[Jalouse]

A good way to look at money is what level of income it will produce, a fairly widely accepted figure is that if you have your money sensibly invested you can spend 4% per year, with this level of spending you won’t be eating into your money. Higher than this and your wealth will be going down over time.

Using this 4% figure then you can easily see how much money you need to save to achieve a desired level of income shown in the following table:

SavingsIncome/yearIncome/month

1300,000 12,000 1,000
2500,000 20,000 1,667
31,000,000 40,000 3,333
41,500,000 60,000 5,000
52,000,000 80,000 6,667
62,500,000 100,000 8,333
73,000,000 120,000 10,000
83,500,000 140,000 11,667
94,000,000 160,000 13,333
104,500,000 180,000 15,000
115,000,000 200,000 16,667
125,500,000 220,000 18,333
136,000,000 240,000 20,000
146,500,000 260,000 21,667
157,000,000 280,000 23,333
167,500,000 300,000 25,000
178,000,000 320,000 26,667
188,500,000 340,000 28,333
199,000,000 360,000 30,000
209,500,000 380,000 31,667
2110,000,000 400,000 33,333
2210,500,000 420,000 35,000
2311,000,000 440,000 36,667
2411,500,000 460,000 38,333
2512,000,000 480,000 40,000
2612,500,000 500,000 41,667

So for example if you want to achieve an income of $100,000 per year you will have to save $2,500,000. It must be noted that there is no tax to be paid on this income as you are just spending your own money, a $100,000 income could be equivalent to approximately $160,000 pre-tax income depending on where you live.

The lowest figure of $300,000 will produce an income of $1000 a month, this is probably the bare minimum that would allow you to live in some places but you would be quite limited on your options, from what I’ve read you could have a reasonable lifestyle on this income in somewhere like Chang Mai.

Once you make it to level 4: $1,500,000 you’re in a great position, $5,000 per month doing absolutely nothing for the rest of your life. In 95% of the world you can have a great lifestyle on this.
Looking at the figures higher up if you want to be really rich you have to put a significant amount of money away and the chances of you doing this become lower and lower, probably the only guaranteed way of doing this is if you’re heading to Wall Street, then maybe you have a high chance of building up over $10,000,000. I have no idea how many people who head to Wall Street achieve this.

A couple of caveats, this income is in present day money, if you have a plan that you want to be sitting on a million dollars in 15 years the spending power will be devalued through inflation. In 15 years it’s unlikely that you could live anywhere on $1,000 a month.

The second caveat is if you have a wife and kids then you realistically have to make more if you want your freedom. $5,000 a month supporting a family is a lot different to $5,000 a month as a single guy and if you have a couple of million in the bank it could be very difficult to convince your wife that you can only spend $80,000 a year.

Lastly most people are spenders, the majority of people if they were given $3,000,000 would spend way more than $120,000 a year and in five or ten years it would all be gone. If this is you, you have to realise that you have little chance of building any serious wealth.

[Entropy]

I like the general idea of where you are headed. But i have this to say: inflation and taxes. Let me put down how i will create a passive income using $1,000,000. I will invest in 10yr treasuries. Because they are the safest thing on this earth. By 10yr treasuries, i am completely ignoring that of USA and any european nation, for obvious reasons that anybody reading macroeconomics should know by now. So, which one am i going with?

NEW ZEALAND, BRAZIL, AND INDIA.

You can look up debt to gdp ratio of these countries and compare them to that of other western nations. It beats the other western nation to pieces. Check out their current account, their GDP growth rate, their jobless rate, and factor in political stability. Dont get me wrong, Algeria has a 1.5% debt to gdp ratio, but i wont put my retirement money there. Qatar has a GDP growth rate of 39%, but i wont park my retirement money there too. Greece has a rate of 34% on their 10yr bonds but i wont touch it with a 10feet pole. You get the idea. You have to balance all these factors out.

So, NZD 10yr treasuries is at 4.01%. BRAZIL is at 12.55%, INDIA is at 8.89%. India, Brazil, NZD are not going to burn down or experience a coup d'etat in the next 10yr. They will safely outlive me. Besides, this marriage is on a 10yr by 10yr basis....i can always change my mind 10yr from now.

Capital allocation: I will but 50% in NZD and 25% in brazil and 25% in india.

Diversification reduces risk.

I use NZD instead of AUSTRALIAN because their economics are the strongest among the western nations...they both have similar 10yr rate of 4.01 and 4.02%. However, AUD you pay capital tax gains of 50% 1yr and 33% subsequently...however, in NZD...you pay zero in taxes on 10yr bond held for 1 yr.

