Who can FIRE? This was a questions that was raised at the dinner table in the Cheesy Finance household. It was actually on the day we had the podcast interview. To be brutally honest, we are really spoiled  privileged. Take two people with a MSc. degree and professional designations, two full time jobs, a reasonably frugal nature, and you have a winning recipe for FIRE. But what if you earn a median income, or less, how good are your chances to FIRE? Can  you even FIRE?

Who can FIRE? Perhaps you can!

Who can FIRE? Perhaps you can!
Source: https://pngtree.com/free-fire-background

Who Can FIRE?

Before we can answer the question who can FIRE? We need to define some boundary conditions. Otherwise there are simply way too many variables. Here we go:

  • Three “situation” scenarios: Single, DINKS (Dual Income No Kids) & a family (two adults, two kids)
  • FIRE age no later than 50 years (so you have about 25-30 years to get to FIRE)
  • You start with the journey to FIRE once you get our of school (without student debts!)
  • Median income in the Netherlands (2017 data) is €37.000 gross and about €25.000 net
  • Return on investment is set at 6% average (assumed inflation adjusted)
  • 4% rule is applicable (in either withdrawal or as a net cash-flow)
  • No social benefits (I.e. allowances for healthcare, low income, etc.) during/after working years
  • No wealth tax included as an expense during working years (to simplify)
  • Assumption of a steady amount of savings throughout the years (to simplify)
  • No expensive live events (i.e. divorce, illness, etc.)
  • Wealth tax calculated on actual wealth (no “discounts” included that you could have with real estate valuations)

Dutch Income Distribution

How much are Dutch households earning? The latest (visual) data available from the Dutch bureau of statistics (CBS) is from 2014. The graph below shows the number of households vs. their available net income. This is shown for “all households” (in light blue) and for “families without kids before age 65” (dark blue):

Who can FIRE? Income distribution

Who can FIRE? Income distribution (net income per household)
Source: http://visualisatie.cbs.nl/nl-NL/Visualisation/Inkomensverdeling

 

Some data that accompanies the above graph.

  • Total households in 2014: 7,950,228 (light blue)
  • Single households: 2.803.852
  • Couple households: 2.498.744 (“DINKs” are the subgroep is shown in dark blue)
  • Family households (1 or more kids): 2.647.632

When I looked at the data behind the graph, about 50% of households need to “survive” on less than €30.000 net per year. Obviously, if you are a single, that should not be an issue. But for a couple with 2 kids this is a bit more difficult, albeit certainly not impossible. Many folks are in that position (say about 25%), as you can see in the dark blue section of the graph above.

Let’s look at a few scenarios and see if FIRE is possible before age 50?

Scenario 1: Single

You are single and earn a median income (€25.000 net per year). When you are very frugal and have a simple life (“barebones”), your expenses are assumed at €15.000 per year (€1.250/month). This leave €10.000 for investing and thus a savings rate of 40%. If you want to enjoy life a bit more (“comfort”), and don’t’ mind to work a bit longer, your expenses are assumed at €20.000 per year. In short, you have €5.000 per year to invest which is a savings rate of “just” 20%.

Based on the two lifestyle scenarios (“Barebones” and “Comfort”), you will need about €420.000 and €585.000 in assets. These numbers are based on the 4% rule (or 4% net cash-flow) and incorporate wealth taxes (2018 percentages and discounts). For more details on how this work, see this post (still contains 2016 tax percentages, but the calculations are the same!).

Who can FIRE? Scenario Single

Who can FIRE? Scenario Single

The graph above show wealth as a function of years, based on a certain amount of absolute savings per year. Based on this graph, you will need 30 years before you will reach a “comfort” level FIRE and about 21 years to reach a “barebones” level FIRE. In both cases you will be able to actually FIRE before the target age of 50 years! That is good news.

Keep in mind that in the Dutch retirement systems you might get a lot of extra spending money (or financial buffer, depending how you look at it), once your pension and/or old age security kicks in at about 65-70.

Scenario 2: DINKS

The next scenario assumes that there are two of you and both have (or combined you get) twice the median income (€50.000 net per year). When you are very frugal and have a simple life (“barebones”), your expenses are assumed at €20.000 per year (the benefits of living together compared to the single scenario!). This leave €30.000 for investing and thus a savings rate of 60%.

If you decide to enjoy life a bit more (“comfort”), your expenses are assumed at €25.000 per year. This leaves a very healthy €25.000 per year to invest and calculates to a savings rate of 50%.

Based on the two lifestyle scenarios (“Barebones” and “Comfort”), you will need about €565.000 and €730.000 in assets. Same logic applies as per the previously discussed Single Scenario.

Who can FIRE? Scenario DINKS

Who can FIRE? Scenario DINKS

Looking at the graph above, you will reach a “comfort” level FIRE in under 15 years. To reach a “bare bones” level FIRE you just need 12,5 years!. This is fairly quick and well before the age of 50. Saving more, in absolute and relative terms will get you to FIRE a lot sooner, but that’s nothing new 🙂

Scenario 3: Families

The final scenario assumes that there are 4 of you in the family and you guys earn 1,5 times the median income (€37.500 net per year). When you are a very frugal family (“barebones”), your expenses are assumed at Є25.000 per year. This leave €12.500 for investing and thus a savings rate of 33%. In the scenario that you want more family time and events (“comfort”), your expenses are assumed at €30.000 per year. This leaves a €7.500 per year to invest and calculates to a savings rate of 20%.

Based on the two lifestyle “choices” (i.e. “Barebones” and “Comfort”), you will need about €730.000 and €895.000 in assets. Again, same conditions as noted above.

Who can FIRE? Scenario Family

Who can FIRE? Scenario Family

When studying the graph above there is still some good news, becoming FI is possible! But you will need 35 years to reach “comfort” level. This means you can still retire before the official retirement age (and with a significant amount of wealth), but not before the magic “50” happens. To reach a “barebones” level FIRE you will need 28 years, so there is still hope for you to call it quits before the age of 50.

