the "living in California surtax"

[rob in cal]

I've lived in California my entire life and its a great state to live in, in many ways. However, the discrepancy between housing costs here and elsewhere is large, and during the recent boom which ended in 2007 it was even bigger. Right now my house is worth about 340 k, and an equivalent house in many parts of the mid-west or south would go for about 200k, so thats 140k in extra investment capital put into housing thats not invested.
140k isn't too bad for the advantages of living near much of our family, and friends in our town, and I believe I have one of the best restaurant delivery jobs in the country.
However, if that 140k margin rises significantly, as it did during the boom (when our house reached about 450k) and is somewhere around 250k, as it was in 2006, it would be tempting to pull the trigger, especially when my youngest is out of the house, which would be possible in another five years. Of course my wife would have to be on board and we'd have to figure out if we really would want to move to another part of the country, just to have 250k or so of extra capital going to work. Plus we'd probably downsize, so would be buying a smaller house in a much cheaper part of the country, so it might become even more than 250 k extra capital.
Anyone else with an expensive house thinking about pulling the trigger?
For us, if such a margin is achievable in another five years, it might mean achieving FIRE by about 2020, assuming our capital keeps growing as it is unrelated to our house.

 

[daylatedollarshort]

Many people we know have cashed out for cheaper parts of the country or sometimes just cheaper parts of the state when they retire and no longer need a job.

Someone from one of our hobby clubs moved to Nevada when prices there had bottomed out.

 

[rodi]

I live in California - and my house is a huge part of my net worth (38%) - but not one I factored in at all, in my ER plans. Well.. I factored in the expense of owning the house - but my goal was to have it paid for by ER so the only expense was the cost of running the house -insurance, taxes, etc. I paid off my mortgage 2 weeks ago, and retired last week.

For us - the cost (outside of mortgage) of owning the house is fairly low comparied to other parts of the country. My taxes are less for a single family with a detached granny flat on 1/4 acre, in a good neighborhood of San Diego, than I paid for a much smaller twin-home in suburban Philadelphia. It's way less expensive in the way of heating and cooling (we don't have AC because we're only about 3 miles, as the crow flies, from the beach... ) Property taxes are locked in at a price that can't go up too much because of prop 13. Our house is older - so no HOA or mello roos. Insurance is about what I paid in suburban Philly. Overall - it costs me less to live here than it did to run my twinhome.

Our house equity does provide a plan B for retirement planning purposes - if we don't have enough money for long term care and end up needing it - the community spouse will downsize, and the difference will pay for long term care. We can move about 5 miles away to a smaller 1 story and get a few hundred grand for the delta.

I've lived in 4 states - and greatly prefer San Diego to other places. Have you lived elsewhere?

I know there are folks on this board who are downsizing from pricier parts of CA to less pricey parts...

 

[FIREd]

We did it all wrong. When I quit working, we lived in a low-to-medium cost of living area (Southeast US) and had adequate funding for a lengthy retirement there. Then DW decided to pursue a job opportunity in California. We fully expected the move to be temporary. But after a couple of enjoyable years here, we would like to stay. That presents a big challenge, thanks to the "living in California surtax" as you put it. Even if were to sell our paid-for house in the south, it would barely provide enough cash for a downpayment on a -much smaller- house in California!

 

[scrinch]

When I retire in a couple of years, we will move back to CA to be near family and friends, surcharge and all. We have lived our entire lives in CA except for 7 years overseas, and we like the weather, the culture, the mountains/coast/cities, and the Giants in addition to our parents, siblings, and kids living there. It is well worth it to us to work a little longer to be able to live where we want in retirement. Of course, if we didn't have the strong connections, we might see it a different way.

 

[MichaelB]

We've moved a few times, I factor in to any housing calculation an additional 10% (over the cost of the new location) to cover all the expenses related to selling, buying, moving, and getting the new place the way we want it.

 

[daylatedollarshort]

Many cities in California are not much more expensive than cities in other states if you live outside the major metro areas. Have you looked at prices within a couple of hour's drive radius of where you live now? Or retirement communities? These seem to often be cheaper per sq ft than the surrounding communities, perhaps because of a more limited target market.

