Education, advice, and evasion

Become a Patron!A few years ago I wrote about one of the curious fixations I observed among the wealthy denizens of the finance industry: the need for "personal finance" education. In this telling, the problems troubling American civilization are not the result of financial deregulation, or corporate consolidation, or employee misclassification, or wage theft, or race and gender discrimination, but rather a simple lack of knowledge. If high school students were instructed in how to balance a checkbook, no other changes would be necessary to usher in the gleaming, gilded, capitalist paradise of Galt's Gulch.I already explained why this conceit is absurd, but I've recently been thinking about how to break down the different layers of communication that are passed off under the mantle of financial education.

Financial education

I consider financial "education" the most elementary layer of personal finance communication. People aren't born knowing what a 529 college savings plan is, what the contribution limits are, or what expenses are eligible for tax- and penalty-free distributions, and many people die without knowing what they are. That makes education the pure transmission of information: 529 college savings plans exist. Individual retirement accounts exist. 401(k) and 403(b) workplace retirement savings plans exist.This information may be interesting, but it's not useful on its own as anything more than dinner party conversation, and we're not allowed to hold dinner parties any more.However, when financiers say personal finance "education," what they usually mean is generic financial advice.

Financial advice

The difference between financial education and financial advice is the difference between saying "there is such a thing as individual retirement accounts" and "you should maximize your annual contribution to your individual retirement account."Financial advice, unlike financial education, is tailored to the individual's circumstances. IRA's exist whether or not your income makes you eligible for deductible contributions, Roth contributions, or non-deductible traditional contributions. But whether or not you, personally, should make deductible, Roth, or non-deductible traditional contributions depends on your personal circumstances — and even worse, it changes as your circumstances change! At the most basic level, the more lucrative your non-IRA investment opportunities are, the less inclined you should be to make IRA contributions.Unfortunately, most financial advisors don't know what they're talking about, because they aren't actually trained in giving financial advice: they're trained in tax evasion.

Tax evasion

I once researched, but never published, a post about the role taxes played in post-war Britain on the global export of British music, as performers were required to spend most of the year outside of the United Kingdom in order to avoid taxes on their worldwide income. There's even an anecdote about a Beatle (or was it a Rolling Stone?) insisting his private jet circle over Heathrow until midnight so that he didn't exceed his allotted days on English soil.This is the category of advice financial "advisors" tend to provide: tax evasion stands in as a substitute for actual financial advice. Without knowing anything else about a person's situation, you can tell them to maximize their IRA contributions, maximize their 401(k) contributions, harvest capital losses during high-income years and capital gains during low-income years, strategically name 529 plan beneficiaries, and front-load contributions to donor-advised funds.But it's absurd to call this financial advice. Someone who tells you how to make more money is offering financial advice. Someone who tells you how to spend less money is offering financial advice. But someone who writes a letter for you to the IRS explaining that actually comparable salaries in your industry are $30,000 so you shouldn't be liable for FICA taxes on your sales of $5 million isn't offering financial advice, they're evading taxes on your behalf.You may think that's a service worth paying for, or you may not, but when financiers promote the benefits of financial education, don't forget they're talking about spending scarce classroom time teaching kids how to evade taxes.Become a Patron!

Strategies to pay for an early retirement

Become a Patron!Last month I got to spend some time with a relation who recently left a high-powered tech job, and who asked for some advice about financing a more or less indefinite period of unemployment. I am strongly opposed to mixing money and family, but I eventually relented and offered some ideas in general terms about how I would advise someone who came to me in his situation. I thought it might be useful to write up those ideas in case they're useful to anyone else in his situation.

Get your finances in order

Over the course of a 15 or 20 year career, workers accumulate an enormous quantity of financial junk. Multiple 401(k) and 403(b) plans, stock options and grants, individual stocks, term and whole life insurance policies, etc. Even if you tend each garden carefully, it can be hard to figure out what you really own: is a Fidelity target retirement date fund really equivalent to a Vanguard fund with the same target date? Is a Betterment "aggressive" portfolio the same as a FutureAdvisor "growth" portfolio?An underrated advantage of an early retirement or break in your working life is that it's an opportunity to get all that junk sorted out at minimal or no cost, for the simple reason that long-term capital gains are untaxed if your taxable income (after deductions) is below $39,375 for single filers and $78,750 for married joint filers. In low-income years you should be "harvesting" as many gains as possible in taxable accounts, and unlike with capital losses, there's no wash sale rule with respect to gains. In low-income years, you can realize taxable gains, pay a 0% long-term capital gains rate on them, and then buy identical securities with a new, higher cost basis.In addition to resetting your taxable basis, you should also consolidate your old retirement accounts in traditional and Roth IRA accounts with your preferred custodian. This is a good idea in general, but a break from the workforce is as good a time as any to finally get around to doing it.

How likely are you to return to work, and when?

This is the single most important question when contemplating early retirement, but unfortunately one of the most difficult to answer accurately. The two easiest answers are "I'm certain I will return to work in 1 year," and "I'm certain I'll never return to work," but few people are able to give either. On the one hand, in one year unemployment could be 15% and no one will be hiring 40-year-olds with unexplainable gaps in their resume. On the other hand, 3 months into a supposedly "permanent" retirement you might have already landscaped the lawn, oiled all the hinges, replaced your floor, repainted your living room and be pulling your hair out from boredom.Nonetheless, while it may only be an educated guess, guess you must, since whether or not you return to work is the main input into the most important question: how much risk can you expose your savings to? Unlike some people in the FIRE community, my attitude towards risk is simple: if you do not plan to return to work, you cannot risk any money you need for retirement, while if you are certain to return to work, then you can expose a relatively large amount of your assets to risky investments.You may have noticed a semantic trick I played: I'm not interested in your total assets, I'm interested in the assets you need for retirement.Take the case of a 40-year-old with $1 million in liquid, taxable assets, in a brokerage account for example, who never intends to return to work. They can spend $2,778 per month for the next 30 years, before claiming their maximum Social Security old age benefit at age 70, the very day they exhaust their brokerage account balance. But what if, upon studious reflection, they determine that they only need $1,500 per month to live? In that case, while keeping $540,000 in safe assets, they're free to invest $460,000 in risky assets, knowing that even complete disaster will leave them enough money to meet their needs.It doesn't matter what they call that $460,000, whether it's their "legacy" or "play" money or "gambling" money, what's important is that you can't risk money you need to survive.Hopefully this makes clear the importance of the return-to-work question: if you're certain to return to work in a year, then your "sabbatical" shouldn't have a substantial impact your asset allocation at all: set aside 12 or 18 months worth of cash, CD's, or Treasury bills, and leave the rest invested in an age- and risk-appropriate long-term portfolio. 5 years out of the workforce requires a higher allocation to safe assets, both for the longer timeframe and to take into account the likelihood of lower earning as your experience and skills age. To account for 10 years of early retirement you should count on a significantly lower income, if you do ultimately return to work.

Health insurance

While healthcare costs can pose a serious financial hardship for workers, in retirement the situation is much simpler: if you live in a Medicaid expansion state, you can enroll in Medicaid, which has no premiums or deductibles, and nominal co-payments for prescription drugs. There's no open enrollment period, so you can enroll as soon as your employer-sponsored insurance coverage ends.If you live in a non-expansion state, you'll need to claim the maximum advance premium tax credit and cost-sharing reductions by entering an income into your state's health insurance marketplace that's right around 140% of the federal poverty line, and selecting an eligible Silver plan. You may end up paying a few dollars a month in premiums — in non-expansion Wisconsin my monthly premium was $0.83, so I just paid the $12 once a year in advance to make sure my policy wasn't canceled in case I forgot. When you file your taxes you'll be asked to calculate how much of your advance premium credit you have to repay, which will be $0 or close to it, as long as you're sure to keep your income low enough.And once you turn 65, of course, you're eligible to enroll in Medicare. While Medicare is worse insurance than Medicaid (coming as it does with premiums, co-payments, and deductibles), it does give you access to a somewhat wider range of providers, which is increasingly valuable as you age, depending on your health status.One quick note here: many people have heard of the "Medicaid asset test," which requires people enrolled in Medicare to spend down certain assets before they become "dual eligible" and begin to receive much more generous Medicaid coverage. This asset test does not apply to non-Medicare enrollees living in Medicaid expansion states. Thanks, Obama.

The incredible advantage of working at least a little bit in pretirement

Finally, I want to point out an important advantage to bringing in at least a little bit of income in retirement, or "pretirement" as my relation calls it. Consider the same 40-year-old above, with $1 million in liquid assets and $1,500 in monthly expenses, who therefore needs $540,000 in safe assets and can invest $460,000 in risky assets — an overall asset allocation of 46/54.Earning $500 per month (33 hours at $15 per hour, or roughly 8 hours per week), reduces the cash need over the next 30 years to just $360,000, leaving $640,000 to invest in risky assets — a much risker overall asset allocation of 64/36, with a consequently higher expected final value.A few hours of work per week, whether it's as a high-powered consultant, or a low-powered Walmart greeter, relieves an enormous amount of pressure on your assets.

