December 2015 – The Stocky Fox

Saying “I Do” impacts what Uncle Sam says he’ll take

December 31, 2015January 25, 2016 Stocky 1 Comment

Foxy Lady and I have been thinking about getting a divorce. We don’t want to leave each other or be with someone else. We still love each other, probably more now having been through 6 years of marriage and having brought two amazing cubs into the world, than when we were first married. And let’s be honest: there’s no way I could do any better. Foxy Lady is foxy, is an amazing mom, has a high-powered career, let’s me stay at home with the cubs. She probably could do better, but don’t tell her that.

So we still want to remain fox and vixen, but just not in the official “married” sense. What gives? Since it’s a topic of this website, it probably has something to do with personal finance. By being married we pay about $15,000 more in taxes than if we were living in sin as two single foxes. Let me explain:

The federal tax code (and that of many states) is extremely complex and curiously set up. It is meant to be progressive (wealthier people pay a higher percentage of their income in taxes), but in an attempt to achieve that goal, lawmakers have created a bit of a cluster that has some seriously screwed up features. The “marriage penalty” is one of those.

Paying more if you’re married

Let’s look at two nearly identical couples: Mr and Mrs Leopard who are married, and Mr Tiger and Ms Lion who have been living together but never tied the knot. Mr and Mrs Leopard each have good jobs and each make $100,000. Similarly, Mr Tiger and Ms Lion each have good jobs and each make $100,000.

Mr and Mrs Leopard file jointly and owe taxes of $43,000 on their $200,000 income. However, Mr Tiger and Ms Lion together owe taxes of $39,000 on their $200,000 income. What the hell?!?!?! Mr and Mrs Leopard are seriously pissed. Mr Tiger and Ms Lion just paid for their annual family vacation Disneyworld. Or better yet, they can use that money to fund an IRA and in 30 years they’ll have an extra $320,000, thanks solely to the fact that they never said “I do.”

That seems like a pretty big deal. Being married or not has a 10% impact on the amount of taxes you pay. How is that possible? This is fundamentally an issue of figuring out who the IRS thinks is rich, remembering that we have a progressive tax code.

The IRS looks at two people with a combined income of $200,000 as being richer than one person making $100,000. Maybe that makes sense. The couple is probably pooling expenses like housing and the bills that go along with that. A single person is bearing those housing expenses on her own. That, in a nut shell, leads to the IRS taxing the $200,000 couple more than the $100,000 individual.

That’s all well and good until you have situations like Mr Tiger and Ms Lion. The rationale that the expenses for two single people go out the window because they are really acting like they are married, sharing their living expenses just like Mr and Mrs Leopard. When you choose filing status you can pick “Single” or “Married” but you can’t pick “Single but pretty much act like we’re Married.” That’s the loophole.

Paying more if you’re Single

The opposite effect also occurs. Imagine Ms Ocelot and her boyfriend Mr Panther. Ms Ocelot has a high powered career where she’s making $200,000. Mr Panther is a freeloader who watches TV and plays video games all day and occasionally writes on his blog which doesn’t generate any money.

Ms Ocelot pays $50,000 in taxes on her $200,000 income. But if she made an honest man out of Mr Panther, their tax bill would fall to the same $43,000 that the Panthers pay.

That $7000 annual difference is just the same effect as above, but in reverse. The IRS views a single person making $200,000 as being richer than a couple making that same amount. Again, it kind of makes sense; that income is only supporting one person in the “single” example but two people in the “couple” example.

What it all means

“Stocky, what is the point you are trying to make? Surely, you aren’t suggesting deciding on marrying someone based on the tax code.” I kind of am. Are you married because the state of Illinois or the US government says you are? Not really. You’re married because you love your partner, you want to take on life together with that person, you are committed to her until the end of your days. That’s how it is for me.

