A math/finance question

[jt2]

I'm building a tax/cost of living tab into a retirement planning spreadsheet I've been working on for a while. I'm modeling different delay and other factors for input/output. I have time, spend/budget, rate of return scenarios pretty well nailed down.

What I want to do now is build a dropdown box that factors net cost of living adjustment, where 100 equals the SF Bay Area, and the adjustments would be for other areas.

Since Cost of Living calculators don't always agree, I picked one pretty much at random: http://money.cnn.com/calculator/pf/cost-of-living/index.html just to build a strawman - as this plays out I'll likely find a better source.

So, using Reno as an example, the COL is .702 vs. the Bay Area. Simply enough, you can apply that as a multiplier against a budget. Crude but effective.

State income tax however has me a bit confused.

Using an arbitrary figure of $120k income, CA effective tax rate is 6.47% (CA makes no distinction between regular income and LTCG).

There's where I run off the rails - how to factor that in. Dammit, Jim I'm an IT guy, not a finance wiz. Using my Reno example, I don't think it works to simply adjust that COL factor.

So, how do I do this?

 

[augustiron]

Nevada has no personal income tax, so...divide by zero?

 

[easter bunny]

Does the COL factor somehow include things like differences in income tax, sales tax, etc? Or is it just a factor of durable goods and housing?

 

[aminalmutha]

Nevada has no personal income tax, so...divide by zero?

 

[jt2]

Nevada has no personal income tax, so...divide by zero?

Ha! So my income becomes infinite. I like it. Go on...

Does the COL factor somehow include things like differences in income tax, sales tax, etc? Or is it just a factor of durable goods and housing?

The latter (plus services and other expense items). None of the ones I've seen factor in taxes.

 

[DataDan]

Taxable income: $120,000

State income tax that must be paid in SF: .0647*120,000 = 7764
State income tax that must be paid in Reno = 0

After-tax income, SF = 120,000 - 7764 = 112,236

After-tax income, Reno equated to SF = (120,000 - 0) / .702 = 170,940

That's just the math. The .702 estimate seems sketchy.

 

[jt2]

That makes sense, I was tying myself in knots trying to come up with a single adjustment factor number. I just need to split it out into two cells that look at the dropdown selection. Duh. Thanks!

The numbers are from C2ER, and roughly match other calculators I've glanced at. Though I'm disinclined to argue data with a data guy.

What are your thoughts on getting a more realistic number?

 

[DataDan]

That makes sense, I was tying myself in knots trying to come up with a single adjustment factor number. I just need to split it out into two cells that look at the dropdown selection. Duh. Thanks!

The numbers are from C2ER, and roughly match other calculators I've glanced at. Though I'm disinclined to argue data with a data guy.

What are your thoughts on getting a more realistic number?

For a first cut, I'd try to get an accurate estimate of housing expense from real estate sources--principal, interest, insurance, and taxes--and assume unchanged level of spending for food, energy, medical, etc.

 

[augustiron]

Remember, weed, gambling and prostitution are completely legal (and not free) in nevada so factor that in as well to the cost of living

 

[SteelerFanatic]

I don't know if you work for a large company, but if so you could ask them how they calculate wages for the same job differently for the regions.

I know for something we pay $150k for in Pleasanton we pay $110k for in Toronto and Pittsburgh, PA.

Same job, same responsibilities. They tie Salary into the COL divisor so that it works out the same "quality of life" wise for the two employees.

give or take if you consider climate as a quality of life. :laughing

 

[JesasaurusRex]

pretty sure there are no 6 figure jobs in Reno lol...ask me how i know :|

 

[asdfghwy]

pretty sure there are no 6 figure jobs in Reno lol...ask me how i know :|

Does it even matter if one bedroom apartments don't cost $2000?

 

[mercurial]

I don't think you can programmatically adjust for State Income tax because it doesn't follow a formula, it varies state by state. If you know how much retirement income you have, you should be able to calculate an effective rate for each state and have a helper tab with that data in it. Probably the best you can do.

 

[JesasaurusRex]

Does it even matter if one bedroom apartments don't cost $2000?

ya, i suppose you're right

 

[jt2]

For a first cut, I'd try to get an accurate estimate of housing expense from real estate sources--principal, interest, insurance, and taxes--and assume unchanged level of spending for food, energy, medical, etc.

RE costs are relatively easy to estimate. There is a very real difference in cost of staples as well, but get your point - for planning purposes, assuming flat costs is an easy risk management strategy.