Now, this is technically a bad example, as by 28 years I really hope that your kids are living on their own and that you can get to the “DINKS” levels in terms of expenses. That being said, this depend on the age you get kids of course. So many variables! “Personal” finances eh?

No Median Income?

What if you don’t earn a net median income (as about 60% of the households do; see net income per household percentage graph below)? Subject to how low you can go in expenses and/or by living in another country, there are still options to FIRE (or at least RE). But it’s certainly not “easy” for most people.

If you want to stay put in the Netherlands and don’t want to deprive yourself of too much, the sad reality is that it will be difficult for the large majorty of the households/people.

Who can FIRE? Income distribution 2014

Who can FIRE? Income distribution 2014
Source: https://www.cbs.nl/-/media/_pdf/2016/26/2016welvaartinnederland.pdf

Note to the graph above, this is showing “a standardized” household income = 2,2 people. The associated graph for standardized net income is shown below (the one at the beginning of the post is not standardized to 2.2 people!).

Who can FIRE? Standardized Income distribution

Who can FIRE? Standardized Income distribution
Source: http://visualisatie.cbs.nl/nl-NL/Visualisation/Inkomensverdeling

Conclusions

Albeit not all data and scenarios presented above match “statistically/mathematically”, the general trend is pretty obvious.This post was then also not a complete surprise. But I was a bit disappointed in how many people should be able to reach FIRE in the Netherlands. Even when people are frugal and invest all their savings, FIRE is simply not for most. This does not mean that you should not live below your means and invest your money, but getting out (really) early is just for “a lucky few”. For the majority of the people it is a dream (hence the large numbers that play the lottery) .

Want to FIRE as a single, make sure you save and invest at least €2.500 per year (~€210 per month) and be/live (very) frugal.  Couples should aim for at about double that. As a family, you better start aiming for about €7.500-10.000 per year (€700-800/month)! For these scenarios FIRE won’t be very luxurious (unless you move), but you will have a lot of time to do fun things! Part time work is also always on option of course! Just work 2-3 days per week, instead of 4-5. You are still better off this way.

Cannot save this much? You can still retire a number of years (say up to 10) before the traditional retirement age. Just eat into your savings/investment until the time old age security (AOW) and pensions kick in (assuming you have any). But leaving “some” wealth to supplement and provide a general financial buffer. With the formal retirement age trending towards 70, this is still very good news for a lot of people! One additional note if you do get out sooner your pension contribution will drop and you will get less once your are eligible! Always check what you your estimated income will be after formal retirement at https://www.mijnpensioenoverzicht.nl/pensioenregister/.

 

What are your thoughts on this?

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Based on this already “old” post by Early Retirement Extreme (ERE), Jacob was able to live off $5.000-7.000 per year, as late as 2011. For argument sake, let’s assume that this $7.000 annual spending in 2011 is now $7.714 in today’s money (2018). This would be about €6.250/year (current exchange rate ~$1.233/€), can you survive on this amount in the Netherlands? How low can you go? In the Netherlands at least!

How low can you go?

We have done earlier assessments about how much money we would need in various scenarios for FIRE. I’ve plans to revisit this post and apply the 2018 taxes. But it also got me thinking, how low can you go? Let’s have a look!

How Low Can You Go? FIRE Limbo

How Low Can You Go?
FIRE Limbo!

Some boundary conditions to consider:

  • No insurances other than mandatory ones (e.g. health insurance);
  • Bare bones living, no fluff/holidays, but  some leisure is included;
  • No government benefits included;
  • You still need to be able to stay healthy (e.g. eat/sleep well);
  • Let’s assume you are FIRE and have no need for a job (i.e. no commute, limited clothing costs, etc.); and,
  • It has to be legal!

Housing/Living

The idea is to live a cheaply as possible, so we will look at extremes here.

How Low Can You Go? Living in a Garage

How Low Can You Go?
Living in a Garage?

Options that I found/could think of are:

  • Camping out in the “wild” (read public lands or forests) = Free, but very much illegal in the Netherlands. You would still need a tent too!
  • Live in your office = Free, but probably illegal and not applicable as we assume you are FIRE.
  • You could also live in a box truck  = Free and illegal. However, buying the APK approved truck (i.e. road legal) would be rather expensive around here, probably not really an option.
  • Garage box (€35/month). You probably need some funds (or do dumpster diving) to make it “habitable” and a gym membership to be able to shower (€25/month). Total costs about €60/month. Also illegal!
  • Room for rent (€50/month). The lowest I could find was really cheap, but you had to help with choirs around the house. Let’s go with this one (not discounting that you might be able to live somewhere for free if  you work on say a farm).

Since we are law abiding and we want to do as little as possible (i.e. limited work), the yearly expenses for living are about €600 (including utilities!).

A more reasonable/realistic number, if you want to have your own “private” room is about €250/month including utilities (€3.000/year). But again, this is not really barebones, eh?

Food and Groceries

Based on our own grocery expenses (with 3 people, about €350/month), you should be able to easily live off €116 per month. Let’s assume you are good at cooking and very efficient. You also don’t want to die from malnutrition, so let’s assume  you can live off about €3/day (€90/month). This include toiletries as well.

Total costs per year: €1.080

How Low Can You Go? Groceries

How Low Can You Go? Groceries

Side note: according to the NIBUD (a budgeting site from the Netherlands) I’m grossly underestimating. They recon you need €5-6/day as a minimum per adult person. However, despite the NIBUD stating our expense are “not possible”, we managed to do this already for a few years in a row.  I’ll take their numbers with a grain of salt.

Healthcare

In the Netherlands you are required to insure yourself, its mandatory by law. The lowest rates I could find, based on an adult, was €75/month (no dental/highest deductible/basic coverage). Assuming nothing bad happens and you are healthy and brush you teeth, the total yearly expense are €900.

