At 77 He Prepares Burgers Earning in Week His Former Hourly Wage
It seems like another life. At the height of his corporate career, Tom Palome was pulling in a salary in the low six-figures and flying first class on business trips to Europe.
Today, the 77-year-old former vice president of marketing for Oral-B juggles two part-time jobs: one as a $10-an-hour food demonstrator at Sam’s Club, the other flipping burgers and serving drinks at a golf club grill for slightly more than minimum wage.
Special Report: The Future of Retirement
While Palome worked hard his entire career, paid off his mortgage and put his kids through college, like most Americans he didn’t save enough for retirement. Even many affluent baby boomers who are approaching the end of their careers haven’t come close to saving the 10 to 20 times their annual working income that investment experts say they’ll need to maintain their standard of living in old age.
For middle class households, with incomes ranging from the mid five to low six figures, it’s especially grim. When the 2008 financial crisis hit, what little Palome had saved -- $90,000 -- took a beating and he suddenly found himself in need of cash to maintain his lifestyle. With years if not decades of life ahead of him, Palome took the jobs he could find.
Mopping Floors
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The youthful and perennially optimistic grandfather considers himself lucky. He’s blessed with good health, he said. He’s able to work, live independently and maintain his dignity, even if he has to mop the floors at the club grill before going home at 8 p.m. and finally getting off his feet.
“That’s part of the job,” he said. “You have to respect the job you’re doing and not be negative -- or don’t do it.”
Low-income Americans have long had to scrape by in old age, relying primarily on Social Security. The middle class, with its more educated and resourceful retirees, is supposed to be better prepared, with some even having the luxury to forge fulfilling second acts as they redefine retirement on their own terms. Or so popular culture tells us.
The reality is often quite another story. More seniors who spent much of their careers as corporate managers and professionals are competing for low-wage jobs. For these growing ranks of seniors with scant savings, it’s the end of retirement.
Downward Mobility
About 7.2 million Americans who were 65 and older were employed last year, a 67 percent increase from a decade ago, according to government data. Yet 59 percent of households headed by people 65 and older currently have no retirement account assets, according to Federal Reserve data analyzed by the National Institute on Retirement Security.
“People who built successful careers, put their kids through college and saved what they could, are still facing downward mobility,” said Teresa Ghilarducci, an economist at The New School, who has studied the finances of seniors.
It’s about to get worse. Right behind the current legions of elderly workers is the looming baby boomer generation, who began turning 65 in 2011 and are reaching that age at a rate of about 8,000 a day. They’re the first generation expected to fund their own retirements, even as they live longer lives.
They, too, are coming up short. Company-paid pensions are mostly a thing of the past, replaced in the last three decades by 401(k) accounts primarily funded and managed by employees. The median 401(k) balance for households headed by people aged 55 to 64 who had retirement accounts at work was $120,000 in 2011, according to the Center for Retirement Research at Boston College.
Not Enough
Those savings will provide $4,800 a year, assuming seniors withdraw 4 percent annually, the amount recommended by retirement experts to ensure retirees don’t run out of money in their lifetimes.
Little wonder that half of baby boomers aged 50 to 64 don’t think they’ll ever have enough to retire, according to a 2011 survey by AARP.
“The current retirement savings systems isn’t working, and that’s becoming a crisis as Americans who make it to 65 in good health are now living at least two more decades,” said Larry Fink, chief executive officer of BlackRock Inc. (BLK), the world’s largest asset manager.
“Longevity should be a blessing, but if you haven’t planned for it, you’re going to work much longer than you ever dreamed of doing,” he said. “Or you better be good to your children because you’re probably going to be living with them.”
Being Independent
That’s the last thing Tom Palome wants to do -- even though his children have offered to take him in. After decades of keeping his body trim -- at 5-foot, 10-inches tall, he weighs a fit 170 -- and his hair colored a dark brown, he’s often mistaken for a 60-year-old and has no intention of giving up his independence.
On the job at Sam’s Club, Palome is easy to spot amid shoppers pushing carts down the aisles. It’s not just the bright green apron he’s wearing with the words “Tastes and Tips” printed across the front nor the matching green baseball cap that set him apart in the Brandon, Florida, store near Tampa. It’s also his charisma and determination.