So, the rate of return on 50% [email protected]%; 25%[email protected]%; 25%[email protected]% all adds up to a nice averages out to roughly 7.36% return.

That translates into $73,600 per year. USA 10yr yield is 2%. USA inflation rate is 2.9%. The 2.9% beats the 2% return. As you can see, the 7.36% return spread across a western nation and two BRIC countries(i.e NZD, BRZ, IND) to diversify risk beat the USA inflation rate by roughly 4.46% margin. It makes no sense if your investment cannot beat inflation rate. It not just important that your investment returns is positive....it has to be positive net of fees, taxes and inflation targets.

Taxes. Let us talk about that. If you are US citizen...it doesnt matter where you go in the world...you will be DOUBLY TAXED. That is, you pay the taxes of the country you are in...or working in currently...then you pay the taxes of the USA on top of that. To my knowledge, america is the only that does this. In fact, if both your parents are americans...and you moved to Hungary at the age of 3 and were raised there all your life and starting working...the IRS expects you to file taxes and pay them...(on top paying Hungarian taxes).

To my knowledge ONLY USA does this: double tax their citizens where ever they are in the world.

Now, let's break it down: CAPITAL GAINS TAX aka CGT

For NZD is nonexistent at zero. The labour party is proposing it. INDIA alos have zero on bonds if you held up to 1 yr. BRZ has 15% flat.

So, for NZD...we have 4% return on $500k = $20,000.
For INDIA we have 8.89% on $250k = $22,225
For BRAZIL we have 12.55% on $250k = $31,375. Take out 15% capital tax gain, and you are left with = $26,668.

I would love to park everything in BRAZIL with a 12.55%....and just make $106,675 every year net of fees.....but, you have to diversify.

Anyways, BRZ, IND, NZD.....All this translates into $68,893 per year net of fees. Now, if you are a US citizen..you still needs to pay what? capital tax gains of 11% on that $68,893. Which now translates into:$61,314 finally.

other countries dont care if you've already paid capital tax gains in those countries....but not the USA...they still require their pound of flesh.

So, i guess you are left with $61,000 to play with every year which beats the inflation of 2.9% by 3.1% margin. Which also translates into: $5,190
every month.

That is why it is just strange to see people win lotteries of after tax of $2million or 3million or 5million and still end up spending everything all and becoming bankrupt. How? It makes no sense to me. Now, multiply that by 2 = for $2million = $10,219 per month. And at the end of 10yrs you will still have your original money intact because they are treasuries insured by the nation itself.

If i have a aftertax lottery win of $3million, i will be spending $10,000 to $15,000 per month, saving the remaining $20K to $15K. Instead these fools run around buying houses and limos etc. Idiots.

My financial goal? A cool $10million will be nice. That will translates into $50k per month. Well, i will have to include switzerland and singapore and china(if i can get in) in my bond portfolio...so, it might drop a bit due to lower returns(but singapore, switzerland has no capital tax gains, so, that will upset the drop to some degree.) and since i am not a us citizen i dont have to give a shit about double taxes. So, that probably translates into a cool $50k per month.

However, knowing my ambition...i probably wont stop until i reach $100million.

***if you know how to legally avoid all those taxes, please, let me know.** You can get a dual citizenship and renounce your US one.

Anyways, you get the gist of how i would go about it. Below i have attached the bond rates of 10yr bond of various countries.

[reaper23]

op:

bro, in what land will not be paying taxes on passive income?

and on another note, this is great example as to why real estate is a good investment. earning 4% is crap. you can have much better yields with just a little leverage.

[Tigre]

Those assumptions should really be double-checked.

There's usually tax to be paid on investment income. Depends on your nationality, residency, where the investments are placed, and what class of income you're modeling. It makes a big difference whether you're thinking dividends, bonds, CD's, or trading gains.

A capital gain is the profit you make when you sell something. Difference between the buy price and sell price. Though I have limited experience with bonds, I don't understand what kind of holding vehicle would let you hold the bond for a 10 year term, but treat your periodic bond interest earnings as a capital gain.

[Lemmo]

4% seems like a pretty crap return, even if you are trying to be conservative. Just buying some blue chip stocks can get you 5+% in dividends.