Transport

We are in the Netherlands, so you will have a bike! Depending on how much you use it, let’s include €50/year in costs related to wear and tear. There might be things you need to do that are not within cycling distance. For this let’s assume €250 in transport related costs for public transport or occasional car rental for a day.

Total yearly expenses: €300

How Low Can You Go? The Bicycle

How Low Can You Go?
The Bicycle

Leisure

We said bare bones with no fluff/holidays at the beginning. In short, most leisure activities are things like reading books, going for a hike or cycle ride, volunteering & visiting free activities around town. However, it’s not about becoming a hermit, so let’s include some minor expenses for the occasional leisure event.

Total yearly expenses: €200

Other Costs

Considering life has become increasingly digital at the moment, you will need access to internet (for banking, health insurance, taxes, etc.). Some access can be free at the library, but let’s assume you cannot always time things. Let’s also include mobile phone (sim only, no data) and banking fees with this. Total costs per year €125.

You also need cloths, thrift stores are great for this obviously, but they may not always have what you need. Since you have time on your hands, you already repair some of your own cloths. Total expense for the year €150 (I’m generous here).

I’ve probably forgot a few items, so let’s include another €225 for unforeseen expenses.

Total other costs sum up to a total of €500 per year

Conclusion

The grand total of the expense noted above is €3.580. That is really low! It’s also very much barebones, not easy and you are really just “surviving” with the occasional exceptions. If something happens the expenses will quickly rise. For example, if you are taken to hospital, your deductible of up to €885 will be added to your expenses. If your bike breaks, that’s likely another €50-100 (for a used cheap bike). Perhaps you need glasses? You see where I’m going with this. The number above does not include for any buffer! Nor does it include replacement costs. Perhaps a value in the order of €5.000 is more reasonable (add in the “private” room and you are at €7.400).

For reference purposes; what’s poverty level in the Netherlands? It’s about €1.030/month for a single adult (2016 numbers). This is a total of €12.360 per year. Welfare support at the moment, for a single adults over 21 year of age, is €992,12/month (€11.905,44 per year). There are all after taxes.

The point I’m trying to make is that it is possible to survive in the Netherlands with very little money. How much you will enjoy life, and how comfortable it is, is a different thing. It seems that the numbers by Jacob are achievable, even in the Netherlands, but not easy to manage. Then again, we are talking Early Retirement Extreme here!

 

Thoughts?

 

 

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When we would reach FIRE, we don’t need a car anymore to get to work (yay!). However, we will still want to move around as we don’t live close to many of our relatives and friends. We will primarily try to do this with our bicycles and public transport, but this is not always an option. The type of transportation will all depend on the distance, locations and costs. However, the freedom of a car can be quite nice. Plus, if you need to move (kid) stuff around, a car is rather useful. But what’s the cheapest way to get around with a car? Todays post will review the Car Ownership vs. Car Rental vs. Car Sharing vs. Private lease debate. At least for the Dutch…..

Car Ownership vs. Car Rental vs. Car Sharing vs. Private lease

Car Ownership vs. Car Rental vs. Car Sharing vs. Private lease

The Assumptions

As you would likely agree, there are too many options to review and the needs and distances for each of us will be (very) different. I’m going to try to provide ranges and rough indications of what would work best for each scenario. Granted, there might still be other options and situation that will affect the data presented. The idea is to use this info as a guideline to start your own assessments.

As most of you know. the Netherlands is a very expensive country from a car perspective. We will therefore only focus on two car classes:

The mini class is fine to get up to 4 people around in short trips under about 1-2 hours. It’s the simplest away to get from A to B. The compact class is great to get up to 4 people around in reasonable comfort and to move stuff around (love hatchbacks!).

Why not review anything bigger? Because you only need one of these on occasion and not every day when you are FIRE. If you need one, just rent one for the day/week. Rates are only €10-25 more per day for rentals/car-sharing, so won’t kill the budget.

The Mini

The following assumptions where used for the mini class:

  • 2.500, 5.000, 10.0000 and 20.000km driven per year;
  • Two scenarios where the average trip is either 50 or 100km;
  • For the scenario of 20.000km/year and 50km average, we used 300 days of use;
  • Fuel costs are €1.50/l;
  • Fuel consumption is 21km/l (~50 mpg);
  • Car purchase price is €8.000 (assumed about 3 years old);
  • Driver is 35 years old an had a clean 10 year driving record (for insurance purposes);
  • Opportunity costs based on 7% yield per year; and,
  • Private lease includes 12.000km pear year, extra km cost you €0.06/km.

The Compact

The following assumptions where used for the compact class:

  • 2.500, 5.000, 10.0000 and 20.000km driven per year;
  • Two scenarios where the average trip is either 50 or 100km;
  • For the scenario of 20.000km/year and 50km average, we used 300 days of use;
  • Fuel costs are €1.50/l;
  • Fuel consumption is 17km/l (~40 mpg);
  • Car purchase price is €15.000 (assumed about 3 years old);
  • Driver is 35 years old an had a clean 10 year driving record (for insurance purposes);
  • Opportunity costs based on 7% yield per year; and,
  • Private lease includes 12.000km pear year, extra km cost you €0.07/km

The Data Sources

For the assessments I used the following data sources and sites to get pricing information (for affiliate links!).

For car ownership

Wat kost een auto?

https://www.autotrader.nl/

For Private Lease

https://www.privelease.nl/

Private Lease van Justlease.nl

For Car Rental

https://www.cheapcars.nl/

https://www.sixt.nl/

hhttps://www.greenwheels.com/nl/

For Care Sharing

https://www.snappcar.nl/

https://mywheels.nl/

The Results

Ok, time for some pretty graphs. Based on the above scenarios, data and car types, the following graphs provide some guidance. Keep the following in mind:

  • For car ownership the opportunity costs are also included. In case of the mini class these costs are €560/year;
  • Car ownership includes all costs, including depreciation, maintenance, fuel, insurance and taxes;
  • Costs for car rental, car sharing and private lease are also all-inclusive rates;
  • If the average trip is 50km and distance is 5.000km/year, the assumption is that you do 100 trips per year. Similarly, if the average trip 100km and the distance is 2500km/year, the assumption is that you do 25 trips per year. The number of trips obviously significantly affect the costs in the rental and car sharing options, as you are charged by the day; and,
  • In all scenarios we assume you get the car for the whole day (24 hours).