He waves to a mother with a toddler in tow and insists she sample the blueberry-flavored crackers he has stacked neatly on a tray at his aluminum work station.
“They’re multigrain, and healthier for kids than cookies,” said Palome, who researches the products he pitches on the Internet.
Product Demos
He’s supposed to sell two boxes of the crackers during his seven-hour shift. He sells 24 by clean-up time, then grabs a garbage bag and gathers containers and leftover food from demonstration carts around the store.
The next day, a humid Sunday in August, Palome is at his second part-time job, an eight-hour shift as a short-order cook and bartender at Rogers Park Golf Course in Tampa. Working solo, he’s in perpetual motion, rushing between the take-out counter at the golf course’s cafe and indoor counter to collect orders and operate the cash register, while grilling hot dogs and hamburgers and grabbing soft drinks from the refrigerator.
It’s a busy day at the 18-hole municipal course, and he serves 70 customers before closing time. Then he scrubs down the grill and sweeps and mops the floors.
Palome earns about $80 for his day’s work, $7.98 per hour in wages, plus tips.
“I earn in a week what I used to earn in an hour,” he said, adding that he understands seniors can’t easily keep or get jobs that pay middle-income wages.
Social Security
Palome, who said his jobs keep him active and learning new things, could survive without working. He receives $1,200 from Social Security and a $600 a month pension from his last corporate job. Still, his $1,400 in monthly wages allows him to bolster his savings and provides for some extras. He goes to the theater, pays for plane tickets to visit his children and grandsons and takes occasional vacations.
“I know seniors like me who hardly ever leave their homes because they don’t have money to do anything,” Palome said. “They could work, but won’t take a lesser job.”
To stretch his income, Palome runs his dishwasher once a week and turns off his hot water heater every morning after he showers. He buys airline tickets six months in advance, booking rental cars for as little as $13.80 a day.
Getting Stuck
Palome grew up in Poughkeepsie, New York. His parents were both immigrants, and his father worked as a laborer. After a stint in the Navy, Palome had a chance to work at a local International Business Machine Corp. (IBM) plant. The work was steady, with solid pay and benefits. Instead, he enrolled at Fordham University to study business, relying on veteran benefits to pay tuition. His father was so angry Palome turned down the plant job that he didn’t speak to him for months.
“I knew that anyone who got into that plant never got out,” he said. “You just got stuck because of the steady pay.”
Palome landed a job at Shulton Co., the maker of Old Spice after-shave lotion and cologne, then moved to Yardley of London as a brand manager. His big break came in 1975 when he was recruited to The Cooper Cos. as vice president of marketing for the Oral-B dental-care business.
The job gave him a high five-figure income and an executive’s life at age 39. He flew first class to Cooper offices in the U.S. and in England, Sweden and Germany. He helped win an endorsement for the Oral-B toothbrush from the U.S. Olympic Committee. He had a closet filled with business suits, and on weekends he played golf with other executives.
Tragedy Strikes
That life turned upside down when his wife, Edna, was killed in a car accident in 1983. Palome’s daughter, then a college student, offered to come home to take care of her brothers, who were 14 and 16 years old. Palome insisted she stay in school. He took charge of the parenting and the housework.
“I was numb, in shock and trying to hold everything together,” he said. “And my sons didn’t want anyone in the house besides me, not even a housekeeper.”
When Cooper relocated from New Jersey to California, Palome didn’t want to uproot his family. So in 1980, when he was 44, he started a consulting company, with Cooper as his main client. He also did consulting for Sandoz Pharmaceuticals, Johnson & Johnson and others.
In flush years, Palome had several clients and earned about $120,000. Though he saved for his kids’ college and helped his elderly parents, retirement wasn’t on his radar.
“I never thought I’d live this long,” he said.
No Savings
Because he was self-employed, Palome didn’t have a 401(k) account, and he has never had a tax-deferred IRA, or Individual Retirement Account. It’s the same for most Americans. Only about half of private-sector workers were covered by an employer-sponsored retirement plan of any kind in 2011. And fewer than 40 percent of those participated, according to the Employee Benefits Research Institute.