Remember, weed, gambling and prostitution are completely legal (and not free) in nevada so factor that in as well to the cost of living

Budgeted under "hobbies and entertainment". :thumbup

I don't know if you work for a large company, but if so you could ask them how they calculate wages for the same job differently for the regions.

A lot of companies use the same source that I linked (e.g., Payscale uses that database, and a lot of companies use Payscale. Not sure about Mercer and others).

pretty sure there are no 6 figure jobs in Reno lol...ask me how i know :|

Working wouldn't be part of the plan. That number would be dividend/cap gain income. No job, no worries. :cool

I don't think you can programmatically adjust for State Income tax because it doesn't follow a formula, it varies state by state. If you know how much retirement income you have, you should be able to calculate an effective rate for each state and have a helper tab with that data in it. Probably the best you can do.

Exactly. Was looking to build a lookup table with a dropdown selector. I was getting wrapped around the axle trying to come up with a single adjustment factor, which was making my brain hurt. Breaking it out into two columns and applying appropriately to income/expense makes it pretty simple. :laughing

Classic case of trying to outsmart oneself. All that's left to do is lookup tax rates by state for a static number (doing variable would be too much work).

 

[two wheel tramp]

Does it even matter if one bedroom apartments don't cost $2000?

$2000 for a one bedroom? Where?!?

Remember, weed, gambling and prostitution are completely legal (and not free) in nevada so factor that in as well to the cost of living

:laughing

This is my favorite barf post for today.

Jt2, you're not moving! :x

You have to stay here with the rest of us. This isn't rarf or narf or oarf.

 

[easter bunny]

pretty sure there are no 6 figure jobs in Reno lol...ask me how i know :|

How do you know? I guess it depends on the field - but there are plenty. Getting into one is the problem because it's such a small area. It's constantly expanding though.

Does it even matter if one bedroom apartments don't cost $2000?

Maybe not as expensive as the Bay but prices are going up. I moved here in 2011 and prices have literally doubled. A 1BR in a halfway decent area (not luxury, just a decent area with no meth heads breaking into your car and reasonable proximity to downtown) is about $1200.

 

[mlm]

My retirement planning sheet is set out on a timeline per year with all future income and expenses categorized. That includes expected taxes on any income/withdrawals and non-discretionary expenses being called out separate. Makes it easy to model things like changes in expenses/income and retirement date.

Haven't bothered to plan how things would work if we moved, and adjusting for tax and COL would be trivial compared to the impact of selling/renting our current home. Either going to have a big chunk of extra cash, or an income stream that by itself would be large enough to live off.

 

[jt2]

Jt2, you're not moving! :x

You have to stay here with the rest of us. This isn't rarf or narf or oarf.

:kiss

Just a thought exercise at this point. Family and friends in the area would make it tough to leave.

My retirement planning sheet is set out on a timeline per year with all future income and expenses categorized. That includes expected taxes on any income/withdrawals and non-discretionary expenses being called out separate. Makes it easy to model things like changes in expenses/income and retirement date.

Haven't bothered to plan how things would work if we moved, and adjusting for tax and COL would be trivial compared to the impact of selling/renting our current home. Either going to have a big chunk of extra cash, or an income stream that by itself would be large enough to live off.

I've built something similar, with spending and categories pulled from historical data in Quicken. Over the last few years, I've added quite a few "what if" tools, mostly fiddling with rates of return and timelines.

I'd built in taxes as static because I'd just assumed staying put, but rising costs, traffic and crowding have me more receptive to alternatives.

The point was driven home more by copious reading on https://www.reddit.com/r/financialindependence/ about how much an effect HCOL/LCOL transitions post-retirement can have. Think it'll be interesting to add a side by side comparison in the tool.

 

[bikeama]

My retirement planning sheet is set out on a timeline per year with all future income and expenses categorized. That includes expected taxes on any income/withdrawals and non-discretionary expenses being called out separate. Makes it easy to model things like changes in expenses/income and retirement date.

I did the same thing 8 years ago. Was surprised to see that income would increase significantly at 62 when I took SS and again 3 years later when the wife took hers. Had no debt and pulled the plug at 60, seven years ago. So far so good and just got a notice that SS will go up 2% next year. I have been pulling enough from the tax deferred money to get to the top of the tax bracket I am in. In 3 years and will have to do minimum withdraws on the tax deferred money and income will increase again. :teeth Planning and seeing it work sure is fun.

Never looked at moving to a lower tax state. Have several friends who have, however have grandkids here so not leaving.