Average trip of 50km

Cars Costs 50km average trip - Mini Class

Cars Costs 50km average trip – Mini Class

 

Cars Costs 50km average trip - Compact Class

Cars Costs 50km average trip – Compact Class

Average trip of 100km

Cars Costs 100km average trip - Mini Class

Cars Costs 100km average trip – Mini Class

 

Cars Costs 100km average trip - Compact Class

Cars Costs 100km average trip – Compact Class

The Conclusions

This assessment provided us some interesting insights, and some surprises too! We always believed that private lease was very expensive, but this is not as bad when you compare cars of about the same age (we used a 3 year old car for ownership vs. a new car for private lease). This is partially caused by the opportunity costs.

Another interesting (but not surprising) observation is that the number of days you actually use the car are of greater impact on the costs when renting or car sharing. If you can limit the number of times you need a car, you significantly reduce the overall costs for rental/car-sharing.

Some other general conclusions:

  • If you need a car only once-twice per week, you are better of with car-sharing or renting. Which option is better for you depends on availability of both rental cars and car-sharing programs in your area;
  • If you need a car about twice-three times per week, buy a small (older) one. This way the opportunity costs are lower and you still beat a private lease; and,
  • For us personally, we are cheaper off going for car-sharing or rental (we have both option in our area) when FIRE. We probably only need the car 25-35 times per year for one or two days each. Considering our current car costs us about €4.500-5.500/year (all-inclusive), we would save quite a bit of money on transportation costs.

Fun Fact for our American/Canadian readers. The road tax on a F350 Diesel (weight 2726kg; €3340/year) is more than operating a mini car for a whole year at 20.000km (all-inclusive!). That is why we drive small cars in this county 🙂

 

What about you, any new insights into car costs? Does this match with what you see with your own car? Have you used car-sharing yet? We are curious about your thoughts!

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To pick up where we left of last week, this week we will look at the historical cost. But we will also quickly look at the potential development of future healthcare costs. We have been digging in historical data to see how healthcare costs developed over the past 30 years. Both in absolute terms and in relation with inflation. We hope this gives you and us a bit of an idea what to expect during FIRE in the coming years.

Rising Healthcare Costs

Healthcare costs are rising in pretty much every country around the world. Looking at the healthcare cost per citizen for various countries, you can see the immense burden on the governments (which we fund). But also on ourselves in the form insurance premiums, deductibles and other indirect healthcare cost. Let’s have a look at both.

Overall Healthcare Costs

The US is particularly high up when looking at healthcare costs per capita, but unfortunately the Netherlands is not that great either. Dutch healthcare costs have been increasing rapidly over the last years. The graph below shows the growth of healthcare cost over the period from 1980 to 2009 (EOCD health data). The Netherlands started out at about $850/year in 1980 and increased to $5.056/year in 2010 (second image).

Historical Healthcare Costs

Historical Healthcare Costs

Healthcare Cost Per Capita in 2010

Healthcare Cost Per Capita in 2010

Based on an calculated average of 2.58% inflation in this same period (derived from the graph below), the healthcare cost should have been around $1.823/year in 2010 (instead of $5.056!). The actual average healthcare cost inflation was thus a staggering 6.1%. Almost two and a half times the average inflation, that’s high. On a positive note, investment returns (in the US at least) during the same period outpaced this increase in healthcare costs 🙂

Dutch Inflation 1980-2016

Dutch Inflation 1980-2016

Direct Healthcare Cost

Let’s look at how overall healthcare costs are broken down. Based on this report (prepared by the Dutch bureau of statics – text in Dutch), the breakdown is as follows:

The light blue is insurance premiums (mandatory insurance), the dark blue is deductibles, the purple is extra healthcare insurance (voluntary insurance). The two (yellow) green’s and orange are covered by taxes and social premiums (some taken from your paycheck/paid by your employer). We thus pay about a third of the overall healthcare costs directly via insurance premiums and deductibles. The remainder of the overall healthcare costs is paid indirectly via various taxes and social premiums.

Since the mandatory insurance commenced in 2006, premiums have increased from about €1027 per person per year (no deductible at that time) to €1541 per person per year (based on €98/month rate + deductible) in 2017. That is an 50% increase in 11 years, or 3.75% per year. For comparison purposes, the inflation between 2006-2017 was only 1.69%.

Future Costs?

As noted in last week’s post, healthcare insurance is mandatory in the Netherland. Current (2017) costs range between about €77 and €150 per month per person (subject to the coverage and deductible you want). That’s already a lot of money. If you are unlucky enough to land in a hospital, you can shelve out the deductible too as a bonus expense.

It should also be noted that insurance companies are currently not making much money on healthcare insurance (they are about at cost, sometimes even below). In short, it is not unlikely that premiums will rapidly rise in the coming years to remain profitable (or at least keep up with rising healthcare costs).

So, what are healthcare costs going to do? If per capita healthcare cost for the period between 1980 and 2010 are an indication, we could count on about 6% per year. Direct costs on the other hand increased by “only” 3.75% in the period from 2006 to 2014.  Not as bad as the overall per capita healthcare costs, but still well above inflation.

We think it is fair to say that healthcare costs will most likely outpace inflation with a significant margin. This is something to consider in your FI calculations. We are counting on our healthcare costs (premiums + out-of-pocket expenses) to go up with 5%/year going forward. We assume that overall healthcare cost increases will be limited by the current low inflation. But we also assume that premiums will go up rapidly in the coming years. Therefore a 5% increase seems reasonable, but time will tell….

