In the past (before I temporarily killed this blog back in 2020) I did yearly updates on Box 3 and what impact this had on the Cheesy Index. But it’s been a while since I looked at Box 3 and the impacts on our FIRE numbers. Something to do with our lifestyle inflation. But with all the fuss about Box 3 lately, and because I need to prepare a FIRE 101 presentation for the upcoming meetup, I figured it was time to give it another go. However, not just for me, but also for you my dear reader. So today I present to you: Box 3 and your FIRE number.
History Lesson
Quick history lesson on Box 3 and it’s taxation setup for the Netherlands:
- In 2001 the third tax box is introduced in the Dutch tax system. Box 1 is taxation on regular income from work/pension/benefits. Box 2 is taxation income from special interests (i.e. if you own more than 5% of the shares of a company). The newly introduced Box 3 is taxing the income from your wealth (assets minus debts).
- The taxation in box 3 is pretty straight forward for the period from 2001-2016. It assumes you made 4% on your net wealth, which was taxed at 30%. So it boiled down to having to pay 1,2% tax on your net wealth (with a minimum threshold on which there is no taxation). For real estate, where leverage is applied, this worked in one’s favor, as you would have high debts and thus relatively low wealth and higher returns. Thereby lowering the absolute and relative taxation (this is one of the reasons we originally got into real estate).
- But due to dropping interest rates, people with just savings got screwed. They sometimes paid more taxes than they received in interest. They protested at various Dutch courts and won. So the system was/is being overhauled. Savings were to be taxed less, investments to be taxed more. This all started from tax year 2017. The assumption in the system introduced that year was that if you have a higher wealth, you would have more investments compared to savings. If you had more wealth, your relative taxation would gradually go up with it.
- Fast forward to 2024. We are now taxed 36% on income from wealth (up from 30% in 2017). Savings are assumed to return 1,03%, other investments are assumed to return 6,04% and debts are assumed to cost you 2,47%. Together with some other changes, this drove up the relative tax burden on our (and your) net wealth. Only upside, the minimum threshold, before Box 3 taxes are applied was upped to €57.000 per person (double if you are a couple).
The Math
Okay, let’s run some numbers and make some graphs! I looked at a couple of things:
- What is/was the taxation for various wealth numbers from 2016 – 2025. Just to see how the same amount was/is taxed.
- How bad was inflation and how much did this affect a FIRE number in combination with the increased taxation?
- How much money does one need today if one wishes to retire on the equivalent of €30.000 a year in spending (based on 2016) as a couple (with kid(s) as applicable).
How did taxation change?
I looked at the absolute and relative tax burden on the following wealth numbers (taking into account the taxation rules applicable for 2016, 2017, 2024 and 2025) assuming you are a couple for tax purposes:
- €150.000
- €250.000
- €500.000
- €1.000.000
- €2.500.000
A note must be made that for 2016 and 2017, the tax calculation does not differentiate between savings and investments. But the calculations for 2024 and 2025 do. So to make a more apples with apples comparison, I looked at 3 different portfolios:
- Portfolio 1: only savings/cash (no investments of any kind)
- Portfolio 2: only investments (no savings or cash of any kind)
- Portfolio 3: a 20-80 split between savings and investments
To make life easier, I assumed that there is no leveraging of any kind. So no debts in Box 3 nor any deductions (like the algemene heffingskorting).
This produced the following graphs (all with the same Y-axes for each type – showing total taxation value and taxation in percentage of wealth):
As you can clearly see, the tax burden for people with just savings has decreased, where that for people like us that invest, have increased. Heck, if you have a wealth of around €1M with minimal savings and high investments, you are getting hammered with almost 2% taxation. When taking into consideration that there is also such a thing as inflation, you really need your investments to perform well, in order to have some money to use for living life.
Inflation?
Now, the above charts are great, but they don’t show the whole story if you want to FIRE. When we started our FIRE journey, we assumed we could comfortably survive on around €25.000/year (we started in 2014). For this assessment we upped it a bit to a more comfortable €30.000/year as of 2016 (which was roughly in line with our spending including travel/discretionary spending at that time).
But this €30.000/year is obviously subject to inflation. And despite being low in the late 2010’s, it went up fast in the early 2020’s. Assuming 2016 = 100, the following graph shows how inflation affected the requited equivalent of €30.000/year. At the beginning of 2025, you need €39.104 to be able to afford the same life expenses as €30.000 provided you in 2016. Now, this is obviously an average (based on CPI data from the Netherlands), so it could be that your personal situation might be different. It is therefore always a good idea to know exactly how much you spend on life each year.
How much money to you need to retire early?
To get back to the final question: how much do you need to FIRE on the equivalent of €30.000/year (based on 2016 and corrected for inflation), assuming your returns on investment (after inflation) are either 3, 4, 5, 6 of 7% (and no algemene heffingskorting applied).
