Ask Paul: I want to retire early, how can I pay less tax on my investments?

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I have been interested in the FIRE movement (financially independent, retire early) for 11 years.

I work full-time and I am an aggressive saver, and regularly invest in listed investment companies and exchange traded funds listed on the ASX.

The dividend distributions are getting bigger, which I am happy about, but I am also paying extra tax on this passive income.

Ask Paul I want to retire early, how can I pay less tax on my investments early retirement reduce tax liability

Any ideas on how I can reduce my tax liability? - Phil

Well, Phil, there are many money-related movements that really worry me.

These all too often are schemes concocted by the "leaders" to rip off those who listen to them. But the FIRE movement is one I do agree with.

Financial independence is something I have been encouraging people to aim towards for my 40 years as a financial commentator. It just makes so much sense.

During this time I have often used my "17 times" rule.

To be financially independent, a rough guide is to work out how much you would need to live on, multiply that by 17 and you have a target to aim for. So, if you thought $50,000 was the right amount, multiply by 17 and your financial independence target is about $850,000 in investment assets.

The point FIRE makes, which I strongly agree with, is that the way to get there is regular savings and investment and, critically, reducing expenditure. If you can live well on a lower amount, the amount you need to have invested reduces and, of course, you can save more.

About the only thing I am not so sure about is the "retire early" bit.

After decades of saving and investing, I hit financial independence a while ago, but retirement is not on my list. What financial independence does is allow me to work only at things I enjoy and add value to my life, such as Money magazine.

I do appreciate that tax cuts into your investment income and means you have less to invest.

The only solution here is sensible tax planning. Franked dividends really help; the other big one is super.

For financial independence, super is a nearly magical but legal tax structure. With maximum tax payable of 15% inside super, franked dividends see the ATO giving money to you, so maxing out your contributions may be a great way for you to go.

The other option is to consider borrowing to invest, where the interest is tax deductible and offsets taxable income. But this is a different story; here we need to look at the risk involved and how you feel about risk.

One thing is for sure, if we want to be happily financially independent, we need a strong society around us. This means hospitals, roads, schools, police, laws, a court system and so on.

A democracy is not cheap. It certainly makes sense to legally minimise tax, but I know that supporters of the FIRE concept also want a society that provides peace, security, infrastructure and a support structure for those who need it.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.
Comments
J L
September 22, 2021 4.49pm

What a great statement, sometimes we forget how we benefit from our current tax system, this is especially important as we get older and make more use of medical benefits.

"A democracy is not cheap. It certainly makes sense to legally minimise tax, but I know that supporters of the FIRE concept also want a society that provides peace, security, infrastructure and a support structure for those who need it."

Sally Gopal
September 22, 2021 8.52pm

Agree, a well written article and we as individuals easily forget that tax dollars are essential for services we use everyday.

Mike Richards
September 22, 2021 8.59pm

You are earning a growing passive income from dividends (that are probably also fully franked) but are complaining about tax and the fact that you will retire early. Give me a break, 1st world problems ?

The only way this could be better if you took the attitude that "I paid taxes all my life" and you wanted a pension too...

peter Choi
September 25, 2021 12.06pm

I agree with Phil. Everybody needs to save, invest, consider tax implications and aim to be financially independent. Your work life may be cut short at any time by unexpected events and you need to be prepared. From what I have read, people are forced to retire early and live the rest of their lives in poverty. I don't want this to be my future.

John Battista
October 1, 2021 1.44pm

I like to talk about finances but have seen most poeple dont like to talk about it much which i find annoying.planning is the secret I think.

Money magazine
Verified
October 1, 2021 2.03pm

You've come to the right place, John. We LOVE to talk about finances!

- Money team