Many now approaching retirement began saving too late, stopped saving when they lost jobs, or borrowed against their 401(k) accounts to finance their children’s college tuition. They also often chose investments that failed to yield the best results, or they bailed out of the stock market after the financial crisis battered their savings, then missing the rebound.
“How is the average middle-class person going to amass $1,000,000 by the time they’re 65, which is what they’ll need to get $40,000 a year in income from their retirement savings?” Ghilarducci said.
Keep Going
Palome had lean years when he couldn’t easily save. He decided to take a job running a Friendly’s restaurant in Parsippany, N.J., from 1990 to 1993. He figured he’d acquire new skills, which have since proved useful.
“Tom always did what he had to do to keep going,” said his younger brother Peter, who’s 66 and lives in the same senior community.
Palome later ran a restaurant at a New Jersey golf club while he continued his consulting. At 64, when an 800 square foot manufactured home he’d seen in Plant City, a Tampa suburb, became available for $21,500, he purchased it with a credit card to amass frequent flier miles. He then sold his New Jersey home for $180,000, kept what he needed to quickly pay off his credit card debt and divided the rest among his children so they’d have down payments for their own homes.
“The house was theirs as much as mine, and that’s their inheritance from me,” he said.
Don’t Panic
At first everything went according to his plan. Palome enjoyed the year-round warm weather and he avoided dipping into savings by doing part-time bar-tending and catering. Then the financial crisis hit. Palome’s part-time work evaporated. His savings, which he’d invested mostly in stocks, shrank from about $90,000 to less than $40,000.
“I was shocked by how fast I lost so much,” he said.
Palome didn’t panic. He rewrote his resume, taking out references to his corporate career so he wouldn’t appear overqualified for restaurant and hotel jobs. He searched online jobs sites and local papers for leads. Between 2008 and 2011 he figures he applied for about 100 jobs.
He came close to getting two of those until his prospective employers learned his age. He was never told explicitly that he was too old for a job. Yet hiring managers who asked when he could start working never called again after he submitted required copies of his driver’s license with his birth date.
Foreclosure City
“I was in a foreclosure city in a foreclosure state,” he said. “So many people were out of work. Who wants to hire a 75-year-old?”
Two years ago, Palome saw an advertisement in a local paper for an AARP Foundation job training program. He met with Maxine Haynes, the program’s Tampa project director, who helped him get an interview at Advantage Sales & Marketing LLC, which runs food demonstrations for Sam’s Club and other stores.
“He had so much energy and enthusiasm when he walked through the door here, I knew I had to try to help him,” Haynes said.
Palome aced the interview with a spontaneous pitch on how to sell a simple magic marker. Still, he worried his age would be a deal breaker.
“You ought to know I’m 75,” he offered.
“Age is only a number,” Wanice Matthews, Palome’s current boss at Advantage Sales & Marketing, later said. “If I had 10 more Toms on my team, I’d have the best team in the business.”
Every other morning, Palome does 70 sit-ups and 70 squats and almost as many leg lifts and arm strengthening exercises. He alternates his at-home exercises with two or three 10-mile bike rides each week.
Heating Pad
At Sam’s Club, his single 30-minute break during his seven-and-a-half hour shift is not enough time to prevent backaches and leg cramps after standing all day.
“Make sure you rest when you get home and don’t do any housecleaning,” Palome recently advised a new employee, a widow who hasn’t worked in years.
When Palome gets home, he stretches out on his couch, tucking a heating pad behind his back before preparing a light supper. He goes to bed by 10 p.m.
If Palome has one regret, it’s that he didn’t get better retirement investing advice somewhere along the line. “I thought I could do it on my own,” he said.
Still, he’s proud of his accomplishments. He built a career in marketing, raised a family following a tragic loss and helped his kids get a start in life.
“I’m not going to sit on my laurels and say I was an executive making six figures and traveling the world,” he said. “I tell people I demonstrate food and I do short-order cooking. I don’t mind saying it. What’s important is that I can work today.”
