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Today we are going to take a look at the impact taxes have on retirement savings.
Let’s jump straight in by examining some numbers:
Compound interest, given time, creates significant growth. If you invest $10,000 at 5%, it will grow to $16,289 after 10 years and $20,789 after 15 years. Jump 25 years after the initial investment and the $10,000 initial investment will have grown to $33,864. If the investment is topped up each year by just $1,000 the effects are even more dramatic; after 25 years, your savings will have become $83,977. These figures demonstrate how reinvesting interest or dividends add substantial growth to the investment. This is because the ongoing interest is applied to both the initial sum invested and to the return gained from that investment.
If you invest your $10,000 with a 10% annual return and also maintain your $1,000 annual top-up investment, you will receive an impressive $216,529 after 25 years.
However, tax erosion on those gains can seriously reduce the investment growth. Let’s take an annual 20% tax on gains from investments as an example of an onshore rate. Returning to the $10,000 investment with 10% annual growth and, to simplify matters, forget about adding further investments. Over 25 years, you will see 983% growth providing a $108,347 fund. The tax erosion of a 20% tax on gains reduces that investment growth to 585% leaving the fund value, after 25 years, at $68,482 – almost cutting your retirement pot in half.
International investments can grow free of tax with the exception of any withholding taxes levied on the dividends and other income they attract. This is known as ‘gross roll-up’ and is an important benefit to be considered by expats when investing.
As an expat in Asia, you have the opportunity to use your savings and investments to provide a very healthy and secure financial future for your family. There are considerable tax advantages to be gained by using the correct international investment solutions for your longer term financial goals.
Infinity specialises in financial services for expats in Asia. If you want your nest egg to grow significantly larger, contact our professional advisers today to find out the best investment solution for you.
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