4 ms·

I didn't see Tony Wright's article the other day, but I've just read it and the article linked here. I have a few comments. First, for the rest of this comment

by djm 16y ago

I didn't see Tony Wright's article the other day, but I've just read it and the article linked here. I have a few comments. First, for the rest of this comment I'll define income as 'what you've got coming in' and wealth as 'what you keep or what you grow'. Most people fail to make this distinction (If you ask somebody if they are wealthy they will start talking about how much they get paid), but it's important, especially when thinking about how to optimize your tax situation. Tony's article makes several assumptions: (1) That you want to live a high consumption lifestyle. The $200k p/a first class lifestyle he quotes isn't necessarily what everybody wants. Even people with some wealth have to live within their means or they'll (as he correctly pointed out) lose it eventually. I'd actually take a guess that a typical family wouldn't be able to spend $200k in a year if they did not make purchases whose primary purpose was to display status. (2) That you would invest your $4m in a low-return investment. (3) That you would invest the money in such a way that 100% of your income is realisable (subject to income tax). The best strategy, imo, for somebody with a freshly minted $4m to play with is to put as much as possible into an investment where growth in their wealth is not realisable (which usually means buying property because appreciation is not taxed whilst it's happening [1]). They have a balancing act to play because they want to invest as much in this way as possible whilst leaving enough in an investment that will provide them with an income substantial enough to live on. As for Ryan W's article, I'd basically agree with what he said other than the part about buying a property with a mortgage. It would be better to buy a smaller property you could afford outright or partner with some other investors to buy the apartment complex (which has it's own set of problems). [1] I might actually be wrong about this. I know I've read somewhere that there have been attempts to tax wealth directly in some US states. I've no idea how the govt would be able to do this in a workable way though - how to you value the appreciation in somebody's house when the only meaningful way to value a property is to sell it?