To contact the reporter on this story: Carol Hymowitz in New York at [email protected]
To contact the editor responsible for this story: Jonathan Kaufman at [email protected]
Bakken – Hype Versus Reality
As Wall Street, CNBC, and feckless politicians tout American energy independence from the miracle of shale oil, reality is already rearing its ugly head. Production grew by 24% over the first six months of 2012. Production has grown by only 7% over the first six months of 2013. That is a dramatic slowdown. The fact is that these wells deplete at an extremely rapid rate. Oil companies will always seek out the easiest to access oil first. They have already accessed the easy stuff. This explains the dramatic slowdown. Peak Bakken oil production will be below 1 million barrels per day. The last time I checked, we consumed 18 million barrels per day. I wonder when that energy independence will be achieved? Reality is a bitch.
Bakken Oil Production Growth Has Slowed Significantly In 2013
By: Devon Shire
http://seekingalpha.com/author/devon-shire [9]
The headlines ring of “booming” American oil production and “gluts” of oil (USO [10]). I’m here to tell you that while the boom is real, there is no glut of oil and we need to be aware that the huge production growth of the past eighteen months is going to slow.
It already is slowing.
I’ve been watching what is going on in the Bakken pretty closely because I think it is going to be an excellent proxy for what will happen across the country.
Let’s take a look at what happened to production in North Dakota during the first six months of last year (2012). Here is the raw data [11] detailing barrels of oil production per day:
December 2011 – 535,000 boe/day
January 2012 – 547,000 boe/day
February 2012 – 559,000 boe/day
March 2012 – 580,000 boe/day
April 2012 – 611,000 boe/day
May 2012 – 644,000 boe/day
June 2012 – 664,000 boe/day
Daily production in North Dakota increased by 129,000 barrels per day from December 2011 to June 2012.
Now let’s look at the same period for this year (2013):
December 2012 – 768,000 boe/day
January 2013 – 739,000 boe/day
February 2013 – 780,000 boe/day
March 2013 – 785,000 boe/day
April 2013 – 793,000 boe/day
May 2013 – 811,000 boe/day
June 2013 – 821,000 boe/day
Where last year production increased by 129,000 barrels per day in the first six months of the year, this year production is up by only 53,000 barrels per day.
Yes, the rate of growth in the Bakken has slowed considerably in 2013.
To understand why, a person needs to look at the production profile for these horizontal oil wells.
By the end of the first year of production, a new well is producing at a rate that is 30% of where it was the year before. That means a huge amount of drilling each year has to be done just to offset the production lost due to these steep decline rates.
Without a continuous step change each year in the number of wells being drilled and the capital available to do so, production in the Bakken is going to flatten.
Good things are still happening, but we can’t repeat every year the hyperbolic growth that we saw in 2012.
What this means for investors is that we shouldn’t expect oil prices to fall much from where we have seen them over the past three years.
For the past three years WTI oil prices have ranged from $85 per barrel to $105 per barrel. I think $85 is about as low as we can go for an extended period of time because that is likely just about the marginal cost of production for oil in the world today.
Production growth in the Bakken is slowing and so too will production growth in the Eagle Ford. That is the nature of these horizontal oil fields. We get an initial surge in production as capital comes into the play. Then that growth rate slows steadily until it flattens and enters a decline.
A River of American Money Flows to D.C.
Jeffrey H. Anderson
September 23, 2013 12:50 PM
The question at the core of most of today’s debates in American politics is whether all people have an unalienable right to keep the fruits of their own labor—as the Founders believed and the Declaration of Independence (properly understood) asserts—or whether the government should funnel vast sums of money to the nation’s capital and then magnanimously redistribute it back to the tributaries. Well, the stats are in, and it seems that neither of these two notions is really being fulfilled. To be sure, Americans’ money is flowing to the nation’s capital. But it’s not flowing back.
Indeed, the metropolitan area of Washington, D.C., a city with little identifiable industrial output, dominates the Census Bureau’s newly updated list of America’s wealthiest counties. Here are some highlights from that list:
Based on the median family income in 2012, the wealthiest county in America—by far—is Arlington Co., Va., located just across the Potomac River from D.C. In fact, Arlington’s median family income ($137,216) is more than $10,000 higher than that of any other county in the United States.
