Retirement, any takers?

(22-07-2013, 07:44 AM)paullow Wrote:

(22-07-2013, 02:12 AM)d.o.g. Wrote:

(21-07-2013, 07:31 PM)greengiraffe Wrote: Not too long ago, dividends are taxable and subject to franking (everyone included - rich and poor investors). The doing away for sec 44 and the phasing in of 1 tier tax on dividends - effectively meaning that the rich who received the bulk of dividends in personal capacity don't pay taxes.

This is an incorrect analysis. Previously, the companies paid corporate tax, accruing tax credits, and then passed these credits on when they paid dividends. Thus rich people paid more taxes because they received dividends, got the tax credits, and then paid taxes based on their (high) marginal rate. Poor people got the same pro-rata dividends and tax credits, but then paid taxes based on their (lower) marginal rate.

Suppose the corporate tax rate was 22%. If a company earned $1 per share before tax, it would pay 22 cents per share in tax. It could declare a $0.78 per share dividend, and this would come with 22 cents per share of tax credit.

A high-income person in (let's say) the 20% tax bracket would receive $0.78, grossed up to $1, then pay 20 cents in tax, leaving him with $0.80.

A low-income person in (let's say) the 5% bracket would also get $1 when grossed up, but pay 5 cents in tax, leaving him with $0.95.

With the one-tier system, the companies pay corporate tax, and then pay dividends which are tax-free. Effectively, it means that EVERY shareholder is paying the corporate tax rate on his/her dividend. This is essentially a tax increase on the low-income, rather than a tax relief on the high-income.

Under the same conditions as above, the company would declare a one-tier dividend of $0.78, tax-exempt. The 2 people above would receive the same amount, $0.78. Both have seen an increase in tax, but it is much more drastic for the low-income person.

It is actually more complicated in real life because the corporate tax rate is now 17%, which means that both people being studied would get $0.83 in dividends. Compared with the old days of S44 credits, the low-income person still gets less. But the high-income person now gets MORE.

So the one-tier system combined with the lower corporate tax rate has simplified our tax system, but at the cost of increasing income inequality.

Thanks d.o.g. for the time in putting up this detailed post.

Personally, I fail to see how a few percentage points up/down can effect HNWI of wealth 50m upwards. Taking 5% cap gain pa, his wealth would enlarge by 2.5m pa. Plus at a conservative dividend rate of 4%, he would enjoy another 2m pa. And if he is a director or key shareholder with roles in the company, he would receive additional pay. All in all that's perhaps 5m gain PA. Take note, only the last item, he would feel the government tax ie personal income tax.
So I don't see much effect of such individuals, who in the first place don't need to exchange their precious time for their money.

The middle class is the most affected. Executives and managers who earn up to 500k pa. These are people who need to report to work everyday and exchange their time for money.
At the end of the day, still need to pay the government a significant amount of tax.
Mind you, this is his blood, sweat and tears money!
He is indirectly working for the government, like it or not!
A percentage points will affect the latter group the most.

The poor I shan't discuss further as most might have problems day to day living in the first place let alone have savings for investments.

Paul

I'm middle income engineer but dun seem to really feel much impact from income taxes... after all the reliefs/rebates, hardly been paying taxes for the past few years.

The part about 'blood, sweat, tears', not really that way lah. Sit inside air con office, access to internet, flexi hours and got people to talk to, sometimes got challenging puzzles to solve, it's actually quite an ok way to pass time.

(21-07-2013, 03:35 PM)paullow Wrote: The situation is not like needing 25M to buy a 500k HDB flat or needing 150k cash to buy a mac.

Ask you a simple question,

Which car on the road is more common? altis/nissan or rolls royce/lambo?

The answer is quite clear.

And the bread and butter 100k car is very likely to be under loan, and more often than not, the owner only owns one car.

the 1M car on the other hand, is unlikely to be under loan and more often than not, the owner owns not one, but a series of high end cars.

To a HNW person of 25m-50M and above, spending 1-5M on his cars is totally different from a HDB 500k or condo dweller 1M (whose home is more likely to be mortgaged), and taking a 50-100k loan for his car.

That person with 25-50m and above would find it hard to exhaust his money buying his cars, because at that level, he is able to use money as a tool to make money earn more money for him.

A middle class earner husband and wife earning 10-15kpa might seem a lot, but after deducting various expenses, might find it a trying task even to save up a few hundred K. The money just flows out each time the pay check comes in. And most of them need to EXCHANGE THEIR TIME TO WORK FOR MONEY. People who are in this situation would know what I am talking.

So the ultra rich stays ultra rich and even gets richer each year even with his expensive toys but most of the middle class and poor stays status quo.

that's life, in most countries its like that.

I reckon now that the richest 10% in s'pore controls 90% of the country's wealth. It used to be 80:20 before.

Thus the majority 90% of the people have only 10% of the wealth.

One example that I like to use when talking about capital returns.

"How to travel for free for the rest of your life?"

