How much do you need to retire in the Netherlands – 2019 Update

We did an update on the Cheesy Index for 2018 a while back and still need to do another one for 2019. This as wealth taxes have (and will continue to be) changed. To start the legwork for our 2019 Cheesy Index update, we wanted to do another installment of the HMDYNTR series. The what? The “How Much Do You Need To Retire in the Netherlands – 2019 Update?”, that’s what.

How much do you need to retire in the Netherlands – 2019 Update

See here for various previous posts on the topic “How Much Do You Need To Become Financially Independent in the Netherlands”. For this post we will be looking purely at the “base case” of having €25.000 to spend each year (so after taxes!).

For the sake of this post, we assume you are a couple for tax purposes. Having a few kids does not change much on the tax side (except maybe some benefits and deductions), but your expenses will be affected obviously. We also assume you strive to organise your life to have the lowest taxes possible (which might not be 100% possible or practical!).

How much do you need to retire in the Netherlands - 2019 Update
How much do you need to retire in the Netherlands – 2019 Update

We will look at these 4 taxation options to see how much money you would need to FIRE or become HOT in the Netherlands:

1)      All your income falls under Box 1 (HOT option / “FIRE option” if you have short term rentals/Airbnb)

2)      All your income falls under Box 2 (HOT/FIRE option – subject to your required amount of work)

3)      All your income falls under Box 3 (full FIRE option – investments/passive income only)

4)      Your net income has a 40 – 60 percentage split between income in Box 1 and Box 3 (HOT option)

Note, I also updated the original Box 3 post with the 2019 numbers! Also, I did some digging into the tax system and asked a few tax experts. I was able to determine some errors in the previous version for 2017. If your are a couple, and only have income in Box 3, you do get the “algemene heffingskorting” twice (a tax credit). In short, you needed less wealth to FIRE than stated in that post! Corrections are applied here.

Scenario Assumptions

We have assumed the following for each scenario (including updates and modifications from the previous assessments):

Scenario 1:

  • Taxation is based on 2019 rates, inclusive of heffingskortingen (tax credits) and social premium deductions.
  • It assumes income is from “work”, but this could also include income from short term Airbnb rentals for example.
  • It is assumed that the income is equally split between the two of you (to max out tax benefits).
  • No income from other benefits or government/private pension.
  • You both are younger than 67 years (otherwise different taxation rates apply!).
  • No special tax arrangements or benefits (e.g. no company car, you rent a house, no special life insurance or other policies, etc.), just to keep it simple.

Scenario 2:

  • Taxation is based on 2019 rates (still 25%).
  • There is only income in Box 2 from special interests in a company (paid in dividends).
  • Inclusion of 2019 “heffingskorting” for two adults (i.e. €2.477 per person in general tax reductions).

Scenario 3:

  • Taxation is based on 2019 rates.
  • Inclusion of 2019 “heffingskorting” for two adults (i.e. €2.477 per person in general tax reductions).
  • Assumed net ROI of 3%, 4%, 7% and 10% (to show taxation effects).

Scenario 4:

  • Taxation is based on 2019 rates (Box 1 & Box 3).
  • Total yearly net income of €10.000 from labour (or other Box 1 income forms) and €15.000 from investments.
  • Inclusion of 2019 “heffingskorting” for two adults (i.e. €2.477 per person in general tax reductions).
  • No income from benefits or pension.
  • You are younger than 67 years.
  • No special tax arrangements or benefits (e.g. no company car, you rent a house, no special life insurance or other policies, etc.). Again just to keep it simple.
  • Assumed net average ROI’s of 4% and 7%.

The Results

For more details on the taxation amounts, please see Box 1, Box 2 and Box 3 (and check the website of the Belastingdienst for the latest and greatest!).

Based on our assessments, you get the following taxation amounts and effective tax rates based on the above noted assumptions. The required amount of assets are based on the noted ROI’s (not to be confused with safe withdrawal rates!). Unless I screwed up somewhere…

How much do you need to retire in the Netherlands - 2019 Update
How much do you need to retire in the Netherlands – 2019 Update (ignore the couple of rounding errors with target net income)

Observations and Conclusions

Before diving into the observations and conclusion, one major comment. The noted net ROI’s are what your portfolio is actually making you (irrespective of what it consists of!). However, this does not leave room for inflation correction. If you want to take that into account, you will either need a larger portfolio, with corresponding higher tax burden. Or you need a higher ROI to compensate for inflation. For tax purposes, a higher ROI is the best way to go.

Another thing not included here is the tax benefits one has with real estate. Property valuations are currently generally lower than market value and you can correct for “value in rented state“. Plus you can deduct mortgages and loans to determine you actual wealth for tax purposes. Real Estate and leverage are your fiends for tax purposes!

Final note, the asset amount is the amount of invested wealth you need. Your home is not included in this (and will be taxed in Box 1, but I have ignored this for now), nor are any valuable possessions (art, cars, etc.).

The discussion

Based on the (updated where applicable) calculations (with hopefully the correct tax interpretations) there are a couple of interesting conclusions to be drawn:

  • Scenario 1: If you are able to split income almost perfectly, your effective tax rate kan be quite low. A HOT life might involve only working 1-2 days per week! Sign me up 😉
  • Scenario 2: Not much has changed over the years, tax burden is quite high in relative terms. And this is on top of the profit tax that is already paid within the company at 20%.
  • Scenario 3: If you can consistently have your porfolio produce 10%, you can retire without paying taxes. Got to seriously love risks and/or leverage though!
  • Scenario 3A: Let’s assume you have some real estate and are able to generate 7% net cash-flow (that corrects for inflation), you only need to have a leveraged net wealth of about €360.000 to get around. That’s not bad at all! But a net 7% cash-flow in todays housing market is not going to be easy, albeit not impossible for student accommodations.
  • Scenario 3B: If you assume a net ROI of 4%, you could pay relatively little taxes and still enjoy freedom. You would still need to get around €700.000 though!
  • Scenario 3C: Yes, you can retire on a bond/green investment portfolio, but man, do you need to build up a lot of wealth first!
  • Scenario 4A: Kind of a sweet spot for those who want to be HOT! Little taxes, little wealth, still the opportunity for a good life! High return on investment though, but not impossible!
  • Scenario 4B: Might need to consider jacking up your ROI/cash-flow. But otherwise, a good position to be in when you seek a combo of good living, doing work you like and freedom.