If having a wife and kids is a goal, you should probably focus on finding a job that is tolerable rather than trying to plan a way to save enough money to be financially independent from a sufficiently young age. If you plan on staying single, it is probably doable but would you really not want to do some sort of work? A single guy's expenses are pretty minor. My goal would be to reach a stage where I could own my own home and then make enough from part-time work to cover all my living expenses by the age of 35-40. I'd want to have enough saved on top of this to have a significant and growing nest egg so I would have the option of a secure and complete retirement later on (say 60+).

[Jalouse]

Entropy

Some good ideas there where you want to invest, I would personally probably just have someone invest the money for me so I didn't have to worry about it. You don't have to pay capital gains in a country where you invest your money, so there would be no CGT charge in those countries where you have invested your money only in the US.

Reaper23

Simple example you have £10,000 and you take £1,000 of this a year to spend to live on which is essentially your salary there are no taxes to pay on this £1,000 as it's already your money. You will have to pay taxes on dividend income and any CGT profits although you can make up to a certain amount tax free, here in the UK you can make just over £10,000 a year tax free as a capital gain.

Tigre

Pretty much same as above this is why the assumption is that you can take 4% of capital even though on average you should be earning a higher rate on your money that this.

Lemmo

I believe the 4% figure is calculated on average returns over time minus inflation and the taxes you would pay on capital gains and income tax. Of course you can work if you want but I'd much rather be financially independent at an earlier age rather than the traditional retirement age thinking and only work if I want to rather than because I have to.

[Entropy]

(02-18-2012 06:04 PM)reaper23 Wrote:  

op:

bro, in what land will not be paying taxes on passive income?

and on another note, this is great example as to why real estate is a good investment. earning 4% is crap. you can have much better yields with just a little leverage.

switzerland....liechtenstein...are tax havens...you dont pay taxes on passive income yielding investment like stocks and bonds....

Speaking of realestate, the tax on your real estate varies by neighbourhood.

(02-18-2012 06:16 PM)Tigre Wrote:  

Those assumptions should really be double-checked.

There's usually tax to be paid on investment income. Depends on your nationality, residency, where the investments are placed, and what class of income you're modeling. It makes a big difference whether you're thinking dividends, bonds, CD's, or trading gains.

Of course. like i said before, india, switzerland, new zealand, liechtenstein do not pay taxes on capital gains of any kind. Just google it.

(02-18-2012 06:16 PM)Tigre Wrote:  

A capital gain is the profit you make when you sell something. Difference between the buy price and sell price.

Not necessarily. You pay CPT on bond yields even though you havent sold them before maturity.

(02-18-2012 06:16 PM)Tigre Wrote:  

Though I have limited experience with bonds, I don't understand what kind of holding vehicle would let you hold the bond for a 10 year term, but treat your periodic bond interest earnings as a capital gain.

Well here is the link: http://finance.yahoo.com/education/bond/...Bonds_Work

"Another advantage of Treasuries is that interest payments are exempt from local and state taxes (however, not from Federal income taxes)".

Nobody escape the taxman, amigo. You honestly think they will just let you collect a yearly interest and go free without paying taxes on that? lad, you pay taxes on dividends that are not reinvested.

___________________
jalouse,
so you are saying that there wont be a CGT tax from countries where i invested my money? hmm....i will look further into that. thanks for the info.

[Jack Of All Trades]

I have a question about foreign bonds, don't you have to factor in the inflation those countries and spikes in currency valuations relative to the reserve currency you're using? I think the best solution to go about is to look at it through the real interest rate using the countries currency, also I think that buying foreign bonds is limited to people who can pony up at least 100k+ for a block of bonds.

[Tigre]

(02-18-2012 10:54 PM)Entropy Wrote:  

(02-18-2012 06:16 PM)Tigre Wrote:  

Though I have limited experience with bonds, I don't understand what kind of holding vehicle would let you hold the bond for a 10 year term, but treat your periodic bond interest earnings as a capital gain.

Well here is the link: http://finance.yahoo.com/education/bond/...Bonds_Work

"Another advantage of Treasuries is that interest payments are exempt from local and state taxes (however, not from Federal income taxes)".

Nobody escape the taxman, amigo. You honestly think they will just let you collect a yearly interest and go free without paying taxes on that? lad, you pay taxes on dividends that are not reinvested.

Wow, the more I read from you, the less I think you know. Have you actually done any of this in real life? Or are you some kind of Google hero repeating stuff he's heard about but never done?

I was starting off trying to be kind, thinking you just didn't understand the correct names of terms as we use them in the English language. Like, understanding the concept but using the wrong name for it.

But this is basic stuff you can't get your head around.

In the simplest possible terms.