Why Are Healthcare Costs Rising?

What is causing this rapid increase in healthcare cost? This will be a combination of many variables including an aging population, inefficiencies within the healthcare system and increasingly expensive medication.

But there is one component that appears to have a far larger impact than any other: lifestyle choices. We as humans have become so detached from nature that we have also stepped away from an active and healthy lifestyle. Have a look at the following two short videos (reference data to the used research is also provided):

http://nutritionfacts.org/video/nations-diet-in-crisis/

http://nutritionfacts.org/video/what-percent-of-americans-lead-healthy-lifestyles/

Human nature

It’s becoming clearer through science that we ourselves are to blame for most of our chronic diseases (obesity, coronary heart disease (CHD), high blood pressure, cancer, inflammation, etc.). Simply by literally poisoning ourselves through diet and lack of exercise. Fact is that only a small minority of these chronic diseases actually have a genetic component to it. Albeit most people like to believe otherwise (so they can keep up destroying their lives by not changing the way they live).

Fortunately many chronic diseases actually can be prevented, arrested or even reversed through diet and lifestyle choices. The human body is actually able to selfheal under proper conditions, which has been confirmed by many scientific studies on for example diabetes (type 2) and CHD.

Unfortunately, it’s in the human nature to limit energy consumption in everything we do. We are particularly bad at getting off our asses when it comes to something important as our own health. Humans are also really good at putting a bandage on something. Rather than solving the underlying root cause of the problem. For example high blood pressure. Let ‘s take a pill, rather than change the poor diet with too much salt and too little exercise/veggies. Sigh….

It’s Primarily Us!

In conclusion, one of the main reasons why healthcare costs are becoming so expensive is us. It’s also only us that can regain an affordable healthcare system, simply by improving our lifestyles. Literally one step or one bite at a time. Food for thought? 😉

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The Dividend Growth Investor tweeted us the other day if we had a post on healthcare in the Netherlands. In fact we don’t, we only briefly touched on the subject on this post. Considering that healthcare costs will represent about 10% of our total spend during FI, it’s probably not a bad idea to have a look at these healthcare costs.

Healthcare Insurance

The system today is very simple, you have to mandatorily insure yourself for healthcare costs (when you are a resident of the Netherlands). From that perspective it is probably similar to “Obama care” in the US. Beside you having to mandatorily insure, the insurer has to mandatorily accept your request to insure. You cannot be refused based on your medical condition, which is a great thing to have when you are ill.

The mandatory coverage is required when you become 18 years of age, kids below this age are automatically covered under the insurance of their parents. Further, if you have a low income there are benefits to aid you in paying this mandatory insurance.

Healthcare Costs

Healthcare Costs

Basic Coverage

You have the option to select various package as far as coverage is concerned. The “basic” package for 2017 covers you for visits to a general practitioner (Dutch: “huisarts”), hospitalizations/operations, medication, physiotherapy for kids under 18; dental works for kids under 18, child birth, dietary advice and a few other items.

Additional coverage

There is a voluntary option to increase coverage for, amongst others, adult physiotherapy, alternative medicine, psychology, glasses and lenses, dental and certain specific child birth expenses.

Healthcare Costs

Basic healthcare costs will set you back around €92-100+ per month (subject to the provider and terms & conditions of coverage). This is in combination with a mandatory deductible of €385 per person per year. When you increase this deductible to €885 per person per year costs for basic covers drops to around €77-85 per month.

In principle all actual expenses will come out of the deductible first, with the exception of costs associated with general practitioner visits (but not any meditation of bloodwork following the visit!), dental for kids under 18, child birth costs and a few other items.

Additional coverage

The costs for additional coverage vary significantly depending on what you want. But generally ranges between as little as €5 up to €50 per month.

Dental Coverage

Dental work for adults are covered under additional packages. Depending on the package you choose, you can get coverage of up to about €2.000 per year per person (the rest will generally come out of your own pocket). If you only need minor dental work or just check-ups, coverage to about €250 per person per year is usually sufficient. Orthodontics are covered separately in some cases.

Fees for this range €8-50 per month depending on the coverage amount.

Team Cheesy Coverage

Our coverage is with Anderzorg (a Menzis company, no affiliate link here) as they appeared to have the best value for money for our situation. We pay €181.90 per month for the three of us. We have additional dental coverage for €250 per year for the both of us. Our deductible is at the maximum allowable €885 per person, as you probably figured out already.

In short, with no use of the deductible, we pay almost €2.183 per year. We generally budget for around €2.500, which would be about 10% of our FI budget.

Insurance Conditions

Most insurers don’t make lots of money on the basic healthcare insurance coverage due to the competitive market. This is great for the consumer, as you pay really about cost price for this insurance.

However, insurance companies found ways to make your life difficult. Medical care is sometimes only permitted at designated medical institutions with which the insurer has a contract. It could therefore be that you have to travel for certain medical procedures. When you have opted for coverage with a limited number of medical institutions, you could also run into waiting lists issues for certain procedures. Keep that in mind or pay more premium to have free choice in hospitals. It’ up to you.

Future Healthcare Costs?

Now that the basics of the Dutch healthcare insurance are covered, the next logical thing to do is take a look at the development of costs over the past years. We need this to allow us to make calculated predictions where this is going. This will be covered in a post we have planned for next week. Stay tuned!

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(If you have read this post before, it is important to note that updates were made on October 10, 2016 as a result of various comments on this post. The main updates include the assumption that the heffingskorting will only apply once. Not twice, as the least earning of the couple will not longer get heffingskorting as of 2024. In short, we have assumed €2242 heffingskorting for all scenarios)

How Much Do You Need To Become Financially Independent in the Netherlands

In the previous two posts on the topic “How Much Do You Need To Become Financially Independent in the Netherlands”, we looked at three scenarios (the “poverty” option, “base case” option and the “luxury” option) and taxation for these scenarios.

