Author Topic: Saving for retirement in the Netherlands - please help me choose!  (Read 5196 times)

Spruit

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Hi people! Maybe it's not very fruitful to ask such a country-specific question on a mostly U.S. board, but I find that a lot of international wisdom and outside-of-the-box thinking is gathered here so I like to try anyway :-)

I'm newly employed with a small company that doesn't have a corporate pension fund. So, unlike many of my fellow country(wo)men I get to save for my own retirement. This is both exciting (options! choice!) and intimidating. I appreciate any help you can offer with the process of finding out what option suites my wishes best.
Some info that might be relevant
- My gross monthly salary varies between 850-1250 (mostly 1000-1200 range) euros. I'm in the lowest income tax bracket either way.
- I have a debt of 9000 euros (@0.8%) I hope to eliminate by 2017
- Not married, but in a long term relationship
- I like to leave open some options regarding moving abroad if that suites us in the future, no concrete plans though

As I've come to understand, there are basically two options for retirement saving: banksparen and lijfrentepolis. Both are exempt from taxes (premiums are tax-deductible in the build-up fase. No capital tax and lowered income tax), which makes it possibly worthwile to pay into these funds while I'm young.

As I read it, there is only one big disadvantage of choosing banksparen over lijfrentepolis: the risk of a long life (and what a horrible risk this is LOL). If I live to be older than retirement age + 20 years (so, somewhere in the 88-92 range) I get nada. Well, except for AOW, if that still exists at that point in time. That is a gamble, of sorts. Most of my senior family members lived to be in their eighties and nineties and I hope to follow in their footsteps eventually.

So, what is your take on this? Is saving for traditional retirement even worth it on a low income? Is there anything I have overlooked?






PEIslander

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #1 on: March 31, 2015, 03:52:32 PM »
I'm sorry but I have no knowledge that can help you. I am however curious. I just did some google searching to try and understand the Dutch system. I understand it is called a three pillar system where the first pillar is government support to seniors, the second is employee/employer pension plans, and the third is what you comment on - voluntary savings for retirement of which there appears to be the two types you comment upon. Both seem to be forms of annuities with some tax advantages.

Am I correct that you have another option: Get a brokerage account and buy stocks and ETF's? I'm thinking there's nothing preventing this option except possible tax implications. Even with taxable accounts there must hundreds of thousands of investors in the Netherlands. Do you know what the tax implications are?



 

Spruit

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #2 on: March 31, 2015, 11:53:26 PM »
Hi! Thanks for responding. Regarding the three pillar system: I'm missing the second pillar right now. That's where the tax-exempt saving or insurance options come in. Looking at the interests, the third pillar (I.e. investing) looks way more profitable. But then there's no tax exemption. So this is why I am confused about which option is best for my situation.

Spruit

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #3 on: April 02, 2015, 03:45:23 AM »
A quick update for (possiby future) interested folks: investing for additional retirement apparently IS tax deductible via so-called "bankbeleggen", which is good news. This option is not promoted very openly, there are lot's of warnings because of the risk of investing versus saving etc. Only a few banks offer the possibility at this moment. Their investment funds are through index trackers, so that doesn't sound too high risk to me.

There are some tax rules such an investment has to follow, e.g. the fund is blocked untill retirement age (which for my generation is estimated around 72 years, it depends on average longevity). Unfortunately there doesn't seem to be a loophole in this like the US has with the 72t. So now I'm deliberating whether the tax advantage weighs up to the restrictions of such a fund.

Maybe it is wise to invest my saved income, say, 20% via the tax deductible old age option to profit from the tax exemption, and 80% via the regular taxed way to keep my flexibility for retiring early-ish. I'm investigating that further.
« Last Edit: April 02, 2015, 04:01:56 AM by Suzie P »

Shamantha

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #4 on: April 02, 2015, 07:11:56 AM »
Fellow Dutchie here! I would go for the pillar 3 solution if you are looking at early retirement, and at a pillar 2 solution if you are planning on working to pension age (which may be up tp 70+ years old looking at current development). Both options have tax advantages. The pillar 2 solution big drawback is that it is tied to AOW / Social security age, if you retire earlier you lose up to half of your pension, which is a real shame.

