careful. But I’m proud of myself — I’ll be 30 this month and I said by the time I turn 30 I want to have a quarter million dollars in the bank, and while it won’t be by the second I turn 30, it will prob be before New Years. I’ll count that. Plus, I even fit in a $3k, 2-week international trip without killing my goal.

The next BIG goal is $500k before I have kids. Well, that really depends on when I’m having kids. I still want to save $50k a year, but that means I won’t have kids until I’m 35 (I’d like to start earlier.) I want to start the kids thing at 32, I need to up the yearly saving. Really that’s three years of savings at an average of $83k per year. That’s a lot. I don’t think that’s possible. I mean, I could get another job and make a lot more money and then maybe it would be possible. But it is more likely I’ll make the same or less, and I’ll also end up moving in with my boyfriend and paying more in rent than what I pay with two roommates. So that goal is probably actually impossible. But I’ve hit my impossible goals before… three years of crazy frugality for $500k before kids? Well, it would be an amazing feat.

Wealth and Soul: Living Amongst the 1% in Silicon Valley

TeslaAnother day, another dozen $100k Tesla Roadsters passing by on 101. You hike the same hills as millionaires and billionaires, and share the same views during a relaxing day trip to the coast. You work amongst executives and entrepreneurs who have enough to retire on tenfold in the bank, yet are working and building something because they have something to prove to the world and their own egos.

But you are not the 1%. You drive a Honda. Or a Toyota. You work for the 1%. You have a life built on a dream that maybe your stock options will one day get you to that echelon of the Valley. Or make it so you can afford a nice $1.4M home in the Belmont hills (forget Hillsborough or Los Altos.) The older you get, the more you realize that the only way to make it outside of getting extremely lucky is to marry engineering talent or entrepreneurial genius. Or share a common bloodline with tech royalty.

That isn’t my life. I watch with envy as an acquaintances’ husband hits the jackpot in an IPO, their family likely set for life. Another friend of a friend, also married to an engineer, can afford to be a mother and work part time. I look around me at the women I know and they are either struggling to make ends meet or their husbands have impressive, stable, well-paid jobs at F1000s and startups where they are some of the most valued and thus retained-with-benefits employees. Continue reading

America’s Most Stressed Generation

In today’s latest bit of depressing sociological discovery by The New York Times, reporter Catherine Rampell highlights what personal finance bloggers have been saying for years – college degrees are the high school diploma of years ago, but the cost for the degree isn’t fairly matched with the proper career and salary.

The article features a law firm in Atlanta that has a policy to only hire employees with college degrees, even for the $10 per hour “runner” job that really shouldn’t require a college education to perform. Due to diploma inflation and weak job markets, it’s easy to make the cut off for consideration in any role a degree. The firm agrees the education isn’t really necessary for the positions, but the social life gained in college to joke about school sports teams is. How sad.

In 2005, when I graduated college, the job market was better than it was today. I still had a very hard time finding a job, but refused to settle for an administrative position which took the four years of schooling I had just completed and rendered them useless. Luckily, I had the fortune of changing jobs frequently early in my career and moving up with each transition. These poor college grads working at this law firm are loyal to a fault, and are excited for small raises being promoted from one position that shouldn’t require a college degree to another. These are the same people who need to go back to school to get an MBA or professional masters degree in order to make any sort of reasonable living. The bachelors degree just gets them a very basic job. Continue reading