How Much Do You Need To Become Financially Independent in the Netherlands

How Much Do You Need To Become Financially Independent in the Netherlands

In light of recent discoveries and online discussions with various other bloggers (Financieel Vrij en Mr. FOB, both in Dutch), an update of the last post is required, and for a good and very positive reason: lower taxes! Albeit not incorrect as a ballpark calculation, the previously mentioned net worth requirements can be considered as too conservative.

We therefore recalculated the total asset value required to provide your household (in this case defined as two adults and one/two children) with a net “base case” income of €25,000 per year (in 2016 Euros). The assumption remains that you make an average return on your investment (ROI) of 4% after correction for inflation/escalation, but before taxes (unless noted otherwise).

For this analysis we assumed 4 (updated) scenario’s (see link below for details):

1)      All your income falls under Box 1

2)      All your income falls under Box 2

3)      All your income falls under Box 3

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

For the original post with further details on when the scenarios would apply and how this would work in the real world, see here.

The major difference with the previously performed analyses is that we now also correctly incorporate the heffingskorting (aka “a general tax refund”) for scenarios 2, 3 and 4. Furthermore, we now also assume the new 2017 tax rates on wealth in Box 3. Finally, a few more minor calculation errors were corrected and assumptions changed to better reflect reality.

Scenario Assumptions

We have assumed the following for each scenario (including updates from the previous assessment):

Scenario 1:

  • Taxation is based on 2016 rates
  • It assumes income is from labour (Box 1, but only assumes you get the “heffingskorting” (no other benefits for sake of simplicity).
  • No income from other benefits or government/private 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.), just to keep it simple.

Scenario 2:

  • Taxation is based on 2016 rates
  • There is only income in Box 2 from special interests in a company (paid in dividends)
  • Inclusion of “heffingskorting” for two adults (i.e. €4484 2242 in general tax reductions)

Scenario 3:

  • Taxation is based on 2017 rates
  • Inclusion of “heffingskorting” for two adults (i.e. €4484 in general tax reductions)
  • Assumed net ROI of 2%, 4% and 7% (to show taxation effects).

Scenario 4:

  • Taxation is based on 2016 rates (Box 1) and 2017 (Box 3)
  • Total yearly net income of €10.000 from labour (or other Box 1 income forms)
  • Inclusion of “heffingskorting” for two adults (i.e. €4484 2242 in general tax reductions)
  • No income from benefits or pension
  • You are younger than 67 years (calculation uses a person of 35 years)
  • No special tax arrangements or benefits (e.g. no company car, you rent a house, no special life insurance or other policies, etc.)
  • Assumed net ROI’s of 4% and 7%.

The Results

For 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). Please keep in mind that taxation between box 1, 2 and 3 is not interchangeable (i.e. taxation credits cannot be switch between boxes)!

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 returns on investments.

FIRE Scenario Results

FIRE Scenario Results

New Observations and Conclusions

Based on the updated calculations (with hopefully the correct tax interpretations) there are a couple of interesting developments compared to the previous analyses (as shown here):

  • Scenario 1: pretty much the same with no major changes.
  • Scenario 2: you need considerably less gross income to the make the €25k net income thanks to the heffingskorting. However, it remains unknown how many assets you need. As this scenario covers dividend payments by your own company or company in which you have a majority share of at least 5%.
  • Scenario 3a: Significant change of €55k, as with the heffingskorting you now need fewer assets and can actually end up paying very little taxes. However, this means you do actually make more than 7% net ROI, every year (possible, but not very likely if you are invested in the stock market). The sobering thought is that you still need more than 7% ROI to become FI in the Netherlands without having to pay taxes.
  • Scenario 3b: Double whammy here due to the heffingskorting, you need fewer assets to get a net €25k income, however fewer assets is less wealth tax. End result, a drop of about €119.000 in required assets. Hmmm.. we were a bit too conservative on the last assessment (What we had actually calculated, without realizing it, was almost the “Luxury” income scenario).
  • Scenario 3C: now this one is interesting. Due to the new progressive tax regime for Box 3 wealth, it has now become impossible to get €25k net income if you only have a ROI of 2%. In short, you will always need to sell assets in this year (or years) to cover expenses (irrespective of the total amount of assets, even if you have €2.000.000 or more!), assuming you have no emergency cash, obviously.
  • Scenario 4a/4B: as expected you need fewer assets due to the heffingskorting to be able to partially become financially independent. If you like to work part of the time (say 1-2 days per week), you need anywhere between €202k and €435k to live comfortably with your family (subject to your actual ROI).

Taxation

A general comment is that whichever option you choose to financially retire (assuming passive income in box 2 or 3), effective taxation is (much) lower than that on income (see Scenario 1 – Box 1) when you return on investment is above the 4%. If your ROI is around the 4%, taxation on wealth or income is about the same in percentage (due to all kinds of tax benefits received from performing work).

As you can imagine we also recalculated our new own target for our FIRE required Net Worth. We won’t make this number public, but it should be obvious that our target dropped considerably. We are therefore much further ahead on the Cheesy Index than previously calculated. Keep an eye out for the next Cheesy Index update!

How about you, have you determined your number? Did you calculate it right the first time around? Are we still missing anything? Let us know!

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In the previous post on the topic “How Much Do You Need To Become Financially Independent in the Netherlands”, we looked at three scenarios (the “poverty” option, base case option and the “luxury” option). One of the main things we concluded is that taxation significantly increases the amount of required assets before you can call yourself financially independent. We assumed an average tax burden of approximately 30%. However, was this calculated correctly?

How Much Do You Need To Become Financially Independent In The Netherlands (Part 2)

How Much Do You Need To Become Financially Independent In The Netherlands (Part 2) Source: https://pngtree.com/free-fire-background

How Much Do You Need To Become Financially Independent In The Netherlands (Part 2)

In this post we will evaluate the impact of Box 1, Box 2 and Box 3 taxation on the total amount of assets required to provide you with a net “base case” income of €25,000 per year (in 2016 Euros). The assumptions remain that that 4% rule applies, that you make an average rate of return on your investment (ROI) of 7% and that we encounter an average 3% inflation. Obviously, swings in the ROI and inflation affect the total amount of assets required.