You also have the 4th pillar option, which is basically investing your own money. No tax advantages but also no restrictions.

I am also considering at this moment. I am entitled to pillar 1 (AOW/social security) as well as pillar 2 from the date of AOW. However, as of this year, pensions in pillar 2 are capped at 100.000 Euro. For the amount on top of that you can no longer build pension, and as I earn slightly more than this I would have to look at either a pillar 3 or 4 solution. 

Pillar 1 and 2 are mandatory for me, and I think they are sufficient, I am therefore not sure if I actually need to do something. The pension (AOW+pillar 2) is targeted to bring me 70% of my last wages. The view behind topping up your pension is that you can't survive on less than this 70%.

Well, as I am currently living on 50% I do not see any issues with that :-) In 5 years time I hope to be mortgage free so then it will go down to only spending 30% of my wages. I therefore see more in just investing in index funds etc. rather than a pillar 3 solution which comes with restrictions. This will leave me free to stop or reduce working at any point in time, rather than this being tied to a bank product with a fixed term which I can't break without losing tax advantages.





Spruit

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #5 on: April 03, 2015, 01:35:02 AM »
Fellow Dutchie here! I would go for the pillar 3 solution if you are looking at early retirement, and at a pillar 2 solution if you are planning on working to pension age (which may be up tp 70+ years old looking at current development). Both options have tax advantages. The pillar 2 solution big drawback is that it is tied to AOW / Social security age, if you retire earlier you lose up to half of your pension, which is a real shame.

You also have the 4th pillar option, which is basically investing your own money. No tax advantages but also no restrictions.

Hi Shamantha! I may have things muddled. Pillar 3 is banksparen / bankbeleggen, correct? As I understand it, this option is also tied to AOW age and doesn't allow for early retirement. Or am I missing something here?

My plan is to at least set up some form of old age fund, as AOW is only 750 euros now (let alone what happens after more cutbacks), and I can't live on that alone.  I expect medical costs to rise as I age as well. How large this fund should be is something I'm investigating. I don't want to scrape by when I'm eighty, but I also don't want to invest all my financial means for later when I can get more out of them in the coming years. I have contacted one of the banks that offer bankbeleggen, to inform about the flexibility of this option with regard to variable contributions. I don't want to get stuck with a fixed expense, no matter how  tax deductible it may be.

So, I'm looking for the right balance between pillar 1/2/3 and 4.

Mr FrugalNL

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #6 on: April 03, 2015, 06:50:20 AM »
- I have a debt of 9000 euros (@0.8%) I hope to eliminate by 2017

You weren't asking about this but.. I wouldn't pay off my student debt any faster than required. Every euro you have can be put to one of several uses:
- paying off the debt (saves you 0.8 cents per euro a year)
- put in a normal bank savings account or 'depositorekening' (currently earns you about 1.5-1.8 cents a year if you choose wisely)
- invested in index funds/ETFs (earns you more still than the savings account, but only reliably so in the long run).

In other words, paying off this particular debt is the worst option you have. Debts generally are bad, but this is a textbook example of good debt because the interest rate is so low. In fact, if you were eligible to borrow more at that rate (and will invest rather than spend it!) I'd heartily recommend you do.

As I've come to understand, there are basically two options for retirement saving: banksparen and lijfrentepolis. Both are exempt from taxes (premiums are tax-deductible in the build-up fase. No capital tax and lowered income tax), which makes it possibly worthwile to pay into these funds while I'm young.

