You can’t buy avocado toast with VTSAX (Why cash flow is king)

by The Darwinian Doctor

In today’s post, I’ll outline reasons why cash flow investments may be better than stocks like VTSAX for supporting financial independence in high cost of living areas.  

What is it about avocado toast?

Mmm… Millenial catnip

There’s just something magical about the combination of velvety avocado and crunchy toast, #AmIRight?  Add on a squirt of EVOO and a little sea salt, and you’re in business.

The problem with avocado toast is that it’s incredibly expensive for what it is.  Especially in Los Angeles, where that picturesque pile of goodness will run you anywhere from $10-20 a pop. 

This high price tag has made avocado toast the poster child for everything that’s wrong with cities and Millennials today. 

Why is this tasty treat so darn expensive? There’s a lot of reasons, but the high taxes and property values here are a big factor.  The kitchen worker who is putting together your avocado toast is also paying high rent and gas prices. She also needs to make a living wage. That translates into higher prices for everything from movie tickets to yes, avocado toast.  

The traditional road to financial independence

There’s not much room for avocado toast in the traditional road to financial independence (FI). This traditional journey has been illustrated very well by FI pioneers like Mr. Money Mustache.  It consists of just a few simple steps:

  1. Realize that working 9-5 until traditional retirement age is bogus. 
  2. Cut living costs to the bare minimum
  3. Save 25x your living expenses in investments
  4. Tell your boss that you quit.  
  5. Live a financially independent life of personal discovery and enlightenment

This traditional journey often ends with the FIRE seeker moving to a part of the US with a much lower cost of living.  

OK, so north Lake Tahoe probably isn’t the cheapest place to retire. But to compensate, they often set the thermostat to a frigid 55 degrees Fahrenheit in the winter.   


As I’ve discussed before, the Dr-ess and I are going to try to achieve moFIRE (morbidly obese FIRE) while staying put in expensive Los Angeles. 

The traditional path to financial independence needs to be tweaked for high cost of living areas.  

In our 15 year plan to financial independence, you’ll notice two things:

  1. Our annual expenditures are high (~$250k)
  2. Therefore our “FIRE number” is very, very high ($6.35 million)

These two factors change the traditional path to FI. If our planned expenditures are going to be similar in “retirement,” we can expect a much higher tax burden than most. Also, we need to accumulate a truly massive nest egg.

You can’t buy avocado toast with VTSAX

This brings me back to the title of this section:  You can’t buy avocado toast with VTSAX (Vanguard total stock market index mutual fund).

When I say this, I mean that there is always a cost to access investments. 

Obviously you could cash out shares of VTSAX and then use that money to buy breakfast.  

But how much does it cost to access your VTSAX?

I ran into this issue when I was considering pulling money out of the market to fund a real estate purchase. 

Although I was funding one investment for another, I still paused because the shares I was eyeing had appreciated about 15% over the last 6 months.   Since it was going to be short term capital gains, I was looking at almost a 50% tax bill on the appreciation (37% federal, 10% state).

I still ended up pulling out the money because I realized that I was still coming out ahead. But the thought of the tax bill still stung.

The paradox of stock investing

This is the paradox of stock or index fund investing.  The more the asset has appreciated, the more it hurts to convert it to cash.  This is true now if you’re moving assets out of a taxable account, and also later if you’re pulling assets out of a tax deferred retirement account.   

So the purpose of this cheekily titled post is to remind you that even in retirement, you’ll need access to cash on a daily basis. If you’re relying on your taxable  stock or mutual funds portfolio alone, there will be taxes when you access these funds. The more avocado toast you plan to eat (and the more money you withdraw) the higher these taxes will be. 

At a moFIRE level of planned spending (>$200k/year), I might be facing a 25% haircut on the appreciation of my index funds when I cash them out.  With retirement funds, this appreciation will (hopefully) be a lot over time, so accounting for these taxes means I may need to put even more away in advance.

What about the Roth IRA?

You’re absolutely right, good point!  Roth IRA money is taxed going in, so withdrawing this money as a qualified distribution won’t incur taxes, no matter how much appreciation it has had. But for your average high earner, there’s a hard limit to the money that can be put away into a Roth IRA ($6000 via the backdoor Roth IRA route in 2019).  

Cash flow is king

And now for the alternative.

I’d argue that for anyone who wants to become financially independent, cash flow is king.  

Every  dollar of cash flow, especially if tax protected, is $25 less that needs to be saved in portfolio investments.  (This is from the 4% rule from the Trinity study.) This applies to cash flow generated from a business, from dividend producing stocks, a pension, or from rental property income. 

And bonus:  cash that flows into your bank account every month can be used to buy avocado toast! Score!


So I’d argue that if you want to achieve financial independence and eat avocado toast forever, generating perpetual streams of cash flow is the way to do it.  Tax protected cash flow is even better.

This can eliminate the monetary and psychological burden of cashing out appreciated index funds like VTSAX. It can also decrease the amount of money that you need to stash away to hit your FIRE number.

My chosen tax-protected cash flow vehicle (for now) is rental real estate investing.  

On that subject, you may be waiting for my rental property projections. 

Well so am I! It’s been about 2 weeks since I purchased the property, and it’s still not rented out yet.  I’m getting antsy, but am trying to be patient. As soon as I’ve got it rented, I’ll release the details of my expected returns. 

Until then, I’m amusing myself with a 25 year projection of a hypothetical taxable stock portfolio compared to a hypothetical real estate fiefdom of 9 rental properties.  That’ll be the topic of my next post.  

Until then!


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4 years ago

I personally have been tilting my portfolio towards real estate (private syndication) to obtain these passive income streams which have a far more favorable tax rate than earned income.

The dividend rate for VTSAZX is around 2% so you would need quite a stockpile of stocks if you wanted to live off dividend income alone and avoid the capital gains taxes. Of course if you hold your asset for longer than 1 yr you get a little more favorable long term capital gains than the short term rate you had endured.

3 years ago

Any thoughts about REIT?

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