When Can I Retire ?

When I started planning for my early retirement , I wanted to calculate when can I consider myself financially independent and found a website that helped me with the calculation.

Early Retirement Calculator 

If you would see that India has an saving percentage of one third of our income and we can strive to increase it to half

When you play around with the calculator you will understand that the key number that makes a lot of difference is the Saving rate hence in any retirement planning one should Focus On Saving to start with as that is in our control as against the market returns.

One of the drawback of the calculator was the it didn't take inflation into consideration as that would eat into the money over years hence I reduced my Annual Return of Investment by the rate of inflation, ie close to 2% for Sweden and may be 5-6 % for India.

Instead of the Withdrawal rate I have put in the average dividends rate across my portfolio that is given out as I would like to keep the principle amount constant and not dip into the stockpile that could reduce the ROI in the long run.

There is a 4% retirement withdrawal rule that was coined by William Bengen in 1994 (increased to 4.5 % ) which is being defaulted in the calculator, but as mentioned in the above the inflation as well as market return over a period of time would have an impact on this rule. Just imaging that if there would a market downturn during the starting years of retirement the money in the stockpile would get depleted quickly and hence the future withdrawal would take a hit. Hence instead of the safe withdrawal I would like to have a 4% dividend rule to start with that would increase over the period of earning life and hence could sustain a market down turn through dividends and the the withdrawal could be used for any emergency that could arise out of the longevity of lives we enjoy these days.

When I calculated the number it gave me was 14 years to retire and I then added five more years to it so that I can earn the needed moolah for any emergency expenses that could crop up.

Here is what Warren Buffett said during the weekend !!

Every year in May Berkshire Hathaway hosts their annual shareholders meeting in Omaha where 40K shareholders of Berkshire Hathaway descend to hear to what "Oracle of Omaha" Warren Buffett has to say and that was during the last weekend this year. I was lucky that I found time to hear to the live broadcast of Q&A where Warren Buffett, 89 along with Charlie Monger, 95 sit for more that 5 hours to take questions from shareholders and answer them with some humor. I was surprised about the energy both of them had at their age and wish I would have the same state of mind and energy when I turn that old . They could pass on the baton to the Indian origin Ajit Jain as his next successor.

Here are few points I noted

Buffett said to invest in areas that you know when deciding on what companies to invest in and he calls them as 'circle of competence' and also believes expanding your 'circle of competence' but to be cautious and patient when investing

Buffett thinks that stocks are ridiculously cheap if you believe that 3% on the 30-year bonds makes sense.

Buffett said, "You can invest small sums at much higher rates of return than you can large sums"

Charlie said "You don't need a portfolio of large stocks if you know what you are doing."

Buffett said,"It’s the two things you can’t buy: Time and Love." "I’ve been very, very, very lucky in life to be able to control my own time to an extreme degree."

"Charlie’s always valued that too. That’s why we really wanted to have money, so we could do what we damned pleased."

"I could do anything that money could buy, pretty much, and I’m having more fun doing what I do than doing anything else."

The last sentence he said is the reason I am trying to retire early and to do what I love to do. 

Which Konto to buy Stocks in AF or ISK or KF ?

When I started thinking about saving one thing that came to my mind was tax planning as we do in India where we have multiple avenues or sections that can be used to save on taxes by investing. It was hard for me to find those options as finding the right applicable taxation at the Skattaverkt website was hard and even if I found anything it was difficult to understand and interpret them using Google translator and Swedes try to avoid discussing financial things openly during a fika. I was super excited when I found ISK and KF for long term saving with minimum tax implications.

There are three types of accounts that can be used to trade in Sweden.

• Aktie & Fond konto (Stock and Fund Account)
• ISK - InvesteringsSparKonto
• KF - KapitalFörsäkring

Aktie & Fond konto (Stock and Fund Account) is a normal trading account and is taxed at 30% for all capital gains as well as dividends. You need to declare each and every stock transaction detail that is done during the year in the account when filing tax using a K4 form. The only positive point of this type of account is that you can offset the capital losses that you incur in the account against any capital gains during the financial year. For all dividends that are received in the account a preliminary tax of 30% is deducted.  I use the Aktie & Fond konto as a holding account for money before I transfer it to ISK or KF. As there is no interest on liquid funds that are in this account there are no tax implication if you place your buffer money in Aktie & Fond konto. The Aktie & Fond konto are covered under the deposit guarantee insurance which assures a compensation of upto 950 000 SEK in case the custodian bank goes bankrupt. I use this account to receive barn bidrag amount before I transfer them to their respective accounts for investment.

At the end of the blog I have detiled out the steps to open the accounts

ISK - InvesteringsSparKonto is a trading account which was introduced to support long term investing with better tax conditions .You can buy stocks aswell as mutual funds. The taxation is based on the size or the capital base in the account and not on the capital gains or losses that happen. You will have to pay a quarterly tax based on capital base .The rate of tax is based on the government loan rate that is on November 30 of the year plus 1% and the minimum rate was set to 1.25% considering currently we have very low interest rates.

In the above example I started the year with 50K in the account and added another 50K during this year.
Capital base is calculated as (292000+50000) / 4 = 85500
Then it is multiplied by Government loan rate (2018 rate was 1.51% ) : 85500 * 1.51% = 1291.05
I will pay 30% of the amount as tax 1291.05 * 30%  = 387.31

If I would have had the same type of transaction in Aktie & Fond konto and considering a 8% ROI I would have paid 100000 * 8% = 8000 * 30%  = 2400 . Hence saving in ISK is tax efficient than the Aktie & Fond konto 

It is beneficial to buy only Swedish Stocks in ISK as the dividends are not taxed and for Non-Swedish dividends are taxed at 15% to 27% based on the company and can be automatically claimed back in the tax declaration against interest expenses but the ceiling is set to SEK 500 , hence I buy only Swedish , Non-Dividend paying Foreign stocks and Mutual funds in ISK.

KF - Kapital Försäkring  or Capital Insurance is similar to ISK but you can nominate some one else as the nominee other then immediate family as its beneficiary for example you can nominate the account to kids from your previous marriage and they will inherit it when they turn 18 . In case of your untimely death the nominee would receive an additional 1%.

Regarding the taxation its a little bit different than ISK on how its calculated. Deposits during the first half of the year are counted as 100%, while deposits during the second half are calculated as 50%.

Capital base is calculated as 50000 +15000 +21000 + (50% * (5000 + 9000 ) = 93000
Then it is multiplied by Government loan rate (2018 rate was 1.51% ) : 93000 * 1.51% = 1404.3
I will pay 30% of the amount as tax 1404.3 * 30%  = 421.29

Swedish Dividends are tax free similar to ISK but its beneficial to buy Foreign Stocks in KF as the Stock broker is the custodian of this type of account and will take the responsibility to get the withholding tax back without an upper limit. Usually they take a couple of years to get back your withholding taxes, hence I buy only Dividend paying Foreign stocks in KF.

Don't move money in and out too frequently from ISK or KF as it would increase your tax liability. 

How to open an Aktie and Fond Konto

One of the brokers I use is Avanza, who is currently giving free Stock Trading in the main Stockholm stock exchange across all type of accounts for new customers until your savings reachs SEK 50,000 or 500 trades within a period of 12 months. You could use the below link to open an account and get the free trading, all you need is a personal number aswell as Bank ID to open a new account. Opening of any type of accounts are free of cost.

Open New Account with Avanza 

I will write another blog with comparison of different Stock Brokers and their fee structure.