Good on you for thinking about this now rather than later. This article might help you better understand the differences between banksparen and lijfrente. I'm in the same boat as you and have opted for a lijfrente investment product. I have an investment account with a narrow range of funds to choose from and can pay money into this account until I reach retirement age. Withdrawals are impossible but I can pay as much money into the account as I choose; how much of this I can deduct from my income tax depends on my total salary. Money in the account is exempt from the 1.2% tax on assets applicable to money in a regular old bank account. When I reach retirement age, I have to use the money from the account to buy a periodic payment from a bank or insurer. I haven't been terribly impressed with my insurer's quality of service so far, but the product itself seems suitable enough in my situation.

One more thing to bear in mind about banksparen vs lijfrente: If you die before reaching retirement age then your heirs are entitled to the sum accrued with banksparen; in the case of most lijfrentepolissen, they get nothing! Something to bear in mind.

EDIT: Tax deductibility is great and everything, but I've come to prefer the flexibility of 'box 3 sparen/beleggen', also known as opening a regular old bank or investment account that doesn't come with tax incentives and restrictions. 'box 3' refers to the three 'boxes' of the Dutch taxation system and is not to be confused with the three 'pillars' of our pension system!
« Last Edit: April 03, 2015, 06:53:49 AM by Mr FrugalNL »

Shamantha

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #7 on: April 03, 2015, 12:33:49 PM »

Hi Shamantha! I may have things muddled. Pillar 3 is banksparen / bankbeleggen, correct? As I understand it, this option is also tied to AOW age and doesn't allow for early retirement. Or am I missing something here?

It is indeed banksparen/beleggen. You can do that in order to add to your pension, or to retire earlier in you have an otherwise sufficient pension. However you have to commit to a period of time to get the tax advantages, and it is therefore not as flexible as 4. Check for example http://www.unive.nl/pensioen/eerderstoppenmetwerken for one of the products I was looking at recently.
Quote

My plan is to at least set up some form of old age fund, as AOW is only 750 euros now (let alone what happens after more cutbacks), and I can't live on that alone.  I expect medical costs to rise as I age as well. How large this fund should be is something I'm investigating. I don't want to scrape by when I'm eighty, but I also don't want to invest all my financial means for later when I can get more out of them in the coming years. I have contacted one of the banks that offer bankbeleggen, to inform about the flexibility of this option with regard to variable contributions. I don't want to get stuck with a fixed expense, no matter how  tax deductible it may be.

So, I'm looking for the right balance between pillar 1/2/3 and 4.
I think I would go for a mix of pillar 3 and 4. I would use pillar 3 to fund the minimum I would need after retirement age on top of the AOW, as this is secure and has a guaranteerd return. However, you would be stuck with a fixed expense if you want the security. I would then use pillar 4 to fund early retirement. However I am quite risk averse and I am sure a lot of people on the forum are confident that you could fund it all safely with pillar 4 investments.

I have a meeting with a pension consultant (offered by my work) next week and will let you know if I get any enlightment from that :-).

Spruit

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #8 on: April 03, 2015, 01:39:43 PM »
- I have a debt of 9000 euros (@0.8%) I hope to eliminate by 2017

You weren't asking about this but.. I wouldn't pay off my student debt any faster than required.

I simplified the debt for readability. It is actually 35K of student loan debt, backed up by 26K which I was able to save up. So 35K - 26K = 9000 euros in "real" debt. I'm in a hurry to get the 26K up to at least 35K, at which point I will consider myself "debt free" ( I'm in no hurry to speed up the government's pay back period of 15 years though, because of profitable interest rates like you mentioned).

I think I would go for a mix of pillar 3 and 4. I would use pillar 3 to fund the minimum I would need after retirement age on top of the AOW, as this is secure and has a guaranteerd return. However, you would be stuck with a fixed expense if you want the security. I would then use pillar 4 to fund early retirement. However I am quite risk averse and I am sure a lot of people on the forum are confident that you could fund it all safely with pillar 4 investments.

I have a meeting with a pension consultant (offered by my work) next week and will let you know if I get any enlightment from that :-).

