Retiring early - did I get this right or did I miss some hidden costs?

#1

Hi all,

I have a quick question. My goal is to retire with an annual income of 120k… this being Switzerland, me living in Zürich and I having a family.

My original plan has always been “ah well, with a capital of CHF 4.5m and a SWR of 2.667% I would have the 120k. From that I can pay all my taxes and living expenses. Taxes shouldn’t be much higher than when I work.”. Now I found out about the capital tax which is a major hindrance which I stupidly didn’t consider.

I built a nice Excel Spreadsheet and found out that I would need CHF 7m to retire on an annual income of 120k in Switzerland. That was a shock! That’s almost double what I planned for.

120k income (assuming the worst, everything is dividends) from CHF 7m results in -> 16’879k capital tax, 10’266k income tax, 2’714 church tax (that I can get rid off), local multiplier of 119% -> 62.1k in taxes per year! That halves my income!

I know this is a calculation assuming the worst. No deductions whatsoever. But I have always been the cautious type. Is this in line with your expectations? Or did I forget some other costs that would pull my required principal even higher?

#2

Why do you plan a withdrawing rate of 2.667%? Do you consider 3% too risky? 120k expenses is a lot of money. I understand, supporting yourself, wife, kids and the tax office :smirk: can be costly. But surely once the kids are 25, you don’t need to support them any longer? With an SWR of 2.667% you will probably leave them a nice inheritance when you die :stuck_out_tongue:.

Switzerland is a cool country: beatiful, clean, with mindful people. But it’s very expensive. By choosing a different country to retire, you could easily cut that required nest egg by half.

As a contrast to your 7m, let’s calculate a nest egg required for a single person in Poland, spending 1000 CHF monthly, an equivalent of average salary. With an SWR of 3%, that’s 400k :slight_smile: .

#3

All great points.

2.6667% because I am crazy worried about a bad sequence of events. Furthermore there is a lot of debate whether 4% is actually still valid. So I just set my goal to 2.6667%. You are right though, 3% may be sufficient for whatever I want to achieve. It actually lowers my required capital quite a bit.

Next… yes, you are right. Switzerland is definitely HCOL and suboptimal. I have however a variety of reasons why I would like to stay here. It’s a challenge but yes, I’m up for it. And if I can’t stand it anymore I will move.

#4

Would there be serious consequences if you had to live on “only” 100k for a year or two if shit hits the fan early during your retirement?

Flexibility and risk can theoretically buy a lot of freedom and you seem to have a lot of room to absorb some bad years.

I am still torn between going 3.5% or 4% but my retirement is still at least a decade out.

#5

Good point. Or alternatively, if a crash comes, you could come back from retirement for a year, and use the extra savings to buy cheap stocks.

#6

…and the expenses? You should care more about your expenses than your income…

#7

I could live with 100k, I have planned for that. That means cutting back on nonessentials. But I guess I’d be fine with it. I am very cautious :slight_smile:

#8

Absolutely. I can get them down, especially during a downturn. I have no doubt about the fact that there is some aspect of my expenses being a bit on the high side, especially since as part of my FIRE I dream of starting a business that will require some bootstrapping.

My general doubt was not about my setup but in general whether I understood the capital taxes correctly and whether my computations were really plausible.

#9

I think you pay capital tax only once to the canton. So in total you would pay 16k capital, 10k canton, 12k villages which is 38k, not 62k

Which I think is reasonable for a 7-millionaire that can generate 120k only from dividend…

#10

Hi Grog,

I just checked online using https://www.steueramt.zh.ch/internet/finanzdirektion/ksta/de/steuerberechnung/npers/staats_und_gemeindesteuern.html

actually the capital tax is applied both on a cantonal and a comunal level. However i was a tad off with the income tax. Anyhow, the results are as I expected:

  • Income: 6’486
  • Capital: 16’877
    Base Tax: 23’363

Comunal tax: 23’363 * 1.19 = 27’801.95

Total tax for Zürich residents (incl. other minor stuff): 53’549

#11

ok thanks! intersting. Still for someone with 7000 000 I don’t think is excessive to ask for 50k, although all that money has already being taxed once…

#12

Yeah. Well, I guess that’s why some cities and towns are quite interested in attracting wealthy residents… they get a nice tax income.

#13

Anyway how old are you and when would you plan to retire? I mean ammassing 7 million just to have 150k from dividend would take a long time. And 7 millions making 0% after inflation you can still take out 150k for 45 years before finishing it, considering that the more you draw down the less taxes you pay and you need to draw less etc so probably you can stretch it to 50-55. All by making 0% after inflation. Even with 1% return you can probably live 80 years off that money.

So the idea of living off money indefinitely its a nice one but you need to balance it out with:

  • do i need to leave money behind? can i go to 0? Will my children suffer, did they earn a right to my money?
  • how much do I want to work to make it happen?

Basically you will be trading your time working (maybe 15 years more) just so that you can leave money to your children? Wouldn’t they prefer you spend the time now with them instead?

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#14

+1 to this.
No need to create a fortune if you plan to live until 100.
“Plan” :slight_smile:

#15

Thanks for your support guys. Believe me, I get the mustachian ideals. Although I like my job I want to stop working very soon. I set myself a hard deadline for August 2018 so come what may, I will retire the latest by then. I don’t like to talk about my assets but I am currently at around 5.5m (due to saving, investments and an inheritance) so I am practically ready but I want to increase my wealth a bit to reduce the risk. I feel that we didn’t have a market crash in a while and I want to lower my SWR as much as possible. As I currently enjoy my job and like my colleagues, it’s not as much of a hassle
waiting a tad longer.

Let’s say that until my retirement I am cruising along. I am reading as much as I can and I am setting up my retirement and preparing everything. I admit that this phase of “knowing” to be FI / RE soon is really really enjoyable. I enjoy my work even more, the pressure completely disappeared… and I just don’t care about politics, career or anything else anymore. I know that this Christmas will be the last one with an employer :slight_smile: I keep imagining the face of my boss when I’ll tell them I will be leaving.

My whole question revolved around the taxation issues. I naively used wrong tax assumptions (especially due to the inheritance pushing me above where I expected to be) and I was wondering whether I really got it right… but it appears so…

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#16

Now I see why you want to remain in Switzerland. With that kind of wealth there is no need to leave :slight_smile:. It’s cool to know that there are also Mustachians among millionaires. The rich people I got to know are usually bosses of companies and they still work long and hard. I always wonder where they find motivation to push through. Either they’re used to it, or they like it.

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#17

Dear Bojack, your points have also kept me busy for a long time. My best reply to this dilemma is that some people don’t know how much is enough and see money as a scorecard for how successful they are. Even amongst the most successful managers there will always be this - very childish and frankly unnecessary - competition for ultimately nothing at all - some numbers on a piece of paper.

I can highly recommend the book: “How will you measure your life” by Clayton M. Christensen or check-out his Ted-talk here: https://www.youtube.com/watch?v=tvos4nORf_Y - it’s part of human competition I suppose.

The easiest form of this is the following question: Would you rather earn 100,000 per year on an island where everyone else earns 150,000 or would you prefer to earn 50,000 on an island where all others earn 25,000? Even though you’d be getting more with 100,000 in the first case you’d feel “relatively worse off” than in the second example where you just earn half as much but still twice the median salary. Human happiness appears to be relative after all.