My wife and I have a plan to reduce our expenses and boost our investment income after the kids go to college. We currently live in California, a state that has a really high cost of living, but we plan to move outside of California after the kids go to college.
We own our home debt-free, which was a financial goal we established while working towards achieving financial independence, but it is a significant part of our net worth and it does not generate any investment income and has continuing maintenance costs. After the kids go to college we intend to enjoy another part of the country and boost our investment portfolio by eventually selling our home and moving out of California, buying or renting a property in another part of the country, and placing the majority of our sale proceeds into assets that generate cash flow.
We have done some initial due diligence and ranked different states on their desirability to us based on certain criteria, including a location’s proximity to California, overall affordability, home values, tax burden, weather, and health rankings. Based on these criteria, we identified the following states that we will be visiting over the next few years:
- New Mexico
In December we visited Denver, Colorado and the surrounding suburbs to determine if it was a place we could see ourselves moving to after the kids go to college. We spent three days in the area, with the first day focusing on learning more about Denver, the second day focusing on visiting neighborhoods north of Denver (Boulder, Longmont, Broomfield, Louisville, Lafayette, Superior), and the third day focusing on visiting neighborhoods south of Denver (Littleton, Greenwood Village, Cherry Creek, Castle Pines, Highlands Ranch, Lone Tree, Parker). Overall, we enjoyed our time in Colorado. My wife and I definitely liked the feel of the neighborhoods south of Denver and the picturesque mountain views that were part of many of them. The neighborhoods north of Denver seemed a little older to us and more mixed although some of them had a very comfortable feel with small downtowns, etc. In some we didn’t like the amount of cannabis dispensaries (it seemed like a lot to us) and Denver seems to have a bit of a homeless problem like most big cities today.
It was colder than we are used to in California with the temperatures ranging from 20-50 degrees Fahrenheit. Even though it was much colder than where we live we didn’t feel it would be an obstacle to moving to Colorado. As advertised, Denver and the surrounding areas were dry and sunny and during the daytime we could walk around without feeling too cold. We needed to make sure we had our long underwear on during the evenings.
We met a lot of locals and overall they were very friendly. We also met transplants (i.e. people that had moved to Colorado from other parts of the country) and they spoke highly of Colorado and most of them were happy with their decision to live here. Most people we talked to during the trip thought Colorado was expensive (and getting more expensive by the day).
The next step for me after identifying Colorado as a place we enjoyed is to complete a simple financial comparison between California and Colorado to determine the order of magnitude financial benefit we would get by moving to Colorado.
Simplified Financial Analysis – California v. Colorado
I look at the following areas when determining what kind of financial benefit my wife and I will see from moving to a different location:
- Difference in Home Values: The difference between the value of our home in California and the value of a home we would purchase in the location being compared to determine how much we will be able to invest after paying for a home in the different location. I then assume a 6% annualized rate of return on the additional investment proceeds to determine an annual benefit.
- Difference in Property Taxes: The difference in annual property taxes paid between my California home and the home we would purchase in the different location.
- Difference in State Income Taxes: The difference in state income taxes paid. I assume $150,000 in income ($120,000 from investments and $30,000 from some type of business income).
- Difference in State Sales Taxes: The difference in sales taxes paid. I assume $50,000 in annual purchases that will be taxable at the local sales tax rate.
There will be other cost reductions but my simplified analysis does not capture these benefits. For example, there was a big difference in gas prices between Colorado and California. I filled up my Colorado rental car with gas before returning it to the rental company and it cost $2.60 per gallon. In California, gas costs a little over $4.00 per gallon right now. We would probably save a little more than $1,000 per year in gas costs in Colorado but this analysis does not factor in these types of benefits.
Difference in Home Values
Homes are expensive in Colorado but I would have approximately $250,000 in sales proceeds to invest if I sold our house in California and purchased a home that we liked in Colorado. At a 6% return, we would make an additional $15,000 per year in investment income.
Difference in Property Taxes
Colorado has some of the lowest property taxes in the country, with an average effective property tax rate of less than 0.6%. The property tax rate on my home in California is a little over 1.2%. I would save just under $9,000 per year in property taxes paid.
Difference in State Income Taxes
Colorado’s income tax structure provides certain deduction on retirement income and is considered tax-friendly towards retirees. My marginal state income tax rate would also be 4.63% in Colorado compared to 9.3% in California. I estimate that I would save a little over $4,000 per year in state income taxes by moving to Colorado.
Difference in State Sales Taxes
Both California and Colorado are known for having high sales tax rates (these rates vary by county) but it seems that my sales tax rates would go from 7.5% to just over 5% if I moved from California to the area we liked most in Colorado. It’s not a big difference but we would save a little over $1,000 in sales taxes every year by moving to Colorado.
Overall, we would see a financial benefit of $28,000-$30,000 per year in these four major areas by moving from California to Colorado. That’s a big deal on annual income of between $100,000 and $150,000 and moving to Colorado would help us maintain our financial independence for the long-run.