Investment Strategy Problem

Fabian · Post by **Fabian** » Thu Jul 29, 2010 8:03 am

Hi all,
I want ERE or at least ER as I am already 35 and have almost zero in the bank.
Now, if I want to retire on 1.000 € per month I need 300.000 €. I therefore need to save almost 2.000 € monthly (to retire at 45) and get 6% interest out of it (I also calculated in taxes I need to pay on interest). Here in Germany we earn 1.500 € monthly on average so saving 2.000 € per month is a big big goal.
On the other hand I could put my savings in something like a 401k. It's a kind of retirement account. You don't have to pay taxes on interest while you're saving. Also, the money you save is tax-deductable. These advantages make this the best investment strategy from an economical point of view. The problem is you can't earn money with it. You get monthly payments out of it when you are minimum 60 years old. So with this strategy no ER is possible.
I don't know what to do. Any ideas are welcome!
Fabian

Post by **jacob** » Thu Jul 29, 2010 8:10 am

Split savings into two accounts. A taxable one to carry you from ER to age 60, and a tax-advantaged one to carry you from 60 and onwards.

Steve Austin · Post by **Steve Austin** » Thu Jul 29, 2010 11:02 am

Fabian, what are your approx./est. income tax rates, in year 2010, year 2035, and somewhere in between, say year 2025? (try to account for whether you'll move or not)? Is there any difference between your income tax rate and a capital gain/dividend tax rate im Deutschland?

Fabian · Post by **Fabian** » Thu Jul 29, 2010 11:41 am

Steve, in Germany for any capital gains above 800€/year you pay 26,375% taxes. If I put that money in my 401k-like account I don't pay those taxes but will pay income tax on the monthly payments when I am 60...
Income tax is/will be in the range of about 22%-30%.
Fabian

George the original one · Thu Jul 29, 2010 6:27 pm

Fabian - I think you'll find that if the tax rates are similar, then it doesn't much matter whether they're paid initially or deferred.
Tinkering with Firecalc, it seems that having $250k in the taxable account and $100k in the deferred account at age 45 should span the gap safely.

Fabian · Post by **Fabian** » Fri Jul 30, 2010 6:27 am

No, George, it's not that way. As I wrote earlier, I can deduct 70% of my payments off my taxes. And this goes up every year by 2%. So next year 72% and 74% the year after and so on. It's hard to beat this advantage with the stock market.

George the original one · Fri Jul 30, 2010 5:14 pm

Ah, yes, I understand now!

Matthew · Post by **Matthew** » Sat Jul 31, 2010 4:29 pm

In America, I think once you leave work you have the option to roll over a 401k into an IRA, then we can file a 72t, which allows us to withdrawl early, but you are required to continue equal withdrawls until you are 60. Can you research if you have this type of option in Germany? Otherwise, I would keep most invested outside of the retirement plan except for any amount that might be matched by your job. Retirement accounts create attractive incentives to save but also hinder many people from ever retiring early. The government always has the power to change the rules, so even if there is a loop hole out, it might not be there when you plan to use it. Forcing you to take the penalty, which might not be advantageous unless you are in very high tax brackets.