Hello Mustachians,
I've run into the MMM blog a few months ago and have since been a lot more conscious about my finances, and I'm here to ask some advice on where to actually put my savings. I've always been reasonably financially responsible, but I always reasoned that I put some money towards a pension, have a sizable emergency fund, and any money beyond that is not very useful to save so you may as well spend it. So after being inspired by MMM I'm looking at the best way to grow my 'stash given the tax/regulations situation here in the Netherlands, which I’ll try to explain as well and as concise as I can. My case:
Situation:Age: 27
Income: € 35k take-home
Expenses: € 23k
Savings: € 12k
Assets:Apartment worth € 105k, with € 120k left on mortgage
Emergency fund: € 17k (in 1.85% savings account)
Pension account: € 3.6k (only started this year)
Investments: € 10k
Money in my checking account waiting to be moved: € 6k (where to put this is the key question)
No other debt
Goal:To provide options for Future Me. Not necessarily to retire extremely early, but still earlier than normal with possibly a sabbatical year or something, who knows. In short, some degree of financial independence.
Specific question:I have €8.4k/year to put somewhere, and I’m not sure whether I should max the pension account or not. My choice is between a hugely tax-advantageous but equally restrictive pension account, or accepting the taxes and investing post-tax. What should I do?
The Rules and restrictions:- The pension account is similar to a 401k: I have investment options with low costs etc. and manage the money myself.
- Contributions are tax deductible, at 42% marginal tax rate. Max contribution for me is €6.8k/year. I calculated I need to contribute €3.6k/year (adjust for inflation) to provide my pension from age 68 or so (projected official retirement age by that time).
- Withdrawals are taxed at about 38% when withdrawn before official retirement age, and taxed at about 22% after retirement age.
- Withdrawal must be done by purchasing (1) a life annuity (fixed monthly payment until death) starting any time you like or (2) an annuity with a fixed length for a period of at least 5 years, starting no earlier than age 65. You can do both (1) and (2) and create multiple income streams this way. You cannot withdraw money in any other way, there is no 401k-Roth pipeline or anything like that.
- Money in the pension account is exempt from capital gains tax.
- Most employers have a company pension plan here, but mine doesn't. I intend to stay here for a while but probably not until retirement, so I might end up with a mix of bits of pension.
- The total value of my investments and savings above €20k is subject to 1.2% capital gains tax per year independent of actual capital gains. The pension account is exempt from this.
- Social security (currently € 14k/year) starts at the official pension age which is expected to slowly increase, probably to 68-70 when I reach that age. Note that this makes it really hard to use the pension account for early retirement, because before the official pension age I will need to withdraw more pension than after, which cannot be realized within the restrictions.
- Accelerated payment of the mortgage is very complex and seems to be about a neutral value proposition for me, let's leave that possibility out of scope here.
Any insight would be most welcome. In particular I’d also love to hear from other Dutch people how they approach it and if my summary of the rules is even correct (PS. If there’s any Dutch forum on personal finance please let me know, I haven’t been able to find any yet – most people seem to leave this stuff to the financial advisor or just don’t bother at all).