A few notes on timing

I mentioned above the advantages of harvesting tax-free capital gains in low-income years, but I want to point out a few other opportunities that arise once you've stopped working.Once you've rolled over your workplace-sponsored retirement balances to IRA's, you're able to convert your traditional IRA balances into Roth IRA balances. This is a taxable, but penalty-free, event, so you can convert up to the amount of your standard deduction every year (or your remaining standard deduction after accounting for earned income) tax-free (and substantially more than that at today's favorable income tax rates). Those Roth balances can then be withdrawn tax-free any time after age 59 1/2, and aren't subject to required minimum distributions.Finally, it's worth considering how and whether to make withdrawals from retirement accounts in general. An example of a "simple" strategy would be to draw down taxable assets before age 59 1/2, take distributions from qualified retirement accounts until age 70, then rely on your Social Security old age benefit and any remaining required minimum distributions from then on. More sophisticated strategies do exist, however: your assets may last longer, or accommodate higher spending (two ways of saying the same thing) if you're able to meet your spending needs with your untaxed long-term capital gains in lieu of retirement assets prior to age 70, giving the latter more time to internally compound tax-free. Retirement assets are also granted much more protection in bankruptcy, a kind of built-in insurance policy against sudden financial misfortune.These strategies can be quite complex, and I would not attempt to implement one without consulting a fee-only financial advisor, i.e. one who is not paid to sell you their firm's flavor of the week.Become a Patron!

Let's all go to the movies

When Ronald Reagan needed to explain to the American people the outlandish claims of his voodoo economists, he would often reach back into his remaining intact memories of his first career, as a Hollywood star. Who could forget such iconic roles as "The Gipper," "The Gipper: Tokyo Drift," and of course "2 Gipper 2 Furious?"Reagan patiently explained to his lead-damaged voters that high marginal income tax rates on actors meant that after getting paid for two films per year, leading men and women would take the rest of the year off, knowing that each additional movie would be worth just pennies on the dollar to them.The logic is airtight: if a blockbuster takes 2 weeks to film, an actor considers two weeks of work worth $200,000, and their studio considers the actor's work worth $400,000, then at 50% tax rates the actor is willing to work but at 70% tax rates they'd rather chase starlets around the pool at the Chateau Marmont.Between 1981 and 1987, Reagan got his wish, unleashing unimagined productivity in the acting industry by reducing the marginal tax rate on top incomes from 70% to 38.5%. Or did he?

Methodology

Due to my unfortunate literal tendency, I got to wondering: if 70% marginal tax rates were keeping actors from taking on a third film each year, did lowering top marginal tax rates to 38.5% increase the number of films top actors were willing to take on?Since tax rates fluctuated wildly between 1981 and 1986, this gives us a natural disjuncture point. For each of the 25 years ending in 1980, and the 25 years beginning in 1987, I looked at the top-billed and second-billed actor in the highest-grossing film of the year, and asked a simple question: how many films did that actor appear in? There are a few obvious problems with this methodology: if actors are paid the year principle photography occurs, but the film is released in a different year, the wrong actors might be selected for a given year. Additionally, surprise hits, particularly independent films, might have high box-office receipts but not have needed to compensate their actors correspondingly. I don't think these problems should matter much, but if you do, you can do your own analysis.

Results

Having put all this data together (you can check it out for yourself), I wanted a way to easily visualize it. In each charts the number of total film credits by the top-billed actor in the highest-grossing film of that year is shown in blue, with the number of total film credits by the second-billed actor in the highest-grossing film stacked on top in red.Here are the 25 pre-reform years:And here are the 25 post-reform years:Another approach is to look at some statistical values. Pre-reform, the average number of films by both top-billed and second-bill actors was 1.8, with a range of 1 to 5 (props to Gene Wilder in 1974) and standard deviation of 0.65 and 1 for top-billed and second-billed actors, respectively.Post-reform, the average number of films dropped slightly, to 1.72 (top-billed) and 1.68 (second-billed), with a range of 1 to 4 (Sam Neill in 1993 and Billy Bob Thornton in 1998). The standard deviation rose slightly for top-billed actors to 0.94 and fell slightly to 0.85 for second-billed actors.Using the sum of both top-billed and second-billed actors, as I did in the charts above, yields a fall in the mean from 3.6 to 3 films per year, and a slight rise in the standard deviation from 1.26 to 1.29 films per year. Using the combined data, the median and modal number of films by each year's pair of actors is identical pre-reform and post-reform, as is the range, with 2-7 films being made by each year's pair, with 3 films per year remaining the most common total value.

Why did the Reagan tax reforms fail?

From the perspective of encouraging our highest paid actors and actresses to produce more films for our entertainment and enrichment, the verdict is clear: the Reagan reductions in top marginal tax rates were an abject failure. A tax reform that reduced revenue by roughly 1.1% of GDP in order to incentivize increased economic activity at the highest end of the income scale instead left that activity slightly lower than it was pre-reform!One key to understanding why is the interaction of what we can call "wealth effects" and "income effects." To clarify the difference, consider a simple case of interest rates on plain-vanilla savings accounts. If interest rates are currently at 10%, what happens if they fall to 9%?On the one hand, this will make saving marginally less attractive. You may be willing to deposit $1,000 if it will earn you $100 in interest per year, but if it only earns you $90 per year, you may prefer to spend all or part of the $1,000 instead. This is the income effect: the less net income you receive from an activity, the less incentive you have to do it. It's also the effect voodoo economists choose to emphasize.But a second effect is working in the opposite direction: the wealth effect. If your goal is to accumulate a total of $2,000, then a reduction in interest rates from 10% to 9% will not lead you to save less, but instead cause you to save more, since your previous savings will no longer let you achieve your goal in the same time frame.Likewise, the wealth effect of a higher interest rate is not increased thriftiness, but the opposite: you need to save less money to achieve your wealth goals at an 11% interest rate than at a 10% interest rate, leaving you more money to spend rather than save.Once you understand the income and wealth effects, you can see one reason why Reagan's efforts were doomed. The income effect means that post-1987, actors got to keep a far higher share of their income, increasing their incentive to work as much as possible, but the wealth effect means that it took far fewer films to accumulate the kind of wealth that puts you comfortably among the rich and famous. Not every actor struck the same balance, but a glance at the data shows that for highly-paid actors on the whole, the two effects almost perfectly canceled each other out.

Conclusion: wage slavery or capital strike?

This exercise, and generally taking income and wealth effects seriously, isn't supposed to suddenly grant you some special insight into the correct marginal tax rate on high incomes. Instead, it's meant as an invitation to think about what, exactly, we want our tax policy to achieve, and how.To give a simple example, if we believe that investment banking is a good and worthy activity that improves the peace and prosperity of the world in one way or another (allocating capital, hedging commodity prices, whatever), then should we prefer to have a large number of investment bankers working reasonable hours and making reasonable incomes or a small number of investment bankers working inhuman hours and making preposterous incomes?In the one case, high marginal income tax rates might reduce the willingness of investment bankers to work long hours in order to earn higher and higher incomes, forcing firms to hire more of them at more reasonable wages and hours. If investment banking is, instead, as specialized an activity as Guild Navigator, then perhaps lower tax rates are necessary to encourage the very highest specimens to achieve their full potential.But as The Gipper made clear, it's not enough to say that we'll "let the market decide," for the simple reason that "the market" is a product, not an input, of public policy.

Everyone should have access to the federal Thrift Savings Plan, but not for you reason you think

Shortly before his humiliation and expulsion from public life, Florida Senator Marco Rubio resurrected the idea of allowing some non-government employees to invest in the Thrift Savings Plan, which is the federal equivalent of private-sector 401(k) and non-profit 403(b) plans. The proposal got some sympathetic attention from lazy personal finance journalists, and some critical responses from bloggers serving the federal workforce.

The lazy reason to support TSP-for-all: lower costs

The narrow reason financial journalists latch onto in support of TSP-for-all is administrative costs, and it's true that TSP charges less in overhead and fund management fees than virtually all private retirement schemes, between 0.032% and 0.033%, depending on the fund.

Let me be clear: costs matter, and that's a lower cost than, for example, a Vanguard mutual fund held in a Vanguard 401(k).

But, as opponents of TSP-for-all are quick to point out, those costs are subsidized in part by fees paid by employing agencies. Universal enrollment in TSP might provide some economies of scale, but would also introduce a large number of non-subsidized workers into the system, dragging up average costs even if the final cost is lower than most workers pay today.

For that reason many TSP-for-all proposals involve replicating a second pseudo-TSP for non-federal-employees, so federal employees continue to enjoy their agency subsidies and lower costs, while non-federal-employees are shunted into a parallel system with higher, unsubsidized costs.

With costs as low as they already are in the private mutual fund industry, this strikes me as the least convincing argument for TSP-for-all.

A decent reason to support TSP-for-all: simplicity and universality

An argument for TSP-for-all that I'm more sympathetic to is that decisions over the availability of tax-advantaged retirement savings shouldn't be made by employers at all. If the federal government decides it's willing to let people shield $25,000 in earnings from income tax in 2019 ($6,000 in IRA contributions and $19,000 in workplace contributions, plus catchup contributions in both), why should your boss get to decide whether you are able to take advantage of that benefit or not? It's as nuts as companies running their own private health insurance offices.

Providing everyone, with or without their employer's permission, with access to the total retirement savings benefit they're entitled to, is a commonsense measure, although as I've said in the past, my preference would be to simply eliminate workplace retirement savings plans entirely and increase and universalize the contribution limits for individual retirement accounts (which isn't mutually exclusive with TSP-for-all).

TSP-for-all is also sometimes praised on the grounds of simplicity, and here the argument is fair enough as far as it goes. It's somewhat shocking even to me, but the "best retirement plan in the country" has just 5 investment options (plus "Lifecycle" funds that blend the 5 in different proportions): US large-cap, US small-cap, US bonds, international developed stocks, and the TSP's proprietary "G fund."

The first four are fairly standard low-cost market-capitalization-weighted index funds, while the G fund is unique in that it offers interest income based on intermediate-term US treasury rates, but with the principle guaranteed so that the fund can't lose money when interest rates rise. A neat trick!