Yes, please let me know what the consultant's take on this is. At this moment I think nr. 3 (bankbeleggen) looks promising. A pretty flexible product (i.e. flexibility regarding how much I invest at any moment in time, no fixed expense), decent returns through index investing, relatively low costs AND tax benefits. Here's a link for who's interested in the specific product I'm talking about: Brand New Day Pensioenrekening. I filled in their calculator, and it seems I would need 2000 euros invested only once to receive 1400 euro every month year after retirement, on top of the 750 euros a month AOW.
« Last Edit: April 03, 2015, 03:10:42 PM by Suzie P »

Mr FrugalNL

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #9 on: April 03, 2015, 02:48:33 PM »
I simplified the debt for readability. It is actually 35K of student loan debt, backed up by 26K which I was able to save up. So 35K - 26K = 9000 euros in "real" debt. I'm in a hurry to get the 26K up to at least 35K, at which point I will consider myself "debt free" ( I'm in no hurry to speed up the government's pay back period of 15 years though, because of profitable interest rates like you mentioned).

Very good, then pretend I didn't say a word.

Yes, please let me know what the consultant's take on this is. At this moment I think nr. 3 (bankbeleggen) looks promising. A pretty flexible product (i.e. flexibility regarding how much I invest at any moment in time, no fixed expense), decent returns through index investing, relatively low costs AND tax benefits. Here's a link for who's interested in the specific product I'm talking about: Brand New Day Pensioenrekening. I filled in their calculator, and it seems I would need 2000 euros invested only once to receive 1400 euro every month after retirement, on top of the 750 AOW stipend. I currently get paid only 1000 euros gross a month, so this would actually be a near doubling of income. That seems like a generous safety margin. Time is definitely on my side :-)

I tried the Brand New Day caculator and my one-off deposit of 2000 euros got me a final capital of 32000 euros and a pay-out of 2000 euros per YEAR from age 65 to 85. That's with a pretty aggressive asset allocation and a long time horizon. Are you sure about your calculation? :-/

Spruit

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #10 on: April 03, 2015, 03:07:10 PM »
Doh! You're right. It's the payout per year. Seemed to good to be true LOL.

Shamantha

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #11 on: April 09, 2015, 08:28:05 AM »
Had a discussion with a pension consultant from my work today on how to implement the new pension rules. Her advise was to only save what I think I need to retire comfortably in the regular pension schemes that only start paying out after AOW age, and anything additional find my own pillar 4 solution. This is partially based on the fact that I will have no mortgage when I retire, which will significantly lower my costs of living. If I would invest the rest in a different pillar 3 solution, it would only make the payments after AOW age higher, which is not what I am looking for. By the way: I looked into several pillar 3 solutions and what I said earlier that they are secure, is not necessarily the case, some have a high risk profile so that is also something to watch. A lijfrente with a guaranteed result is a better option if you are risk averse.

For me it is clear what I want: early retirement, but for you I am not sure what your goal is? You currently have a relatively low wage, but this will grow, how do you see this developing in the future? How much money do you think you will earn 10 years from now? At what age do you want to retire? Do you want to buy a house? How much money do you think you will need in retirement on top of the AOW (expecting this still to exist in some shape or form). All of these questions were in the questionnaire of the pension consultant and I think they are good questions, on which you need the answer before you make any decisions on what type of pension you want to go for.


Spruit

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #12 on: April 11, 2015, 02:45:54 AM »
For me it is clear what I want: early retirement, but for you I am not sure what your goal is? You currently have a relatively low wage, but this will grow, how do you see this developing in the future? How much money do you think you will earn 10 years from now? At what age do you want to retire? Do you want to buy a house? How much money do you think you will need in retirement on top of the AOW (expecting this still to exist in some shape or form). All of these questions were in the questionnaire of the pension consultant and I think they are good questions, on which you need the answer before you make any decisions on what type of pension you want to go for.