One plus in California is depending where you live you may be able to be outside a big part of the day so you don't need as much indoor living space.

 

[nash031]

I've lived in California my entire life and its a great state to live in, in many ways. However, the discrepancy between housing costs here and elsewhere is large, and during the recent boom which ended in 2007 it was even bigger. Right now my house is worth about 340 k, and an equivalent house in many parts of the mid-west or south would go for about 200k, so thats 140k in extra investment capital put into housing thats not invested.
140k isn't too bad for the advantages of living near much of our family, and friends in our town, and I believe I have one of the best restaurant delivery jobs in the country.
However, if that 140k margin rises significantly, as it did during the boom (when our house reached about 450k) and is somewhere around 250k, as it was in 2006, it would be tempting to pull the trigger, especially when my youngest is out of the house, which would be possible in another five years. Of course my wife would have to be on board and we'd have to figure out if we really would want to move to another part of the country, just to have 250k or so of extra capital going to work. Plus we'd probably downsize, so would be buying a smaller house in a much cheaper part of the country, so it might become even more than 250 k extra capital.
Anyone else with an expensive house thinking about pulling the trigger?

It depends on if you want to live in California or not...

DW and I own a small home in a very expensive part of San Diego. We are likely in the 50% range of equity in that house, which would be a significant boost to our portfolio... but we love where we live, we still manage to save a ton. *IF* we decide to retire here, we'll have to account for that cost of living in our plans. That means we'll need more money... but we can plan for that.

If you'd be just as happy or happier some place less expensive, then sure. Sell! But you have to decide that, and IMO it's less a financial decision than an emotional one.

 

[38Chevy454]

Count me as one that moved out of CA and happy to do so. Living in San Francisco bay area was liberal controlled hell for me. No amount of weather and having close beach, mountains, or other perceived benefit is enough to offset that.

I pay much less in prop tax, state income tax, all the other hidden taxes and fees, and overall cost of living is less now than compared to being in CA. I am far better off from a financial standpoint. Also happier not dealing with the politics of CA.

 

[MichaelB]

We did it all wrong. When I quit working, we lived in a low-to-medium cost of living area (Southeast US) and had adequate funding for a lengthy retirement there. Then DW decided to pursue a job opportunity in California. We fully expected the move to be temporary. But after a couple of enjoyable years here, we would like to stay. That presents a big challenge, thanks to the "living in California surtax" as you put it. Even if were to sell our paid-for house in the south, it would barely provide enough cash for a downpayment on a -much smaller- house in California!

Is the increased cost of living just real estate, or do you see it in general? When we left the NY area I was surprised at the difference in COL.

 

[longranger]

Have loved living in California for the past 30 years. Moved here at 27. We upsized our home twice to accommodate a growing family so prop 13 has not benefitted us. The only way we will be able to RE in state is to both downsize and move to a less expensive area of the state.

In preparation for that change we have sold and just closed escrow on our sizable home of 12 years. Pulled lots of equity but did not gain more than $500,000 from purchase price in this up and down market. The cash will be invested as we rent and survey our options. That process will likely last several years while the kids settle, we explore quite a few areas that look promising and wait for the next "down" housing market to buy our next home all cash.

 

[CaliforniaMan]

Have loved living in California for the past 30 years. Moved here at 27. We upsized our home twice to accommodate a growing family so prop 13 has not benefitted us. The only way we will be able to RE in state is to both downsize and move to a less expensive area of the state.

In preparation for that change we have sold and just closed escrow on our sizable home of 12 years. Pulled lots of equity but did not gain more than $500,000 from purchase price in this up and down market. The cash will be invested as we rent and survey our options. That process will likely last several years while the kids settle, we explore quite a few areas that look promising and wait for the next "down" housing market to buy our next home all cash.

Found this interesting chart on California real estate cycles. Shows very clearly the three cycles in my experience living here most of my life. Chart only goes to 2004, but we all know what happened after that. Chart aligns with my memory that past cycles lasted 10 to 15 years or so. Will the current one be the same, shorter or longer, who knows.

