For those of us who diligently save, invest, and plan with the goal to be able to retire sometime before the average age of 62, early retirement seems like an achievable and perfectly reasonable thing to aspire to. However, it’s worth reminding ourselves that most people don’t think this way.
I recently read the stream of comments on an article about the author’s journey to, and ultimate achievement of, early retirement in his 30’s. Readers’ comments ran the gamut but could roughly be grouped into a few categories, including “good for him”, “this is impossible”, and “you’re not pulling your weight by retiring early”.
It’s the latter objection that really struck me. One of the commenters’ point was this – the government spends a lot of time and money educating each person in the US. Kindergarten through 12th grade, plus possibly 4 additional years of subsidized college, adds up to a substantial investment. If a person only works for 10 or 20 years not only are they not paying enough in taxes to “reimburse” the government for the cost of their education, they aren’t doing their part to fund Social Security, Medicare, and Medicaid through payroll taxes either. In short, people are mooching off the system to retire early.
According to a report from the Census Bureau, in 2012 it cost, on average, $10,615 per year to educated a child at a public school. Using a handy-dandy inflation calculator we find that’s equivalent to $11,039.8 in 2016. 13 years of education (K-12) then costs the government (mostly local and state, with some federal contributions) $143,517.40 in today’s dollars. That IS a large investment. Are we then indebted to the government (or society, or however you’d like to think of it) to work for 45 years to pay back that money through income taxes?
I think the answer is no for a few different reasons.
1. You don’t owe anything
You can’t be beholden to somebody else for something you’re forced to do. Education is obligatory until a person turns 18 years old. If the government is forcing you to attend school you’d don’t have an obligation to “repay” the government by generating sufficient taxable income.
2. You’ll still be paying taxes in retirement
Second, retiring early doesn’t mean the end of paying taxes. If a person retires early and doesn’t receive any more salary, or EARNED income, then it probably mean the end of payroll taxes for the retiree. However, I don’t know of anybody who just puts their entire retirement nest egg in a non-interest paying account and steadily draws the account down throughout their lives. People buy stocks, bonds, CDs, rental properties, etc. The income from those sources are taxed. In addition, retired people who own homes pay property taxes (which largely fund local education) as well as sales taxes.
3. You’ve Probably Paid Enough Taxes Anyway!
I assume that the average person pursuing early retirement is making
significantly more than the average person. Yes, there are people making $40k that are retiring early, but to get there they need to practice the kind of extreme frugality that has no appeal to the average person. As your income increases your taxes increase faster. The average per capita income in the US is approximately $36k. If you double your income to $72k you’ll pay approximately 3.5x as much in taxes. If you’re in the $200k+/year income bracket and you’ve worked for 10+ years you’ve likely paid enough taxes to cover your education and then some. If you earn enough to achieve early retirement, you’ve likely been a high earner and have thus paid quite a bit in taxes already.
4. Benefits are Proportional to What You Paid
Programs like Social Security provide an income in old age (roughly) proportional to what a person contributed over their lifetime. If a person pays less into Social Security over their lifetime they’ll receive lower benefits as a result. Your benefits are based the average of your inflation adjusted salary (up to the maximum amount of taxable Social Security earnings, which is $118,500 in 2016). If you retire at 45 years old and don’t generate any more earned income then you’ll get a $0 in income for the next ~20 years until you retire. Your benefits will thus be significantly lower than they would have been if you’d worked until retirement.
So, in short, I don’t see anything irresponsible about retiring early. If you get to early retirement you’ve likely already paid PLENTY in taxes, you’ll continue paying taxes in retirement, and you won’t be taking anything from the system anyway.