If the government said there was a clerical error and our marriage certificate was never filed so I wasn’t actually married to Foxy Lady, I wouldn’t love her any less. I wouldn’t be less committed to her and the two cubs we’ve brought into this world together. Actually, I have a few friends, and maybe you do too, who are as committed to each other as any married couple, but they aren’t married in law.

But since the federal government says Foxy Lady and I are married, legally we MUST file as “Married” and that ultimately leads to us paying about $15,000 more in taxes than if we acted in the EXACT same way but just never signed that piece of paper six years ago. And that’s serious money. $15,000 in our case or $4000 in Mr and Mrs Leopard’s case or $7000 in Ms Ocelot’s case really adds up. Over a life time, that could be a million dollars.

Marital advice from Stocky

So does Stocky endorses people who make similar incomes to not get married and couples where one person makes a lot more money to get married? It seems severe, but why not? This is one savings strategy that could pretty much fully fund your retirement.

Of course there’s the big caveat that you need to be in a very strong relationship. One so strong that legally being “married” or “single” doesn’t impact the real-life state of your relationship. If yours is at that level then seriously consider taking the free money the IRS is making available.

Yet, when I give that advice to people, recommending that they get divorced (but remain totally committed like they were married), they look at me like I’m crazy. How could I even suggest touching the most sacred of unions for a few bucks. Totally get it. And to date, no one has followed my advice on this, so there you go. But if your marriage is such that it can survive the US government saying your single, there could be some serious dollars in it for you.

You’ve ready my crazy theory on how to reduce your taxes. What do you think?

Investment returns of home improvements

December 28, 2015December 27, 2015 Stocky Leave a comment

As many of you know, the Fox family moved from California to North Carolina when I quit my job and Foxy Lady got a great job with VF Corporation. Part of moving is getting a new house, and part of getting a new house is fixing it up and updating it so it’s just the way you like it.

So often people look at home improvements as an “investment”. And most of the time they misuse that word. To me an investment is something where you pay money now with the expectation of getting that money back in the future plus a return on top of it. Most home improvements aren’t investments at all; they are just expenses. For example, painting the rooms in your house isn’t an investment. You’ll never get that money back. It’s not to say that you shouldn’t do it. Maybe you’ll really the new look of the room and that will make it worth it. But don’t say it’s an investment.

In fact, it’s pretty well accepted that almost every home improvement you do will give you a negative return. Of course, that doesn’t mean you shouldn’t do it. It’s just you should do it because you’ll enjoy your new kitchen or your three-season porch or your hot tub, not because you think that $10,000 you paid will increase the value of your house by $11,000.

All that said, there are a few home improvements that we’ve done, or are considering doing, that might make good investments in the “finance” meaning of the word:

CFL and LCD light bulbs

LED.BULB.A23-150W

In the past few years there has been a real revolution in light bulb technology as traditional incandescent bulbs have given way to newer, more energy efficient technology. In our new house we had a lot (probably 60 or more) light bulbs in the house, all of which were the older, incandescent kind. Would it be a good investment to change all those out for LED bulbs?

To do the calculation, you have to estimate how expensive electricity is (in North Carolina it is about $0.12 per kWh) and how much you use that bulb each day. For a bulb you’re using a lot, that might be 4 hours a day or more. Then you have to compare the cost of an LED bulb to a regular bulb. In the past couple years prices for LED bulbs have come down precipitously (deflation); just a quick search on amazon.com shows that you can get an LED bulb for about $4 (with an expected life of about 18 years) and an incandescent bulb for about $1 (with an expected life of about 2 years). Of course, the reason you would do that is beyond LED bulbs lasting a lot longer, they also use about 85% less electricity. So it becomes a pretty simple calculation of does the longer life and electricity savings make the higher price of the bulb worth it?

This is a big, fat YES. The calculations show that the investment return on an LED bulb is about 120%!!!! So you’ll get that extra $3 you spent on the more expensive bulbs and then some, every year for the 18 year life of the bulb. Friends, it doesn’t get better than this. We live in a world where the stock market gives us 6-8% on average but with a ton of volatility. This is a sure thing—basically a bond where you’re guaranteed to make money on your investment.