I think between them these are excellent components in a retirement savings portfolio, and wouldn't have any serious objection if they were the only options available in a TSP-for-all plan. But there are perfectly reasonable objections to this fund lineup as well: emerging markets are completely absent, as are international bonds. Do those asset classes have a role in every portfolio? Of course not. Should they be categorically excluded from investments? That depends on the trade-off you want to make between simplicity, versatility, and diversification.

The best reason to support TSP-for-all: a simple national supplemental annuity

The primary source of retirement income for Americans is not traditional defined-benefit pensions, and it's not defined-contribution retirement plans like 401(k)'s and 403(b)'s. It's Social Security's old-age benefit, a federal program that guarantees retirement income based on your recorded earnings paid into the program during your working lifetime.

One problem with our current jerry-rigged retirement system is that under our laws, annuities are not investments at all: they're insurance contracts, sold on a commissioned basis by state-licensed agents and state-regulated for-profit companies.

If, instead, we want voluntary savings to accumulate and supplement workers' Social Security income in retirement, then there's no better solution than a federally-guaranteed annuity, available nationwide, based on a worker's balance in the federal Thrift Savings Plan.

The Thrift Savings Plan already offers a free calculator showing how your retirement savings can be converted into a single lifetime, joint lifetime, or inflation-indexed annuity (and even a few more exotic options related to non-spouse beneficiaries), and I haven't been able to find another company offering better terms. However, those annuities are still technically issued by the private MetLife corporation, and subject to state law (and bankruptcy court).

But since the federal government already runs a guaranteed income program for retirees, the greatest promise of TSP-for-all is the ability to convert accumulated savings into a supplemental Social Security benefit, guaranteed by the federal government to last as long as you do.

What do we want from our retirement system?

Nothing could be simpler than our retirement system as it exists today: the rich do what they can, while the poor suffer what they must. But this rule is not written in the stars, it's the product of very specific decisions made in the development of our retirement policy:

• Employers are allowed to decide the retirement savings options available to their employees, so low-wage employees have less access to tax-advantaged savings vehicles than high-wage employees;
• Social Security contributions are capped so high-income workers have more disposable income to contribute to tax-advantaged plans than low-income workers do;
• Low-income workers who are able to save in individual retirement accounts can be lied to by financial advisors who are not required to act in their best interests.

A simple, cheap, universal, federal Thrift Savings Plan won't solve every problem in the world. But no one defending the current system is even pretending that it's doing an adequate job providing for income security in retirement.

So how about we try something different?

What should you do if your Vanguard 403(b) account is getting access to Admiral shares?

Workplace 403(b) retirement plans are, very roughly speaking, the non-profit and public sector's answer to the 401(k) retirement plans offered by private companies. If your workplace 403(b) account is administered by Vanguard, you probably recently received a letter explaining some changes to your account. The most important changes are:

• a change in fee structure from a $15 annual fee per fund held in the account to a $60 annual fee regardless of the number of funds held;
• access to low-cost Admiral shares with no minimum investment requirement.

My understanding is the changes will go into effect in early November for plans affected by the change.

Why it matters

Previously, like 401(k) accounts held at Vanguard, 403(b) accounts only had access to higher-cost Investor shares. Combined with the per-fund fee, that meant many investors were best off investing in a single target retirement date fund or fixed-allocation LifeStrategy fund in order to pay as few per-fund fees as possible. Since those funds hold higher-cost Investor shares, they're a bit more expensive than a 3-fund or 4-fund portfolio built with Admiral shares or Vanguard ETF's, so many investors prefer to assemble lower-cost portfolios with those instruments in their personal accounts.That wasn't possible in 403(b) accounts until now.

Who wins?

There are two ways 403(b) participants might benefit from this change:

• People with balances below $50,000 who already held 4 or more funds with Admiral shares in their account by definition will save money after the changeover: they were paying $60 or more per year ($15 per fund) for higher-cost Investor shares. Now they'll pay a flat $60, plus save money by paying lower expense ratios on each fund they hold, as long as it has Admiral shares.
• Anyone who held funds with Admiral shares that are sufficiently cheaper to offset any increase in annual fees. For example, if your only holding is Vanguard High-Yield Corporate Fund Investor Shares (hopefully as part of a diversified portfolio) you're currently paying $15 plus a 0.23% expense ratio. Admiral shares have an expense ratio of 0.13%, so if your balance is over $45,000, you will pay less in combined annual fees and management fees after the changeover.

Who loses?

The biggest loser in this changeover is folks with over $50,000 held at Vanguard and who intend to remain in funds that do not offer lower-cost Admiral shares. Previously, having Flagship status with Vanguard waived their per-fund fee in 403(b) accounts, so folks with $50,000 or more in assets at Vanguard paid no annual fees no matter how many funds they held in their accounts.Now, they'll pay a flat $60 annual fee no matter how many funds they hold or how many assets they have with Vanguard. As explained above, folks who hold Admiral shares in their accounts will see an offsetting reduction in fund expense ratios. But target retirement date and LifeStrategy funds are popular as simple, one-and-done investment allocations, and neither kind of fund offers lower-cost Admiral shares. That means folks exclusively invested in those funds will be paying higher annual fees (unless they were invested in 4 different funds for some reason), but still won't benefit from access to Admiral shares.

How to play it

I've laid out all of the above because of my unfortunately literal tendency, and the fact that money is one of the fews things in life that benefits from being taken literally. I think there are basically two ways a 403(b) participant can react to these changes:

• Do nothing. Remember, the absolute maximum you'll be paying in additional annual fees is $45 per year, since you were already paying $15 per fund in your account. If you are holding funds that offer Admiral shares, you'll see your Investor shares automatically converted and you'll make back some of the additional fees in lower expense ratios. If you aren't holding funds that offer Admiral shares, you'll remain in your Investor shares and pay the higher annual fee without seeing any benefit. Obviously it doesn't feel great to pay an extra $45 above what you were paying before, but that still only works out to what, four and a half bananas a year?
• Convert from a loser to a winner. If you are currently holding target retirement date, LifeStrategy, or other funds that don't offer Admiral shares, you can convert your current holdings into an identical allocation to the individual funds, which do. So instead of $10,000 in a Lifestrategy Growth fund, you could move to $4,780 in Total Stock Market, $3,210 in Total International Stock, $1,410 in Total Bond Market, and $600 in Total International Bond, all of which offer Admiral shares. Then you'd also want to tell your 403(b) administrator to change your payroll contributions to reflect those ratios. Between once a year and once a quarter you'll also want to log on and rebalance your account to reflect changes in the market value of those securities (I don't see any benefit to rebalancing more often than quarterly. Don't peek).

Finally, if you have other investments outside your workplace 403(b), you may benefit by being able to use Admiral shares to create a more appropriate overall asset allocation than you currently have. For example, if you previously held LifeStrategy or target retirement date funds in your 403(b), you may have struggled to appropriately allocate risk in your IRA's and taxable accounts taking into account that fixed asset allocation.Now, by holding the underlying securities, you can more finely tune your asset allocation across all your accounts. Of course, whether or not you actually benefit depends on how much time you want to spend micromanaging your investments!

How much is your obsession with tax efficiency costing you?

Something that I find separates me from the classical financial independence/early retirement community is the particular obsession of that community with achieving financial independence in order to retire early from work.In the framing I see regularly repeated, you're supposed to study for the most lucrative degree possible, then get the most lucrative job available, then earn as much money as possible and save as much of your income as possible, in order to quit the job you despise as soon as possible.To me this is obviously nuts: if you're able to survive on a pittance, why not cut out all the middlemen and simply earn a pittance doing something you actually want to do?But much more importantly to me, the focus on paid labor means FIRE types tend to put off entrepreneurship until after retirement, or look at it as a means to finance retirement, rather than as a shortcut to the life they actually want to live.An under-appreciated obstacle to pursuing entrepreneurship earlier in life is the focus on the tax efficiency of investment decisions. I think that focus is a mistake.

The strong case for tax efficiency

One offshoot of the obsession with paid work is the obsession with tax efficiency of the investments made with one's labor income. I always like to address the strongest possible case for positions I disagree with (partly because sometimes I change my mind!), and the strong case for taking maximal advantage of tax-advantaged savings plans is quite strong:

• The upfront tax savings afforded by traditional IRA's and 401(k) plans allows your after-tax income to be invested at a higher value than they otherwise would. In the 25% marginal income tax bracket, $1,000 in after-tax savings would require $1,333 in pre-tax disposable income. That same $1,333 in pre-tax disposable income could instead be used to invest $1,333 if directed to a traditional IRA or 401(k) plan. That's a 33% "bonus" to your initial capital, which will hopefully compound happily for years to come.
• The tax-free withdrawal of Roth assets allows the appreciation on your assets to be withdrawn without tax liability in retirement and in certain other circumstances. A $1,000 contribution compounding at 5% annually for 30 years will produce $3,321 in capital gains. In a taxable account, dividends would be taxed annually and any final capital appreciation would be taxed on withdrawal. Meanwhile rebalancing transactions within the account may produce additional intermediate taxable gains (although they might also create losses).
• Both types of account permit tax-free internal compounding, which both disentangles your total return from the vagaries of your year-to-year tax situation and saves you the hassle of calculating your capital gains tax liability each year, which is not fun.

The simple case against tax efficiency

The simplest way to explain the problem with tax-efficient investing is through the restrictions on what kinds of investments can be made with tax-advantaged retirement vehicles:

• you cannot live in real estate owned by your tax-advantaged retirement vehicles (or receive any other pre-retirement benefit from your investments);
• S-corporations cannot accept investments from tax-advantaged retirement vehicles.

