Influencing factors of the best country to accumulate FI money and RE?

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wolf
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Influencing factors of the best country to accumulate FI money and RE?

Post by wolf »

I have searched and found these topics
viewtopic.php?f=14&t=6849&hilit=country
viewtopic.php?f=14&t=5121&hilit=country
viewtopic.php?f=14&t=1299&start=250

Unfortunately they don't cover what I am thinking about. Still, I hope there is not another thread covering my questions.

I question myself about the influencing factors in order to select the best country to accumulate FI money and RE there. Of course this is hypothetical and theoretical, but I wanted to find factors which influences if a country is more suited or not. With "best country" I mean the shortest time to accumulate FI, the fastest track to FI and RE.

I guess there have to be some assumption. I see the following:
- the person has the same ERE skills, wisdom and competencies
- the quality of the lifestyle is the same in each country (e.g. housing, food, etc.)
- the person accumulates money and will retire in the same country
- the person is FI, when the passive income cashflow covers the cost
- the person has the same expectations toward nature, ...
- maybe more in order to have a concrete discussion...

My first guess is that taxes matters (income and VAT) and the net income in relation to cost of living (local purchasing power), in order to have a high Savings Rate. Is it that easy? I think not. I am interested in your ideas. Maybe you have thought about this question also?

I try to find objective reasons. Because in a "Introducing topic" someone said that he or she is living in Singapore and I answered intuitionally that this is "not the best country to FIRE/ERE". I judged subjectively without thinking about it carefully. So I wonder about more objective influencing factors. Maybe you have more ideas about this.

Eureka
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by Eureka »

I guess you are too hypothetical. What do you mean by same expectations towards nature? Even in the same country you will have a huge variety of nature and your surrounding nature and the climate zone might be a very decisive factor.

Pick a tropical lonely island somewhere with fertile soil and lots of varied vegetation including lots of edible plants. Then you can basically ERE from day one. The abundant nature wil provide you with all you need.

In such a climate you only need a very basic shelter and simple clothes and you can get your food by foraging - and eventually some basic fishing and hunting. Lots of room to develop and apply lots of varied skills and if you bring books and other stuff for study, you may also keep yourself busy intellectually.

bryan
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by bryan »

Yeah, I was hoping to start some discussion in that thread but not much happened. Mostly my own fault for not seeding the conversation enough, to be sure. Maybe I'm the sort of OP @Fish doesn't like (see Forum Posting Ethics thread).

It sounds like you want predominately financial considerations? That should be simpler than what I was trying for in my thread. You may have better luck over at the /r/financialindependence?

Financial securityis something that EREers shouldn't have to worry about for very long; it may be better to think of other factors than tax rates etc. For me I would probably just try travelling around a bit and finding forums having nothing to do with personal finances, to get an idea. Maybe narrow your choices by applying some "most important criteria." I admit I don't toe the line for criteria in the "ERE cities" discussion.

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Seppia
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by Seppia »

I maybe don't understand the question but I'll try provide some random input:

- From a strict "financial optimization" standpoint, the optimal solution is clearly to accumulate in an expensive/high net salary place (NYC, Zurich, etc) and retire in a nice, but lower cost place (Central America, Italy, Spain, Thailand etc).

- assuming you really want to do it all in the same country, I would guess any civilized democracy can do, but if I had to pick one I'd still pick the USA, because you can basically apply the strategy from the above point just moving across states.

- your assumptions about "same life quality in any country" seem completely detached from reality. Quality of weather and available food would be among the main differentiating qualities I would consider. Good luck finding the same quality of food in Siberia and Spain for example.

- taxes per se don't really matter, it's the value you get in return from them that does. France has higher taxes vs the USA, but you get excellent, free healthcare in return.

Bottom line, I'm obviously biased by my life experience, but I think getting FI in a low tax, high salary place is best, then to RE I would move to a place with good and cheap healthcare, good weather, good food, solid culture and low cost of living.

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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by jacob »

There seems to be a presumption of wide and free choice of country. Yet, the availability of work visas and residence permits generally require either a professional job, lots of money, or breaking the local laws. So the exercise seems rather too academic?!?

