How much do you need to retire in the Netherlands – 2020 update

It’s that time of year again for me to look forward and determine the new “early retirement numbers”. We do this for ourselves each year to find out what our new target wealth should be based on a 4% net return (and some other scenarios), including applicable taxes. How much do you need to retire in the Netherlands – 2020 update!

Early retirement in the Netherlands

For the current (2019) version of the post see here “How Much Do You Need To Become Financially Independent in the Netherlands”. Similar to last years (2016 and 2019) we will be looking purely at the “base case” of having €25.000 to spend each year (so after taxes!).

As in previous years, we assume you are a couple for tax purposes. Having a (few) kid(s) does not change much on the tax side (except maybe some benefits, credits and deductions). It does affect your expenses obviously, but let’s assume you are creative enough to stick to €25.000 (corrected for benefits/credits if you will). We also assume you strive to organise your (working) life to have the lowest taxes possible.

How much do you need to retire in the Netherlands – 2020 update

We will look at these 4 taxation scenarios 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” => Part-time work only to cover “the minimum you need”
    “FIRE option” => You have short-term rentals/Airbnb for your income and do some “work”
  2. All your income falls under Box 2:
    HOT/FIRE option => subject to your required amount of work (for example, if you just receive company dividends virtually without performing work, I would classify it as a “FIRE option”)
  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 new 2020 tax numbers!

Scenario Assumptions

We have assumed the following for each scenario:

Scenario 1 (minimum work hours option):

  • Taxation is based on 2020 rates, inclusive of ” algemene heffingskorting” (tax credits) and social premium deductions.
  • It assumes your 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 (company owner option):

  • Taxation is based on 2020 rates (increased to 26,25%).
  • There is only income in Box 2 from special interests in a company (paid in dividends).
  • Inclusion of 2020 “algemene heffingskorting” for two adults (i.e. €2.711 per person in general tax reductions).

Scenario 3 (“traditional” FIRE option):

  • Taxation is based on 2020 rates.
  • Inclusion of 2020 “algemene heffingskorting” for two adults (i.e. €2.711 per person in general tax reductions).
  • Assumed net ROI of 3%, 4%, 7% and 10% (to show taxation effects).

Scenario 4 (“bit of both” option):

  • Taxation is based on 2020 rates (Box 1 & Box 3).
  • Total yearly net income of €10.000 from “work” (or other Box 1 income forms) and €15.000 from investments.
  • Inclusion of 2020 “algemene heffingskorting” for two adults (i.e. €2.711 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% (to show taxation effects).

The Results

For more details on the taxation amounts, please see Box 1Box 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 – 2020 update

Observations & Notes

Notes

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 and/or you need a higher ROI to compensate for inflation. For Dutch wealth tax purposes, a higher ROI is the best way to go (go figure!).

Another note here is not including 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 (still) deduct mortgages and loans to determine you actual wealth for tax purposes. Real Estate and leverage are your fiends for tax purposes (but this will likely change in 2022!!!)

Final note, the asset amount is the amount of invested wealth you need. Your home is not included in this assessment (as it will be taxed in Box 1, but I have ignored this for now), nor are any valuable possessions (art, cars, etc.). So for these calculation purposes I assume you are renting!

The review

Based on the 2020 tax calculations the conclusions are pretty similar as with the 2019 assessment:

  • Scenario 1: If you are able to split income almost perfectly, your effective tax rate can be quite low. I mean 8%, hello! A HOT life might involve only working 1-2 days per week, sounds pretty good to me. But you will never FIRE in this scenario, albeit that might not matter to you.
  • Scenario 2: This option has not changed much over the years, tax burden is quite high in relative terms (25%). And this is on top of the corporate profit tax that is already paid within the company at 16% for 2020.
  • Scenario 3: If you can consistently have your portfolio 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 pretty good! Also, assuming the coming years provide a similar overall return, the stock market would work well too (i.e. the S&P500 return is about 7% after inflation over the last 30 years).
  • 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 €650.000 in invested wealth though.
  • Scenario 3C: Yes, you can retire on a bond/green investment portfolio/very defensive 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! Lowest taxes of all scenarios with a labour component at only about 4%! You need relatively little wealth with the opportunity for a good work/life balance! But, you do need your investments to consistently provide you with around 7% returns.
  • Scenario 4B: Not the greatest combo from a tax perspective. Might need to work on getting the wealth and return up so you can FIRE completely or get closer to a 4A scenario (and are able to spend some more).

Obviously, because some tax rates were changed based on inflation and policy updates, the overall taxation dropped for each scenario from 2019 to 2020. Also the required wealth numbers dropped. More interestingly, the numbers dropped more than what you would expect from the (anticipated) inflation correction. Great, so it just because a little easier (for now) to become FIRE in the Netherlands!

Cheesy Numbers?

I have also recalculated our own new target number for FIRE, which dropped this year due to the lower taxation in Box 3. 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 aiming for a full FI under Box 3 (with any Box 1 income as a buffer/safety margin).

That being said, the new proposed taxes for 2022 are going to make life a lot more difficult! Perhaps a combo of Box 1 and Box 3 is kind of ideal, especially if you have a flexible part-time job. But with new developments in the Cheesy household, additional Box 2 income is not completely out the question either…..

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

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7 Comments

    1. Hello Udit, sorry, no can do. I don’t mind helping out with some questions, but I’m a big proponent of figuring out your own finances and taxes. You have to understand what’s going on and how to calculate them yourself. Best of luck!

  1. Interesting numbers, @Team CF!
    There two things missing in this welfare-heavy country that I always take into account when making calculations like this: Being able to withdraw funds from your savings (a non-safe withdrawal). Especially in the million euro’s case I would not wait for that kind of savings before retiring.
    Also, in the Netherlands we still get the state pension AOW, and you probably have some pension plan. This means that, after a certain age, the amount of money required is significantly lower, or maybe even nonexistent.
    For me, the takeaway from your calculations is that a mix of income sources works best. There is even an investment strategy making use of long tail returns. Too much work for me, but at least working and financial returns are looking good. Thanks for that!
    Are you planning on using your savings with a non-safe withdrawal rate?

    1. Although I get your (valid) point, if you are virtually FIRE in your mid to late 30’s, you cannot really count on AOW as you still need to bridge 30 years before you get any (and the amount is unknown!!). Your pension has the same issue, and will be smaller too if you completely stop working in your mid to late 30’s. But as you correctly noted, you could assume a higher withdrawal rate and draw down some of wealth in the anticipation of additional funds coming in after formal retirement. This can be a valid strategy, but comes with many assumptions and associated risks. Hence, we prefer to be fully FIRE or be about 80% done and keep a part-time job on the side to supplement the remaining income and reach full FIRE at some point before the formal retirement age. In any case, we will likely end up with way too much money, which I personally find a more reassuring scenario than too little 😉 By the time I’m old and grumpy, I’ll figure out a way to utilise the excess.

      Depending on your preferences, personal finance can be interpreted and executed in sooooo many ways 🙂

      1. You are, of course, correct. In fact, I’m not counting on too much myself, especially the AOW. But working out the scenario’s is fun, as you demonstrated 🙂

  2. Thanks for this! With these numbers we could do scenario 4B in late 2022 already. We currently do not live in NL but will move back around that time. Just really contemplating renting vs buying at that time, especially with the upcoming new VRH in 2022.

    Btw You have a typo in Scenario 3A in the table. It should say 7% two times.

    1. You are welcome Mark. Definitely work out some scenarios for yourself to see what option (tax wise and home wise) works out best.
      Ps. thanks for the note on the type, updated it!

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