The county with the 2nd-highest median family income ($127,192) is Loudoun Co., Va., also located in the D.C. metro area (according to the White House Office of Management and Budget’s list of metropolitan areas). The 3rd-highest tally ($125,162) belongs to Howard Co., Md., which technically isn’t part of the D.C. metro area but is located between D.C. and Baltimore and is home to many people who commute to D.C. The 4th-highest tally ($124,831) belongs to Fairfax Co., Va., yet another county located in the D.C. metro area.
In other words, in a nation that ranges from the Pacific to the Atlantic and boasts such grand and affluent cities as New York, San Francisco, Los Angeles, Chicago, Dallas, San Diego, Boston, and Seattle (among others), the four wealthiest counties in the land are all within commuting distance of the capital.
In the fifth spot, the New York metro area finally makes the list, as that position is held by Hunterdon Co., N.J. ($123,454). California finally makes the list in the sixth spot, which is held by Marin Co. ($115,513), located just across the Golden Gate from San Francisco. The seventh spot, however, is filled by Montgomery Co., Md. ($113,588), which borders D.C.
Thus, the D.C. metro area (population: 6 million) claims 4 of the top 7 spots, while the nation’s 380 other metro areas (total population: 308 million) combine to claim just 3. Is this what President Obama means by “fairness”?
Looking just a bit further down the list, there are only 26 counties where the median family income is over $100,000. Texas, Florida, and Illinois are among the 40 states that do not have a single $100,000 county. California has only 2. But the states bordering D.C.—Virginia and Maryland—have 7 and 4, respectively; and not one of those is in southern Virginia or northern Maryland.
Below are the metro areas that, based on median family income, have the most $100,000 counties.
Metro areas with the most $100,000 counties:
1. Washington, D.C., 9
2. New York, N.Y., 7
3. (tie) Baltimore, Md., 2 (both centered within 40 miles of D.C.)
3. (tie) Boston, Mass., 2
5. (tie) Bridgeport, Conn.; Denver, Colo.; Nashville, Tenn.; Philadelphia, Pa.; San Francisco, Calif.; San Jose, Calif., 1
Note that the metro areas of Chicago, San Diego, Seattle, Miami, Dallas, Houston, and even Los Angeles don’t include a single $100,000 county among them, while the D.C. metro area has 9. Note also that New York’s metro area (population: 20 million) is more than three time the size of D.C.’s, yet the former has fewer $100,000 counties than the latter.
The eye-opening affluence of D.C.’s surrounding areas might make one wonder whether all of that city’s wealth has merely moved out of the city proper. Alas, this clearly hasn’t been the case. In addition to D.C.’s extraordinarily affluent suburbs, the median family income in the city itself ($82,268) is higher than the median family income in 46 of the 50 states.
The seemingly inescapable conclusion is that a great deal of Americans’ hard-earned money is flowing to the nation’s capital and simply staying there. Decades of efforts to centralize and consolidate money and power in D.C. have, not surprisingly, made D.C. an unparalleled center of money and power.
About 175 years ago, Alexis de Tocqueville, referring to the unfortunate mindset of so many of “the ambitious and capable” in our society, wrote, “It is a waste of one’s time to want to prove to them that extreme centralization can be harmful to the state, since they centralize for themselves.”
The stats suggest he was right.
Anderson is executive director of the newly formed 2017 Project, which is working to advance a conservative reform agenda.
http://www.weeklystandard.com/print/blogs/river-american-money-flows-dc_756600.html
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The roots of shadow banking
CEPR: THE ROOTS OF SHADOW BANKING
Enrico Perotti
Univ of Amsterdam, DSF and DNB
RSA warns over NSA link to encryption algorithm
RSA believes one of its algorithms may be compromised
RSA, the internet security firm, has warned customers not to use one of its own encryption algorithms after fears it can be unlocked by the US National Security Agency (NSA).
In an advisory note to its developer customers, RSA said that a default algorithm in one of its toolkits could contain a "back door" that would allow the NSA to decrypt encrypted data.
It "strongly recommends" switching to other random number generators.
RSA is reviewing all its products.