Or what am I missing here?

Fish
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by Fish »

@myself - Way to go Fish! I see I’ve alienated most of the forum with that thread. :? :lol: #TimeForANewAccount

@jacob - My impression is OP wants a “difficulty of FI/RE” index that can correct for differences in income, taxes, cost of living, investment options, etc. That is, if it takes X years to reach FIRE in country A, one can use the index to estimate that how long it should take in country B, all else equal.

wolf
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by wolf »

@fish: You get to the point what I am wondering about.

That would not be something that changes my plans, but I am only curious about it. It is hypothetical and acadamic, because there are many restrictions and consumptions. I wanted to try to find out when someone can say that a country is optimal or suboptimal for FIRE (in combination with ERE). Another thought would be when a country/region/city is optimal for using ERE skills..,For this question I will have a look in the above linked threads. Still, I have learned some new aspects and answers to my original question. And thank you for your tips. Although my nickname and this thread indicates that FIRE is on my head, I can say that with almost the same degree I strive for ERE. :roll:

Fish
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by Fish »

Here's something simple to get us started. Remember, it takes a model to beat a model :P

I submit that the relevant parameter for comparison is how many years of expenses can be saved on average, per year of work. For this first attempt, I'll only consider income, taxes and cost of living. We'll start with an equation for saving which is whatever is left over from income after paying taxes and expenses.

(Eq. 1) Savings = Income - Taxes - Expenses

Divide both sides by cost of living (expenses) to normalize the savings.

(Eq. 2) Savings/Expenses = (Income - Taxes)/Expenses - 1

Before proceeding further we need to define the terms on the RHS of the equation.
  • Income refers to earned income. I find it is easiest to ignore unearned income, but something like a basic income could be highly relevant, and if it exists could be subtracted from expenses on a post-tax basis.
  • For taxes, we'll use a very basic distinction of an income tax (proportional to income) and a consumption tax (e.g. sales tax, VAT) that is proportional to expenses. In the savings equation, only income tax is included in the "taxes" term while consumption taxes are lumped with expenses. I haven't thought of how to account for wealth taxes yet.
  • Expenses is all out-of-pocket spending, including consumption taxes as mentioned above.
Since the income tax is usually expressed as a percentage of income, we can substitute Taxes = (Tax Rate * Income) into eq. 2. With minimal simplification this becomes:

(Eq. 3) Savings/Expenses = (Income * (1 - Tax Rate))/Expenses - 1

What we want to compare is the (Savings/Expenses) ratio between two different countries/living situations/etc. For example, someone in the USA with a pre-tax income of $50,000/year, tax rate of 16% and expenses of $7,000/year would have a Savings/Expenses ratio of (50,000*0.84)/7,000 - 1 = 5.

Now I'm going to use the data on this page (only because it was the top google result):
https://en.wikipedia.org/wiki/List_of_E ... erage_wage

At the time of writing, I see Germany has an average monthly gross wage of 3,703 EUR and a net wage of 2,270 EUR, implying a tax rate of about 39%. By contrast, France has an average monthly gross wage of 2,927 EUR and average net wage of 2,225 EUR (average tax rate of 24% on income). If we assume that one can live on annual expenses of 6,000 EUR = 7,000 USD (Jacob's constant), we can calculate Savings/Expense ratios as following (note the multiply-by-12 on income to make it per annum):

Savings/Expenses (Germany) = 12*(3,703 * (1-0.39))/6,000 - 1 = 3.52
Savings/Expenses (France) = 12*(2,927 * (1-0.24))/6,000 - 1 = 3.45

The similar result is expected because the net wages are nearly identical despite the different tax rates.

wolf
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by wolf »

That's great fish! The model and equation look fine.

If I understand correctly by the examples USA is better suited from a financial view (income, tax, expense) than Germany or France.

I can add something. There are maybe country specific aspects to consider, but please feel not offended, because you can't know the specifics e.g. for Germany. I also do not know the specifics for France or USA.

e.g. in Germany you have
1. average monthly gross wage of 3,703 EUR
2. and a net wage of 2,270 EUR
That doesn't mean that the income tax is 39%, because with the difference health insurance, unemployment insurance, care/nursing insurance, and pension are paid also together with income taxes.