Cheesy Numbers?

Having focussed on this post, I still need to recalculated our own new target number for FIRE. However, we won’t make this number public. That being said, we are also aiming for about €25.000-30.000 per year. We will likely have a tax combo between Box 1 and Box 3. However, we are still aiming a full FI under Box 3 (with any Box 1 income as a buffer/safety margin).

 

How about you, have you determined your number? Did I make an error somewhere? Please let me know!

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30 Comments

  1. Nice overview indeed! But what about the pension income when you are officially retired according to the law? If you aim for 25k a year, you will need less when you hit your age for retirement resulting in less wealth you need to build. Fo example if you have a pension income of 10k a year, while aiming for 25k, you only need an additional 15k once retired. What is your view on this?

    1. In essence you are correct, but keep in mind that if you get out early (using Box 3), you won’t have much of a pension (like me). Old age security will always be there in some shape or form, but the amount is unknown. Personally we use those extra monies as buffer. It would help offset extra inflation due to rising health care costs or, if all goes well, we just have extra money to travel & enjoy life. Of perhaps to make more donations, help (grand)kids, etc. But your point remains, you might end up with more money than you need with this approach.

      If you are somewhat older(45-50 before you FIRE), it does start to make sense to start looking at how much you get from your pension and see if you can get away with less wealth (which obviously is easier to do and saves on wealth taxes!)

      1. Thanks for taking the time to answer my question! So I guess you aim to be fat FI in the end ;).

        I will be a little bit older when I reach my FI date (hopefully around 55) and by then I also have a reasonable pension build up so I will take that into the calculation to further reduce my FI number. But it makes the calculation a bit more complex though. I already have an advanced excel model in place. Currently thinking of unlocking this know-how so that other people in similar situation (people with a far amount of pension) can benefit from it. Cheers and keep up the good work!

      2. Yeah, you got a point there, we should be FAT-FIRE after we receive our pension and AOW! Never looked at it that way, but I like it 🙂
        This calculations for FIRE is extremely personal indeed, especially in the Netherlands due to pension and AOW. Best of luck to you!

  2. Dear Cheesy, this is a great post explaining that the Dutch are not that bad as perceived on taxing cash and wealth. Me and my family are Dutch and have lived in UK for nearly 20 years. FIRE is a couple of years ahead. BREXIT is not encouraging us to stay at the moment, but I did not consider returning to Netherlands because of the vermogensbelasting (which is tax on hard earned cash that was already taxed). Your post prompts me to have another look. The UK is still a nice place to live and is pretty good on tax free and pension saving and, even better, it lets your take the monies at age 55. You said you did not include pensions but I assume pension income would count as income from work. Keep going with you blog, very interesting perspectives. The UK also has a colourful FIRE community and it is great to read how other countries with their different rules and laws are doing the same.

    1. Thank you very much for the great comment! Glad you enjoy the blog, makes it worth it for me to continue.
      And yes, with pension I did mean pension income at age 65-68, which is indeed seen as income under Box 1. That being said, if you have a foreign pension plan, you might be able to take out money before age 65. Still income in Box 1 though!
      Good luck with the last few years to get to FIRE.

  3. Great!.. one question. I never understand where your own mortgage free goes in these scenarios. It’s an asset that doesn’t acquire income but you have to live somewhere I guess. Can you explain this to me? thanks.

    1. If you are mortgage free, your expenses will be lower (no more monthly payments). So perhaps you can do with just €20.000 per year instead (just property tax, insurance and maintenance costs for the house). That being said, you will likely keep paying for your paid off house in Box 1 (eigenwoningforfait = 0.X% of the WOZ value). This will mean less tax credit available to cover the taxed owed on wealth.

      Does this help?

      1. For that reason I will not pay off my mortgage completely. I will leave a small mortgage remaining so that the interest paid on that mortgage offsets the taxes (eigenwoning forfait). Better to invest that money in an income producing asset.

      2. Yeah that helps. I did think of this myself when I thought it through. I still don’t know what is the best option financially, but personally I would rather not be dependant on credit. BTW the eigenwoningforfait is just the incometaxrate of the named amount to pay. Somewhere between 40 and 50 percent? I don’t know the latest rates and it is slowly introduced. You pay this as well when you have a morgage only its canceld out then with rent reimbursement. There are so many risks involved in whatever strategy is chosen. I doubt I will ever really FIRE haha.

  4. Nice overview. But that wealth tax really is annoying for you Dutch guys!
    I think in Belgium you can get pretty clos to 0% tax level (earning only the tax free amount of 7.500 euro via working and the rest with options shoudl put you there ..)

    1. Actually with the current deductions and rates, it’s actually not that bad! For a couple with income from just wealth, the first €511.600 is now free of net taxes!

  5. Caramba, Cheesy, I truly admire your in dept work here.

    It is not easy to make something difficult as the Dutch Taxation system into a oversight like this!

    Chapeau,
    Petra

    1. Thanks Petra, it certainly is not an easy tax system! I had to simplify a couple of areas to make it manageable. But I’m pretty happy with the end result to be honest!

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