My goal? To not end up totally broke after retirement age :-P
But, seriously: so much is still up in the air for me, but I want to get my bases covered at least. I can already tell that AOW won't be enough, and that's currently all I'd have after turning 72.
Early retirement would be great, but I'm not sure it's feasible with our salaries.
I've just started working, I don't have a fixed contract, have no idea how my income will develop. I think it will grow eventually, but I just don't know by how much and in what rate. BF has a very "regulated" job, a very predictable income development. I do not, unfortunately. I'm not in a high income field, I do know that.

Regarding the house buying: yes I (in theory) want to buy a house, but I'm not sure when that will happen (can't currently buy the house we'd want on our modest salaries, but we can (and do) rent it.).

How much money I'd need is something that's hard to estimate (I've just turned 28, I don't know how my life is going to develop before or after 72). I do know AOW alone won't cover my current costs, certainly if health care cost come into the equation. I think it is safe to say I need at least another 800-1000 euros a month in old age.

I am a "twijfelkont" (I'm sure doubt ass is not the right translation, what is??); I'll be procrastinating forever because I don't know all the details, the subject's complicated etc etc.The thing is, if I wait untill I can answer all these questions for sure LIFE has already happened and I'll be rather late to the party. It seems wise to at least set up an arrangement for the absolute basic income I think I need now that I'm young (and have the advantage of time in the market on my side), and arrange the rest with private investment / paying off eventual mortgages etc.

Mr FrugalNL

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Re: Saving for retirement in the Netherlands - please help me choose!
« Reply #13 on: April 11, 2015, 03:15:55 AM »
My goal? To not end up totally broke after retirement age :-P
But, seriously: so much is still up in the air for me, but I want to get my bases covered at least. I can already tell that AOW won't be enough, and that's currently all I'd have after turning 72.
Early retirement would be great, but I'm not sure it's feasible with our salaries.
I've just started working, I don't have a fixed contract, have no idea how my income will develop. I think it will grow eventually, but I just don't know by how much and in what rate. BF has a very "regulated" job, a very predictable income development. I do not, unfortunately. I'm not in a high income field, I do know that.

It's hard to plan half a century ahead! It will get easier after you and your boyfriend have been working for a few years and you know more about your income and expenses. Your plans will probably change a few times before you reach AOW age, so don't feel bad about not having everything planned out in minute detail.

Regarding the house buying: yes I (in theory) want to buy a house, but I'm not sure when that will happen (can't currently buy the house we'd want on our modest salaries, but we can (and do) rent it.).

Have you looked into whether buying or renting is cheaper? If buying's cheaper do you have any relatives with money in their bank accounts being whittled down by taxes and inflation? Would they be interested in lending you money to buy the house, in a 'familiebankconstructie'? This is potentially a very lucrative way of financing a home purchase. You need rich relatives for it, though!

How much money I'd need is something that's hard to estimate (I've just turned 28, I don't know how my life is going to develop before or after 72). I do know AOW alone won't cover my current costs, certainly if health care cost come into the equation. I think it is safe to say I need at least another 800-1000 euros a month in old age.

I used mustachecalc.com to calculate that, if you get a 5% (after inflation, after tax) return on your investments, and invest 2100 a year, you will have 300,000 by age 70, from which you should be able to safely withdraw the equivalent of 12,000/year (4% Safe Withdrawal Rate) without ever running out of money. Not too bad, eh? You'd only need to save 175 (after tax, inflation adjusted) per month to achieve that.

I am a "twijfelkont" (I'm sure doubt ass is not the right translation, what is??); I'll be procrastinating forever because I don't know all the details, the subject's complicated etc etc.The thing is, if I wait untill I can answer all these questions for sure LIFE has already happened and I'll be rather late to the party. It seems wise to at least set up an arrangement for the absolute basic income I think I need now that I'm young (and have the advantage of time in the market on my side), and arrange the rest with private investment / paying off eventual mortgages etc.

If you start saving money in your bank account now, then take six months to figure out exactly what to do with it, you'll still be doing very well. No need to rush into anything right this week.