Roof-top solar panels

Back in California it seemed like everyone had solar panels. Out in North Carolina, they are much rarer. We have decided to become trend setters and install the panels on our roof. Unlike the LED lights, where you could probably dig in your sofa cushions to find enough to pay for a light bulb, solar panels represent a huge up-front cost.

We’re looking into a 20-panel system that would generate about 4000 watts of electricity. The all in cost would be about $18,000, but after you take into account tax credits, the cost ends up being about $14,000. That’s a lot of money for sure, but you do get something pretty sweet, namely a lot of cost-free, pollution-free electricity.

When you look at our location, the pitch of our roof, the direction our roof faces, and all those other factors, those 20 panels would generate about 800 kWh per month. That would be subtracted from the ~1200 or so kWh we use per month, and at about $0.12 per kWh, those panels would save use about $100 per month.

If you do the calculations, that ends up being a 5% return which isn’t great considering the risks of the panels breaking or the energy company changing the regulations to not be so generous or something else that I can’t even think of right now. On the other hand, if you assume that the cost of electricity increases 5% per year, the return jumps to about 10% which is pretty decent. And depending on your personal views regarding the environment, the return on your money may not be as important as reducing the need for about 10,000 kWh per year of coal-generated electricity (that’s about 7 tons of CO2 per year).

We’re still thinking about doing this or not, but I think we will. But for this, the motivating factor is not the investment return (which is a “neutral” for me) but the environmental impact.

Vacuum robot

Foxy Lady and I got each other an iRobot vacuum for Christmas. It cost about $400. It’s a pretty cool little device but certainly not the Rosie the Robot that they might have you think.

We have found that it does a decent job in smaller areas, but you can’t really let it go and “clean the entire house”. That said, we have two little cubs who create a concentrated mess in our kitchen/dining nook/living room area. Seriously, Foxy Lady and I try to keep up and we’ve made the depressing comment on more than one occasion: “Didn’t you just vacuum in here?” The area just seems perpetually dirty, particularly below where the cubs eat.

So we set the robot to do its thing every other day. It does a decent job, certainly not as good as if a person was doing it, but that’s the beauty of it—it’s cleaning while you’re off doing something else. So I’ll give it a solid B.

But how is it as an investment? Not very good. We have a cleaning person come in every two to four weeks to clean our house. We pay that person $80, so if the vacuum robot saved us a trip or two, it might lead to a decent return. But the truth is that the vacuum robot only does the floors, and really only that limited area. We still need the cleaning person to actually mop the floors in the kitchen/dining nook/family room as well as vacuum and mop the rest of the house. Plus there are all the other house cleaning activities (bathrooms, windows, counters, etc.).

So we use the cleaning person just as often with or without the vacuum robot, making the return 0%. Life is definitely nicer when the floors aren’t totally gross, but that makes it a good purchase, not a good investment.

This blog is already starting to get long so I’ll stop here. But I could also do this on our learning thermostat (low return), tankless hot water heater (low return), new television (surprisingly high return). Please let me know if there are any other home improvements that you are thinking about and wondering what the return is. In the meantime, replace all your incandescent lights with LED lights, and it will be the best investment you can make.

What to make of pensions

December 23, 2015December 22, 2015 Stocky Leave a comment

Medtronic is such an amazing company, for so many reasons. Beyond that whole “create amazing medical products that help people live healthier, fuller lives,” they offer some incredible financial benefits to their employees to help them build a comfortable financial future.

One benefit in particular is they give each employee and extra 5% of their pay which they set aside in a pension account. When you leave the company, they give you that money either in a lump-sum or they will give you a pension for the rest of your life. It’s an awesome benefit, but it involves a difficult choice: do you take the lump sum or do you take the pension? Here is how I made that choice, and the different factors I took into account.

