To listen to American Financial Independence podcasts might feel frustrating for someone living in Finland. The living and working conditions in the US are so different from those in Finland. And mostly Finnish conditions are not beneficial for those of us trying to reach financial independence. This is mainly because of lower wages, high taxation and high trading costs. Don’t get me wrong, there are great things as well in Finland!
Let’s dive into the topic and compare some points mentioned, wages and income tax first.
Salaries and taxes
According to the American website Salary.com the average salary for an Information Technology Manager in the US is 121 520 $ (approx. 111 000 €) as of October 30, 2019. Seeing a similar Finnish website Palkkadata.fi the salary for the same position is 60 888 $, or 63 957,97 $(December 1, 2019).
When you run that number through an Income Tax Calculator at Neuvoo.com it tells you that the total tax in Finland for this salary including local and income tax, pension costs and unemployment insurance will cost you 23 047 € (approx. 25 800 $) a year and your net pay will be 37 841 € (approx. 42 366 $). Using a similar American calculator at Thetaxcalculator.net tells you that taxes and social security will make up 29 707,58 $ of 121 520 $ and leave you with 91 812,42 $.
The numbers conclude much less income taxation in the US even though the gross income is much higher, percentage-wise the numbers speak for themselves:
Net pay Finland is 66.24 % and tax percentage 33,76.
Net pay US is 75.55 % and tax percentage 24,45.
This was only one example but it is valid in general: Salaries in Finland are low and taxes high compared to the US.
Income taxation varies quite a lot in the US, depending on the state you’re living in. Not so much in Finland, there is only about a 1-2 % variation in municipal taxes. Tax progression in Finland is much steeper and tax brackets much more restrictive.
According to OECD data and countries included from 2019 research, for families with two children Finland has the third highest average personal income tax rate of 31.75 %. The US ranks on 21st place with an average personal income tax rate of 13.7 % (Source: Investopedia.com).
Taxes, taxes and more taxes
Obviously, income tax is a big chunk of the tax burden but then there are other taxes having quite some impact on your hard-earned euros.
Standard sales tax is 24 % in Finland and there are two reduced rates:
14 % on food, restaurant services, catering services and animal food.
10 % on books, pharmaceutical products, passenger transportation and accommodation.
On the other hand, in the US sales tax varies from state to state but the highest average with combined state and local sales tax 2019 is only 9.47 % percent (Tennessee). There are even states with zero local sales tax and only state taxes apply (Source: Taxfoundation.org).
Long term capital taxes
Ok, after having paid higher income taxes and higher sales taxes you could think we would get a break when it comes to taxation for investing your savings, but the pattern of high taxation continues when looking at long term capital gain taxes. In Finland these are 30 % and increase progressively to 34 % for the amount surpassing 30 000 € a year, no matter what your income is. So, it’s always 30 % or 34 %.
Long term capital gain taxes in the US are depending on the income and for 2019:
Long-term capital gains tax rate
$0 to $39,375
$39,376 to $434,550
$434,551 or more
Only gains surpassing the tax brackets are taxed, so let’s assume you don’t have any other income but 50 000 $ income from capital gains, only 10 625 $ are taxed with 15 % which would be 1593,75 $.
In Finland with the same income of 50 000 € from capital gains, up to 30 000 € are taxed with 30 % which would be 9000 €. The remaining 10 000 € will be taxed with 34 % which would be 3400 €, so altogether 12 400 €.
As a conclusion this leaves a person in the US with 48 406 $ cash in hand and a person in Finland with only 37 600 €.
Those numbers are ugly for us in Finland but unfortunately they don’t lie!
Inheriting money or property in Finland is expensive. In fact, it is not uncommon that inheritors aren't able to inherit because they can´t afford to pay the taxes following an estate inheritance! Sounds crazy, doesn't it? If the inheritor is the spouse or children and the inheritance exceeds 20 000 € they will pay between 7 and 19 % in taxes. Other, not as close relatives, will pay between 20 and 35 %.
The US no longer has an inheritance tax. Inheritances of cash or property are not taxed as income to the recipient. The estate state tax, which the estate itself pays, will be charged for inheritances exceeding 11.2 million dollars. A special provision of the law allows the estate of a surviving spouse to as much as double the exemption.
As a result, not many estates or their beneficiaries will owe any tax at all. According to Investopedia.com the federal estate tax applies only to a tiny minority of super-rich taxpayers, estimated at about 2000 a year in total. As of 2019 only six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania) impose an inheritance tax.
However, before an inheritance tax is due, the value of the assets must exceed certain thresholds that change on a yearly basis but generally it is at least 1 million. And, none of them taxes inheritances that go to the spouse or children (Source: Investopedia.com).
Ok, ok, enough with taxes for this time, no chance to cover them all but the glimpse on above taxes gives a clear picture comparing Finland to the USA.
In the introduction I mentioned wages, taxation and trading costs.