Of course most custodians restrict your investment options even more, limiting you to publicly traded securities offered through their own brokerage platform. My point is broader though: in exchange for the tax efficiency of your investment you explicitly restrict your ability to invest your excess income in your own business.

The best case for investing in public markets is that you don't have any ideas

I constantly have ideas for businesses, so I find it kind of hard to get inside the head of someone who doesn't have any ideas for businesses (I occasionally post free business ideas if you're having trouble coming up with one of your own).But the most convincing case to direct as much of your disposable income as possible into tax-advantaged savings vehicles is that you think the public markets as a whole, your preferred asset allocation, or even a particular active mutual fund or hedge fund manager will perform better, taking into account the relevant tax advantages, than you will investing in your own business.In my experience, this intuition isn't very convincing.

Business is more profitable than you think (but less profitable than you want)

I have a sort of unique position since, on the one hand, my own business is extremely capital-unintensive: I pay a few hundred dollars per year for my web domain and content management system, then I get paid depending on how good people think my websites are.At the same time, I have a lot of friends who have extremely capital-intensive businesses: buying and reselling merchandise and gift cards. Their overall profit depends largely on the amount of volume they're able to push through their supply and distribution chains, and the more capital they have to buy products, the higher their profits are.The reason I raise this juxtaposition is that I think it's informative about how you should direct the profits from any given line of business. A capital-light business that has a rapidly decreasing return on reinvested capital makes tax-advantaged investment accounts more attractive as a way to boost the returns on the business's retained earnings. Meanwhile, a capital-intensive business that has a steady or only-slowly declining return on reinvested capital should make tax-advantaged accounts less attractive since once profits are shielded they're unavailable for reinvestment in the business.The reason this result should be counter-intuitive is that the capital-intensive business is likely more profitable than the capital-light business! In other words, the more profitable your business is, and the higher your returns are on reinvested capital, the less you should want to shield your profits in tax-advantaged accounts which can only be invested in public markets.

We don't need tax reform, we need mind reform

Alright, the preceding was a bit pedantic. My unfortunate literal tendency at work, no doubt. But I wanted to lay it all out to make as clear as possible my case for abandoning your obsession with the tax advantages of your workplace retirement plan and finding, as soon as possible, the business that will let you live the life you actually want.If we want to create a society of entrepreneurs and entrepreneurship, we don't need to cut corporate taxes, or cut taxes on pass-through income, or accelerate depreciation, or have a tax holiday on repatriated earnings.We don't need tax reform, we need mind reform.We need to tell people that it's good and right that they leave their jobs to start their own businesses. Every second spent on the potential tax consequences if or when they ever turn a profit, and how to shield that profit from taxes, is time that could be spent on the actual business an entrepreneur is trying to bring into the world. Our economy needs more businesses and fewer workers, and the obsession with tax policy is a major obstacle in the way of that vision.The reason tax reform can't be the answer is that even in our current tax regime entrepreneurship is much more profitable than labor. What anti-tax evangelists have done is convince entrepreneurs that the taxes they pay are extravagant, exploitative, and destructive, when they're nothing of the sort: business is just so profitable that entrepreneurs end up paying more in taxes on their small businesses than they did as employees. That's because their income is higher as entrepreneurs than as employees.At the end of the day, no just system of taxation is going to levy lower taxes on entrepreneurs with a given level of income than on employees with the same income. Yet that's precisely the regime Republican members of Congress are currently trying to implement. I think they'll fail, and I hope they'll fail, but your decision whether or not to start your own business should have nothing to do with their eventual success or failure. You should start a business based on the life you want to live.The taxes will work themselves out. Of course you can decide to withhold your own ingenuity from the marketplace, but the marketplace is going to be fine without you. Will you be fine without the marketplace?

Business is not work is not investing

One of the more curious tricks played by late capitalism on the minds of its subjects is conceptually transforming all aspects of life into different forms of capital. From this trick arises the idea of "social" capital, which turns relationships with friends, neighbors, and loved ones into assets that can be assigned a precise value based on discounted future cash flows. Knowledge, education, and experience become "human" capital. Customs and manners become "cultural" capital.With so many forms of capital available, actual capital — ownership of the country's productive capacity — puts on a blue suit and tries to blend in with the drapes.

Don't confuse business, work, and investing

Perhaps because I have my hands in so many pots, I have a particularly acute sense of the difference between business, work, and investing:

• I run a business producing travel hacking and personal finance content on the internet;
• I have a bunch of jobs, where I do work and receive pay;
• and I own a bunch of Vanguard mutual funds, one Vanguard ETF, and 50 shares each of Fannie Mae and Freddie Mac (because gambling is fun and this Mnuchin guy is going to make me rich).

A business makes money from customers

In my business, I sell ad space (through Google Adsense), subscriptions, and Patreon patronages or whatever they're called. In order to entice customers, I have to be funny, smart, sarcastic, valuable, or whatever else customers want in order to voluntarily pay me.This is the nature of business: you can put as much time or money into an idea as you like, but if no one wants to buy anything from you, you won't make any money.

A job makes money from an employer

The defining characteristic of a job, as opposed to a business, is that you are paid for your work. Now, over the history of capitalism different models have been used to pay workers so I don't want to get hung up on a single model: there are hourly, salaried, piece-work, and commission models of employment, and plenty of others I've probably never heard of. What they have in common, though, is that the employee is entitled to payment from their employer for the work done regardless of their value to the employer.The distinction between a business and a job could not be more clear: businesses are paid voluntarily by customers, while workers are required to be paid by their employer. In US law this is even enshrined in the Bankruptcy Code, which places wages owed above the claims of other unsecured creditors.

Investing is an inherently passive enterprise

By "passive" I'm not referring to passively-managed mutual funds, but rather to the nature of investing. Investing is the process of holding an ownership stake in an undertaking you are not running and are not employed in. Unlike a business, where your income depends on how skillfully you execute the undertaking, or a job, where your income depends on your ability to satisfy your employer, when you invest, your income depends entirely on other people's successful execution of the underlying business. When you buy a bond the return of your coupons and principal depends on someone else earning enough money to make those payments. When you buy a stock your dividends depend on someone else generating enough free cash flow to make those distributions.

Understand which part of your income comes from which activity

The US tax code at times seems deliberately designed to confuse this fundamental distinction between business, work, and investing. For example, many doctors legally organize their practices into "businesses" when what they're really doing is work: billing insurance companies for services rendered at a predetermined rate. Likewise many actual business owners legally organize a certain portion of their business income as wages, dividends, and capital distributions. And of course hedge funds are rightly famous for deliberately confusing their business activities (attracting capital from investors), work activities (picking investments), and investing activities (sitting around waiting for stock prices to rise or fall) in order to secure the most generous tax treatment for each.These games can be fun and lucrative (albeit time-consuming) but I would encourage you to be honest about which part of your income actually comes from each enterprise, not for the sake of manipulating your income taxes, but to understand what you're really being paid for. Owning rental real estate, for instance, is part business (attracting tenants to your buildings), part work (maintenance you do yourself), and part investing (depositing rent checks). Running a blog is all business (attracting readers), while writing for someone else's blog is all work (whether you're paid per word, per post, or per month).

Conclusion: find the combination of income sources that works best for you

About 33% of my income is business income, about 66% is income from work, and about 1% is investment income. This is not, notably, how I report it on my tax return. Rather, it reflects the reality of how I'm compensated for different activities: for which do I rely on attracting customers to voluntarily pay me and for which am I paid for the work I do?I don't personally privilege any one income source over any other, as each has its own charms:

• running a business has the advantage of making me fully responsible for all my successes and failures, with no one to answer to but myself (unfortunately I'm a terrible boss);
• working jobs has the advantage of being able to focus on a particular task instead of fretting about my impact on the business's bottom line;
• and investing has the advantage of not requiring (or allowing) any input from me, besides voting the occasional proxy (I always vote against all the director nominees, on principle, and you should too).

I think the rejection of wage work by FIRE types is often a bit overwrought. If you don't like your job, you ought to get another job. If you don't like your hours, you ought to work different hours. If you don't like your co-workers, you ought to find some different co-workers. On the other hand, the idea of working even more hours, with co-workers you like even less, at jobs you hate even more, just to eventually replace your work income with investment income seems at its core like a tragic miscalculation.My suggestion is to find the combination of income sources across businesses, jobs, and investments, that let you achieve your goals with the minimal amount of existential despair today, not two, five, or ten years in the future.

See how "frugal" I am

I always have a good time reading the latest explanation for how easy it is to save money if you just make a few simple sacrifices, whether it's your daily latte, your breakfast avocado toast, or whatever other "excess" has seized the imagination of our Baby Boomer media publishing overlords.But even I was surprised when a reader tweeted me the other day to say "you are brilliant at being frugal."

Here are all my great frugal living tips

• Instead of buying a morning latte, I make a pot of coffee every morning, which produces roughly 12 cups of coffee. A 24 ounce bag of coffee from Whole Foods costs about $12 (more like Whole Paycheck, amiright?), and lasts about a week. I pay $0.14 per cup of coffee!
• Instead of renting phones from wireless companies and buying into preposterously expensive contracts, I buy my iPhones outright and then pay $55 per month for wireless and data service. I also keep my iPhones for years and years instead of replacing them every one or two years.
• Instead of making car payments, paying for car insurance, and buying gas, I ride the subway and walk.
• Instead of owning a TV and paying for cable TV service (and replacing my TV every few years), I stream, buy, or steal whatever I want to watch.

How much money am I saving?

