Life After Full-time Work Blog

Learn about preparing for life after full-time work through posts from Don's upcoming book.

# 7: Taxes

How to think about the taxes you pay, and why there are no universal principles that you can follow.

The US Internal Revenue Service has the following quotation inscribed above the entrance to its headquarters in Washington, DC: “Taxes are what we pay for a civilized society.” It’s attributed to the Supreme Court Justice Oliver Wendell Holmes, Jr. Mind you, he might not have liked the resulting civilization, because he is also quoted as saying, a couple of years later: “The liberty of the citizen to do as he likes so long as he does not interfere with the liberty of others to do the same … is interfered with … by every state or municipal institution which takes his money for purposes thought desirable, whether he likes it or not.”

The fact is that we pay taxes. My point here is not that we may not like what our taxes are used for. Instead, my point is the apparently arbitrary way in which taxes are levied. Instead of a few simple rules, tax codes typically consist of multiple volumes characterized by huge complexity. It’s as if you are asked to approach the taxing authorities with all your money stuffed into various pockets in the clothes you are wearing, and they say, “From that first pocket we’ll take 40%, from the one next to it 20%, you can keep whatever is in that third pocket, from the fourth one 22.5%, from the fifth one …”  And so on.

In many countries it’s even more complicated than that. If you put more money in one pocket, they’ll take away money from a different pocket.

Once you’ve experienced this, the natural thought is that, before you approach them next time, you should rearrange your money so that they take much less in total. And you discover that finding out how best to do this is very difficult, and whole tribes of people make their living by getting to know the complexities and advising innocent citizens like yourself about how to minimize their taxes. (And then the laws change … but let’s leave it there.)

Taxation makes a significant difference to the proportion of your earnings that the state permits you to keep for yourself, as opposed to for paying for your society’s civilization. Of all the financial issues that are involved in planning for life after full-time work, taxation is typically one of the most important, perhaps even the single most important one.

Think of it this way. You have a dollar. Whether you’re allowed to keep 50 cents of it for yourself, or 75 cents, or the whole 100 cents, makes a huge difference to you. (Or if you have one euro, or how many pennies in the pound you can keep, and so on. You get the idea.) Taxation typically has far more impact than the investment arrangements that are made for you.

That example of adding money to one pocket and finding that the government then takes money from a different pocket can be particularly insidious for the lower-paid members of our society. For example, the government may offer supplementary payments to those with very little income. Then, when those recipients earn more income on their own (more money in your earned income pocket), the supplementary payments may be reduced dramatically (they take money out of your supplementary payments pocket). In some countries it may be possible to earn more income in a way that doesn’t result in losing the supplementary payments. I’m not making a moral judgment on whether this is socially desirable or not – I’m just saying that the tax code can be so complex and interactive that adjusting to it could be the most significant financial thing you do.

So you might want to consider getting good tax advice.

You won’t find any from me. Not that my goal is to make you a tax expert – that would be inconsistent with my general goal anyway, which is not to give advice but to educate you to the point where you can have an informed conversation with experts. But as regards taxation, I won’t even make any attempt at outlining principles.

The reason is the apparently arbitrary nature of tax rules. Ask any country’s foremost tax expert to go into another country and use the approaches that work in the first country, and the expert will tell you that the second country requires quite different approaches. It isn’t just the tax rates that differ. Even the principles on which taxes are based differ. Consequently there isn’t a universal set of principles that I can tell you about, or even anything close to one. What is tax-exempt in one country is partly taxable in another and fully taxable in a third. Taking money from Pocket A and placing it instead in Pocket B in one country becomes a procedure that should be reversed in a second country, while a third country labels its pockets in a different alphabet altogether.

That’s why I have no principles to offer you on taxes.


The subject of taxation is important. Don’t ignore it. You might want to seek advice on this issue even if you choose a do-it-yourself approach on other retirement issues.


I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.

4 Responses to “# 7: Taxes”

  1. K.C. says:

    So true, and great advice! As a professional in the financial planning industry for the past 20 years, I have seen more clients than not who forget to take taxation implications into account as they consider their income stream in retirement. The tax man can’t be ignored, but for some reason, that comes as a surprise to many!

  2. Mohan Kinra says:

    I will give an example of a big mistake I made with respect to my IRA withdrawals.

    During a five year period, when my job situation had caused a significant drop in annual income, I should have withdrawn as much as I could have and put the money into a Roth IRA. The reason is that my tax bracket would have been much lower than it is now.

    I cannot do anything about the past mistake, but I hope this example will serve others in the future.

    • Don Ezra says:

      Thanks, Mohan, for sharing your experience. That’s always much more powerful than simply stating a principle.

Leave your question or comment