California Median Real Estate Prices since 1968

 

[CaliforniaMan]

Many cities in California are not much more expensive than cities in other states if you live outside the major metro areas. Have you looked at prices within a couple of hour's drive radius of where you live now? Or retirement communities? These seem to often be cheaper per sq ft than the surrounding communities, perhaps because of a more limited target market.

One plus in California is depending where you live you may be able to be outside a big part of the day so you don't need as much indoor living space.

We are just finishing a big patio and deck remodel, we spend a good portion of our time outside all year, especially in the summer months. They way we live in San Diego County, outdoors so much of the year, you simply cannot do in very many other states. Did I mention that we have a law that in winter the snow must stay in the mountains where it belongs!

Count me as one that moved out of CA and happy to do so. Living in San Francisco bay area was liberal controlled hell for me. No amount of weather and having close beach, mountains, or other perceived benefit is enough to offset that.

I pay much less in prop tax, state income tax, all the other hidden taxes and fees, and overall cost of living is less now than compared to being in CA. I am far better off from a financial standpoint. Also happier not dealing with the politics of CA.

CA is one of the most diverse states in the country, ethnically, culturally, politically, etc, and one of the things that endears me to it. Not all of CA is SF Bay area, which I will grant you is one of the most extremely liberal in the nation. But there are many very conservative areas of the state as well.

No question though, it will cost more in coastal Southern California.

I have one friend that moved to southern Utah and loves it there. Does a lot of hunting, fishing, boating, found it much more to his liking than CA.
Different strokes... One of the things I like is that in So. CA though I get to have both conservative and liberal friends.

 

[robnplunder]

I thought about cashing in my house and moving out of CA for lower cost of living when I RE. I am an avid golfer and prefer outdoor activities. After a bit of research, I decided that the "surcharge" is worth staying in CA. The weather just simply can't be beat by other States.

 

[FIREd]

Is the increased cost of living just real estate, or do you see it in general? When we left the NY area I was surprised at the difference in COL.

Housing is the elephant in the room, of course: +500% and more per sqft compared to our last location in the south.
Property tax rate on a newly purchased property: +100%.


That's not all. Some items like food and gas are marginally more expensive (maybe +20% or so).

But we have seen big increases for:
Car insurance: +40% (same coverage except annual mileage went from 10K to 5K)
Water: +300%
Electricity: +60% (average price per Kwh)
Cable TV + internet:+55% (identical cable TV package, but slower internet connection)
Healthcare insurance premiums: +90% (note that it is also much harder to live here on an income that would make it possible to qualify for Obamacare subsidies).
State income taxes: +175%, which in turn triggered the AMT so +8% on our Federal income tax bill.

Overall, our spending has doubled. Yet we live in a much smaller home and did some major cutbacks on discretionary spending.

All this makes me wonder... Why do we want to stay again? Then I stroll through the redwoods and all is forgotten.

 

[Chuckanut]

Several years ago, maybe three, the WSJ had an article about the 50 most exciting start-up companies in the USA. IIRC, 35 of them were in California. Not bad for a state that is supposed to be on life support.

 

[robnplunder]

Also, wages are higher in CA to compensate for higher living expense.

 

[aja8888]

I cashed out and left, although the divorce killed the financial end of the move. Texas is great and very affordable. Plus, for those who want to work, there are plenty of jobs.

 

[W2R]

I lived in the Berkeley/SF area for six years back in the 1960's, and in the southern part of San Diego for six years in the late 70's early 80's.

I have lived in seven states, but I consider California to be essentially two states, since northern and southern California are so different. If the cost of living is not considered at all, here is how I would rank them, from most favorite to least favorite:

1. Hawaii
2. Missouri (tied for second place)
2. Louisiana (tied for second place)
4. Texas
5. Virginia
6. Mississippi
7. Northern California
8. Southern California

Each to his/her own! If we were all the same, life would be boring, right? And honestly, I'm just not all that enthralled with California, and never was, after the first couple of years there around the time of the Summer of Love back in the 1960's. The magic wore off pretty quickly.