I used a typical calculator in the internet and it looks like that:
- gross wage 3,703 EUR
- income tax 707 EUR,
- pension 346 EUR,
- unemployment insureance 56 EUR,
- health insurance 311 EUR,
- care insurance 56
-> net wage 2,227 EUR (I don't know why the two numbers differ btw. wikipedia and the calculator, but I think that the calculator is more precise and correct in this special case) The problem with a calculator is that you have to define if there are kids, which tax category you have, etc.

I guess, this makes things not easier, but we do know more about comparisons between countries.

Is this (that the difference between gross and net is not only income tax) also relevant for the US?

How can we put this into the equation? Maybe like this

(Eq. 4) Savings/Expenses = (Income * (1 - Only Income Tax Rate))/Expenses - 1

I guess this is a point where one have to decide if more effort is worth it, because it could probably end in a hypertheoretical equation in a academic sense (as said before) that will likely has not much practical use. Still, it would be great to have a index :-) I guess I am a "index" nerd and think about those type of things. :?

Fish
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by Fish »

That USA "example" was made-up data intended to show how to plug numbers into the formula. And thanks for pointing out that I don't understand taxation in Germany, because I don't.
MDFIRE2024 wrote:
Fri Nov 10, 2017 2:05 pm
Is this (that the difference between gross and net is not only income tax) also relevant for the US?
Yes, in the US we also have taxes for pensions, healthcare, and sometimes unemployment and disability insurance. Combined with income tax, these payroll taxes constitute a transfer of wealth from the working population. From a strict mathematical perspective, payroll taxes of any kind are an impediment to financial independence. (Though as Seppia might point out, high taxes are not such a bad thing if it results in a high quality of life.) So to clarify, what I referred to as "income tax" earlier should more broadly encompass all payroll taxes that are imposed on earned income. The idea is for income * (1 - tax rate) to reflect disposable income, because DI is the relevant income parameter for financial independence.

On another note, using Jacob's constant=7,000 USD/year for expenses (regardless of location) somewhat defeats the exercise because it reduces the index to simply maximizing income and minimizing taxes. On the other hand, it does seem to be a reasonable expense floor that can be attained with sufficient determination and creativity. Does anyone have thoughts on the cost of living aspect?

wolf
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FI achievability index (DRAFT)

Post by wolf »

I created a draft of a index, based on equation 3 from fish.
S/E stands for Savings/Expenses. The higher the better.
y2FI stands for years to FI (25x annual expenses saved)
Gross income and net income are based on country average data from wikipedia. So it represents an average (person).
In order to normalize Cost of Living per country I used data from numbeo. They have a index for Cost of Living plus Rent/Mortgage per country, normalized to New York City.
Expenses is 7000$ p.a.
Exchange rate is 1 USD=0.857 EUR
I created a Google Table, where all data is stored and calculated. It would be great if you verify the correct use of data and the equation. Please give me feedback about errors, misunderstandings, wrong data, more ideas to optimize.
In order to start a draft of a index, I neglected the fact about that "payroll tax" includes other things as health insurance... (as discussed earlier.) I know this is not good and can/must be optimized.
Currently only European countries and USA are considered.

Everyone who is interested to see the whole table, you can visit it here. Google Table

S/E y2FI Country
4,8 5,2 Denmark
4,8 5,3 Sweden
4,4 5,7 Finland
4,3 5,8 Cyprus
4,3 5,8 Germany
4,3 5,8 Switzerland
4,3 5,9 Luxembourg
4,2 5,9 Norway
4,1 6,2 Spain
3,8 6,5 France
3,6 7,0 Ireland
3,4 7,3 Netherlands
3,3 7,5 Iceland
3,3 7,6 Austria
3,1 8,0 Italy
3,0 8,2 United Kingdom
3,0 8,3 Belgium
2,5 10,2 USA
2,4 10,6 Slovenia
2,3 10,7 Estonia
2,2 11,6 Czech Republic
2,0 12,6 Poland
2,0 12,7 Greece
1,9 13,4 Croatia
1,7 14,7 Portugal
1,5 16,4 Hungary
1,5 16,4 Slovakia
1,5 16,7 Latvia
1,5 16,7 Kosovo
1,5 16,9 Romania
1,3 19,4 Lithuania
1,3 19,9 Bosnia
1,2 21,0 Montenegro
1,2 21,6 Macedonia
1,1 23,7 Serbia
1,0 25,2 Bulgaria
0,8 29,7 Albania
0,8 31,5 Russia
0,6 41,1 Belarus
0,2 146,6 Moldova
0,1 366,7 Ukraine

