would we actually pay any taxes?

[KTP]

At this point this is just a thought experiment, but I am curious what our tax burden will be if we manage to retire early.

For a very simple scenario, say we have one million invested in large stable companies paying an average dividend of 3.5%. Say we also had $200k in cash in CDs and treasuries paying 4% (hopefully in 8 years they will be at least back to this return).

So we would have an annual income of $35,000 from the dividends and $8,000 from the CDs and treasuries, or a total annual income of $43,000 without drawing down the principal.

With today's tax laws for a married couple without children, what might our tax burden look like? This would be our only income, no W2 wages. Would we owe any SS or medicare? (I am pretty sure the answer is no) Could we actually come close to paying zero taxes even though we would have over 1.2 million in assets?

[MonkeyMama]

No - no SS or MC taxes.

"Today's" law would be $2k-$3k in Federal taxes. (I am ignoring 0% capital gains tax for 09/10, since those expire and are an anomaly).

No doubt that is a much smaller tax burden than you currently carry?

In general, I stay away from long term tax projections. I would not count on super low taxes in retirement. I would not count any part of current tax rates/laws remaining the same. BUT, if you can live on far less than you do now, then your tax burden will remain lower than if you worked. That part will remain so.

[KTP]

In todays dollars we could live on $43k a year ($3600 a month). I think if you remove the extra principal we are paying on our home mortgage our monthly outflow including $400 for free spending money is less than $3600, more like $3100 or so.

If neither of us were working we certainly would not need more than one vehicle, so that cuts down on some costs. Health care would go up since it wouldn't be employer covered..but that may change for us all over the next several years anway. I think at age ~46 we should at least be able to get major medical coverage on the both of us for $500 a month.

You are correct though..very hard to predict what the taxman will do in 8 years...

[Broken Arrow]

I could easily be wrong about this, but are you not subject to short term capital gains? Which translates to income tax?

Also, what about inflation? Perhaps the calculations need to add another 3% to account for it.

[Seeker]

I think at age ~46 we should at least be able to get major medical coverage on the both of us for $500 a month.

I would think that the above is already wrong today.

I am 50 years old and I can get basic insurance for some minimum $200 a month if I go outside and apply.... and that's today and the minimal cost. It's also with a minimum co-pay of 5k/year that would be due by me personally first, if I need any kind of major health care. And it excludes any drugs. Again minimum coverage, today, in my area (ie my zip code and local providers)

I don't know if 46 is your current age or if you're expecting that price to be $250 per person eight years from now? Please remember that health care costs are out of reach for many people now.... if things do not change, how much worse will it be 5 years from now (let alone 8 years)?

You might want to head on over to some of the online insurance providers and see what your medical would cost you today, versus 8 years from now (ie. add some years to your age), in your locality.

[KTP]

No, it sounds like I was at least correct for today's major medical insurance rate. You say at age 50 you can get major medical with a 5k copay for around $200 a month.

We are age 38 and will be age 46 in 8 years. It sounds like today at age 46 and non smoker we could insure both of us for major medical with a 5k or 10k copay for under $500 a month.

In 8 years it is possilble there will be a totally different healthcare system, but if not, then allowing for a 5% a year increase in healthcare costs (well above inflation) and it looks like major medical will still be affordable if you are able to self insure for the large copay. (having 1.2 million in the bank would make even a 10k a year copay fairly trivial, and the least of your worries over getting better). Besides, several of the companies I will be investing in will be in the medical field (j&j, pfizer, etc). As they benefit from the drastic increase in health care costs, so shall we.

Best case scenario? We retire early and they pay for national health care by raising the income tax for everyone else.

[Taxplanr]

Yes you would be paying income taxes. You would need to look for income streams that would have tax benefits such as depreciation deductions.

[KTP]

I am sure you would pay *some* income tax, but wouldn't it be miniscule?

If your 1.2 million was in stocks and you only were living off the dividends, say $40,000 a year total for a married couple, wouldn't your tax liability be extremely small?

What is the standard deduction nowadays? like 11,000? Add in just a couple of other deductions and you are talking about being married filing jointly on a adjusted income of around $25,000.

The government would not be able to tax you on the 1.2 million plus which is appreciating in value (hopefully), only on the dividends (assuming you can live off just the dividends).

Heck, maybe we could even qualify for one of those welfare, er, I mean stimulous payments we just missed out on in the past