• If a daily latte costs $4 per day, that's $28 per week, so I save $16 per week buying coffee in bulk.
• If an iPhone SE costs $499 and lasts 4 years, by paying $55 instead of $100 per month, I make back my "full price" iPhone in about 11 months and every month after I save $45 per month.
• I spend about $100 per month in subway fares, compared to whatever my monthly budget would be as a car commuter.
• I spend $39.99 per month for internet from a local cable internet service provider, that provides no premium channels, no sports, and no news — because they don't provide any television service at all.

I'm not frugal

The idea of calling this "frugality" is based on the idea that a person starts out life with cable TV, a new smartphone, a cup of designer coffee, and a car. From that maximal viewpoint, everything you don't do can be credited to your "frugality bank" as some kind of merit you can store up in heaven, or elsewhere.But I never bought a cup of espresso every day. I never signed up for a never-ending treadmill of mobile phone contracts. I never bought a car, let alone borrowed money to buy a car. I never bought a television, or paid for cable TV service.I can't take credit for all the money I'm saving because I think it would be absurd to spend money on the things you spend money on.

I don't know why you do the things you do

I am struggling, if it's not apparent, to keep this from coming across as judgmental. But it's not judgmental at all! I don't have the slightest interest or desire to sign up for the kind of expensive, ongoing purchases that are apparently treated as normal by your typical Baby Boomer financial columnist.But you know yourself much better than I do. Maybe a new television gives you the kind of pleasure a trip back home to watch the rodeo gives me. In that case we can agree that neither of our activities is more or less frugal than the other: I spend money to go watch the Western Montana rodeo, you spend money to hang a new 11D TV on your wall.

Conclusion

At the end of the day, I've never cut anything out of my life in the name of frugality. I wouldn't "prefer" to rent a cell phone than buy my own phone and pay for service. I wouldn't "prefer" to rearrange my apartment in order to liberate a wall I could mount a flat-screen TV on. I wouldn't "prefer" to drive instead of walk. I wouldn't "prefer" to drink store-bought espresso instead of my own home-brewed coffee.But that's often the language used around frugality: that people should sacrifice something or other in order to meet one financial goal or another. I don't buy it. I say you can build the life you want to lead from the ground up, instead of tearing somebody else's ideal life down to the studs.

If a gap year is good, a gap life is even better

Last week Noah at Money Metagame announced he and his wife were considering what he called a "gap year:" taking time off from the workforce to go on an "epic road trip across the country." I thought this was an excellent idea, and told him so on Twitter. Then I started riffing on gap years and realized the thing I liked least about it was the idea of limiting it to a year: if a gap year is good, surely a gap life is even better.

What is a gap year for?

Noah presumably took the idea of a "gap year" from the current enthusiasm among upper-middle-class parents to encourage their kids to take a year off between graduating from high school and enrolling in college. During such a gap year, a youngster who has been on the "academic treadmill" (in Time's nomenclature) can "work, travel, volunteer or explore other interests" before enrolling in a higher education program.You can see why someone who didn't take such time off in their youth might be attracted to the opportunity to learn more about the world and oneself than is possible in some kind of career-track job they joined straight out of college (which they enrolled in straight out of high school). And rightly so!Noah and Becky will no doubt discover people and places they never could have imagined during their gap year. They'll also discover things about themselves and each other, unburdened by the 9-t0-5 (plus an hour commute in each direction) schedule they've shackled themselves to so far.

Why a gap life is even better

As for me, the arguments in favor of a gap year are so compelling, I simply don't see any reason to limit the gap to a single year. Personally, my preference is for a gap life, where you can "work, travel, volunteer or explore other interests" in whichever ratio works for you, for as long as you (both shall?) live.

• During a gap year you might pick a single job, like waiter or barista, to experiment with. During a gap life, you can pick as many jobs as you can find time for, from factory worker in Wisconsin to shale oil roughneck in North Dakota to sleep experiment subject in Massachusetts.
• During a gap year you might travel across Eastern Europe, or Southeast Asia, or Latin America. During a gap life you can travel anywhere you like, as many times as you like, whenever you like.
• And when you're off the "academic treadmill," you ironically have access to a virtually unlimited amount of education. Almost anywhere you live is sure to have a school where you can enroll for next to nothing to learn almost anything under the sun. If you develop a particular interest in a subject, you're also free to move somewhere that subject is taught better than anywhere else.

A gap life is the inverse of early retirement

The early retirement philosophy is "now that I have a ton of money I can do anything I want." A gap life is about asking the question, "what do I want to do?"And it turns out that most things don't cost that much money; many of them are even profitable!If you want to find out what working in a factory is like, people will pay you to work in their factories. If you want to find out what teaching English is like, you can find people to pay you to teach English. If you want to learn Spanish, it's pretty easy to find someone to teach you Spanish.

A gap life isn't easy; life isn't supposed to be easy

Before you start angrily commenting about raising children and picking school districts and paying mortgages, let me stop you: I understand that choosing to live the life you want to live instead of the life you were convinced at age 14 you were supposed to live isn't easy.I simply don't see the advantages of an easy life over a complex, messy, frustrating and annoying life! Moreover, it's not at all clear to me that following the rules, attending the right classes, getting the right degrees, applying for the right jobs, and saving the right amount for retirement actually makes your life any easier.If it did, why would Noah and Becky be so desperate to bail out 5 years after getting started? What is the early retirement movement but a collective admission that "traditional" career paths are working for fewer and fewer people?The obvious answer to me isn't that people should get off the traditional career path 10, 20, or 30 years early through extreme frugality and a high savings rate. It's that they should decide for themselves whether they want to get on a traditional career path at all!

Conclusion

Among the chattering classes there's a growing consensus that we need to find new and different ways to talk about work, and I've written before about how that discourse is failing to deliver answers that are meaningful to actual, human workers. While you're more than free to treat it as tongue-in-cheek, my idea of the "gap life" is one suggestion for how to cannibalize our culture's existing rhetoric in service to the actual people who live in it.So the next time someone asks you what you do for a living, feel free to answer:"I'm actually in the middle of a gap life, trying to figure out what I want to do next."

What is going to happen to your financial independence after the crash?

There is a phrase I frequently read and hear from financial independence types that I find extremely confusing, and which is one of many reasons I find the concept of financial independence troubling, at least as I've seen it promoted on the internet. The phrase is: "depending on what the markets do."A typical formulation is, "we'll be financially independent in 2018, depending on what the markets do." Or: "I'll quit my job in February, depending on what the markets do."This is the corollary of the "4% rule" (or the 3% rule, or the 5% rule), which suggests that you can calculate the market value of assets needed to retire by dividing your needed income by some predetermined percentage.Only one of two things can be true: you can become financially independent based on the market value of your assets, in which case you can likewise become newly financially dependent based on the market value of your assets. Alternately, if you are still financially independent when your assets decline in price, then you were already financially independent when your assets passed through those new, lower prices, and you were wrong to rely on the safe withdrawal rate — you should have been using some other, better metric.My personal guess is that faith in these "safe withdrawal" models is based on the fact that most financial independence types have been pursuing early retirement only in the aftermath of the global financial crisis, and thus have only limited experience with large, sustained collapses in prices across approximately all asset classes. The belief that US equities will rise by 8% per year in perpetuity seems, if anything, conservative given the sustained run stocks have been on since 2009.But economies enter recessions, asset prices fall, and when they do I think the knock-on effects are going to be devastating to many early retirees.

Let's talk about correlation

For example, Coach Carson describes a technique he calls "house hacking" in the following way:

"Once I had 3 of the 4 units rented out, I moved into the 4th unit, lived there for 6 months, and applied for a refinance. Because the value was now much higher (about $155,000), I was able to borrow $120,000 and pull out 100% of my invested money. This particular strategy is known in online real estate circles as the BRRRR Strategy (Buy, Rehab, Rent, Refinance, Repeat). But I’ll talk about that more in the financing section of this guide."

What has Coach Carson done here? First he creates an asset (the property) and a liability (a bank loan and "private financing"). Then he spends some money improving the property. Then he creates 3 new assets (3 contracts with tenants to pay him) and 3 new liabilities (3 contracts with tenants to provide them with housing). Then he creates a new liability using the increased value of the property as collateral, and a new asset, the cash in his bank account.At this point Coach Carson is probably ok. Even if all 3 of his tenants broke their leases tomorrow, he's still got $120,000 in his bank account, which could presumably service his mortgage, private financing, and line of credit for years. Hell, if he wanted to he could just abscond with the money and leave his creditors holding the bag.But Coach Carson isn't going to sit on $120,000 forever. He's going to invest it, and therein lies the problem. When the crash comes, his assets will halve in liquidation value, but his liabilities will remain unchanged. Even worse, his tenants will lose their jobs, break their leases, and move back home. Coach Carson is going to have a hard time replacing them, and will be forced to accept lower rents — if he's able to find new tenants at all. Suddenly his cash-flow-positive or -neutral asset has become a cash-flow negative asset, forcing him to find more and more money elsewhere — like his recently cratered stocks. Coach Carson no doubt thinks he's going to go on a buying spree when he can get stocks at a deep discount to their current prices. Instead, he's going to be liquidating them at fire sale prices.Ok, I don't know anything about Coach Carson, and this has nothing to do with him personally. But what he is describing clearly has nothing to do with financial independence.

What is your model for financial independence?

Many financial independence types have gotten into the content game lately, and good for them — the more the merrier! But the basic pattern I described above applies with minor adjustments to this business model as well. When the economy next stumbles and people start canceling their Blue Apron subscriptions, who is going to pay for weekly podcast ad spots? When venture capital dries up, are the warring mail-order mattress companies still going to be around to dole out sales commissions? When credit tightens and defaults rise, are banks going to be paying anyone who asks nicely for credit card referrals?In other words, the part-time job you're counting on to insulate you from the vagaries of the market cannot perform that function if it is also subject to market forces. "I can always drive for Uber" won't work when Uber collapses amidst lawsuits from creditors and employees.