gyardley 16y ago
I've no idea how the govt would be able to do this in a workable way though - how to you value the appreciation in somebody's house when the only meaningful way to value a property is to sell it? A bureaucrat called a 'tax assessor' makes an assessment - which may or may not be fair - of your property's current value. You're then charged a percentage of this assessed value in taxes. That's how property tax works across America today.
patio11 16y ago
how to you value the appreciation in somebody's house when the only meaningful way to value a property is to sell it? I think property taxes are fairly widespread in the US, actually. Your county has a group of assessors, who pick a SWAG based on comparable recent sales and -- ahem -- their desire to have the county generate tax revenue this year, and then you get to pay .8% or whatever of the assessed value in property taxes. My father has drolly noted more than a few times that he wishes this assessment came with a shotgun clause (i.e. if the assessors tell you your house is worth $X, you could say "Sweet! I'll have the lawyer draw up the sale documents. You can have the keys tomorrow.")
- djm 16y ago
  Thanks for the clarification (you too gyardley!). I'm in the UK and we don't do that here. We pay 'stamp duty' when buying a house and capital gains tax when selling (or not as there are exemptions) but nothing on an ongoing basis for the appreciation in value.
  - semanticist 16y ago
    In the UK Council Tax is based on the value of your property, based on some fairly informal assessments done years ago. Challenging your Council Tax band is possible if you think the value assessment is incorrect. It's not a direct tax on the wealth embodied by the property, but it is a way by which the wealthier pay more tax.
    - djm 16y ago
      You have a point. I guess you can make a case that CT is an indirect wealth tax though it certaintly isn't intended to be. And of course the property value isn't re-evaluated on an ongoing basis so appreciation isn't reflected in the tax you pay during any given years liability. In my original comment what I was really trying to get at is that, as an investment strategy, you would want to maximise your wealth by minimising your realisable income and that the typical way to do that over time has been to accumulate wealth in property. I guess I was wrong about this in the US but it's still a valid strategy in the UK.
webwright 16y ago
Regarding my assumptions, you're largely right... Though I take issue with: "(2) That you would invest your $4m in a low-return investment." My assumption is that you'd invest in a BALANCED PORTFOLIO. What sort of return do you think a balanced portfolio would get you?
- mrtron 16y ago
  A balanced portfolio is a very inefficient portfolio. Many people would be willing to take risks, or don't want/need to hedge against everything. His real estate example is a good one - you are at the mercy of housing/renting markets. But over the long term these have been quite steady and wouldn't be outside most peoples' risk thresholds.
  - webwright 16y ago
    No, a balanced portfolio aims to balance risk and return. If you put all of your cash into one (or many) high-risk-high-return securities, you run a meaningful risk of losing a big pile of your cash. There's a pretty well-understood playbook for wealth management. You SHOULD be willing to take risks (with a very specific % of your portfolio)... But at any given time some of these risks will have gone south, some will have gone north, etc. Feel free to find me a wealth manager who offers big double digit returns over multiple decades.
    - mrtron 16y ago
      The Warren Buffet school of thought on the issue is put your money into a few things you understand really well, and he is one of the better managers of our time. I understand the 'balanced' wealth management approach - I am just not sure it is the ideal way to go. Is pg better off dumping money in mutual funds, real estate, commodity index funds and bonds - or driving the majority of his wealth into YC? He lives and breathes startups - so even trusting the best managers I would say he would be foolish not to invest a lot into YC himself. I also would like to see the results of how bubbles, world wars, massive inflation, depressions and other difficult to hedge against events impact balanced portfolios vs someone dumping all their money into a single apartment building. My instinct is both would be equally screwed. And an event like that is almost certainly going to happen during the next 50 years. I don't disagree with you at all - there are just several angles.
endtime 16y ago
>I'd actually take a guess that a typical family wouldn't be able to spend $200k in a year if they did not make purchases whose primary purpose was to display status. Mortgage + 3 cars + 2 kids in college + 1 in a private high school + 1 family vacation = ??? I don't think any of that stuff is a status symbol, or excessive. And it seems like that would easily exceed 200k a year, and that's excluding utilities, food, etc.
- djm 16y ago
  Well, were talking about somebody with $4m to play with. Unless they expect to get a better return from investing the money than the rate they are paying for their mortgage it makes sense that they would have bought the house. You don't think three cars is excessive? We'll have to differ in opinion there. A lot of your costs depend on location obviously but, yes, I stand by my hunch.
- lotharbot 16y ago
  > it seems like that would easily exceed 200k a year it seems to me like that wouldn't exceed 100k a year, and "2 kids in college, 1 in private high school" is probably your highest consumption year. Seems like we have vastly different expectations as to what's reasonable to spend on those things. See also my comment [0] and kscaldef's [1] on the previous thread. I'd also assume you don't have mortgage/car payments with a $4.3m buyout, but instead pay those things in full but amortize the costs in your budget spreadsheet. [0] http://news.ycombinator.com/item?id=1627640 http://news.ycombinator.com/item?id=1627640 [1] http://news.ycombinator.com/item?id=1627551 http://news.ycombinator.com/item?id=1627551

by djm 16y ago

gyardley 16y ago

I've no idea how the govt would be able to do this in a workable way though - how to you value the appreciation in somebody's house when the only meaningful way to value a property is to sell it? A bureaucrat called a 'tax assessor' makes an assessment - which may or may not be fair - of your property's current value. You're then charged a percentage of this assessed value in taxes. That's how property tax works across America today.

patio11 16y ago

how to you value the appreciation in somebody's house when the only meaningful way to value a property is to sell it? I think property taxes are fairly widespread in the US, actually. Your county has a group of assessors, who pick a SWAG based on comparable recent sales and -- ahem -- their desire to have the county generate tax revenue this year, and then you get to pay .8% or whatever of the assessed value in property taxes. My father has drolly noted more than a few times that he wishes this assessment came with a shotgun clause (i.e. if the assessors tell you your house is worth $X, you could say "Sweet! I'll have the lawyer draw up the sale documents. You can have the keys tomorrow.")

