Intro: Welcome to the Paragon Podcast. A podcast focusing on the needs of high net-worth individuals and their families. We discuss the markets, tax strategies, and how to better manage wealth with the goal of living better for today while planning for tomorrow.

Elean
Hello everyone. Welcome to the podcast and thank you for tuning in. I’m Elean Mendoza and I’m here with Evan Shorten, the firm’s founder and principal.

Evan
Hello everyone. I hope you’re all doing well, staying safe and enjoying the summer. Before we get started, I want to ask you to subscribe to our podcast via the Apple Podcasts App, Stitcher Radio, YouTube, or all of them.

Elean
In our last episode we discussed how to invest in a low interest environment with rising inflation. One of the strategies that we briefly mentioned, and the subject of today’s podcast, is geoarbitrage. Simply put, geoarbitrage is a very fancy way of saying, “moving to a location with a lower cost of living.”

Evan
As we mentioned in the prior episode, one way to counteract the rising cost of goods and services is to move to a location with a lower cost of goods and services. For example, one way to beat inflation is to invest in inflation hedged assets whose income increases with inflation, however if those type of assets don’t fit within your investor profile or risk appetite, you can achieve similar results by lowering your cost of living and allowing your current income to go farther.

One thing that we didn’t mention in the last episode is that inflation can be local. Furthermore, the effects of inflation can be artificially created by tax increases. A tax increase can make the cost of goods and services go up in value without being recorded in inflation metrics. In California, we know this effect all too well. In addition to gas prices increasing across the US over the past year, California increased taxes on the price of gasoline, ultimately creating an effect where gasoline far outpaces the increase in gasoline prices nationally.

Elean
Ok, so let’s take a look at few different examples of how moving to a lower cost of living area can both help you mitigate the effects of rising inflation and help your nest egg go further.

Evan
The cap in SALT deductions, referring to state and local tax deductions, really highlighted just how much a state’s income tax can erode returns on income gained from investments, interest, and retirement accounts. For example, the top tax bracket in the state of California is 13.3% for those who earn $1,000,000 or more, while the majority of residents earning between $58,635 to just under $300,000 are in the 9.3% income tax bracket. In the state of New York, the top tax bracket is 10.9% for those earning $25,000, 000 or more, while the majority of residents most likely pay between 5.97% and 6.85%.  To add insult to injury New York City income earners pay an additional 3.9% income tax.

A resident in these states could offset the current risk of rising inflation by moving to a lower tax state or to a state with no income tax.

Elean
And if you’re curious, there are currently nine states that do not have an income tax. That’s Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. It’s no surprise that four of these states were recorded in the top 10 fastest growing states in the 2020 US Census, with Florida and Nevada being top retirement destinations as well.

Furthermore, for retirees, who no longer have earned income and are living off their retirement accounts, three additional states do not tax distributions from 401(k)s, IRAs, or pensions. Those states include Pennsylvania, Illinois, and Mississippi.

Evan
Now I know we previously framed geoarbitrage as a strategy to help mitigate the impact of rising inflation, but the reality is, depending on your level of assets and the income generated by those assets, inflation may not be your biggest concern. Perhaps you’re more concerned with leaving an inheritance that could positively impact the lives of your heirs. In this scenario moving to a lower cost area can help you preserve your investment portfolio and perhaps even help you grow it in your retirement years.

So let’s compare the cost of living in Los Angeles with some of the most popular retirement destinations.

Elean
And if you’re curious about methodology, we are using NerdWallet’s cost of living calculator which pulls data from the Council for Community and Economic Research. We’re going to stick with Los Angeles, California as the reference point because we’re based out of the Los Angeles as well as the majority of clients.

Evan
Ok, so if you lived in the Los Angeles metro and received a pre-tax income of $100,000 from your investment portfolio and decided to move to Scottsdale, Arizona located in the Phoenix metro area, you could maintain your current standard of living on $67,162.

Some of the items taken into account are a 53% lower housing cost; 13% lower food costs; 20% lower healthcare costs; and a top marginal tax bracket of 4.50%.

Another popular retirement destination, especially for Southern California residents is Summerlin, Nevada located in the Las Vegas Metro area. Living in Los Angeles with a $100,000 pretax income you could maintain the same standard of living on just $69,459 in the Las Vegas metro.

Some of the items taken into account are a 50% lower housing cost; 18% lower food costs; 10% lower healthcare costs; and no income taxes or taxes on capital gains and investments.

Finally, let’s take a quick look at the Orlando metro area, located in central Florida. The Orlando area has several retirement destinations within it such as the Villages and Lady Lake. With a $100,000 income in Los Angeles, you could maintain the same standard of living in the Orlando metro area on just $61,216.

Some of the items taken into account are a 64% lower cost in housing; 16% lower food costs; and 20% lower healthcare costs; and again no income tax or taxes on capital gains and investments.

Elean
Now keep in mind, moving is a major life decision. Even with the advent of modern day communication and the development of the internet which wasn’t widely available 30 years ago, moving still entails a reassessment of your family values, lifestyle choices, and financial goals. I know this podcast focused mostly on tax-free states, but the reality is you can arbitrage climate, outdoor activities, access to healthcare, entertainment, proximity to family, and so on- geoarbitrage doesn’t have to be motivated by tax savings.

Evan
Additionally, it helps to consult with your financial advisor. Updating your financial plan, discussing your values, and reviewing multiple financial scenarios for your portfolio is key to getting a complete picture of whether a move can benefit you or if you even need to move at all. 

Elean
Ok. With that, we want to thank you for tuning in and hope that you enjoyed this episode of the Paragon Podcast. If you ever have any questions or need help with your financial matters, please don’t hesitate to reach out to us. You can reach us by email at [email protected]. Lastly, please don’t forget to subscribe to the Paragon Podcast on the Apple Podcast App, Stitcher Radio, or YouTube.

Thanks for listening and we’ll see you here next time.