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Old 09-05-2014, 07:51 AM   #61
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So yeah, I'd much rather have $600K at 32, than at 65-70. But, $600K would be more likely to let a 65-70 YO be FI than a 32 YO. So by that particular metric (proximity to FI), it's a hard call. Of course, at 65-70 you may only have a few good years left...
Yeah, rich is hard to define and any definition will always leave something on the table. Rich defined more by FI seems closer than income though as it takes more into account.

I'd rather be 32 with $600k than 65-70 too, but that is mostly because I don't want to be 65-70 yet
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Old 09-05-2014, 08:01 AM   #62
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Thanks for pointing this out. I have been telling my friends who are govt employees and teachers that they are the nouveau-riche!!! Somehow they don't get it!

Pretty soon there will be 2 classes--those with and those without--pensions...
I tend to forget this aspect, because I tend to associate those nice pensions with people like my parents and grandparents, moreso than my generation. But then I just remembered a good friend of mine, who is a teacher. I think his pension maxes out at something like 54% of his salary. And, he'll get SS on top of that. His salary is close to mine, and he intends to work longer than me. I forget how long he has to work to get that 54% pension. I think something like 30 years, and he has to be 55 or older. But, I don't see him as the early-retiree type, as he finds his job rewarding.

Anyway, if I worked until 55, SS at 62 would give me about 23% of my salary. If I stuck it out until 65, about 30%, and 35% if I took it at 67. I'm sure my friend's situation would be similar. So he's on track to replace at least 77% of his current salary, just through his pension and SS.

He also does save into whatever the teachers' equivalent of a 401k is, so he's in better shape than he thinks he is, although he does worry about his future.

I've told him that even with $1M, you can only live off of around $30-40,000 per year, so in many ways, he's more financially secure than I am.
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Old 09-05-2014, 08:07 AM   #63
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"compounding money" isn't super special exempt money that "rich" people get paid in, it was once "labor money" and thus already subject to "heavier taxation". Thus defeating any point you were trying to make regarding the unfair nature of taxing heavier the money made through "harder work".
Wait are you actually trying to count the original taxation of the money as it was earned by the company and apply it to the "burden" of the investor?
If I had a choice of a 1 million dollar income from a job vs 1 million dollar income from dividends and capital gains I would always take the 2nd choice. The income from the investments would be taxed(to me) much less than the job income would be. What counts here is the bottom line. I have no sympathy for the investors tax burden here. Instead I am trying to get more of my income from investments because of the "super special exempt money" that the rich do get paid in.
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Old 09-05-2014, 08:35 AM   #64
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Wait are you actually trying to count the original taxation of the money as it was earned by the company and apply it to the "burden" of the investor?
What?

What I'm saying isn't profound, but it clearly was overlooked or forgotten by dallas when first the highly subjective and difficult to defend opinion of "more heavily taxing those working the hardest" was first posted.

Money that is "compounding money", meaning money that is invested in some vehicle and no longer taxed as wages but taxed as capital gains didn't appear from thin air into anyone's portfolio. It first had to be made via wage before it could then be invested. It is a pretty straight forward concept.

Thus trying to make a point about "harder earned money" (wage income) being taxed higher than "compounding money" (passive income) is moot.


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If I had a choice of a 1 million dollar income from a job vs 1 million dollar income from dividends and capital gains I would always take the 2nd choice.
Well... yeah, I would imagine everyone would.

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I have no sympathy for the investors tax burden here.
Cool, me neither.

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Instead I am trying to get more of my income from investments because of the "super special exempt money" that the rich do get paid in.


Who wouldn't want their passive income to eventually surpass their active income?

But how was that passive income built?
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Old 09-05-2014, 08:42 AM   #65
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Another thing to consider about "passive" income like dividends and capital gains, is that when you get them, unless they're reinvested, they reduce your stocks/mutual funds by that much.

So, if you have $100,000 invested, and it pays dividends and a capital gain of, say, $20,000, you don't suddenly have $120,000. You still have $100,000, but now you have to pay taxes on $20,000.

Of course, stock prices usually keep going up in the long run, so you should make out okay.

Then, there's the time value of money. If I bought a stock in 1988 for $50 per share, and sold it today for $100 per share, I'd have to pay capital gains tax on $50 per share. However, adjusting for inflation, I have made nothing at all, because everything has essentially doubled since then. Now, that's an extreme example...hopefully if I had a stock that was just sitting there like that, I would have sold it long ago!
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Defining Rich in America
Old 09-05-2014, 08:54 AM   #66
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Defining Rich in America

Engprodigy, the usa greatly skews it's taxes toward income earners and consumption. It lightly taxes corps and capitalists.

If you don't want to accept the social impact of very public macroeconomic tax policy, thats your right. But I'm not going to engage in debating your belief system any further as you seem to be emotional about the subject. You can even feel you've won if you like.


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Old 09-05-2014, 09:30 AM   #67
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Engprodigy, the usa greatly skews it's taxes toward income earners and consumption. It lightly taxes corps and capitalists.