The advice comes in the wake of New York Times allegations that the NSA may have intentionally introduced a flaw into the algorithm - known as Dual Elliptic Curve Deterministic Random Bit Generation - and then tried to get it adopted as a security standard by the US National Institute of Standards and Technology.
Privacy
In the 1990s, the NSA tried to claim the right to unlock all encryption systems, but lost the battle after privacy rights and freedom of speech advocates objected.
The NSA maintains that it needs to be able to decipher encrypted communications to protect the US against terrorism and organised crime.
A replica of Alan Turing's Bombe decryption machine used during WWII: Throughout history governments have tried to decipher secret messages
As the documents leaked by the former government security contractor Edward Snowden have demonstrated, the NSA has been intercepting communications data from all over the world through its Prism surveillance programme.
But it is locked in a continuous battle with cryptographers who are developing increasingly sophisticated security systems.
One of the NSA's tactics has been to persuade leading technology companies, such as Microsoft and Google, to co-operate with the security services in providing access to user data. Privacy rights campaigners have been concerned over how far this co-operation may extend.
Under US law, service providers have to hand over user data to the NSA but are not allowed to publish how many security-related data requests they receive.
A growing number of providers are beginning to stand up to the government and demand more transparency.
For example, the Digital Due Process Coalition, which is calling for reform of the 1986 US Electronic Communications Privacy Act (ECPA), includes companies such as Apple, Google, Facebook, Amazon, Linkedin and Microsoft.
The coalition argues that the ECPA has been outpaced by the rapid rise of the internet and the explosion of digital data.
http://www.bbc.co.uk/news/technology-24173977
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Chart Of The Day: The Fed’s “Renormalization” Shock (All 600 bps Of It)
As we noted earlier, Bernanke's actions this week make it very clear that between "financial conditions" and the fragility of growth, the US is incapable of surviving without ZIRP and QE (for now). As Barclays notes, ultimately, normalisation should proceed according to a timeline that does not threaten recovery, yet will result in a neutral monetary policy by the time the economy reaches full capacity and the desired inflation rate. However, there are many uncertainties along this path.
Chairman Bernanke has said it might take "two or three years after 2016" to reach a 4% fed funds rate (the FOMC’s ‘longer-run’ expectation), but, as the disturbing chart below highlights, even an adjustment to 2.0% (the median FOMC expectation for December 2016) entails formidable adjustment of monetary policy once allowance is made for the tapering of QE. Given we now know that 'tapering is tightening' [8], the implicit rate hike from a reduction in QE will mean a 600bps tightening in financial conditions. Do you believe in miracles?
[9]
There is a wide variation of econometric estimates of the impact of LSAP, but one rule of thumb is that net purchases of $800bn have, very approximately, a similar impact on US GDP to a 100bp reduction in the fed funds rate.
This implies that the Fed’s cumulative LSAP (set to approach $3.0trn by Q1 2014) might be considered equivalent to lowering the fed funds target rate by 370bp. We have tried to represent this in terms of a negative equivalent fed funds rate in the chart above, which illustrates that a return to ‘normality’ in terms of the Fed’s balance sheet and reaching even a 2-2.5% fed funds rate would represent a formidable tightening of US monetary conditions.
Simply put - how do you think our easy-money [10], share-buying-back [11], leverage at all-time highs [12] corporations will cope with a 600bps rise in the cost of capital over the next three years?
Source: Barclays
Synchronize your Meta Trader folders
Elite Meta Sync synchronizes your files between MT4 installations as well as creating a backup in your My Documents folder.
Elite Meta Sync will sync your experts, indicators, dlls, libraries, and other files between all MT4 terminal installations.
This tool is offered free for Global Intel Hub members only. Do not share this tool or resell it. You may use it on as many computers as you wish.
Unzip, and install - it's fairly self explanatory, but a help file is included which can be accessed once the application is launched.
The Only Legal Way to Escape US Taxes Besides Death and Renunciation
Sep 18, 2013 - 09:37 PM GMT
By Nick Giambruno, Editor, International Man
When I hear about strategies that purport to legally allow US citizens to avoid having to pay income taxes, the first thing that usually comes to mind is that it is some sort of dodgy cockamamie scheme.