Dependence is the natural state of man

I've been referring to "financial" independence as a nod to the genre, but if you widen the aperture just slightly you can see that financial independence isn't impossible due to some nuance of double-entry bookkeeping, it's impossible because independence is impossible.It makes as much sense to talk about financial independence as it does to talk about medical independence. Even a surgeon with the skill and confidence to perform surgery on herself (awake!) doesn't know how to compound the anesthetics and antibiotics needed to survive the procedure: she's medically dependent on a pharmacist.A stable and growing economy is full of exciting opportunities, and I am a fierce advocate for people to seek out and explore those opportunities rather than rotting in a cubicle (although if you are rotting in a cubicle I hope you follow me on Twitter to stay distracted). But to live in a stable and growing economy we're dependent on good macroeconomic policy from policymakers we individually have little influence on. We depend on the quality of our representatives and, for their selection and election, on our fellow citizens.

None of this has anything to do with work

I'm a great believer in early retirement — so much so that I retired at 28. But I am not, and have no intention of ever being, financially independent. I depend on the Affordable Care Act to provide affordable, comprehensive health insurance. I depend on the courts to protect me from being wrongfully evicted. I depend on water utilities to provide access to potable water. I depend on Google to accurately track visitors and pay me my share of their ad revenue. On my other site, I depend on Stripe to collect and distribute readers' subscription payments. I depend on the Automated Clearing House to deposit the payments in my bank account. I depend on elected officials to defend Social Security so in old age I'll have a guaranteed source of inflation-protected income.In other words, I'm as dependent as a newborn child, and always will be. If you're waiting to retire until you're financially independent, you're going to be waiting a long, long time.

This should be a golden age of entrepreneurship; why isn't it?

It's no secret that I'm a cheerleader for self-employment and entrepreneurship. I now run two blogs, this one here on the Saverocity network and another at freequentflyerbook.com. I've never asked anyone permission to start a business, I don't have a "business license," I just run a business like a goddamn American. That's the spirit I'm trying to promote here: if you aren't willing to start a business until you're convinced you'll be able to replace your salary as an employee, you'll never start a business and you'll never be an entrepreneur. The only way to start a business is to start a business.Moreover, there are a number of factors that should make our times a golden age of entrepreneurship:

• comprehensive health insurance is now affordable to entrepreneurs through the expansion of Medicaid and subsidized insurance on the Affordable Care Act exchanges. So-called "job lock," which kept people slaving away as employees instead of implementing their small business ideas in order to retain access to affordable health insurance should be a thing of the past: today you should be able to start a business with no income whatsoever, and graduate from Medicaid, to subsidized exchange health insurance, to unsubsidized exchange health insurance. While pre-ACA only those confident or stupid enough to go without health insurance, or young and male enough for insurance to be affordable, could ever dream of venturing out on their own, today anyone should be able to quit their job and immediately enroll in comprehensive health insurance with premiums, deductibles, and co-pays corresponding to their income level;
• on the flip side, employee benefits have gotten stingier and stingier as conservative ideologues do everything they can to strip employees of the protections unions and defined benefit pension plans used to provide. While waiting for a pension to vest and seeing your benefits in retirement grow and grow used to be a compelling reason to stick with a unionized workplace for as long as possible, the gutting of both unions and retirement plans in the private sector has made self-employment relatively more attractive than becoming a "company man;"
• meanwhile, current public market asset prices are so elevated that it's reasonable to expect relatively low returns on investments in publicly traded securities. If you don't have enough money or contacts to subscribe to one of the few high-quality venture capital funds, you can do the next best thing: start your own private business, and keep every dollar you earn.

What happened?

Given the confluence of factors above, why is it that I still need to be out here in the wilderness shouting at people to start their own businesses? I don't have a definitive answer, but I do have some suggestions.

• the refusal to expand Medicaid in many Republican-governed states has created an enormous obstacle to affordable health insurance. Instead of being able to seamlessly transition up through Medicaid eligibility to subsidized and then unsubsidized exchange coverage, these states are left with an enormous coverage chasm. If an entrepreneur knows that she'll be left without affordable, comprehensive insurance coverage if she becomes pregnant, let alone suffers a serious disease or injury, under what possible circumstances would she risk that?
• Businesses are privileged in the provision of certain benefits. Everyone knows about the exclusion of health care benefits from taxable pay, but there are other considerations as well: when employers match contributions to 401(k) plans or HSA's, the benefit to participants is subsidized by the contributions of non-participants. In other words, an employer that matches 3% of payroll contributions to a 401(k) isn't spending 3% of payroll on 401(k) matches. They're only matching the contributions of participants in the plan, reducing the overall impact on wages of the employer match. While the self-employed are free to open 401(k) accounts, they're solely responsible for both the employee and employer contributions to the plan. An obvious solution would be to create a generic retirement plan open to everyone, whether employee or self-employed, which would reduce or, preferably, eliminate the role of the employer in our retirement savings regime.
• In connection with the above, businesses which provide paid family or maternity leave have an advantage over the self-employed, since entrepreneurs have to pay for their benefits out of retained earnings (or debt), instead of spreading the cost over an entire workforce. An obvious solution would be to support a universal paid leave policy funded by a modest increase in payroll taxes on all workers, whether they work for themselves or for someone else.
• Bureaucratic malfeasance. There is an important difference between regulation (good) and implementation (typically terrible). It's the difference between getting a facility inspected and approved before using it to prepare and sell food and requiring 30+ days to get an inspector on site to inspect and approve your facility. It's the difference between requiring a license to drive and requiring people to wait in line for 2 hours to get their picture taken for their driving license. It's the difference between requiring entrepreneurs to register for an account to pay estimated taxes quarterly and requiring entrepreneurs to get their bank to notarize a form before getting their estimated tax payment account approved.
• Finally, the self-employed are treated with suspicion and disdain by most civic institutions. If you follow me on Twitter you've probably seen me talk about this anecdote before, but it is absolutely representative of the general experience of being an entrepreneur. The Brookings Institution and the American Enterprise Institute recently released one of their "consensus" proposals on a program for paid family leave. On page 25 of the report, you'll find the following paragraph: "Requiring that employers protect the job of a worker who takes leave is desirable (see Chapter III), but sensible restrictions on eligibility and work history will ease the burden on employers, especially smallbusinesses, and reduce workers’ ability to abuse the system. Expanding the coverage to the self-employed is potentially vulnerable to fraud and misuse." I was fortunate enough to attend the presentation of the report (if you listen or skip to the end you can hear me ask the panel about this apparently deliberate insult to the self-employed). Why would anyone, let alone an organization ostensibly dedicated to free enterprise, accuse entrepreneurs, the very people whose risk-taking is the backbone of a competitive capitalist economic system, of fraudulently misusing state programs of support? What would it even mean to fraudulently misuse paid family leave? Faking a pregnancy? This is the United States of America, not a long-running Broadway musical.

We can fix this, but we have to decide to fix it first

If we want to promote entrepreneurship and self-employment, there's nothing standing in our way. Start with asking actual entrepreneurs a few questions: what obstacles did you face while starting your business? What could be done to help others pursue self-employment? I've provided some answers, but I don't have all of them. Maybe tax attorneys face different issues than restauranteurs, who face different issues than artists, who face different issues than musicians, who face different issues than garment retailers, who face different issues than mail scanning and forwarding services. There may not be a single solution to the problems faced by entrepreneurs in different industries. It may take time and ingenuity. But the first thing required is discovering the issues that entrepreneurs face and tailoring solutions to make entrepreneurship a real possibility for more people who are discouraged by the misuse and abuse of small businesses by the American political system.

In defense of lifestyle inflation

An important conceit of a variety of forms of financial advice, including the financial independence space but also genuine financial planners, is the avoidance at all costs of "lifestyle inflation." Lifestyle inflation, the theory goes, is the curse of spending additional money on living expenses just because your income increases, whether it's due to raises, promotions, bonuses, or job changes.My insight into this phenomenon may be unfamiliar to you, because unlike your favorite financial independence blogger or investment banker, I'm poor.

Living below, above, and within your means

You can imagine at any income level someone choosing to spend more than they earn, less than they earn, or as much as they earn. In this context it's irrelevant whether the person is saving aggressively for retirement or not: they can save aggressively whether they are spending more or less than they earn each month. For example, like many people I both have student loans and make sure to max out my Roth IRA each year. Additional years of IRA contributions are worth more to me than accelerating the pace of my student loan repayments, so I privilege IRA contributions above student loan payments. Your calculus, naturally, may be different.

Living below, above, and within your needs

The important thing to me is not whether you are living within your means. The important thing to me is whether you're living within your needs.As a poor person, I know that your means and your needs have different values. I live within my means, but below my needs. For example, this is my office:[embed]https://twitter.com/FreequentFlyr/status/876907518609551362[/embed]To the right of my desk is a wall. To the left of my desk is a dining room table. If I made more money, the most natural thing in the world would be to rent an apartment with an additional bedroom so I could set up a proper office instead of working at a small desk tucked away in the corner. This is an illustration of what it means to live within one's means but below one's needs.

Why don't financial independence types understand this?

It appears to me that the reason financial independence bloggers are so obsessed with cutting expenses out of their budgets is that, never having been poor, they leapfrogged the "living within your means" step all the way to "living above your needs." While the ordinary working poor have never had to "decide" to cut "unnecessary" expenses of their budget, the suddenly wealthy — whether doctor, accountant, or real estate magnate — immediately start spending their entire disposable income, including on things they later discover are entirely unnecessary.But to be clear, this stylized case is extremely unusual among the public at large, however common it is among financial independence bloggers; whether or not your expenses are within your means is an entirely different question from whether they're within your needs.