If you don't want to accept the social impact of very public macroeconomic tax policy, thats your right. But I'm not going to engage in debating your belief system any further as you seem to be emotional about the subject. You can even feel you've won if you like.
Talk about a good sound bite.

Do you have a metric yet on gauging how hard workers are working at specific jobs? I'm guessing no, which means that you still cannot defend your entirely emotional assertion that those working the hardest are taxed the heaviest.

Do you understand yet that passive income is built via wage income?

You have a certain obvious ideology, I barely ever lurk here and yet when I do it seems I often come across you making politically/ideologically charged posts.

Speaking of emotional responses...

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But our system heavily taxes those working the hardest for their money, and taxes very little of the "compounding"money.

- the idea that anyone can achieve anything in america is not a false statement, but it is very far from being the truth too. It just makes a good sound bite.
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And if you don't believe that good honest people work their asses off until they just about die and pay higher overall taxes due to consumption and income taxes , then im sorry, i dont argue math with anyone..

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Old 09-05-2014, 09:37 AM   #68
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Okay guys, don't get this topic shut down on us, now!
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Old 09-05-2014, 09:39 AM   #69
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Your right
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Old 09-05-2014, 09:58 AM   #70
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Because Person A, being dead, is incapable of being taxed? The taxes apply to Person A's heirs, who are asked to pay their share of their unearned gains?

If one wants to help relatives while being fully aware of their heartfelt appreciation, one can give yearly non-taxable gifts. That way, one can also check to see if the relatives are just blowing the gifts on fast things, in time to change one's will and leave everything to a charity that pays no tax!

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Why?

I've always thought an inheritance tax was inherently unfair.

Person A earns many millions in his life, saves/invests most of it and wants to give it to his relatives. His choice.

Person B earns the same amount and blows it all on fast boats, fast cars and fast women. Also his choice.

Why should person B get a pass while person A has to have what he wants to do lessened?
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Old 09-05-2014, 10:06 AM   #71
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One other difference between wage income and investment (interest/dividend/CG) income is that with the later you are being taxed on your inflation gains.

Here's a simple example:

You have $100,000 invested in a stock. It pays no dividends and it increases in value at 5% a year so it doubles in value in 14.4 years. Lets also assume a steady 5% inflation rate over those 14.4 years.

After 14.4 years, you then sell your stock. It's worth $200,000 giving you a $100,000 long term capital gain. You pay a 15% federal tax on this gain - $15,000 in federal taxes.

The trouble is that this investment exactly held steady with inflation. Your $200,000 has the same buying power as the original $100,000. EXCEPT you have to pay $15,000 in taxes so you are actually behind by $15,000.

If the US ever does tax capital gains the same as wage income, we should at least add in an inflation adjustment.
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Old 09-05-2014, 10:17 AM   #72
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Back to the original subject...some posters mentioned the younger folks "looking" the part. In my area, I see this A LOT. I live in a neighborhood (NW burb of Atlanta) that was built in the late 70's. Many of the original owners still live in the neighborhood and many others are retired. I bought the house in 2012 at a very reasonable $140K (now assessed in the neighborhood of 250K). Some of the best schools in the metro area (and Georgia) are where we are, so over the last 10-15 years, the developers have come in and developed most of the land that was available. Now they are buying some of the older ranches (all on 3/4+ acre lots) and building McMansions that run from low 600Ks to well over 1M. In Georgia, this is an expensive house.

ANYWAY...my DW (who is a Realtor)was pulling up deeds a few days ago and absolutely stunned at the difference in mortgages in the area. Almost all of the McMansions bought over the last 5 years were financed for at least 80% the value of the home (many with HELOCs added on 6 months later), whereas in our old neighborhood, the number of homes with mortgages was less than 40%.

I have also noticed when chatting with folks around our area, our average neighborhood neighbor is either retired, self employed, or work from home. On my street alone (7 houses), only 2 have people that physically go to work everyday. When I am walking the dog and go thorough the newest "McMansion" neighborhood during the day, it's an absolute ghost town (well, except for all the lawn services, etc.). When you do see them and chat them up, you hear about how incredibly busy they are.

So...I do think that the "millionaire" next door is a pretty common occurrence. This isn't to say that everyone in a McMansion isn't "well off", but if I was able to pull up actual net worths, I would bet our old contemporary neighborhood would give the McMansion folks a good run for their money.
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Old 09-05-2014, 10:27 AM   #73
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Flyboy, my observations about the millionaire next door resembles yours. Many local people with money tend to just continue to live in the home they have lived in. Maybe synergy and comfort level. They update on inside but do not have interest in moving to a bigger home that they could easily afford. I also think in small towns it isn't as common to build a home that truly reflects your wealth either.


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Old 09-05-2014, 10:30 AM   #74
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Flyboy, my observations about the millionaire next door resembles yours. Many local people with money tend to just continue to live in the home they have lived in. Maybe synergy and comfort level. They update on inside but do not have interest in moving to a bigger home that they could easily afford. I also think in small towns it isn't as common to build a home that truly reflects your wealth either.