For this analysis we assume 4 scenario’s (see scenario assumptions below for further details):

  • All your income falls under Box 1
  • All your income falls under Box 2
  • All your income falls under Box 3
  • Your income has a 20 – 80 percentage split between income in Box 1 and Box 3

Real Life Examples

What do these scenario’s mean in real life? Here are some examples for the four scenarios, (please do keep in mind that there are many other examples out there!):

  1. If all your income sits in Box 1, it most likely means that you are still employed as you have income from labour, or you are unemployed and are receiving benefits or you are retired and are receiving a (government/private) pension (and/or a combination of the aforementioned). You have no special interests in (your own) companie(s) (i.e. you don’t hold any shares or are a major shareholder in a corporation, which is taxed in Box 2) and you have limited to no assets and/or receive little to no dividends (as they are taxed in Box 3).
  2. If all your income sits in Box 2, you are not (directly) employed, receiving benefits or a pension (all box 1), you are getting all your income from dividends paid by the company you own or in which you have a substantial amount of shares (see here for details). But you have limited to no other assets (box 3).
  3. If all your income sits in Box 3, you are not employed, are receiving benefits or a pension (all box 1), or you are receiving very little and end up not paying any taxes due to various credits. You either do not own a company or are own a substantial amount of shares in a corporation (Box 2), or when you do, the company does not pay dividends (hence no income and taxation). However, you have managed to collect a (large?) amount of assets in the form or shares, bonds, real estate, loans, etc. This scenario is most likely when you become financially independent prior to age 67 and fully live off dividends, real estate income and/or capital gains from shares/index funds.
  4. The fourth scenario is a combination of option 1 and 3; which you could describe as you having a large amount of assets (box 3) and are also receiving income from employment and/or pensions and/or benefits. The majority of us in the Netherlands will end up in this category at one point during our lives, albeit the ratio between incomes in Box 1 and Box 3 may vary significantly depending on your personal situation.

Scenario Assumptions

As there are way too many variables to consider everything, we therefore need to make certain assumptions for our 4 scenarios. We assume the following for each scenario:

Scenario 1 (this scenario is primarily used to evaluate taxation from a “normal” job compared to taxation during “financial independence”):

  • Taxation is based on 2016 rates
  • It assumes income is from labour and you receive the associated credits/benefits (i.e. “heffingskorting” and “arbeitskorting”)
  • No income from other credits/benefits or government/private pension
  • You are younger than 67 years (calculation uses a person of 35 years)
  • 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 (this scenario represents living from dividend income of your own company without performing any work; it is supposed to be representing “retirement”!)

  • Taxation is based on 2016 rates
  • There is only income in Box 2 from special interests in a company (paid in dividends)

Scenario 3 (this scenario reflect financial independence by living purely on your hard earned assets)

  • Taxation is based on 2016 rates
  • No dividend income assumed (more to follow in a future post regarding dividend tax and Box 3 calculations)
  • Assumed ROI of 2%, 4% and 7% (to show taxation effects), note that the taxman assumes you get around 4% (subject to the amount of assets you have) and we assume you get 7% for our base case.

Scenario 4 (this final scenario reflects financial independence, but you still like to do some work on the side for fun, say 1 or 2 days a week, and get paid for it)

  • Taxation is based on 2016 rates
  • No dividend income assumed
  • Income is from labour and you receive the associated credits/benefits (i.e. “heffingskorting” and “arbeitskorting”)
  • No income from benefits or pension
  • You are younger than 67 years (calculation uses a person of 35 years)
  • No special tax arrangements or benefits (e.g. no company car, you rent a house, no special life insurance or other policies, etc.)
  • Assumed ROI’s of 4% and 7%.

The Results

For 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). Please keep in mind that taxation between box 1, 2 and 3 is not interchangeable (i.e. taxation credits cannot be switch between boxes)!

Based on our assessments, you get the following taxation amounts and effective taxation rates based on the above noted assumptions. The required amount of assets are based on the noted returns on investments (hint, you need to make sure your ROI is as high as you can!).

2016-01 HMDYN P2

Observations and Considerations

Scenarios 1 and 2 are pretty straight forward, but there is a significant impact for scenario’s 3 and 4 subject to your effective ROI and associated taxes (box 3). The explanation on the results is as follows, the lower your ROI the higher your assets needs to be, simple right? However, the higher your assets, the higher the effective taxation, which makes is increasingly more difficult to obtain the required income of €25,000 net of taxes. We therefore see these ridiculous asset amounts to become financially independent.

So how does this work then in reality? You will have years that do better than average and years that do not. During the years you are doing better than average, your taxation is “relatively” limited (but about the same in absolute terms) and you should have some extra that year to reinvest  into (or leave in) your portfolio. During the less than average years, you may have to dip into your principle to pay for the owed taxes (or work to get some extra income). On the upside, during a large stock market/housing crash, you tax burden also gets some relieve as your assets would be worth less!

We never realized these impacts on our cash flow (and required amount of assets) and now realize that we need considerably more assets to “securely” live during our years of financial independence. Or we just need to do some work on the side for some extra income during less than average years to cover the taxes.

Another realization is that most people on their way to financial independence in the Netherlands (and blog about it) do not assess this taxation topic and are more closely looking at the wealth building stage (how and how much). However, if you don’t know the level of your taxation, how can you define your wealth goal? So we have now taken an slightly conservative approach and included assets to cover taxation during financial independence. Our final calculated number is what is used in our Cheesy Index.