As can be clearly seen, the required wealth is now much higher for the “4% rule” than it was in 2016-2017, even when corrected for inflation! This is driven completely by changes in taxation. And it is about to get worse…
In 2028 the new system is supposed to be implemented, where the taxation is done on actual returns rather than assumed average returns (as is done now). However, due to mismanagement at the government, there is now a shortfall in overall tax collection from Box 3 in the period 2026-2027. A proposed measure to correct this is to increase the assumed return on investments from 6,04% (2024) and 5,88% (2025) to a whopping 7,66% in 2026. With a simultaneous lowering of the taxation threshold (down to €52.000 per person from the current €57.000). This is obviously not going to help the aspiring FIRE enthusiast!
If you were to retire on your wealth (and have no more income in Box 1 or 2), you may deduct the “algemene heffingskorting” from your taxable amount by up to € 3.068 per person (double for a couple) for 2025. Which means that the total wealth amounts shown above are actually a bit of an overestimate. For 2025, I’ve also made some calculations with the assumption that you are retired and don’t have a box 1 or 2 income, hence can applied the deduction in Box 3. The result is as follows for yearly expenses of €39.104/year at various returns:
Cheesy Index
So what about the Cheesy Index? How is that going based on the current (2024-2025) tax system and in light of our increase cashflow due to lifestyle inflation. Well, not good. We currently spend about €50.000/year in cashflow terms to live life. Assuming the 4% rule / 4% ROI after inflation on our mixed portfolio, we would need about €2,3M in net wealth to account for the taxation (including algemene heffingskortingen). Needless to say, we are not there yet… Heck, we are way off! Based on the Cheesy Index graph (which I have not updated since 2022), I’d say it’s still pretty much valid. The conclusion at the bottom of that page, that we would need another 8-10 years, is probably also still valid. Assuming no increased tax burden, which is unfortunately very likely.
Which leaves us with a couple of options:
- We keep doing the barista FIRE route for now (Mrs CF is working 4 days, but is planning to reduce that to 3 days for at least the first half of 2025; I’m sticking to the 4 days per week for at least the next year-ish).
- We try to cut down our spending (which is pretty difficult, as we don’t waste much, the mortgage is just killing)
- We move to a lower cost of living location (which would means emigrating away from the Netherlands again). But his is not an option for the next 8-10 years (unless forced by geopolitical risks) due to Miss CF. We want to give her a stable childhood where she can have a lot of friends, if we can.
So, for now we stay put, enjoy our money pit and live the best life we can!
How are you doing with your FIRE plans?
FIRE is dead, no other option than just keep working (or go back working, I know some people who did just that ).
I’m keeping a close eye on the box 3 tax. If box 3 tax becomes too high, moving assets to a box 2 might be interesting. But this will likely also mean that tax in box 3 can’t become too because all people will just start doing that….although we have seen politicians taken even more stupid decisions, so who knows.
Most easy solution: I’ll follow your updates and suggestions about what to so .
Ha, now you are aiming too high I’m afraid as to the value of our suggestions 😉
Nice detailed post. I hope you can still bring a positive note in the meetup 😉
We seem to come to the same conclusion: this sucks and if these taxes continue, this might be a death blow for FIRE in the Netherlands.
In my view this will heavily degrade the investment climate in the Netherlands, which will have consequences for the economy in the long run. Since we are already running ahead in the EU, this is a big risk (even with a “right-sided” government).
Your last graph I do not understand, can you clarify? Y axis is yearly spending, but says millions. X axis is 100-200%?
Yes, the ability to FIRE in the Netherlands is not getting any better this way for sure. Which is ironic, considering we are having a rightwing government. But don’t forget that most wealth and investments are in Box 2, not 3. So I’m not too concerned from that point as to the investment climate in the Netherlands, there are many other reasons why that is also becoming less attractive. But that’s a whole other discussion
Corrected the final graph. The Y axis shows the magic FIRE target one would need for various ROI values (on the x-axis). Hope this is now clearer.
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Just to be sure: these calculations are based on the principal amount staying untouched for at least 30 years?
What if you consider the remaining period until pension and social security; this might be well less than 30 years. Also if you don’t mind drawing down from the principal in that period you will probably need much less to achieve FIRE despite Box 3 taxes. From age 45 and onwards it might be well worth to consider that super-early FIRE is not in the stars anymore and that the period until ‘regular retirement’ is rather manageable.
The final calculations primarily look at if you want to retire using the 4% rule, how much money would you need including all taxes that are to be paid. You make a valid point that if you have some old age security (AOW) or pension that comes into play, one would indeed need less. And yes, one could draw down from the principle in that case too.
This really is just a mathematical exercise just to see how high the number would need to be if you want to purely want to become FIRE ignoring any other form of income.
Taxing on net worth is confiscatory. That money was already taxed when it was earned, and any interest or dividends it pays out is already taxed as income, and any growth in value will be taxed when it is sold. So there is zero moral basis for it being taxed simply because it exists. That’s frightening. I’m glad we have managed to avoid that kind of taxation here in the USA, at least so far.