Capital gain is measured when you dispose of the asset. If you buy a house and rent it out for 15 years:
1) Every year you declare rental income less expenses and pay tax on that.
2) When you finally sell, you declare the appreciation in value of your asset as a capital gain, then pay tax on that (once). The income generated in (1) is not a capital gain.

So how do you figure using CGT rates to get tax owing for a year's worth of interest income? Nothing has been bought or sold, it's the wrong class. You should really be using the marginal tax rate.

Also, even though we have established that you're using the wrong rate, are you sure that 15% CGT rate for Brazil is even correct for a foreigner? Cause when I looked into it, I found this:

Quote:

http://www.reuters.com/article/2010/10/2...7020101025

BRASILIA, Oct 25 (Reuters) - Brazil's finance minister on Monday praised progress by the Group of 20 economies on global currency issues and ruled out a new capital gains tax on foreign holdings of local bonds to curb a domestic currency rally.

Brazil would not reinstate a capital gains tax on bond holdings by foreigners, Mantega said, adding: "It's not being considered."

But of course, if you just searched up a Wikipedia page and stopped there, you might think the rate is 15% for non-resident foreigners, as you stated.

There are a few other things you misunderstood, but I'll leave it at that for now. Here is a link about US tax treatment of bonds, if you want to know more. The first paragraph is enough to set things straight: http://www.nysscpa.org/cpajournal/2005/3...ls/p42.htm

Quote:

The tax laws governing the returns from holding bonds are complex and change frequently. The law distinguishes between the two components of return: interest income and capital gain or loss. Capital gains or losses are further classified as short term (bonds owned for one year or less) or long term. Short-term gain is taxed at the marginal tax rate on ordinary income, currently as high as 35%. For investors in the 25% bracket or higher, the current long-term capital gains tax rate is 15% (5% for investors in the 10% and 15% brackets). Interest income is always taxed at the investor’s marginal tax rate.

[Entropy]

(02-19-2012 12:26 PM)Tigre Wrote:  

(02-18-2012 10:54 PM)Entropy Wrote:  

(02-18-2012 06:16 PM)Tigre Wrote:  

Though I have limited experience with bonds, I don't understand what kind of holding vehicle would let you hold the bond for a 10 year term, but treat your periodic bond interest earnings as a capital gain.

Well here is the link: http://finance.yahoo.com/education/bond/...Bonds_Work

"Another advantage of Treasuries is that interest payments are exempt from local and state taxes (however, not from Federal income taxes)".

Nobody escape the taxman, amigo. You honestly think they will just let you collect a yearly interest and go free without paying taxes on that? lad, you pay taxes on dividends that are not reinvested.

Wow, the more I read from you, the less I think you know. Have you actually done any of this in real life? Or are you some kind of Google hero repeating stuff he's heard about but never done?

I was starting off trying to be kind, thinking you just didn't understand the correct names of terms as we use them in the English language. Like, understanding the concept but using the wrong name for it.

But this is basic stuff you can't get your head around.

In the simplest possible terms.

Capital gain is measured when you dispose of the asset. If you buy a house and rent it out for 15 years:
1) Every year you declare rental income less expenses and pay tax on that.
2) When you finally sell, you declare the appreciation in value of your asset as a capital gain, then pay tax on that (once). The income generated in (1) is not a capital gain.

So how do you figure using CGT rates to get tax owing for a year's worth of interest income? Nothing has been bought or sold, it's the wrong class. You should really be using the marginal tax rate.

Also, even though we have established that you're using the wrong rate, are you sure that 15% CGT rate for Brazil is even correct for a foreigner? Cause when I looked into it, I found this:

Quote:

http://www.reuters.com/article/2010/10/2...7020101025

BRASILIA, Oct 25 (Reuters) - Brazil's finance minister on Monday praised progress by the Group of 20 economies on global currency issues and ruled out a new capital gains tax on foreign holdings of local bonds to curb a domestic currency rally.

Brazil would not reinstate a capital gains tax on bond holdings by foreigners, Mantega said, adding: "It's not being considered."

But of course, if you just searched up a Wikipedia page and stopped there, you might think the rate is 15% for non-resident foreigners, as you stated.

There are a few other things you misunderstood, but I'll leave it at that for now. Here is a link about US tax treatment of bonds, if you want to know more. The first paragraph is enough to set things straight: http://www.nysscpa.org/cpajournal/2005/3...ls/p42.htm

Quote:

The tax laws governing the returns from holding bonds are complex and change frequently. The law distinguishes between the two components of return: interest income and capital gain or loss. Capital gains or losses are further classified as short term (bonds owned for one year or less) or long term. Short-term gain is taxed at the marginal tax rate on ordinary income, currently as high as 35%. For investors in the 25% bracket or higher, the current long-term capital gains tax rate is 15% (5% for investors in the 10% and 15% brackets). Interest income is always taxed at the investor’s marginal tax rate.