In defense of lifestyle inflation

For an ordinary person, i.e. not a highly-paid software engineer or owner of a vast real estate empire, the essential principle of financial management is not to "cut out all unnecessary expenses." The important thing is the addition of all those expenses that are needed, but only those expenses that are needed.I need an additional room to work in, but I can't afford it. If I could afford it, I would happily pay for it.Sound budgeting, in other words, isn't about cutting out the unnecessary, it's about adding the necessary. It's irrelevant to me whether your necessary expenses are Vegas conferences with colleagues, chophouse dinners with clients, or something as minor as a little extra room to work in.This is something that only someone building a lifestyle from poverty can understand; if you went straight from college to leasing new German automobiles, you're naturally bound to find unnecessary expenses in your budget. If you never make that mistake, you have the great advantage of being able to spend more on things that matter, rather than spend less on things that don't.

My stubborn preference for mutual funds over ETF's

I understand that I sometimes come across as a bit crotchety when it comes to the early retirement blogging community. Nothing could be farther from the truth! I retired at 29 and haven't regretted it for a day since (if Mitch McConnell manages to scrounge up 50 votes to take away my health insurance we can revisit this discussion). Anybody who advocates quitting your job and doing what you love for the rest of your life is alright in my book.Of course, there are things that I disagree with. The idea that "graduate with the most lucrative degree you can," "get the highest-paying job you can," and "save as much money as possible" constitute some kind of secret insight, instead of being perfect distillations of middle-class American values (for good and ill) is a somewhat bizarre affectation.On the other hand, there are other prejudices of the early retirement folks that I endorse whole-heartedly. One of those is the preference for mutual funds over exchange-traded funds.

It has become very fashionable to prefer ETF's over mutual funds

You can't open the business section of a newspaper these days without reading about exchange-traded funds. You'll virtually always hear their virtues described using the same formula:

• they're traded throughout the day so you can buy and sell ETF's any time you want while markets are open, while mutual fund transactions are only settled once per day;
• unlike mutual funds, ETF's aren't required to distribute capital gains and losses to shareholders at the end of each year, making them more "tax-efficient" investing vehicles.

The important thing to keep in mind is that both of these statements are true. I'm not here to tell you that you can't buy and sell ETF's throughout the day, or that ETF's do, in fact, make taxable capital gains distributions each year.I just don't care.

Why I stubbornly prefer mutual funds to ETF's

I can boil down my preference for mutual funds over ETF's into three main ideas.First, low-cost passive indexed mutual funds do not, in general, distribute taxable capital gains. Here are some examples of funds you might include in a broadly diversified portfolio, if you were so inclined:

• Vanguard 500 Index Fund (VFIAX): no capital gains distributions in previous 10 years;
• Vanguard Emerging Markets Stock Index (VEMAX): no capital gains distributions in previous 10 years;
• Vanguard European Stock Index Fund (VEUSX): no capital gains distributions in previous 10 years;
• Vanguard Pacific Stock Index Fund (VPADX): no capital gains distributions in previous 10 years;
• Vanguard REIT Index Fund (VGRLX): capital gains distributions in 2007, 2008, and 2016 (so-called "return of capital" distributions may reduce your taxable basis, which is largely irrelevant in this context);
• Vanguard Global ex-U.S. Real Estate Index Fund (VGRLX): no capital gains distributions in previous 10 years.

It doesn't make any sense to privilege one fund structure over another for a reason that doesn't actually exist.Second, mutual fund transactions are settled at the daily net asset value, while ETF purchases and sales have to cross the bid-ask spread existing at the precise moment of sale. This is the flip side of being "able" to buy and sell shares throughout the day. In order to buy at 11 am you have to be willing to pay what sellers are asking, and in order to sell at 3 pm you have to be willing to take what buyers are offering. In extremely liquid ETF's during periods of market tranquility that friction will be trivial. In illiquid ETF's and during periods of market volatility you can pay handsomely for the privilege of trading in and out of ETF's at will.Finally, the argument for ETF's begs the question: what are you doing trading in and out of investments on a daily, let alone hourly, let alone minute-by-minute basis? If you had a great batting average, if you had finely-tuned instincts for when an index would tick higher and when it would tick lower, if you really could "read the tape," you would still be crossing the bid-ask spread over and over again, and for what? I'm no fan of so-called "behavioral" economics or "evolutionary" psychology, but you don't need to conjure up some fantasy of cheating death on the savannah to understand that the more opportunities you give yourself to fail, the more likely you are to fail. Systematically adding funds to a portfolio of low-cost passively-indexed funds (as few as possible, but no fewer), with a maximum(!) transaction frequency of once per day, is a way of methodically reducing the opportunities you have to screw up. The high liquidity and low trading cost of ETF's isn't a feature — it's a recipe for disaster.

The use and abuse of "the 4% rule"

I had a good time recently appearing on the Saverocity Observation Deck podcast with Noah from Money Metagame and host Joe Cheung.One thing that I think got a little muddled in our conversation was my feelings about "the 4% rule," which is much beloved by financial independence and early retirement enthusiasts. Rather than try to tell you I'm right and they're wrong about financing early retirement, I think it might be more useful to isolate a few different factors that go into planning a stream of retirement income.

I don't have anything against "the 4% rule" — as it actually exists

Back in the 90's some erudite finance scholars got to work on a historical asset price dataset and determined that in the overwhelmingly majority of cases a retiree could withdraw 4% of their starting portfolio value as of their retirement date, adjust the withdrawal for consumer price inflation annually, and still have a positive portfolio value at the end of a retirement period ending 30 years later.There are two key elements of this analysis to keep in mind: it's based on historical data, and it describes a retirement period that ends 30 years after it begins.To adopt such a rule to finance your retirement, you would therefore have to make two assumptions: the future will be like the past, and your retirement period will end 30 years after it begins.I don't have any clue how members of the early retirement community arrive at the conclusion that those two conditions are true. The first is a violation of the obligatory maxim that "past performance is not a guarantee of future results," and the second is absurd in light of the very premise of early retirement: having more, in some cases many more, years of retirement than the 30 that traditional retirees have had (if they get lucky).

An important aside about Social Security retirement income

Most people are aware of the importance of adjusting prices and income for inflation: the general tendency under conditions of growth for prices to rise over time. A $1 avocado today doesn't cost the same as a $1 avocado in 1970: it costs much, much less, since a dollar is worth much less in 2017 than it was worth in 1970 (no, I don't have any idea how much an avocado cost in 1970).That means to maintain the same absolute standard of living, retirement income needs to be adjusted for consumer price inflation, so that in retirement you'll be able to afford the same standard of living you had upon retiring.The Social Security Administration made the important observation that indexing retirement benefits to consumer price inflation was inadequate: a 95-year-old retiree with benefits indexed to consumer price inflation would today be able to afford the same standard of living as she had in 1987, at age 65. In other words, she wouldn't be able to afford any of the conveniences of modern life, none of which existed in 1987!Instead, Social Security retirement benefits are indexed to wage inflation, so that retirees don't fall behind as productivity and output rises. Their benefits keep up with the rise in technology and productivity that the US economy provides.

An early retirement rule that successfully provides consumer price inflation-adjusted income will immiserate you in old age

The reason the above aside was necessary is that over a retirement stretching not 30 years, but 60 or more years, a rule that provides consumer price inflation-adjusted income will not maintain your relative standard of living. A simple way to illustrate this is using the Social Security Administration's wage deflator. Earnings in 1990, just before a decade-long rise in productivity and earnings, are indexed at a rate of 2.29: each dollar earned in 1990 is worth $2.29 towards Social Security retirement benefit calculations in 2016.Meanwhile, a dollar in 1990 was worth just $1.84 in 2016 according to the consumer price index. The difference? Wage growth tracks productivity growth, which usually exceeds consumer price inflation in a growing economy. Between 1990 and 2016, wage growth exceeded consumer price inflation by 24.5%. That means across the economy at large, wage-earners became 24.5% wealthier than those who successfully tracked consumer price inflation with their investment decisions.At age 35, or 40, or 45, are you willing to lock in your absolute standard of living today? Are you willing to forego flying cars, neural implants, and vacations to Mars? The mass market innovations of tomorrow will remain affordable to people who participate in productivity growth; people whose income merely tracks consumer price inflation will fall further and further behind.

Equity investing gives you a chance to participate in productivity growth

Of course, the easiest way to participate in wage-inflation-adjusted standards of living is to earn a wage. But earning a wage, for obvious reasons, doesn't feel like retirement, let alone early retirement.The other way to participate in national, and even global, increases in productivity is to invest in the companies involved. Today, it's fortunately possible to do so through low-cost indexed investment vehicles. While workers might participate in productivity growth both through increased wage income and the increased value of their investments, one out of two ain't bad: owning a broadly diversified portfolio of stocks will at least allow you participate in one side of the global growth in output.Across a broadly diversified portfolio, the dividends that companies pay out to shareholders will rise along with profits, which reflect the companies' participation in overall economic growth. Think of this as the flip side of Henry Ford's desire for his factory workers to be able to afford Model T's: the more Model T's the workers can afford, the fewer his shareholders can afford. While individual firms strike that balance in different ways ("This is frustrating. Labor is being paid first again. Shareholders get leftovers.”), across the entire economy all profits will be split between labor and capital.

