Ask Paul: I want to retire early, how can I pay less tax on my investments?

I have been interested in the FIRE movement (financially independent, retire early) for 11 years.

I work full-time and I am an aggressive saver, and regularly invest in listed investment companies and exchange traded funds listed on the ASX.

The dividend distributions are getting bigger, which I am happy about, but I am also paying extra tax on this passive income.

Any ideas on how I can reduce my tax liability? - Phil

Well, Phil, there are many money-related movements that really worry me.

These all too often are schemes concocted by the "leaders" to rip off those who listen to them. But the FIRE movement is one I do agree with.

Financial independence is something I have been encouraging people to aim towards for my 40 years as a financial commentator. It just makes so much sense.

During this time I have often used my "17 times" rule.

To be financially independent, a rough guide is to work out how much you would need to live on, multiply that by 17 and you have a target to aim for. So, if you thought $50,000 was the right amount, multiply by 17 and your financial independence target is about $850,000 in investment assets.

The point FIRE makes, which I strongly agree with, is that the way to get there is regular savings and investment and, critically, reducing expenditure. If you can live well on a lower amount, the amount you need to have invested reduces and, of course, you can save more.

About the only thing I am not so sure about is the "retire early" bit.

After decades of saving and investing, I hit financial independence a while ago, but retirement is not on my list. What financial independence does is allow me to work only at things I enjoy and add value to my life, such as Money magazine.

I do appreciate that tax cuts into your investment income and means you have less to invest.

The only solution here is sensible tax planning. Franked dividends really help; the other big one is super.

For financial independence, super is a nearly magical but legal tax structure. With maximum tax payable of 15% inside super, franked dividends see the ATO giving money to you, so maxing out your contributions may be a great way for you to go.

The other option is to consider borrowing to invest, where the interest is tax deductible and offsets taxable income. But this is a different story; here we need to look at the risk involved and how you feel about risk.

One thing is for sure, if we want to be happily financially independent, we need a strong society around us. This means hospitals, roads, schools, police, laws, a court system and so on.

A democracy is not cheap. It certainly makes sense to legally minimise tax, but I know that supporters of the FIRE concept also want a society that provides peace, security, infrastructure and a support structure for those who need it.

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