Trading costs: let’s talk about that shortly
Trading costs are higher in Finland (I think you got the pattern already) and the options of trading platforms is limited compared to US and other European countries like Germany. I guess it’s because the market is not big, given the fact that Finland has a population of about 5.3 million only. There is no possibility for zero fee trading in Finland with one exception: Nordnet offers 4 index funds covering 4 Scandinavian markets with no trading costs and no yearly management fees. Those are:
As mentioned in our earlier post our index funds have an expense ratio of 0.2 which for Finland is quite ok, but nowhere near the 0.04 like Vanguards US total stock market index fund (VTSAX) or many other low cost funds available in the US.
It’s possible to get low cost index funds with reasonable fees at e.g. Nordnet, but those are mostly administered in other European countries (many in Ireland) and you run the risk to pay capital gain taxes twice - in the country of administration and Finland. Of course, there are the double taxation treaties between those countries and Finland, but it can be quite laborious to get the agreed tax percentage back and some risk not getting it at all.
A big advantage in the US are tax-deferred investment accounts. Until beginning of 2020 there was no tax-deferred investing account available in Finland but now there is. It’s called Osakesäästötili or Aktiesparkonto in Swedish and is limited to buy stocks only, not mutual funds, index funds or ETFs.
You can invest up to 50 000 € in principal and capital gain taxes (30 % or 34%) are only applied on the gains when their taken out of the account. Within the account you can buy and sell with no tax impact. Main advantage is clearly the interest on interest effect (compounding) over many years, as you are not paying capital gain taxes e.g. for dividends each time you receive the dividend payout and re-invest the full amount. It’s a beginning but by far not optimal compared with the options available in the US.
Phew! Are you still with me? Feeling somewhat discouraged if you are living in Finland?
We do as well sometimes but then we remind ourselves that a little more patience will do the trick up here!
Patience and the knowledge about the many good things we have in Finland are important factors on the journey towards FI and retirement.
So, what are the pros of living in Finland pursuing FI?
Besides the beautiful nature, white nights in summer and aurora borealis there are many benefits living in Finland. When it comes to financial independence the three main perks are discussed below.
Tax-based funded public health care
According to the Constitution of Finland, public authorities must guarantee for everyone adequate social, medical and health services. Finland’s social welfare and health care system is founded on government-subsidized municipal social welfare and health care services. In addition to the public sector, many private enterprises and non-governmental organizations also provide health care services.
Public healthcare is primarily funded by taxation and by (low) patient fees. Every employee pays 0,68 % of his salary for public health care and another 1,18 % for daily allowances in case of inability to work because of sickness.
Finland has one of the best education systems in the world and the strategy for achieving equality and excellence in education has been based on constructing a publicly funded comprehensive school system without selecting, tracking, or streaming students during their common basic education.
The education system consists of daycare programs (for babies and toddlers) and a one-year "pre-school". The maximum day care fee in Finland is 290 €/child/month. This sum will be lowered if a family of four for example earn less than 6000 € gross income per month. More than one child in daycare at the same time also will lower the fee for the second child.
After their nine-year basic education in a comprehensive school, at the age of 16, students may choose to continue their secondary education in either an academic track or a vocational track, both of which usually take three years and give a qualification to continue to tertiary education. Tertiary education is divided into university and polytechnic systems.
Since the Finnish school system is publicly funded no tuition or fees are charged. So we don´t have to worry about our children going to university or not when we plan for our future.
Social security and pension
Social security in case of unemployment is also guaranteed as is government paid pension.
Regarding social security for unemployment you get about 40 € per day if you have two children. It’s not very high but there are other social benefits available on top e.g. partly payment of rent. Also, if you’re a member of a union or have a private unemployment insurance (which is about 100 € a year) you will get, at least for the first year, about 70 – 80 % of your gross salary.
Speaking about pension, the earliest date of retiring for Mrs. Becoming FI is 66 years and 10 months with deduction to the monthly payed pension amount! The expected retirement age is 69 years and 5 months with full payed pension. The longer you wait to receive pension after the expected retirement date the more you gain on the monthly payouts. The amount of the monthly pensions depends highly on how long you have been working (paying into the pension system) and how much you earn during your working career. The average pension in 2018 in Finland was 1680 € and the median pension was 1459 €. More details about pension amounts and distribution can be found here: Etk.fi
If your working pension is very low you can apply for a national pension called “folkpension/kansaneläke” which is paid as an old age pension and currently makes up about 600 €. Of course, other social benefits are available to support a receiver of the national pension as this is not a high amount, but it’s better than nothing.
Since we are at the beginning of our journey towards financial independence and our goal, set to ten years, often feels like forever - especially the beginning. “Like watching paint dry” as the German blogger Karsten from earlyretirementnow.com described it! However, when checking our “normal” dates of retirement we feel pretty encouraged! Compared to 32 years and 3 months for Ms. Becoming FI and roughly 20 years for Mr. Becoming FI, ten years feels like piece of cake! And we are still hoping to speed up the pace!
P.S.: Man, this took us a while with all the research and a nice little side project buying our first rental property – a 3 room apartment. More on this in the next post, hopefully due soon.
”Sijoittamiseen osake- ja pääomamarkkinoilla liittyy aina riskejä. Sijoitusten arvo ja tuotto voi nousta tai laskea, ja sijoittaja voi menettää sijoittamansa pääoman kokonaan. Historiallinen tuotto ja kehitys ei ole tae tulevasta tuotosta.”