I have almost €70,000.- saved and after reading about index funds, I got very curious.

I am a Spanish citizen living in the UK, and I assume there are some tax implications that I am completely unaware of... How can some like myself (a complete illiterate in finance), put my savings in a low-cost index fund? (can I earn around 4% annually?) and also: is Spain the best place to do this? Perhaps Portugal offers better tax conditions? (I saved all the money after years of hard work in several countries, so I really don’t mind relocating to the place that offers me the best option).

Note: I just inherited a small house in south Spain, and getting 4% annually (€ 2,800) could potentially cover my yearly expenses and I would be able to retire (I am single with no dependants)… The above question came to me after reading posts in the site www.mrmoneymustache.com but unfortunately most of the posts are specific for the US.

  • While I don't like to promote any individual sites or investments I know for a fact that you can buy shares in Vanguard index funds (accepted to be one of the best, most effective and low cost passive funds, by the majority of the investing population) through TDAmeritrade, a fairly acknowledged brokerage. I think you pay a fixed transfer fee so probably better to load bigger amounts at a time. You can also explore Vanguard in specific EU countries for funds within EU specifically if you're not interested in buying the US ones (SP500 or full market) through a middleman. – Jonast92 Aug 26 '20 at 13:59
  • I've invested in mutual funds (not only index funds - that's just a popular way that was very efficient decades ago, but not so much lately...)both in Spain and in the UK. You can do it easily in both countries (UK: fund supermarkets; Spain: Bancos de inversión - huye lo más lejos posible de la banca tradicional para esto ;) ) Between UK & Spain, I kinda prefer the UK for this 1) Because of the ISA wrapper 2) Because fund management fees tend to be lower. The only advantage in Spain are certain fiscal benefits when moving from one fund to another - but that's actually offset by UK's ISAs. – carrdelling Aug 26 '20 at 21:56

The main thing you need to know about index funds is that 4% annually is a long-term average, and the actual annual return will fluctuate wildly. It could be -20% one year and +30% the next year. If you can’t stand to lose 20% or more of your savings in a year, then look at something safer (but which will therefore have a lower average annual return).

If you’re comfortable with the risk, just open an account with a reputable online broker and choose an index fund from the ones that they offer. In the UK they’re generally called investment platforms or fund supermarkets, so you should search for those terms — there’s a good introductory guide here. If you’re resident in the UK for tax purposes, it will make your life simpler if you use a UK broker.

Dividends and capital gains are taxable, but in the UK the first £2,000 of dividends and the first £12,300 of capital gains each tax year are tax-free, so on a €70,000 investment you can probably avoid tax almost entirely by selling enough each year to use that year’s capital gains allowance and then re-investing (but you have to wait 30 days before re-investing in the same fund). You can also put up to £20,000 per year in a tax-free wrapper called an ISA.

  • Thanks! What could be an option if I want it to fluctuate more like around: -4% and +6%? I was planning to move to either Portugal or Spain... Where can I find something like your lart paragrph for these countries? – JoseG Aug 26 '20 at 10:29
  • A 4% average is quite pessimistic tbh. I think it's about 7% long term, but again that could change in either direction, but it's not been 4%. – Jonast92 Aug 26 '20 at 14:01
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    @Jonast92 Think real rate of return, not nominal rate. – Mike Scott Aug 26 '20 at 14:06
  • @MikeScott Can you educate me on what you mean? "The S&P 500 index is a benchmark of American stock market performance, dating back to the 1920s. The index has returned a historic annualized average return of around 10% since its inception through 2019". Since it's about 10% I like to think about 7% as a realistic rate of return but I'd like to understand what you're trying to tell me. – Jonast92 Aug 26 '20 at 14:26
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    @Jonast92 Inflation in the US averaged 3.5% per year between 1926 and 2019, so that 10% nominal return on the S&P 500 was only a 6.5% real rate of return. You might get that much over the next fifty years or you might not, but it’s safer to lowball your expectations. – Mike Scott Aug 26 '20 at 14:48

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