When I left Medtronic, my pension account had about $50,000 in it. Medtronic could give me that in the form of a lump sum, or, based on my age (38 years old), they would give me a monthly pension of $220 until my death. So which one did I pick? Which one would you pick?

The case for taking the lump sum

There’s something to be said for getting the cash all up front. Those monthly pension payments come only so long as Medtronic is able to pay them. Right now they are an extremely strong company financially, but we’ve seen many times how strong companies can fall on hard times and lose their way. This is especially true after major mergers (Time Warner with AOL, Boston Scientific with Guidant, etc.) and Medtronic did just merge with Covidien. I have absolute faith that Medtronic will be able to pay me, but if you get the money up front, that’s one less thing to worry about.
When you get the money, it is usually rolled over into an IRA so you don’t pay taxes on it (if you take it in actual cash, there are major penalties similar to if you cashed out your 401k). So you aren’t paying taxes on the money when you’re younger and you’re probably in a higher income bracket.
The biggie is that you get to invest that money and then have it available when you turn 60. For me that’s a 22 year time horizon so I could invest it pretty aggressively in the stock market knowing that over that long of a time the probability is extremely high that the money will grow a lot. Just using some basic assumptions, that $50,000 would probably be worth about $180,000 when I turn 60.

The case for taking the monthly pension

You can use the monthly pension for today’s expenses. $220 isn’t a ton, but it’s still a nice chunk of change. Just looking at our budget, that could pay for our internet, cable, and car insurance. That’s not bad. Basically I’ll have those “free” for the rest of my life.
A pension is a nice way to diversify. As I mentioned here, most of our savings is in stocks which is appropriate given our ages and personal situation. We have very little in bonds and other safer investments, so having a pension fills a little bit of a gap we have.
When faced with the choice of taking a pension for $220 per month or getting a lump sum of $50,000, the pension is the better deal. If you shopped around for an annuity a 38-year-old male could get a $220 per month, and it would cost about $55,000. So basically by picking the pension option from Medtronic I’m getting an extra 10% compared to what it would cost me to buy it in the open market.

There are good reasons to go either way. Foxy Lady and I struggled with this a lot. For us, it was a choice of going with your head (you’d choose the lump sum) or your heart (you’d choose the pension).

Financially, it’s a much better option going with the lump sum because you can invest it and let it grow. When we’re 60 we could take all that money and buy an annuity worth $720 a month. Given that Foxy Lady and I don’t need the income right now because she’s working and I’ve found a little bit of work on the side, it’s a better deal to take the bigger number when we do stop working.

But the heart wants what it wants. There’s something comforting about getting a tiny income stream now that you know will always be there. It’s not dependent upon the stock market or anything, and if everything did go to hell with the stock market in some catastrophic way, we would have this little bit. Plus, as I mentioned earlier, we have a nice little nestegg right now but it’s all invested in stocks. This provides a little bit of fixed-income diversification. For these reason, we ultimately decided to go with the pension.

So there you go, a nice little primer on how to pick between a lump sum and a pension. What do you think? Would you have made the same choice? If you’re with Medtronic, what are your thoughts on the matter?

Working in retirement

December 21, 2015December 20, 2015 Stocky 4 Comments

“What’s your problem Stocky? You started off writing pretty consistently then in the past few months you’ve become super-erratic. Are you abusing some controlled substance? What gives?” This is a question some of you may be wondering given my admittedly abysmal record for posting regularly.

The fact of the matter is that I’ve been busy working, and that hasn’t given me the time to write as many blogs as I would like. Wait???? What???? I was supposed to be retired, so what am I doing working?

When I was seriously considering quitting my job and taking the plunge into early retirement, I read a lot of blogs on the subject (the best one being www.mrmoneymustache.com). Most offered pretty similar advice: take the first few months to decompress, but after a while you’ll get bored and what to do something meaningful.