Taking an example of a family that budget $10,000 (or any other number) a year for travelling. Instead of going to travel, they decide to invest the money properly every year. At a return of 8% a year, and after 10years, the total amount will around $144,000. After which, the investment will return $10,000 year after year (at 8% return), and the family can travel for free for life! (Financial Freedom! )

I don't really need to be ultra-rich to enjoy life.

(Other examples for Cars, Food, etc, are applicable too. )

Note: Of coz, 8% return every year is not possible... Only travel when the investment return exceeds the cost of travelling.

(22-07-2013, 03:01 PM)NTL Wrote:

(21-07-2013, 03:35 PM)paullow Wrote: The situation is not like needing 25M to buy a 500k HDB flat or needing 150k cash to buy a mac.

Ask you a simple question,

Which car on the road is more common? altis/nissan or rolls royce/lambo?

The answer is quite clear.

And the bread and butter 100k car is very likely to be under loan, and more often than not, the owner only owns one car.

the 1M car on the other hand, is unlikely to be under loan and more often than not, the owner owns not one, but a series of high end cars.

To a HNW person of 25m-50M and above, spending 1-5M on his cars is totally different from a HDB 500k or condo dweller 1M (whose home is more likely to be mortgaged), and taking a 50-100k loan for his car.

That person with 25-50m and above would find it hard to exhaust his money buying his cars, because at that level, he is able to use money as a tool to make money earn more money for him.

A middle class earner husband and wife earning 10-15kpa might seem a lot, but after deducting various expenses, might find it a trying task even to save up a few hundred K. The money just flows out each time the pay check comes in. And most of them need to EXCHANGE THEIR TIME TO WORK FOR MONEY. People who are in this situation would know what I am talking.

So the ultra rich stays ultra rich and even gets richer each year even with his expensive toys but most of the middle class and poor stays status quo.

that's life, in most countries its like that.

I reckon now that the richest 10% in s'pore controls 90% of the country's wealth. It used to be 80:20 before.

Thus the majority 90% of the people have only 10% of the wealth.

One example that I like to use when talking about capital returns.

"How to travel for free for the rest of your life?"

Taking an example of a family that budget $10,000 (or any other number) a year for travelling. Instead of going to travel, they decide to invest the money properly every year. At a return of 8% a year, and after 10years, the total amount will around $144,000. After which, the investment will return $10,000 year after year (at 8% return), and the family can travel for free for life! (Financial Freedom! )

I don't really need to be ultra-rich to enjoy life.

(Other examples for Cars, Food, etc, are applicable too. )

Note: Of coz, 8% return every year is not possible... Only travel when the investment return exceeds the cost of travelling.

Ah.....!
The real difference is the "Haves" do not need to delay their gratifications while most of us have to. Hacks! the "Haves' do not even need to think twice or bat an eyelid so goes the saying. We have to. They can have everything. We have to choose either or. At times, we have nothing to choose.
Well the trick is to be contented with what you can afford now. Till then there is always another time another day. Who knows what's going to be your future? But if tomorrow never comes, so be it.

I agree with smallcap. In sg, the majority of workers who earn 20k to 150k a year are hardly taxed much esp if you are married with kids. Effective income tax rate is like 0-5% if family has 3 kids and husband and wife earn 150k each. The real tax is in the gst, road usage, car tax and housing costs. And to be, for this group, contentment is the key to happiness.

The group that have it worst is the high achieving couple who earn 500k to 1m combined. They are hit by all the consumption related and luxury, keep up with jones prices and yet still pay about 15-20% income tax. Say one earns 800k combined at age 40, income tax alone will be 100k. For this class of people, annual family of 3 expense should be about 400k inclusive mortgage on primary home and luxury car loan. That leaves them with 300k to invest. You need to save for 35 years just to accumulate enough to save 10m which can yield 400k and I am assuming income and portfolio grow at rate of inflation.

This is what Paul means by trading time for money and never getting out unless lucky with asset investments like property. The other solution is to increase saving amt by earning even more (likely since obviously high achiever) or saving more (less likely with sg high earner mindset). The final even harder solution is to build a business and sell it. Which is the most common way to instantly have >10m in pocket before 40.

Pardon me.. I have a hard time empathizing a couple that earned more than half a million annually and paying a high tax.

agree with greypiggi.

And to add to that point, being a high achieving person and taking say 10years to accumulate say 3M, it actually might not be a big sum from their last drawn salary which is achieved with their time. They would likely be hit with luxury expenditures as discussed above.

To place that 3M from their 10years of saving in investments, even if they agree to do so as a couple, would likely be a diversified one to reduce risk. Otherwise they might be at ground zero again if they lose everything and start pointing fingers at each other. Once you have such a high flying couple, they might have different views as to how best (as perceived) to ultilize their funds.
Some might be risk averse to the extent of placing it in FDs. Others diversify to the extent to make individual gains to the overall portfolio gains insignificant.
In other words, at the end of the day, most of their net worth at the end of the day are still mainly earned with their precious time, except from perhaps asset appreciation ie their primary house.
Ultimately, only a few will be able to increase their total net worth by 1 or 2 order higher with shrewd investments, and making it to first rank(may I borrow peter cundill saying).