djm 16y ago
Thanks for the clarification (you too gyardley!). I'm in the UK and we don't do that here. We pay 'stamp duty' when buying a house and capital gains tax when selling (or not as there are exemptions) but nothing on an ongoing basis for the appreciation in value.
- semanticist 16y ago
  In the UK Council Tax is based on the value of your property, based on some fairly informal assessments done years ago. Challenging your Council Tax band is possible if you think the value assessment is incorrect. It's not a direct tax on the wealth embodied by the property, but it is a way by which the wealthier pay more tax.
  - djm 16y ago
    You have a point. I guess you can make a case that CT is an indirect wealth tax though it certaintly isn't intended to be. And of course the property value isn't re-evaluated on an ongoing basis so appreciation isn't reflected in the tax you pay during any given years liability. In my original comment what I was really trying to get at is that, as an investment strategy, you would want to maximise your wealth by minimising your realisable income and that the typical way to do that over time has been to accumulate wealth in property. I guess I was wrong about this in the US but it's still a valid strategy in the UK.

webwright 16y ago

Regarding my assumptions, you're largely right... Though I take issue with: "(2) That you would invest your $4m in a low-return investment." My assumption is that you'd invest in a BALANCED PORTFOLIO. What sort of return do you think a balanced portfolio would get you?

mrtron 16y ago
A balanced portfolio is a very inefficient portfolio. Many people would be willing to take risks, or don't want/need to hedge against everything. His real estate example is a good one - you are at the mercy of housing/renting markets. But over the long term these have been quite steady and wouldn't be outside most peoples' risk thresholds.
- webwright 16y ago
  No, a balanced portfolio aims to balance risk and return. If you put all of your cash into one (or many) high-risk-high-return securities, you run a meaningful risk of losing a big pile of your cash. There's a pretty well-understood playbook for wealth management. You SHOULD be willing to take risks (with a very specific % of your portfolio)... But at any given time some of these risks will have gone south, some will have gone north, etc. Feel free to find me a wealth manager who offers big double digit returns over multiple decades.
  - mrtron 16y ago
    The Warren Buffet school of thought on the issue is put your money into a few things you understand really well, and he is one of the better managers of our time. I understand the 'balanced' wealth management approach - I am just not sure it is the ideal way to go. Is pg better off dumping money in mutual funds, real estate, commodity index funds and bonds - or driving the majority of his wealth into YC? He lives and breathes startups - so even trusting the best managers I would say he would be foolish not to invest a lot into YC himself. I also would like to see the results of how bubbles, world wars, massive inflation, depressions and other difficult to hedge against events impact balanced portfolios vs someone dumping all their money into a single apartment building. My instinct is both would be equally screwed. And an event like that is almost certainly going to happen during the next 50 years. I don't disagree with you at all - there are just several angles.

endtime 16y ago

>I'd actually take a guess that a typical family wouldn't be able to spend $200k in a year if they did not make purchases whose primary purpose was to display status. Mortgage + 3 cars + 2 kids in college + 1 in a private high school + 1 family vacation = ??? I don't think any of that stuff is a status symbol, or excessive. And it seems like that would easily exceed 200k a year, and that's excluding utilities, food, etc.

djm 16y ago
Well, were talking about somebody with $4m to play with. Unless they expect to get a better return from investing the money than the rate they are paying for their mortgage it makes sense that they would have bought the house. You don't think three cars is excessive? We'll have to differ in opinion there. A lot of your costs depend on location obviously but, yes, I stand by my hunch.
lotharbot 16y ago
> it seems like that would easily exceed 200k a year it seems to me like that wouldn't exceed 100k a year, and "2 kids in college, 1 in private high school" is probably your highest consumption year. Seems like we have vastly different expectations as to what's reasonable to spend on those things. See also my comment [0] and kscaldef's [1] on the previous thread. I'd also assume you don't have mortgage/car payments with a $4.3m buyout, but instead pay those things in full but amortize the costs in your budget spreadsheet. [0] http://news.ycombinator.com/item?id=1627640 http://news.ycombinator.com/item?id=1627640 [1] http://news.ycombinator.com/item?id=1627551 http://news.ycombinator.com/item?id=1627551