Fire in Europe: Which portfolio composition?

[algospider]

Hello,

I am 30y from Austria, Vienna and we are a family of three.(wife + 1 kid) We net around 90k per year and our saving rate is 70 - 80% per month. We own a house and are basically searching for a way to become independent.

Ad 4%
I read a lot in the forum that 4% is a SWR and you can basically live forever with that money. Also I read that basically making 4% from capital markets seems to be "easily" doable. However, how can you achieve such returns in europe. In Austria we have capital gain tax 27,5%? What's your portfolio composition?

Future Investment
If we project our current income 10-12 years in the future, we basically are going to earn 1 Million over time. How would you setup a portfolio that basically can support my family and so that we have the option to retire early?

I really appreciate your relies!

[ertyu]

You need the bogleheads forum for this one. It's much larger and there are many more people who know about the particulars of what's best to do in every EU country - tax regulations etc. are often not the same.

[Andy Dufresne]

Go to Bogleheads, as suggested.

The short answer is you can probably retire in 12 years on 1 mil assuming your spending level remains the same.

You spend say 30% of your 90K net, or 27K per year (this excludes rent as you own a house).

4% rule is likely a bit optimistic given negative EU interest rates, with 3.5% more realistic, and 3% safer. 27K/3% = 900K, so you (in theory) should be fine (esp. if you have home equity to fall back on).

However, you may have more kids, you employment status can change (for better or worse) and you have no clue how your expenses will change in FIRE ... so the best thing is to reduce spending and increase savings, do so for a few more years and likely do the math when you are 2-3 years before the plan makes sense.

[algospider]

Thx for your reply!

What might be a good portfolio composition? I am wondering how to get this return as cash in my wallet? Are dividend stocks the right way to do it or is it better to invest in an ETF and take yearly a portion out of the money?

I really appreciate your help!

[Bankai]

There are very many ways to do this, but if you're just starting out and have another decade of work ahead of you, going all in stocks to maximise return makes most sense. Some time before retirement and once your stash has decent size, you might want to start adding more defensive assets like bonds. But there's no point doing it early as you have good income coming in and equity drawdows are good for you while accumulating because you'd be buying when equites are cheaper. Assuming equal taxes on dividends & capital gains, there's no rational reason to prefer dividends over total return (although many people do because they "don't want to touch principal"). Also while accumulating you'd be re-investing dividends anyway. But your main consideration here should be taxes. Are there any tax-advantaged accounts in Austria you can shield your investments in?

[Andy Dufresne]

Thx for your reply!

What might be a good portfolio composition? I am wondering how to get this return as cash in my wallet? Are dividend stocks the right way to do it or is it better to invest in an ETF and take yearly a portion out of the money?

I really appreciate your help!

Depends on your specific tax situation. In my previous note I neglected to discuss is, but it is important as tax rates are higher in Europe in general. Also, some countries treat short term / long term capital gains differently from dividends or interest (on bonds), so you need to figure out what is applicable to you and do the math on a net basis (post tax). This also means you will likely need more than 900K EUR (unless your country allows you very low or zero tax if all you earn is a low amount on interest/dividends).

IIRC, the Bogleheads website has EU/country specific threads which can be more helpful.

[MegaRigger]

For people in Belgium it's very interesting to invest in capitalizing ETFS or companies that are known not to pay dividends. Why? Because there is no capital gains tax if you're not a professional investor. And there is a 30% tax on dividends. Go figure the difference on 20 years of reinvesting dividends.

[Qazwer]

The safe withdrawal rate of 4% is based on a balanced US centric investments. It does not include taxes
https://retirementresearcher.com/4-rule ... und-world/

There are specific tax issues that can relate to different countries portfolios. Bogleheads wiki can be a good place to learn about them.

Dividend stocks can be useful for tax purposes, but most people have shifted to thinking about total return (just sell shares when you need to). There may be ways of potentially doing better than the market but the vast majority of people do better simply investing in broad based index funds.

The 4% SWR initially came from a study in the 1990’s looking at a 60% broad based index and 40% bonds. It was US centric so you will have to adapt that. It was written as a critique of the then common assumption that if stocks average 8% then you can withdrawal 8% a year. The problem with that is every year you have constant withdrawals but stocks give variable returns. So the SWR is lower than the average returns

https://www.retailinvestor.org/pdf/Bengen1.pdf

[nomadscientist]

In countries with high and "flat" investment taxes, the maths is pretty simple: a 3.5% SWR becomes a ~2.5% SWR (at 27.5%) as you need to pay the taxes with investment returns as well as living costs*.

Being subject to countries with high taxes on capital gains makes FIRE less interesting. The return is less for the same costs. The US has an interesting tax situation in which total taxation on most people is not particularly low (even by EU standards) but up to upper middle class lifestyle can be supported if living on capital while paying ~zero taxes assuming one doesn't also have wage income. This situation if usually taken for granted in FIRE writing because most of the audience is in the US, but shouldn't be considered normal globally.

If you want advice on tax optimisation for a weird situation in Austria (FIRE is weird especially in German-speaking Europe), you should 1. consult German-language specialist websites and/or 2. hire an Austrian accountant or tax planner.

Your other options would be to save more money or leave Austria.

Your question about maximising investment returns is really unrelated -

"I read a lot in the forum that 4% is a SWR and you can basically live forever with that money. Also I read that basically making 4% from capital markets seems to be "easily" doable. However, how can you achieve such returns in europe. In Austria we have capital gain tax 27,5%? What's your portfolio composition?"

- of course everyone is trying to maximise (risk-constrained) investment returns regardless of whether they need to pay more taxes or could just save less or spend more money with the higher returns.

In the long run getting 4% from diversified equity investments is easy in the sense that equity investments have returned more than that over the long run in most countries for as long as equity markets have existed. The safe withdrawal rate is lower (and lower than 4%) mainly because you cannot predict whether equity markets will underperform in the early years of your retirement*.

In other words, this is a question about Austrian law/your preference to continue to live in Austria rather than portfolio composition. No one but you can answer whether you would be willing to change jurisdiction. No one on an English-language forum is likely to be able to do Austrian tax planning for you.






*strictly speaking, sequence of return risk and taxes should interact favorably whereby you pay less (or no) capital gains tax in years where you are withdrawing from your portfolio when it is down; I've never seen anyone try to model the size of this effect though

[NuncFluens]

Ad 4%
I read a lot in the forum that 4% is a SWR and you can basically live forever with that money. Also I read that basically making 4% from capital markets seems to be "easily" doable. However, how can you achieve such returns in europe. In Austria we have capital gain tax 27,5%? What's your portfolio composition?

I'm a bit late to the party, but this topic might come up in searches, so I'll add what little I can.

In Germany at least, you can get around capital gains tax by withdrawing once you earn less. You'd request a "Günstigerprüfung", so they'd use your personal tax rate ("Grenzsteuersatz", I think) to tax capital gains, if and only if that would be more favorable for you. If you earn up to ~9.700€* a year from capital gains it's completely tax free, with the progression starting for anything above that threshold. But even with 15.000€ in capital gains a "Günstigerprüfung" would still reduce the capital gains tax.

*might be double that for a married couple (+ more with children?).

Edit: Apparently it's called "Regelbesteuerungsoption" in Austria and the threshold is at ~11.000€