Smashter
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by Smashter »

I'm assuming this means it's impossible to retire in the Ukraine, which sounds right. My company is run by a Ukranian. When a co-worker and I asked him about 401k's he looked at us like we had three heads, told a story about how his father drove a forklift his whole life and died at 63, and then asked what kind of vodka we wanted him to bring us from Kiev next time he visits.

Also, he would be very happy to see Ukraine included in a list that is supposed to only encompass "European countries and USA" :)

Sorry for the diversion, carry on with the math.

Fish
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by Fish »

The US monthly wage of $2,592 (2,127 EUR) is not comparable to the $4,356 (3,703 EUR) for Germany. Let's dig into the primary sources. The German data is an average for full-time workers, while the US data (Table A-4 on that page) is a median for all workers. The right side of Table A-4 is for full-time workers which is more comparable to the German data. Accounting for the relative incidence of male and female workers, I propose a value of ((64990*51640)+(48345*41554))/(64990+48345) = $47,338 annually, or $3,944 monthly (final value for your table: 3,353 EUR). I'm also going to point out the inconsistency of comparing a US median wage with a German average wage. The median and average are likely to be different due to income inequality. But I don't have anything better to offer, so let's move on.

In the US, a single person with no dependents earning $47,338 would pay a total of $8,704 in taxes for an effective tax rate of 18.3%. Of this, $5,083 is for federal income tax based on a taxable income of ($47,338 - $6,300 - $4,050) = $36,988. Another $3,621 would be for Social Security and Medicare. No state income tax is included (consistent with the methodology in your reference 2), though including it could be a further improvement.

The next area of contention is applying the NYC cost of living index of 100 to the entire US. In your reference 4, you can see that the US is assigned a COL index of 77.23, which is comparable to the 73.18 for Germany.

So with these refinements, let's compare the US and Germany:

US = (47,338 USD * (1 - 0.183))/(7,000 USD) - 1 = 4.5
Germany = (12*3,703 EUR * (1 - 0.39))/((7,000 USD * (0.85 EUR/USD) * (73.18/77.23)) - 1 = (27,106/5,637) - 1 = 3.8

Edited to add: I suggest leaving out the "years to FI" column when posting the results in the forum. It's hard to read more than 1 column of numbers in a text-only format unless it's part of a code block (which has its own issues since code blocks do not display well on smartphones).

wolf
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S/E-Index v2

Post by wolf »

I tried to verify my data with other data sources. I found the OECD statistics quite useful. They have "Household net adjusted disposable income" in USD for 2016. http://stats.oecd.org/Index.aspx?DataSetCode=BLI So I changed it.

I use the "household net adjusted disposable income" in order to calculate possible savings per year in USD. (maybe this is not comparable whith 7000$ expenses per year per Person)

The "Cost of Living plus Rent" per Country is normalized to USA with numbeo.com data.

Here is the new dataset. S/E-Index v2 It also includes a rough number for "Years to FI"

S/E = Savings vs. Expenses (based on Equation 3). The Higher the better.

I created a Google Table, where all data is stored and calculated. It would be great if you verify the correct use of data and the equation. Please give me feedback about errors, misunderstandings, wrong data, more ideas to optimize.

In order to start a draft of a index, I neglected the fact about that "payroll tax" includes other things as health insurance... (as discussed earlier.) I know this is not good and can/must be optimized.

