Fees and taxes negatively affect returns significantly.
Let’s see how.
Fees are all those costs associated with your investment activity. The broker you use to invest is not a non-profit organization, but it earns from your operations.
Let’s see what types of fees exist:
- Yearly custody fees: These costs can range from 0 to 1% just because you have to keep your money. Rightfully the broker has to pay for insurance and security systems to keep your money safe. It is also often true that brokers exaggerate these fees. Look for them as low as possible of course.
- Trade fees: Your broker does not work for free and these are the costs on which they earn the most. the broker in order to place your order on the market asks you for a cost (€ 0.5, € 1 or a percentage %). The broker’s goal is to get you to make as many transactions as possible, so that he can get more money out of you.
- Account opening/closing fees: Now unavailable, they were fashionable a few years ago also on current accounts. I recommend you avoid brokers who still have these types of fees because they see you more as chickens to pluck than as customers.
- Deposit/withdraw fees: Some brokers still have this type of fee. If they’re not a high number, that’s not a big deal. On the other hand, it doesn’t seem fair to me that after trading and custody commissions, you also have to pay to get them back.
Other special fees
- TER: Funds have “hidden” costs. The sum of these costs is the Total Expanse Ratio (TER). It is a percentage between 0,07% and 3%. Lowest is better!
- Spread: It is the difference between the purchase price and the sale price of an asset. The spread varies for each broker and also depends on volatility and volumes traded on an instrument. It is difficult to calculate other than using the broker’s services.
Well, you have earned and you want to withdraw your earnings and use them. Well, you have to pay taxes on them.
There are different types of taxes:
- Capital gains taxes: When you sell something that you paid less than that, you have a capital gain. This is taxed on several countries.
- Dividend taxes: When companies distribute a dividend and you own stocks of that company, you earn the dividend. In almost any country the dividend is taxed.
- Wealth taxes: The concept is that you pay a yearly tax following your NW.
- Special investment deductions: Often if you invest in Treasury Bills of your country, you can pay less taxes than invest in other assets.
In Italy for example, there are 26% taxes on both capital gains and dividends.
So, suppose to live with € 2,000 per month and a Withdrawal rate at 3%.
Without taxes we need € 800,000.
But we need € 2,700 to be taxed at 26% and receive € 2,000 per month.
Now we need € 1,081,081 only for the dividend tax.
If we add the capital gains tax we arrive to need € 1,460,920.
It’s almost double than without taxes 😱.
leave you in the bonus link section more about how a 1% fees can reduce your wealth over a 20 years period. Moreover there are also 2 tables, which I have already listed here, with the concept of FU and Withdrawal rate.
We have seen how fees and taxes can greatly influence your savings and investments. So, always remember to try to reduce them as much as possible.