A viable plan for early retirement requires goals, not rules

Of course, as Noah, Joe and I get into during the podcast (which I really do recommend if you want to hear us discuss these and other issues in more detail), many early retirement types also belong to a kind of loosely-organized ascetic community that treats as extravagant luxuries purchases which most Americans treat as staples. It's more than possible that such people experience price inflation lower than the consumer price inflation which the federal government records.But that's a question that actually has to be answered before developing a plan for retiring radically early. A plan to simply save up 25 times your 2016 expenses and withdraw 4% per year, adjusted for consumer price inflation, will leave you relatively destitute in 30 years even if your early retirement goes exactly according to plan.

Everyone needs, and no one has, compounding discipline

I have written elsewhere about the importance of what I call "compounding discipline:" the deliberate choice to take the return you earn on alternative, irregular, and weird activities and reinvest them, instead of spending them. Exercising compounding discipline is essential to realizing the full benefits of those activities over medium and longer terms, but is next to impossible for humans.

Gaming the tax code can't make you rich without compounding discipline

While financial independence types have raised it to an art form, people in all walks of life engage in what I consider fairly outlandish antics in order to minimize the income taxes they pay. And these antics, more or less, work. On the extreme side, you can harvest capital gains, harvest capital losses, recharacterize contributions, or roll 401(k)'s over, under and through IRA's. Even setting those aside, ordinary people cheerfully deduct mortgage and student loan interest and claim this means they're "saving money" on their home or education.Consider the case of a single homeowner with $50,000 in income who paid $10,000 in mortgage interest in 2016. Since $10,000 is higher than the standard deduction of $6,300, the homeowner decides to itemize her deductions, and reduces her adjusted gross income from $39,650 by $3,700, to a total of $35,950. By deducting mortgage interest, the taxpayer reduces her tax liability from $5,690 to $4,933, a savings of $757.My question for you is, what does she do with the $757?The answer, of course, is that she does nothing with the $757. She never, in fact, sees the $757 unless she overpaid her taxes during 2016 (note that making interest-free loans is an odd way to get rich).

Compounding discipline turns savings into assets

I wrote back in February about bringing my adjusted gross income below $18,500 each year in order to trigger the maximum Retirement Savings Contribution Credit, and wrote:

"In 2016 my income was about $22,500, or $4,000 above the cutoff for the maximum credit, but leaving me eligible for a $200 credit. Contributing $2,500 raised that to $400, and contributing $4,000 raised it to $1,000 (I had an excess premium credit repayment in 2016 so I was able to claim my whole credit).An $800 return on a $4,000 contribution was a no-brainer for me."

Making a $4,000 contribution to my solo 401(k) saved me $800 in federal income taxes, but it didn't do anything to make me wealthier because I didn't invest the $800. I never even saw the $800! I have $800 more in my bank account than I would have without the contribution, but I didn't make a "special" $800 contribution to any of my investment accounts.But that's exactly what I would have to do if I wanted to use my tax savings to become wealthier. Likewise, a homeowner deducting mortgage interest really could become debt-free faster by applying his tax savings to his mortgage, a student borrower could use her tax savings to accelerate the repayment of her loans. That's compounding discipline, and no one does it.

It's fine not to have compounding discipline (no one does), just be realistic

Financial independence types love to talk about how important frugality is because every dollar you save will become a zillion dollars in 100 years compounding at 50% APY (or something like that). I don't dispute the math, although it will certainly be interesting to see how FIRE bloggers react when their investments start negatively compounding in the next bear market. What I dispute is that financial independence types actually exercise compounding discipline and invest the savings they achieve with their tax minimization antics.That doesn't mean the savings aren't real! But saving $1,000 on your taxes makes you $1,000 richer. It only makes you a zillion dollars richer if you invest it, which you won't. In fact, you'll never even see it.

Financial independence, early retirement, and real estate

If you have your eyes open, one of the first curious things you notice about the "FIRE" community (Financial Independence, Retire Early) is their fixation on real estate. For example, Mr. Money Moustache "retired" from his job as an engineer in order to become a residential property manager, writing that "many of us consider property ownership to be a key part of our early retirement strategy." One of the very first real life conversations I had with a FIRE enthusiast very quickly turned to his plans to buy up residential real estate in Memphis. And of course the Saverocity Forum has extensive threads on the promise and peril of real estate management.Residential real estate is a fairly curious asset class. It's a depreciating asset (the structure) resting on top of a commodity (the land). Meanwhile, converting the asset into a revenue stream requires active management. It doesn't have to be actively managed by the owner, of course: there are residential real estate management firms that will handle tenant screening, maintenance, and so on for a fee. But whether it's managed by an amateur or a professional, the size and steadiness of the revenue stream ultimately depends on the competence of the management in addition to the quality of the structure and desirability of the land.Based on everything I've seen and heard, here are four things that I think make residential real estate appealing as an investment to people in the finance hacking and FIRE community.

Ease of leverage

If you simply want to invest in real estate as an asset class, Vanguard offers mutual funds that give you exposure to domestic (VGSLX) and ex-US (VGRLX) real estate investment trusts. The Admiral shares have expense ratios of 0.12% and 0.15% and have non-SEC yields of 3.92% and 4.73%, respectively (I had to manually calculate the yield on the ex-US fund so it's as non-SEC as it gets).I recently listened to a podcast episode with someone who decided to coin the term "house hacking" to describe buying multi-unit properties, living in one unit and renting out the rest of the units to cover his mortgage payments. One of his key concepts is "the 1% rule," whereby you should aim to buy properties where the monthly rent is 1% of the property's purchase price. If you bought a property outright according to this rule, you'd earn 12% annually, minus taxes, maintenance and vacancies.But if you buy the property with a 20% down payment, your return on equity is suddenly five times that (minus the interest on the 80% of the purchase price you borrow).The key advantage of doing so is not the leverage itself: you can buy stocks and bonds on margin if you're so inclined. The key advantage is that the underlying asset is never marked to market! Even if you found a broker willing to let you buy VNQ or VNQI (the ETF equivalents of the mutual funds mentioned above) with 20% equity, even a modest decline in real estate prices or change in interest rates would wipe out your equity and trigger a margin call. In the residential real estate market, you can take advantage of rising real estate prices through cash-out refinancing, but even if housing prices decline you'll never lose your shirt as long as you keep making your mortgage payments (which are currently being offered on very generous terms).

Value of specialized knowledge

The stock market is a brutal place to try to apply specialized knowledge. You can know everything there is to know about solar panels, electric storage technology, and self-driving cars, and it still shouldn't give you the slightest hope of guessing whether Tesla's stock will go up or go down, or whether it will do so tomorrow, next month, or in a decade.The residential real estate market, on the other hand, is the kind of place where a person feels they should be able to fairly easily apply their knowledge, experience, and intuition. Everyone knows the neighborhoods in town which are becoming more popular and those which are becoming less popular. Everyone knows where students and young families like to live, and where drug dealers and vagrants gather. You can flip open the local newspaper and see where hip new bakeries are opening and where storied local institutions are closing because of lack of foot traffic.All this means that a person feels like they should be able to pick the "right" properties to invest in even if they're fully aware they're incapable of picking the "right" stocks to invest in and sensibly choose a low-cost indexed portfolio instead.

Tax advantages

No matter how pure your intentions, nobody stays a residential real estate investor for long before they also become an amateur CPA. If you'll allow me to quote at length from the Saverocity Forum:

"Now seeing that we have a positive cash flow on the year most people might think that we're due to owe uncle same based on this cash flow. What most people don't realize is that when you own rental real estate, you are required to depreciate the cost of the property and apply that towards your income/expenses on your Schedule E(real estate profit/loss tax form). Without getting too complicated this means that a portion of the property value(not including the land it sits on) gets to count as an expense over the next 27.5 years of your ownership. So while you get the benefit of claiming an additional expense(albeit an invisible one) on your profit/loss sheet, this does effect the basis value of the property for when its time to sell. For now, based on the property value I get to claim $3000 of depreciation for the year. If I count this against the 1080/year in cash flow, I have a $1920 tax loss on the year. The nice thing about losses from your Schedule E is that they can be counted against your primary income(as long as your income is below 150K, between 100K-150K the amount of losses you can claim against income is phased out and above 150K you can only carryover those losses to use against future capital gains from sale of property). In this case, assuming I am able to claim the loss against my income, that $1920 loss could equate to about a $500 in tax savings(assuming a 25-30%ish tax bracket)"

Obviously I don't have anything against CPA's, amateur or professional, but it's hard to argue that becoming an amateur CPA looks anything like "retirement." To me, it looks like spending a lot of time poring over the tax code making sure all your T's are dotted and all your I's are crossed.Nonetheless, being able to deduct depreciation against earned income gives middle- and upper-class taxpayers a big incentive to actively invest in real estate, essentially supplementing their rental income with subsidies in the tax code.

The triumph of the material?

Together, I think the three features above explain 85% of the appeal of investing in residential real estate for finance hackers and FIRE enthusiasts, and if you asked 85% of them they would say that those features explain 100% of the appeal.But I think it's worth mentioning, at least, that there's something potentially uncomfortable about "just" owning a slice of the S&P 500, or the total US stock market, or the total world stock market. In fact, it might not feel like you own anything at all when the only thing you can see are digits bouncing up and down on your quarterly brokerage statements.Owning real estate isn't like that. If you manage your own properties, you can drive by and see them every day. You have deeds that are recorded in government offices that meticulously spell out the boundaries of your property. You can mow the lawn, lay down new pavement, replace the appliances. The properties, in other words, exist in your own material world, and I think some people find comfort in that above and beyond their tax-advantaged, highly-leveraged, compounding-revenue-stream-generating residential real estate business model.