Deductive Reasoning

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In my view, the miles game is a perfect accompaniment to a frugal living, early retirement lifestyle.

Playing the miles game allows one to escape some of the puritanical asceticism that can make the pursuit of early retirement a little bit of a downer for some people.

I want to shrink my carbon footprint as much as the next guy, but I’m not sure my family is quite ready to move into a LEED certified 115 square-foot hyper insulated box car just yet.

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Home sweet home?

I respect the hell out of those who use combination bicycle/baby trailers to do all their grocery shopping in blizzards, but, for me, sometimes a little bit of luxury is an attractive thing.

The miles game gives you access to lots of luxury,  Whether it be the crucial the luxury of expanding your world with travel, or the over-the-top luxury of sipping Cristal in a fully flat bed International first-class product, luxury can be had in the miles game without moving oneself significantly farther away from financial independence.

But here’s another way that the miles game and early retirement Jibe well; both are incredibly tax efficient.

Because the early retirement enthusiast is so motivated to save a greater proportion of his income, he must seek out every tax advantaged way to invest his savings that there is.

We’ve already talked about two excellent ways (in addition to employer based retirement plans) that a family can save their money in a tax advantaged vehicle; The back door Roth IRA, and the health savings account. Just utilizing these 2 vehicles can allow a family to invest almost $13,000 additional dollars a year tax-free. Great stuff.

But after one has taken advantage of these opportunities, (plus maxing out one’s employer-based retirement accounts,) then without being self-employed or having itemized deductions, it is difficult to find more opportunities for tax-advantaged savings.

Which is where collecting miles comes in!

You see, in general, miles are not taxable.

This article, shared with me by Brad over at Richmondsavers.com, goes into detail, but the take-home is that as long as you’re not earning miles on deductible business purchases, there’s really no mechanism for you to declare miles on your tax return.

This is also true of cashback rewards, by the way, which are seen by the IRS as rebates, not as earnings.

So let’s imagine a scenario whereby a family of 4  is going on a vacation to Disneyland.

The family’s income is about $100,000 a year, which places them in the 20% tax bracket.

Let’s say the trip to Disneyland costs $3000 all in.

If the family just pays for this with a check from their bank account, then the actual cost is much more than $3000.

You see, The $3000 is paid for with post-tax dollars, each of which has had $.20 deducted from it for federal income taxes. (Note that this calculation does not even include FICA taxes, or state taxes.)

So conservatively the trip actually costs them $3750. (300/0.8). And the higher their income, the more its cost would be.

Now let’s say they booked the trip with airline and hotel miles and points instead.

Let’s say they pay just $40 in taxes and fees for the trip.

They are now $3710 richer than they would’ve been have been had they not played the miles game in the first place. Sweet!

But the point of this blog is that that savings is not enough. The dollars have not been maximally utilized yet.

Now suppose that instead of just spending their savings on something else, they invest it in their 401(k). If they keep the money in their retirement account for 30 years, and achieve a 7.5% real return after inflation (based on the historical average return of the stock market,) then the $3710 will have morphed into $24850!

That $24,850 is almost a years worth of living expenses for black belt early retirement enthusiasts like the Mad Fientist or Mr. Money Mustache.

So one could make the argument that playing the miles game and offsetting the costs of travel for one vacation can net you a years worth of labor free retirement.

In fact, I may have already done just that.

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