S/E Country
4,9 United States
4,3 Germany
4,0 Poland
4,0 Austria
3,9 Canada
3,9 Czech Republic
3,8 Luxembourg
3,6 Mexico
3,6 Slovak Republic
3,6 France
3,6 Russia
3,5 Spain
3,5 Portugal
3,3 Sweden
3,3 Slovenia
3,3 Australia
3,3 Finland
3,2 Hungary
3,2 Belgium
3,2 Italy
3,2 Greece
3,0 United Kingdom
3,0 Netherlands
3,0 Turkey
2,9 Estonia
2,9 Japan
2,6 Chile
2,6 Norway
2,5 Latvia
2,4 Denmark
2,2 New Zealand
2,1 Korea
2,1 Switzerland
2,0 Ireland
2,0 Israel
1,8 Brazil
1,5 Iceland
1,3 South Africa

henrik
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by henrik »

Denmark really took a dive there, didn't it...
I guess it illustrates the degree of sensitivity the model has to the input data set chosen.

henrik
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by henrik »

Some other influencing factors to consider (all of which are probably quite hard to find reliable data for):
- percentage of income that can (legally) be sheltered from taxes for retirement
- inflation
- housing costs (prices, rents) relative to income

wolf
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by wolf »

Ok. Now I compare only data from year 2016. So it is more consistent, because before Income was from 2016 and CoL Index was from 2017.
If anyone is interested this is the v3.
S/E-Index v3

Fish
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by Fish »

@MDFIRE - Two issues with using household income: 1) not everyone works full-time, 2) expenses need to be adjusted for the number of income earners in the household. I'm not sure this is what we really want. I recommend using a single full-time worker with no dependents as the basis for comparison. Thanks for taking the time to compile all of the data! I certainly find this interesting.


@henrik - Including availability of tax-advantaged retirement savings is a good idea, however that would be a lot of research. Continuing on my US example from last post, assume this single worker earning $47,338/year is also contributing $18,000 to a 401k and $5,500 to a traditional IRA, both on a pre-tax or deductible basis. This reduces taxable income to ($47,338 - $6,300 - $4,050 - $18,000 - $5,500) = $13,488, and federal income tax drops to $1,558. Combined with the $3,621 SS/Medicare tax, that is an effective tax rate of 10.9% (down from 18.3%). And furthermore, in retirement those tax-deferred monies can be withdrawn at a tax rate of 0% through 72t or Roth conversions, because low expenses translates into low withdrawals/income.

Recalculating, US then becomes: ($47,338 * (1 - 0.109))/$7,000 - 1 = 5.0 (previously 4.5)

I was a little surprised that including the effects of retirement accounts only resulted in a ~10% improvement on the S/E score, but that's because taxes in the US are already relatively low. I wonder what difference it makes for a high tax country. But stepping back and looking at the bigger picture, additional precision doesn't add a whole lot of value. The specific values of the numbers themselves are somewhat meaningless due to differences between personal situation and the baseline assumptions. It's the relative values (between countries) that are useful. Even the 1st iteration of the S/E table already gives a reasonably good indication of which countries are more favorable for attaining FI.

jacob
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by jacob »

Suggestion, instead of using $7000 everywhere, use the poverty line spending for a given country. It's a rough indicator for when quality-of-living fails for someone with no financial/frugal/DIY/etc. skills in that country. Thus, how easy FIRE is w/o applying any personal effort to learn any frugality skills or doing any deliberate web-of-goal designs.

My google-fu failed in finding a list, so you're on your own. Maybe nationmaster.com?

PS: Instead of given the list in S/E, maybe list in the standard savings rate %, that is, S/(I-T).

Fish
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Re: Influencing factors of the best country to accumulate FI money and RE?

Post by Fish »

http://www.thepovertyline.net

Where data is unavailable you could also use the World Bank’s latest guidelines for poverty, which is purchasing power parity (in 2011 USD) of:

$1.90/day for low income countries,
$3.20/day for lower-middle income countries,
$5.50/day for upper-middle income countries, and
$21.70/day for high income countries.

(For a list of countries and their categories, see here: https://datahelpdesk.worldbank.org/know ... les/906519 )

Another option is to look for the source data in this paper: https://papers.ssrn.com/sol3/papers.cfm ... id=1597057 (Paper was tl;dr but figure 2a suggests the existence of a comprehensive listing.)

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