Author Topic: Financial novice with questions regarding the simple math behind ER..  (Read 1187 times)

webface

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Hi,

I'm new to the MMM blog and the community, as well as basically the whole idea of early retirement. Looking at some of the math behind it im thinking that this is something i could actually do. I'm quite young at 25 and i've always been relatively good at saving up money, but im not good with finances other than that, or even maths.

At this point im looking at my options to see what the best course of action is in regards to saving. I live in Norway and the rules of taxation and several other things differ from in the US, but once the similar but different variables are known i think i can more accurately decide what's best. If anyone already has any specific knowledge on these differences i'd love to hear it.

Sums might look odd because of the value/exchange rates but i'll throw out some numbers, exchanged to USD:

- Annual take home income: 40k
- Starting portfolio after setting aside my emergency fund: 16k
- Estimate of annual spending: 25k (40% savings rate)

Income will almost certainly increase quite a bit over the years, but i dont feel like i need to spend any more. I've been looking at where this gets me with saving in index funds at the min rate of 5% returns after inflation, but i have to take into consideration higher taxes (not sure about the US levels):

- Capital gains tax of 25%. Will come into play at the age of retirement when realising gains i guess.
- Total assets tax that kick in at certain ranges, dont know the percentages but:

80% of 259.740 usd would be taxed 574 usd annually
80% of 389.610 usd would be taxed 1.678 usd annually
80% of 649.350 usd would be taxed 3.885 usd annually

This rate goes for all stock funds/accounts over a certain value. Bonds are taxed at 100% of the total fund/account, over this value. Other than these things i cant think of anything else, other than pay and the cost of living to a degree, that is very different from in the US. I dont think we have the equivalent of a Roth, IRA and those types of accounts, and no company matching - but the company you work for pays between 2 and 5 % of your annual salary to your official pension account for payouts after you turn 62 (im doing some research on the flexibility of these accounts).

Currently im selling my car and will only have a loan for the apartment that i share with my SO. Our mortgage interest rate is at around 2,2% with the total cost of the apartment at around 363k (we borrowed 75% from the bank).

Im trying to decide if i'm going to try and pay down this apartment asap, and then start investing in index funds with more money per month, or to go straight into index funds now and pay down the loan normally on the side. I'm quite risk averse so after around 3% inflation and the general risk (and the running 2,2% or potentially higher loan interest on the side) i'm not loving the idea of going the investment route first. But when i look at the potential for exponential growth i kinda get excited for it too.

Also, what happens to the money i invest in an index fund if a financial crisis strikes? At what point do you lose the money? Looking at the history it looks like that's a good time to power through and invest even harder for the upswing. Is that wrong?

Any advice at all would be appreciated. Pardon for my lack of knowledge in the field.

Edit: If anyone can say how these differences in taxation would affect the tables shown in MMM's article "The Shockingly Simple Math Behind Early Retirement" that would be awesome.
« Last Edit: January 30, 2018, 03:27:09 PM by webface »

K-ice

  • Pencil Stache
  • ****
  • Posts: 932
  • Location: Canada
Re: Financial novice with questions regarding the simple math behind ER..
« Reply #1 on: January 30, 2018, 10:22:31 PM »
Hi,

I'm new to the MMM blog and the community....

Im trying to decide if i'm going to try and pay down this apartment asap, and then start investing in index funds ...

Also, what happens to the money i invest in an index fund if a financial crisis strikes? At what point do you lose the money? Looking at the history it looks like that's a good time to power through and invest even harder for the upswing. Is that wrong?

Edit: If anyone can say how these differences in taxation would affect the tables shown in MMM's article "The Shockingly Simple Math Behind Early Retirement" that would be awesome.

Welcome, I canít answer everything but Iíll comment a bit so your questions get bumped.

Paying the mortgage vs investing is hotly debated around here. Historically/mathematically investing is better. But it depends on your risk tolerance & also maybe what your GF wants. My partner is adamant on paying the mortgage. So I match them & have very little left for investing. A good middle ground, many here agree on, is max out your countries retirement tax advantages programs then put any extra on the mortgage.

If the market completely collapses and you loose all your money their is probably an alien invasion. I think historical crashes are around 30, max 50%. (But I didnít google this, Japan was scary. ) Basically you answered your own question. The market should rebound & you should just keep investing. Itís scary as hell to loose money on paper but if you donít sell it itís not lost. Also, be cautious of individual stocks, those can go to zero. But I do not know of ETFs that go to zero.

Lastly, letís look at the math with high taxes. You need 25K to live, but your country deducts 50% (Iím not sure if this is true, worst case). So you actually need to pull out 50k a year to be left with 25K.

So 50K*25= 1.25M stash.

To really figure it out check your tax rate. This gets complicated because it depends where you saved the money. A regular account would tax only the gains, a tax deferred retirement account would tax it all, and finally a tax free account would tax none of it (the TFSA for me in Canada). 

I hope some of this helps. Hopefully a fellow Norwegian can fill in a few more blanks.


webface

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Financial novice with questions regarding the simple math behind ER..
« Reply #2 on: January 31, 2018, 03:17:26 AM »
Thanks for your input!

So i understand there's no simple answer. I still have to get my GF on board with this either way. If we go the mortgage downpayment route then i'll either match her payments and invest the rest. Or i will make some kind of legal deal and pay more to get it down faster and then start investing heavier after it's gone.

Norway is a high tax country, yes, but at the moment im taxed at around 35-40% of my salary - and im gonna find out exactly how much. It goes up to around 50% max (on pure income tax) i think, but you need to have quite a bit higher income than me to get there.

The annual take home income i listed is after tax (40k).

In your stash calculation you took 50K*25 . Isn't it supposed to be annual spending * 25? (to find stash requirement for 4%swr, if that's what you meant)

In that case it would be 25k*25 = 625k. That's still a lot, but absolutely in the realm of possibility.. What i'm most worried about is how the norwegian CGT rate of 25% will effect the % SWR when it comes to withdrawals in retirement. The total stash needed would probably just have to be higher than if i were in the US, but by what factor i dont know.

RichMoose

  • Pencil Stache
  • ****
  • Posts: 969
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Financial novice with questions regarding the simple math behind ER..
« Reply #3 on: January 31, 2018, 09:12:19 AM »
The annual take home income i listed is after tax (40k).

In your stash calculation you took 50K*25 . Isn't it supposed to be annual spending * 25? (to find stash requirement for 4%swr, if that's what you meant)

In that case it would be 25k*25 = 625k. That's still a lot, but absolutely in the realm of possibility.. What i'm most worried about is how the norwegian CGT rate of 25% will effect the % SWR when it comes to withdrawals in retirement. The total stash needed would probably just have to be higher than if i were in the US, but by what factor i dont know.
Taxes are an expense. So while your personal spending might be NOK200,000, once you pay the taxes on the money you need you must adjust that up. (NOK200,000/0.75)= NOK$270,000 * 25 = ~NOK6.75 million or converted $875,000.
That extra $250,000 you need is for the tax liability only.

webface

  • 5 O'Clock Shadow
  • *
  • Posts: 5
Re: Financial novice with questions regarding the simple math behind ER..
« Reply #4 on: January 31, 2018, 10:00:06 AM »
That's exactly what i was looking for, and it was a lot simpler than i thought.. Thank you guys!