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And on that note, I see this reflected in the cars too. Almost all of the McMansions have $60K+ cars in the drives whereas we have lots of older Hondas (especially the 2000-2005 Accords!), Toyotas and a couple of Towncars (that are 10 years old). I feel out of place in my 5 year old Infiniti!
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Old 09-05-2014, 10:31 AM   #75
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One other difference between wage income and investment (interest/dividend/CG) income is that with the later you are being taxed on your inflation gains.

Here's a simple example:

You have $100,000 invested in a stock. It pays no dividends and it increases in value at 5% a year so it doubles in value in 14.4 years. Lets also assume a steady 5% inflation rate over those 14.4 years.

After 14.4 years, you then sell your stock. It's worth $200,000 giving you a $100,000 long term capital gain. You pay a 15% federal tax on this gain - $15,000 in federal taxes.

The trouble is that this investment exactly held steady with inflation. Your $200,000 has the same buying power as the original $100,000. EXCEPT you have to pay $15,000 in taxes so you are actually behind by $15,000.

If the US ever does tax capital gains the same as wage income, we should at least add in an inflation adjustment.
Good point. The bold part of your post I added is what I'd like to see - do some sort of indexing but tax the remainder (i.e. real gain) as ordinary income.
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Old 09-05-2014, 10:37 AM   #76
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So...I do think that the "millionaire" next door is a pretty common occurrence. This isn't to say that everyone in a McMansion isn't "well off", but if I was able to pull up actual net worths, I would bet our old contemporary neighborhood would give the McMansion folks a good run for their money.
More on this from one of TMND author's blogs:

"There are nearly three times more millionaire households (1,138,070 versus 403,211) living in homes valued at $300,000 or less than there are millionaires living in homes valued at $1 million or more. The data strongly indicate that this ratio of "wealth-building productivity" is inversely related to the market value of one's own home as well as those of one's neighbors. Once the market value begins to move up beyond the $500,000 level, wealth-building productivity moves into the unproductive range (i.e., less than 1.00)."

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Old 09-05-2014, 10:44 AM   #77
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Because Person A, being dead, is incapable of being taxed? The taxes apply to Person A's heirs, who are asked to pay their share of their unearned gains?

If one wants to help relatives while being fully aware of their heartfelt appreciation, one can give yearly non-taxable gifts. That way, one can also check to see if the relatives are just blowing the gifts on fast things, in time to change one's will and leave everything to a charity that pays no tax!

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Actually, I disagree with this and agree with Walt34 - it is unfair. Person A may have sacrificed his/her life to earn a tremendous amount of money so that his/her heirs wouldn't have to do so. Inherited/family wealth is how many of the world's greatest scientists, artists, writers, poets, philosophers, etc... were able to fully develop their gifts and thus advance society as a whole. To be confiscatory in order to redistribute wealth through Government spending is simply a way to perpetuate the existence of Government itself.

That said, the growth of an economy comes down to spending, whether by the Government or someone like Person B blows the money on frivolous purchases. Absent spending (and where there is prodigious saving), money doesn't flow easily and you have an economy like Japan's was until recently.
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Old 09-05-2014, 10:51 AM   #78
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And on that note, I see this reflected in the cars too. Almost all of the McMansions have $60K+ cars in the drives whereas we have lots of older Hondas (especially the 2000-2005 Accords!), Toyotas and a couple of Towncars (that are 10 years old). I feel out of place in my 5 year old Infiniti!
This fits my neighborhood too. It's a neighborhood built in the early 60's... many of my neighbors are original owners, and many others are 2nd gen (taking advantage of CA prop 13). (I'm a 2nd gen-er... bought from my dad.)

The cars aren't fancy - lots of camry's accords, some minivans...

In an area close to us - lots of mcMansions with big loans and fancy cars in front of them. I suspect if you compared networth, my neighborhood would come up better, despite the smaller houses and more ordinary cars.
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Old 09-05-2014, 10:56 AM   #79
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Here's a simple example:

You have $100,000 invested in a stock. It pays no dividends and it increases in value at 5% a year so it doubles in value in 14.4 years. Lets also assume a steady 5% inflation rate over those 14.4 years.

After 14.4 years, you then sell your stock. It's worth $200,000 giving you a $100,000 long term capital gain. You pay a 15% federal tax on this gain - $15,000 in federal taxes.

The trouble is that this investment exactly held steady with inflation. Your $200,000 has the same buying power as the original $100,000. EXCEPT you have to pay $15,000 in taxes so you are actually behind by $15,000.
That's a really good point.
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Old 09-05-2014, 10:57 AM   #80
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....
ANYWAY...my DW (who is a Realtor)was pulling up deeds a few days ago and absolutely stunned at the difference in mortgages in the area. Almost all of the McMansions bought over the last 5 years were financed for at least 80% the value of the home (many with HELOCs added on 6 months later), whereas in our old neighborhood, the number of homes with mortgages was less than 40%.

....
I think many if not most non-mcmansions buyers also carry mortgages like that in the first five years or less of ownership? I know we did, and our kids do. And the low mortgage rates today made this decision and getting a HELOC a no-brainer for a lot of smart people.

We are not those people, having neither a mortgage nor a HELOC for several years now. And we don't live in a mcmansion although I have been inside several.
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