Yeah and no, in the Netherlands you are taxed on the return of your wealth. Not the wealth itself. Plus, we are not taxed on dividends (as it can be corrected with box 3 tax on wealth, so you don’t pay twice) or interest or capital gains! Then again, we cannot offset any losses either.
First of all, love the blog and your fact based work. Very impressive.
As for the new box 3, the best is yet to come, 36% capital gains tax in 2028 (if the Dutch tax authorities can make their it systems to work, it’s been postponed a few times and the increase for the hypothetical growth amount to 7,66%), and if you are invested in stocks – here is where it gets mind blowing – the current proposal will also tax you on unrealised share gains, with only the ability to “carry-forward” potential losses. Just think what that would mean in a bull year like 2024.
For real estate, 36% on direct income (rent) will be taxed directly, but the value increase will be taxed indirectly at 36% and will become due at realisation. Realisation means 1) transfer of the property, 2) migration and 3) death – which will be a double inheritance tax for your heirs -, or a nice farewell gift if you want to push the ejection seat button to move to warmer countries after retirement.
How do you factor these elements in into your retirement plans, and are you happy/happier that you converted your real estate into loans (which is more tax efficient)?
Hey Time to move, yes, if all plans go through (which they likely will not), it really will not be pretty and moving internationally definitely becomes an option to consider! Have we factored them in? No, but we are keeping an eye on it and might potentially end up putting more in our own house to shield some of the taxation (and lower expenses at the same time). Yes, quite happy with the switch to becoming a lender, lot less stress and headaches around maintenance and such. So far it was a great decision an in the coming years will also allow for some portfolio redistribution, as we are still overly exposed to real estate (directly and indirectly). Tax wise it is unfortunately not as efficient (the monetary value is higher than the value of the property in WOZ value). But I’ll take it any day!
Hmmm. I think your calculations are far too pessimistic, for the following two reasons:
– The 4% rule is meant to include inflation. The idea is NOT to withdraw 4% of your current portfolio every year, but to withdraw 4% in the year you retire, which you then adjust upwards for inflation in every following year. Pretty much all of the research on the success rate of the 4% rule is based on this assumption. Therefore, you do not have to make additional adjustments based on inflation. See here for example: https://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ Of for the Netherlands here (Mr. FOB takes 3,5% as SWR, but it works the same with inflation) https://www.financieelonafhankelijkblog.nl/veilige-opname/
– The algemene heffingskorting applies to your total income starting in 2025, including any box 3 income. This is especially helpful once you are retired, since you won’t have to pay the first 3086 euros of vermogensrendementsheffing due to not having any other income. For me, this does have a significant impact on how much I will need to retire.
– Vermogensrendementsheffing also has an impact on where I would put my money, I think. Because ‘spaardeposito’s’ are taxed at a significanty lower rate than bonds (deposito’s are taxed like a savings account, whereas bonds are taxed at the same rate as stocks are), I think a ‘depositoladder’ may be more attractive for the stable part of a portfolio in the Netherlands.
What would happen if you were to use deposito’s for 40% of your target number (i.e. the stable part of your portfolio if you follow the 60/40 rule), included the algemene heffingskorting in your calculations for how much you need after retirement, and applied the 4% rule as intended (so: without additional correction for inflation)? I think the picture might be significantly less depressing.
Hello JJNL,
Too pessimistic, likely, as I don’t assume any AOW, pension, inheritance, etc. either. It’s really just a mathematical assessment in case none of the aforementioned exists and you really want to FIRE in the Netherlands as of the various years mentioned. The calculations only show the wealth you need to start.
As to your point 1: Don’t forget that many people, us included, don’t use the 4% rule as we have multiple types of investments (not just index funds / stocks / bonds). We do assume that our investments need to be corrected for inflation and therefore that we can safely spend 4% of our wealth during retirement (and yes, our wealth should thus keep increase each year, such that we have more money the next year to accommodate inflation in our spending). Hence, the comment in the text as to correct for inflation.
As to your point 2: The last graph shows you the impact of the algemene heffingskorting, which drops the required wealth for €39.104 yearly spending with 2025 taxes, by about €300.000. However, when most people work, most (if not all) of the algemene heffingskorting is already corrected in Box 1. It’s therefore good to know what your tax burden will be without this for the journey to FIRE (hence the first 6 graphs).
As to your point 3: I absolutely agree! Low risk bonds are not interesting in the Netherlands due to the current taxation rules, savings may be more tax efficient in some cases.
As to you last comment, I just ran the numbers and you are indeed correct. Assuming €39.104 as per 2025, with a 40-60 split (depositos/stocks) and full use of the algemene heffingskorting and the 4% rule on your total wealth, the target FIRE number would be €1.24M. But there is a big caveat here. The 60-40 rule assumed the historic return on bonds in the US, which are likely higher than that of a Dutch/European depositos. Hence, you might not get the required total return on your wealth (i.e. the 4% rule might be too high). In that case, you might run out of money before you want to. Doing the same run, with 3,5% (and all else considered equal) as suggested by Mr FOB. The required wealth would increase to €1.55M. So we are back to depressing numbers 😉
Thanks for you comments!