For a lot of earlier retirees that “something meaningful” can be a second career, where they’re doing something they really enjoy but that also generates a little income. When I read that, I was really skeptical. I’m good with spreadsheets, but how could that translate to something people would pay good money for but which wouldn’t have the “pain-in-the-ass” qualities of a real job?

So I sauntered off into retirement without any expectations of earning an income. Foxy Lady and I had run the numbers a million ways and we were all set to live on her income and enter this new phase of our life. So that was that.

How it happened to me

After a week or two in retirement I got an email on LinkedIn asking if I would be interested in working for a smaller company running their sales operations department (that’s what I did at Medtronic). I replied that I wasn’t interested in fulltime work, but if they needed help I would be glad to work on a consultative basis. They said “yes”.

A few weeks later, I was catching up with a former colleague. She said they needed some sales operations expertise to help them build the compensation plan for their sales force. Again, I was able to set up a little consulting agreement. A month into retirement, I had two consulting clients who needed help doing the things I did for a living.

This is such a lucky development (but I absolutely believe that you make your own luck), and I really feel like I have the best of all worlds. The nature of the work allows me to work on my own schedule most of the time. Typically I can do the work that needs to be done when the cubs are at fox school during the mornings or in the evenings after they are curled up in their dens. That means during the days I spend the time with them doing all sorts of fun “this is why you retired early” activities like—building dams in the local creek, going to the Science Center and Children’s Museum, making forts out of the couch cushions, etc.

Every once in a while I do travel, but it’s pretty minimal. Foxy Lady and I counted 4 days over the past 6 months that I didn’t sleep in my own bed (and tuck the cubs in). Also, every once in a while there’s a deadline that requires I stay up late, or there’s a conference call that requires a sitter for the cubs. But just like the travel, that has only happened a few times.

Plus, intellectually it’s very satisfying. If you’re the type of person who is able to consider early retirement, odds are you were professionally successful. Sometimes it can be tough trading in the satisfaction of achieving a goal, leading a team, and all those other things for Danny Tiger and building chainsaws out of Legos (pretty much every one of Lil’ Fox’s Lego creations is a chainsaw he uses to cut the legs off our dining room table). Doing consulting has allowed me to stay intellectually engaged, while avoiding all the crap. I don’t have useless conference calls, development plan that are garbage, office politics, and all the other BS that makes you want to consider early retirement in the first place.

Finally, and to the point of a personal finance blog, it has been a bit of a financial boon. I took my salary when I was working, calculated what the hourly rate would be, and tripled it to make my consulting rate. And the companies were happy to pay it. For them, they get someone with expertise in an area they really need, but they don’t need so much that they want to hire a fulltime person for it. Plus they don’t have to pay benefits and all the other stuff. So it’s a pretty sweet deal for them too.

In dollar terms, I’ve pretty much replaced my income. We all know how big an impact a little extra savings can be. So this consulting income, even if it completely dried up after 2015, has really moved the needle for our nestegg.

How it can happen to you

The reason I am sharing all this is because I think a lot of people, me included before six months ago, that don’t really realize what a legitimate option this is. However, many of you probably have really valuable skills that people are willing to pay for on a consultative basis. And this is especially true if your career is one that has enabled you to build up a nestegg that allows you to retire early.

There are a million companies that need database programmers and market researchers and financial auditors and sales ops people. And to reiterate, if you were good enough in your career to amass the wealth to retire early, you’re probably good enough to be really valuable to them.

When I retired, a few of you said something like, “I’ve been thinking about doing the same thing, but I’m just too concerned to leave the comfort of a steady paycheck.” I totally get that, and it’s a sentiment that I shared for a very long time. But my story is an example of what can happen if you close your eyes, grit your teeth, and jump. The rewards can be pretty amazing. Foxy Lady and I marvel at what a great situation we’ve stumbled in to, and none of it would have ever happened had we not taken that leap. We’re so glad we did.

For those of you who have retired early, what have you found in terms of earning opportunities?