This is because the US government is no slouch when it comes to shaking down its citizens for every penny it can get away with. The mind-boggling spending on welfare and warfare policies necessitates this. It would be dangerously foolish in the extreme to think you could slip one past them.
There really was no sure way to legally escape the suffocating grip of US taxes besides death and renouncing your US citizenship… until recently.
Every other country in the world (besides the US and Eritrea) practices a system of residence-based taxation. This means that citizens are not liable for paying income taxes to their home country if they become a legal resident of another country and earn their income there.
Take, for example, an American expat and a Canadian expat who both live and earn income in Singapore. The Canadian would only be responsible for paying the much lower Singapore income taxes, while the American would be responsible for paying Singapore income taxes AND American income taxes (though the IRS does allow for around $100k of foreign earned income to be excluded from income taxes if certain conditions are met).
This is because the US taxes its citizens by virtue of their citizenship (citizenship-based taxation), regardless of where they live and earn their money. Even leaving the US permanently does not absolve you from paying US income taxes. Though Eritrea also practices citizenship-based taxation, it is an impoverished African country and has no ability to effectively enforce it. That's the key difference. The US government can effectively enforce its citizenship-based taxation policies thanks to its massive economic, political, and military weight and the fact that it does not recognize any limit to its jurisdiction (consider FATCA and Edward Snowden).
American expats are therefore in the uniquely unfavorable position of having arguably the worst tax policies and a government that can effectively enforce them. For many, it is a tight and suffocating tax leash. It is no wonder, then, that a record number of Americans gave up their citizenship last quarter to escape these onerous requirements. (You can find more about citizenship-based taxation versus residence-based taxation in this article.)
There is, however, another way besides death and renunciation to legally escape US income taxes, thanks to the Caribbean island of Puerto Rico.
Puerto Rico is an unincorporated territory (commonwealth) of the US, and this allows it to have a special tax arrangement. Namely, legal residents of Puerto Rico who earn their income in Puerto Rico do not pay US federal income taxes (though they still have to file a federal tax return).
All Puerto Ricans are already US citizens, and since it is a commonwealth of the US, Americans are generally free to stay on the island without restriction and do not even need a passport to travel there.
In order to obtain legal residency status in Puerto Rico and the associated tax benefits, one would have to be physically present on the island for at least 183 days a year.
While US citizens who become legal Puerto Rican residents do not have to pay US federal income taxes on income earned on the island, they still have to pay local Puerto Rican taxes. This only amounts to 4% in certain cases, a pittance in comparison to combined US federal, state, and sometimes city income taxes.
This low 4% rate only applies if the services are performed in Puerto Rico for clients outside of Puerto Rico—otherwise a local income tax of as much as 33% is applicable. For example, an investment manager based in Puerto Rico who performs services for US-based clients would be eligible for the lower income tax rate. Consult a tax expert to discuss individual cases and circumstances.
In addition, Puerto Rico recently slashed its taxes on dividends and interest to ZERO, and capital gains taxes to as low as zero (maximum of 10%).This is part of a recent program over the past year or so in which Puerto Rico has been promoting itself as a tax-friendly jurisdiction open to Americans, in order to compete with its better-known Caribbean neighbors like the Cayman Islands.
Taken together, Puerto Rico is an attractive destination for American companies and individuals who have portable incomes, such as software developers, writers, Internet businesses, and especially those dealing with investments, like hedge funds, in which the majority of the earnings are derived from investment income like dividends, interest, or capital gains.
Spending half the year in Puerto Rico, with its beautiful white sand beaches, Caribbean climate, and close proximity to the US is not a bad proposition.
In short, thanks to a system of citizenship-based taxation, becoming a legal resident of Puerto Rico is the only way for Americans to keep their US citizenship and legally avoid US federal income taxes.
There have been at least 40 Americans who have taken advantage of this special arrangement with Puerto Rico and moved there during the past year. Earlier this year billionaire hedge fund manager John Paulson was said to have been exploring this option. Check out the short clip below from Bloomberg about an American who has moved to Puerto Rico for exactly these reasons.
Of course, the US government could always pressure Puerto Rico to change its policies, but people in the know view that as unlikely.
For now, Puerto Rico and its special tax situation definitely deserve consideration for Americans.