It is Warren Buffett’s advice that for most people, the best place to build your retirement nest egg is through indexing. This means buying into an S&P 500 ETF such as SPY. We try to explore whether is this the best course of action for your retirement.

On the whole, the S&P 500 have been racking in returns of close to 10% historically. That is a decent return for a passive investment strategy. However, it does come with equity volatility, which means you must be able to stomach drops of 50% during this journey of wealth accumulation.

Another alternative will be the All Weather Portfolio advocated by Ray Dalio. Based on our numbers crunching, it would generate close to 6%-7% return but volatility will be much more acceptable. We could be looking at drops of 20%-30%.

The motivation for this article is we came across an informative YouTube video by The Fifth Person, where they touched on the intricacies of investing in SPY which is the most popular ETF on the S&P 500.

Their argument will be summed up in the following points where they advise against investing in SPY:

1. Higher expense ratios as compared to similar ETF
2. Subjected to Inheritance Tax of 40% as it is a US domicile ETF 
3. Withholding tax of 30% for dividends
4. There are many alternatives available

 

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Expenses Ratio For SPY

The expense ratio for SPY is 0.09% whereas the other options could go as low as 0.05%. Frankly, this might not be the killer feature. 

 

Inheritance and Withholding Tax

What is more worrying will be the 40% tax over US$60,000 which is massive if you have built a sizeable position. So the plan to avoid this will be to buy an Ireland-domicile S&P500 ETF and it will be CSPX. We can solve two issues at once, where it is not subjected to inheritance taxes as of this writing. 

Furthermore, the withholding taxes will be halved which will be at 15%. We do recognise the savings but S&P500 ETF is known to give meagre dividends that stand at around 1.5% currently.

 

Alternatives Available

So it brings us to the last point which we have many alternatives available. So CSPX will be one to avoid the inheritance taxes and have a lower withholding tax. Another that comes to mind if you are still keen on investing in US domiciled ETF will be Vanguard’s VOO which has an expense ratio of 0.05%.

 

Commission and Fees for Ireland Domicled ETF

One key consideration for investing in an Ireland-domiciled ETF will be the commission rates. Being listed on the London Stock Exchange, the commission is going to be much higher. On top of that, you will be subjected to 0.5% buyer stamp duty. It will bring commission rates and fees based on our estimate to 0.62% to 0.9%.

We know the commission rates for the US are much lower, and if you have a prepaid account, it could go as low as just $1.88 per trade or even free for some platforms. So even if I traded a million dollars worth of SPY, it would cost me just $1.88. If we are going to go through the London Stock Exchange to buy an Ireland-domiciled S&P500 ETF, it will set me back at least $6,200.

 

Summing Up

So putting all the facts and figures on the table would give us a clearer picture of how we are going to structure our retirement portfolio if the S&P500 ETF is a big part of the equation. From what we gathered, even the S&P500 ETF listed in the Singapore Exchange is subjected to this inheritance tax as it is still US-domicled.

If we know when we are leaving this world, it is a wise move to sell off all our US holdings before doing so to prevent the hefty taxes payable to Uncle Sam.

We do acknowledge that stock picking is not a walk in the park and the invention of ETF is great for the normal man on the street. Nonetheless, this requires consistency and the ability to just keep putting in your savings despite the market not doing well.

However, you have to consider the intricacies of putting a big load of your retirement funds into just one vehicle. We hope this article will give you useful insights and points to give some thoughts.

 

Read Also: Is Silver Going to be a Great Investment- $50 Target?

 

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Disclaimer:

The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment. It is not a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.