You would have to provide a negative surtax, or large allowance of some sort, to get me to live there again. Now, if a 1500 square foot house in California had a median price of around $135,000, with property taxes under $1,000, and if California would pay me $1500/month to live there, I might reluctantly consider it. In that case, I'd buy a house near Point Reyes or Pebble Beach and tough it out. There is a lot of natural beauty in Northern California so I would console myself with walks along the intertidal regions.

 

[NW-Bound]

Living in the neighbor state to CA and having many friends and relatives in CA, we visit the state quite often through the decades, and know quite a bit about life there.

CA has many pluses of course, else it would not be so crowded. And that is exactly the problem I have. Too doggone many people!

One of our nieces works in the LA area. She bought a townhome in SD, with the intention of driving down there to relax on weekends. She said that driving down on Fridays after work, she did not get to her place till past midnight. Good grief! I remember in the late 70s, I drove down from Long Beach to visit a friend in SD, and came back in the same day for dinner.

 

[2B]

Also, wages are higher in CA to compensate for higher living expense.

I'm not sure if you are being sarcastic or not. Everytime I have been approached about a job in California it has always been for less money. The big selling point is supposed to be the opportunity to move to California. They must get some takers.

When I graduated back in the 70s, I interviewed for several positions. The one around LA touted their charter bus that took employees to where they could afford to live and it only was a 90 minute ride. One position around SF talked up their program that put 4 single engineers in a 2 bedroom apartment so they could afford the cost of the apartment.

I took a job in Houston for an extra $25/month (not totally insignificant in the early 70s) and got my own one bedroom apartment for less than what my share of the 2 bedroom apartment would have been. I also avoided state income tax and other higher cost of living issues. I moved from the Seattle area so I definitely moved to a dramatically different climate.

I've certainly been to various parts of California and had some nice times there. I haven't been so overwhelmed with what I've seen to make me want to live there. If I was wanting to spend time there, I'd probably avoid the income taxes by moving my residency out of the state and rent condos on a monthly basis. I do understand that there's a lot of attraction to staying where you're comfortable with friends and family near-by. That's why I'll never drag DW out of Houston.

 

[antmary]

I was born in NoCal in the redwood country. I have lived in California for most of my life. I spent a few years living in other places - Pennsylvania and Michigan - during my "adventurous years." But, I was so incredibly homesick.... Today I live in the Sierra Foothills, in an Oak forest. The relationships with friends and family are priceless.

We live in a house we built ourselves, and our electricity bill has never been over $60.00/mo, even during the hot summers. That makes up for the land taxes of $3,000 per year. We grow and purchase much of our food locally.

But, really, I think I would be happy living in just about any state in the NW - Washington, Oregon, Idaho, Montana, Utah, Nevada. I thrive when there is a free exchange of ideas, etc. It seems to me that the entire northwestern US has a feel to it that I recognize as "home."

 

[FIREd]

Also, wages are higher in CA to compensate for higher living expense.

I am not so sure either. DW's income is tied to some regional cost of living index and when we moved from the south to California, her income only went up ~18%. Not enough to offset the higher cost of living. Of course, California is a big state. One can live on a lot less money inland.

 

[NW-Bound]

I have told this story about my brother.

A BIG company in Mountain View wanted him back. He did not say how much higher the pay would be relative to what he got, but there was a stock grant in the mid 6 figures if he would stay for a few years. After figuring out what it would cost for the McMansion he has now, and that he has spent $100K to update to make it perfect to their liking, he had to pass up the offer.

 

[Kimo]

We did it all wrong. When I quit working, we lived in a low-to-medium cost of living area (Southeast US) and had adequate funding for a lengthy retirement there. Then DW decided to pursue a job opportunity in California. We fully expected the move to be temporary. But after a couple of enjoyable years here, we would like to stay. That presents a big challenge, thanks to the "living in California surtax" as you put it. Even if were to sell our paid-for house in the south, it would barely provide enough cash for a downpayment on a -much smaller- house in California!

If you think the "living in California surtax" is bad, try Hawaii's!!!!!