(22-07-2013, 10:17 PM)yeokiwi Wrote: Pardon me.. I have a hard time empathizing a couple that earned more than half a million annually and paying a high tax.

Yeah, those poor buggers! When you have $100m you will feel for them.

(22-07-2013, 10:17 PM)yeokiwi Wrote: Pardon me.. I have a hard time empathizing a couple that earned more than half a million annually and paying a high tax.

Oh, I don't mean they need any help or that we should pity them. All I was doing is stating a matter of fact on what is happening in sg. In fact, when I meet such corporate types I wonder why they do not do the math and internal examination and just realize they should not keep aiming higher beyond what they can really afford. I mean a family who earns 800k has no business driving cars worth anything above 300k, watches/bags/jewellery above 10k, and living in housing worth more than 5m and flying business class, staying in $1k hotels etc. that is a lifestyle of someone with a networth of about 10m usd and up and who still earns some salary. If net worth alone need to be about 15m usd min.

And if they really want to play that all consuming game, either aim to go beyond 1.5m in earnings or start own business. Contentment and some plain math is the key.

(22-07-2013, 09:36 PM)greypiggi Wrote: I agree with smallcap. In sg, the majority of workers who earn 20k to 150k a year are hardly taxed much esp if you are married with kids. Effective income tax rate is like 0-5% if family has 3 kids and husband and wife earn 150k each. The real tax is in the gst, road usage, car tax and housing costs. And to be, for this group, contentment is the key to happiness.

The group that have it worst is the high achieving couple who earn 500k to 1m combined. They are hit by all the consumption related and luxury, keep up with jones prices and yet still pay about 15-20% income tax. Say one earns 800k combined at age 40, income tax alone will be 100k. For this class of people, annual family of 3 expense should be about 400k inclusive mortgage on primary home and luxury car loan. That leaves them with 300k to invest. You need to save for 35 years just to accumulate enough to save 10m which can yield 400k and I am assuming income and portfolio grow at rate of inflation.

This is what Paul means by trading time for money and never getting out unless lucky with asset investments like property. The other solution is to increase saving amt by earning even more (likely since obviously high achiever) or saving more (less likely with sg high earner mindset). The final even harder solution is to build a business and sell it. Which is the most common way to instantly have >10m in pocket before 40.

Personally I think there has been some loss of perspective here. According to the latest statistics from the Department of Statisics, for household income the 41st-50th percentile average is $7,608 per month, while for the 51st-60th decile the average is $9,133 per month. Let's take the average and assume it is representative of a household at the 50th percentile i.e. $8,371/month. This means the ENTIRE HOUSEHOLD is earning $100k per year. This is probably more representative of the middle class that is getting squeezed by housing prices, childcare fees, COE etc.

For a household where husband and wife each earn $150k per year, this means an annual household income of $300k or $25k per month. For 2012 it would put the household ABOVE the 90th percentile which averages "only" $16k per month. A $300k/year household is definitely not middle-class, it is in the top 10% in terms of household income! Such a household is definitely very comfortable and can easily acquire meaningful wealth ($1-5m) if the wage-earners are not silly about spending and are prudent about investing (no scams, and no truly awful investments). This income group should not be bothered at all by housing, childcare or COE.

For the households fortunate enough to earn $500k+ per year, their main risk to not living a comfortable life is probably envy - the need to keep up appearances by buying the latest and greatest. If they can keep such urges in check (or even reject them altogether) there is no way they would not have a nice nest egg in retirement. It would take quite a spending effort to NOT accumulate millions by the time they retire, simply because there is so much cash flowing in. But of course if they buy a new sports car every year, buy a new boat every 3 years, buy a private jet every 5 years... then it's a different story.

(22-07-2013, 10:31 PM)paullow Wrote: agree with greypiggi.

And to add to that point, being a high achieving person and taking say 10years to accumulate say 3M, it actually might not be a big sum from their last drawn salary which is achieved with their time. They would likely be hit with luxury expenditures as discussed above.

To place that 3M from their 10years of saving in investments, even if they agree to do so as a couple, would likely be a diversified one to reduce risk. Otherwise they might be at ground zero again if they lose everything and start pointing fingers at each other. Once you have such a high flying couple, they might have different views as to how best (as perceived) to ultilize their funds.
Some might be risk averse to the extent of placing it in FDs. Others diversify to the extent to make individual gains to the overall portfolio gains insignificant.
In other words, at the end of the day, most of their net worth at the end of the day are still mainly earned with their precious time, except from perhaps asset appreciation ie their primary house.
Ultimately, only a few will be able to increase their total net worth by 1 or 2 order higher with shrewd investments, and making it to first rank(may I borrow peter cundill saying).

Got money no money also must live. Also like that. 50 years ago, people also lived. But now if you have no money you really very chiat luck liu. Not like 50 or 60 years ago all looked the "same". All also lived.