Have i done this in real life? Invest in foreign bond? No. I only trade stocks, bonds, options, futures. I go in and out. I buy and sell them. I daytrade/swingtrade, i dont invest. I have to pay capital tax gains on my trading at the end of the year because i was in and out. But i know that you pay taxes on bond yield and dividends, unless you re-invest them. How do i know? (a)i talked to tax professionals (b) i read it my bond book.

There are two classes: the one you pay when you sell the asset that you bought. (2) the one you pay on the interest that appreciate on that asset BEFORE you sell it. THE FIRST one is CGT. The other is called dividend tax. Now, in certain countries the rate of the dividend tax on qualified dividend is exactly equal to the rate of the CGT. exactly.

Is brazil CGT at 15%? Well, here is where i found my info: http://www.globalpropertyguide.com/Latin...-gains-tax

From your fustrated response, i take it that you think i was saying that capital tax gains are paid on assets appreciation that wasnt sold yet. No. Capital tax gains are not charged on assets that were not sold..However, in certain countries, the amount of CGT = qualified dividend tax.

What i didnt know is what jalouse pointed out: that for him as an person, brazil or india wont tax him. He only have to worry about england tax. That is news to me. I thanked jalouse and i will look further into that.
So brazil rule out taxing foreign holders hey? that is sweet.
Anyways, these are the details i need to flesh out when i am ready to start investing in foreign bonds. In fact, i will get a accountant specializing in international tax codes for this.

[Entropy]

(02-19-2012 12:24 AM)zeeman Wrote:  

I have a question about foreign bonds, don't you have to factor in the inflation those countries and spikes in currency valuations relative to the reserve currency you're using? I think the best solution to go about is to look at it through the real interest rate using the countries currency, also I think that buying foreign bonds is limited to people who can pony up at least 100k+ for a block of bonds.

They have inflation adjusted bonds. That are inflation neutral.They are linked to inflation thereby neutralizing its effects. I will go for those ones.

anyways, the details of these things will be worked out later when i well over $1million. The general idea is what matters to me right now.

[Jalouse]

Here's an interesting article that goes a little more in depth about living off capital and he talks about this 4% figure: http://www.thesimpledollar.com/2009/12/1...f-capital/

Entropy I was pretty certain that you only pay CGT in your own country, I just had a quick search and the facts seem to back this up, it's only if you have some form of residency in another country that you would have to pay CGT in that country and even then you wouldn't get doubly taxed in both countries.

As to this 4% spending figure, this will probably vary by where you live, in the UK CGT is currently 29% which is a big difference from the US rate of 15%, this would make a huge difference to your investments over a long period of time.

[nmmoooreland20]

(02-18-2012 10:54 PM)Entropy Wrote:  

Nobody escape the taxman, amigo. You honestly think they will just let you collect a yearly interest and go free without paying taxes on that? lad, you pay taxes on dividends that are not reinvested.
d my money? hmm....i will look further into that. thanks for the info.

Just a heads up, with certain muni bonds, you can get off tax free. Puerto Rico and Guam bonds are triple tax exempt, as are the bonds of the state you live in.

Of course finding a decently yielding muni can be a challenge, but there are some enticing buys out there.

[Entropy]

(02-20-2012 02:16 PM)nmmoooreland20 Wrote:  

Just a heads up, with certain muni bonds, you can get off tax free. Puerto Rico and Guam bonds are triple tax exempt, as are the bonds of the state you live in.

Of course finding a decently yielding muni can be a challenge, but there are some enticing buys out there.

thanks for the info. I am aware of munis....

from my points of view, when i am well over a $1million and need to start investing that is when i will start worrying about getting the exact detail of what/which bonds right. Right now, i just trade them in bond futures.

But, thanks for the info, nonetheless.

[germanico]

Thanks Entropy, this has been a very educational post.

[Pilgrim37]

Pat Garrett:"I plan on being old,grey and rich"

Billy the Kid: "That's a fine ambition Pat.You keep thinking on how to get rich and I'll keep thinking on how to spend your money!"

[billy]

In my humble opinion I would worry about making the money first and then let the professionals advise about the investmetn and tax, the world is hardly short of IFA's and tax planners.