This is the third and final installment on my Asset Rich Income Poor strategy. The road to asset rich sounds simple at a high level but it’s not that easy at the details level, because every decision you make has tradeoffs. The tradeoffs affect the final outcome in ways you can’t know for sure. I wrote about this challenge in What Makes Investing Hard?
Unless you get lucky, the road is long and arduous. I’ve been at it for nearly 20 years; I’m still not there yet. Along the way you might question why you are doing it. Finally travel the world every year in your old age? How about traveling the world every year now, when you are able to enjoy it more?
That’s where the income poor part comes in. When you build up to asset rich, you can quit before others do, when you still have energy to do whatever you want. When you spread your assets over more years, when you put your assets in the right place, your income looks poor but your quality of life isn’t.
When the media talk about income, as in the median household income in the country etc., they are usually talking about the income on the tax return. Income on the tax return isn’t the same as discretionary income — the money you get to spend as you wish. You can have low income and good discretionary income.
When you own a home free and clear, your housing expenses are greatly reduced. You don’t need as much income to cover your housing expenses. Living mortgage-free isn’t income. Compared with other people with the same income on the tax return, your income goes farther.
When you are no longer concerned about job opportunities, you can choose where you live. Lowering your cost of living isn’t income. Your low income on paper just goes farther.
When you withdraw from a taxable account, spending your own money isn’t income. Realizing capital gains is income but it’s taxed at 0% when your income is otherwise low because of your low housing expenses and low cost of living.
When you slowly convert your traditional money to Roth, you pay very low taxes.
When you no longer draw a salary, you stop paying Social Security and Medicare taxes. Your low income goes farther still. You can join seniors in arguing for saving Social Security by removing the wage cap and raising the contribution rate, on those who still work, of course.
When you plug in a number of zeros into the 35-year work history Social Security looks at, your earnings average over 35 years looks low. The government will give you a better deal as if you had low earnings every year for 35 years.
When you spend your own money before age 70, you can afford to delay claiming Social Security until then. The government will give you yet another good deal for the delay.
By the time you start Social Security at 70, you already converted the majority of your traditional money to Roth. Supplementing Social Security with money from Roth accounts keeps your Social Security tax free.
As long as you contribute to Medicare for 10 years, you get the same Medicare as anybody else at 65. Contributing for more years doesn’t give you anything extra.
When your income is low on paper, you get subsidies for your health insurance thanks to the Affordable Care Act. It doesn’t matter if you also have low expenses.
When you have time, you don’t have to spend a lot of money to enjoy leisure. Skiing through the pines as shown in the feature photo is practically free. Fresh air and exercise are your bonus. You cook from scratch, which is both healthier and less expensive. You enrich yourself with books from the library and free online courses.
All of these contribute to a good quality of life at an income that looks low on paper. I look forward to that day. If all goes well it will take another 3 years. Until then, I will keep working on those “decks” my manager wants.
[Photo credit: Flickr user Bobcatnorth]
Refinance Your Mortgage
Mortgage rates hit new lows. I saw rates as low as 3.25% for 30-year fixed, 2.625% for 15-year fixed, with no points and low closing cost. Check mortgage rates in your state.