America is a nation on the move. The Census Bureau says 35.9 million of us picked-up and went somewhere else in 2013, almost 12% of the entire population.
We move because of such things as jobs, climate, family and schools but there’s another reason as well: A good move can be worth $1 million and maybe more.
Interest Rates & Savings
The push to save has been demolished during the past few years because retirement accounts and savings no longer produce attractive yields. At this time a five-year CD pays about 1.6%. That means if you have $1 million in the bank you might earn almost $16,000 a year. Given that inflation in May was 2.1%, that $1 million — even after interest — is losing buying power at the rate of about $5,000 a year ($1,000,000 x 2.1% = $21,000 less $16,000 = $5,000).
Mind you, you get that tasty 1.6% rate only if you commit to a five-year deal. If you think rates might move higher and opt for a one-year CD term then the interest rate plummets to perhaps 0.85%, so you really take a beating after inflation.
Taxes, of course, make everything worse.
You get the sense that a lot of people have looked at the numbers and come to a few conclusions:
- First, there are a lot of places in the U.S. where real estate is very expensive and state taxes are through the roof.
- Second, there are six jurisdictions with no state income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
- Third, 27 states, according to The Best Times, do not tax Social Security benefits.
- Fourth, a realistic tax picture means you also need to look at such things as property and sales taxes. The Tax Foundation has done this and for 2011, the latest available year, found that Wyoming, Alaska, South Dakota, Texas and Louisiana had the lowest overall tax burdens. The highest? Leading the league we had New York, New Jersey, Connecticut, California, and Wisconsin.
The New Equation
The usual idea is that people don’t want to move if it means they’ll earn less, the likely reason why D.C., Alaska and North Carolina have lead the nation with in-migrations during the past decade according to Atlas Van Lines.
But what if we look at the issue differently? Imagine if we elect to move and that the need for an equivalent salary disappears.
Let’s look at some numbers:
The Johnson's have a San Mateo home valued at $750,000 — a lot in most places but far less than the sale price for the average existing San Mateo home. They pay $2,500 a month for principal and interest, $350 a month for property taxes and $70 a month for insurance, a total of $2,920 per month or $35,040 per year.
The Johnson's have a household income of $175,000, the top state tax rate for them is 9.3% and they pay $11,400 in state income taxes, according to the California Franchise Tax Board. (The top rate in California is 13.3% according to Kiplinger.
They’ve owned their home for a decade and now have $300,000 in equity.
Then the Johnson's move. They buy an equivalent home three hours from New Orleans — in Pensacola, Fla. There’s no state income tax, according to Kiplinger. There's no estate tax. There's no inheritance tax. There's no mortgage because the Johnson's buy for cash. Property taxes are $2,400 a year because the value of their new home is far lower than their property in California. With a pool they pay $2,000 a year for property insurance. Average cost per month: $366. Total per year: $4,400.
Would the Johnson's have a lower salary in Florida? Probably. According to MIT's Living Wage Calculator, a manager in San Mateo County is likely to make $50.67 an hour. In Pensacola the typical wage for the same job would be $43.41 — about $7.26 an hour less or $14,520 a year.
Think of it this way: A five-year CD that pays out 1.6% annually would need a face value of roughly $1 million to generate $16,120. Of course, a CD that generates 0.85% would need a balance of nearly $1.9 million to produce the same annual payout.
Is this a big deal for many households? You bet. The average 401(k) has assets of just $89,300, according to Fidelity Investments.
For balance, the Johnson's in Pensacola are also likely to have a lifestyle with less traffic, lower costs and fewer tremors — the last earthquake in Pensacola took place in 1781, according to the U.S. Geological Survey. Moreover, the money they save on taxes and higher mortgage costs can be used to create further savings through the faster repayment of student loans, auto financing and credit card debt.
Perhaps most importantly, with a smaller financial nut maybe they don’t have to take the worst job in the world or work so many hours.
According to Vizynary.com, in 2012 a total of 493,641 people took up residence in California — and 566,986 left. For Florida in the same year, 537,148 people moved in while 428,325 migrated elsewhere.
Where we live involves such concerns as lifestyles, job opportunities, schools and personal preferences. Money is also part of the equation and for many Americans it’s a part which is getting harder and harder to ignore in a tough job market — especially when the equivalent of massive savings are as close as the nearest moving van.