Conclusion

Based on the assessment above we conclude the following:

  • The Dutch tax system is complex and has a large impact on everyone trying to become financially independent. It does not matter much if you are a dividend investor (all Box 3), real estate investor (also Box 3) or investor in Index Funds or stocks (yup, Box 3 again).
  • From a taxation perspective the most “stable” and easiest to calculate would be income from Box 2.
  • Taxation in Box 3 can work in your favour, but can also hurt you in financially less successful years. The key is to maintain a ROI of more than the assumed 4% by the government (plus 2-3% inflation, so ideally an ROI of 7% and up), and you should be coming out ahead.
  • It may actually pay off to do a little bit of work on the side (say postal delivery, cleaning services, consulting, etc.) for one or two days a week to keep your overall taxation down (the Dutch government stimulates labour and low incomes with significant tax breaks/credits). But it is then debatable if you truly are financially independent, you certainly would have way more time on your hands.

 

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How much do you need to become financially independent in the Netherlands? Well, let’s have a look shall we?

How much do you need to become financially independent in the Netherlands?

This is the “million Euro question”, maybe even quite literally. It is also completely depending on your personal preferences and abilities, which leads to many possible answers. However, to provide some guidance, a few scenarios are reviewed that give an indication of the range and what the limitations are.

In order to become financially independent, you need to have income producing assets that cover your expenses (preferably a little bit more asset income than expenses). So before you know how many income producing assets you need, you need to know your expenses.

We are going to review three scenarios regarding expenses for a couple with one kid (i.e. our situation). However, the lower range may also be considered representative for a single/couple without kids, and the higher range for a couple with two more kids. Most people will think these yearly expenses are far too low, therefore we take a quick look at some of the underlying assumptions why they aren’t.

F.I.R.E.

How much do you need to become financially independent in the Netherlands?

Assumptions

For our scenarios we took the following assumptions into consideration:

  • You no longer NEED a car to get to work, you may still want one for convenience to get around (or travel) but that is up to you
  • You don’t NEED to go on holiday (albeit we rather go as well; just keep it basic and fun and you still can go on holiday(s))
  • Guess what, you don’t NEED at €50 per month mobile phone plan
  • You don’t NEED a new wardrobe every month
  • You don’t get any old age retirement income (government) or pension (i.e. you are not yet 67 years old) (yet)
  • You CAN do a lot of your own work around the house, grow your own food, buy used, etc.
  • It is possible to comfortably live at the “poverty” level (i.e. voor een basisuitkering) at approximately €16,500 per year (after taxes) for a couple (this is the minimum governmental support you can receive)
  • You don’t have to pay for you child’s education (you can if you want, but that takes more money and time before you reach financial independence; or you don’t have children, or they are already done with school)
  • Your home is not yet paid off as you retire way before the normal retirement age and normal 25-30 year mortgage (if it is, great, you will need less)
  • You don’t like fancy cars (transport budget can easily be blasted out of the water)
  • You are very healthy (you work out, eat limited meats, lots of fruit and vegetables, etc.) and thus keep your healthcare expenses low

The expenses used below are obviously rough numbers, depending on your preference, home ownership status (e.g. if you house is paid off or not),  location (urban vs. city) and many more, you will have differences in the expense groups and your overall yearly expenses. However, the below noted scenarios are also meant to give a general idea of what to expect. We are personally aiming for scenario 2, but perhaps without a car and more travel.

Expenses

The following yearly expenses are assumed (based on our own experiences and assumptions above)

Scenario 1: “Poverty” Option
Item Cost Note
Housing and utilities € 9.500 Either rent of buy something small outside a major urban area, including insurance, water, electricity and gas, internet, phone(s).
Groceries € 2.500 Basic foods only
Transportation € 1.000 You bike + public transport and occasional rental car only
Travel/Holiday € 0,- No holidays, just walks in the park
Healthcare € 2.500 Mandatory healthcare without options + minor expenses
Other € 1.000 Everything else
Total € 16.500

 

Scenario 2: Base Case Option
Item Cost Note
Housing and utilities € 12,000 Either rent of buy, including insurance, water, electricity and gas, internet, phone(s)
Groceries € 3,500 Basic foods with the occasional extras
Transportation € 3,000 You still have your own basic car
Travel/Holiday € 2,000 One/Two basic holidays or one more fancy holiday on occasion
Healthcare € 2,500 Mandatory healthcare without options + minor expenses
Other € 2,000 Everything else
Total € 25,000

 

Scenario 3: “Luxury” Option
Item Cost Note
Housing and utilities € 14,000 Either rent of buy, including insurance, water, electricity and gas, internet, phone(s). Nicer house/luxury options than base case
Groceries € 3,500 Basic foods with the occasional extras
Transportation € 3,500 Slightly nicer/bigger car than be base case option
Travel/Holiday € 3,000 A couple nice or one very nice holiday
Healthcare € 3,500 Mandatory healthcare plus options + expenses
Other € 2,500 Everything else
Total € 30,000

Taxes

The Dutch tax system is fairly complex and expensive (see here and here for more information); as a rough indication about 25-40% of your overall income (be it from income from employment, investment income and/or wealth) disappears to government coffers. The system is setup such that the higher the income/wealth, the more taxes you pay.

For the purpose of our exercise we are going to assume an average 30% tax burden. In short, your expenses are equal to 70% of your after tax investment income.

In short you approximately need the following (investment) incomes BEFORE taxes:

  • Based on scenario 1: €23.600
  • Based on scenario 2: €35.700
  • Based on scenario 3: €42.800

Assets

Now that we know our expenses and our approximate tax burden, we can determine the amount of income producing assets we need to become financially independent. For the purpose of this post, we assume you are familiar with the 4% rule (if not see here). It assumes you get a 7% return per year on your assets and inflation is 3%, leaving 4% for you to spend each year going forward. Therefore you will need assets that are 25X your expenses.

  • Based on scenario 1 you would need (at the 4% rule): €590.000
  • Based on scenario 2 you would need (at the 4% rule): €893.000
  • Based on scenario 3 you would need (at the 4% rule): €1.071.000

Too optimistic in your view? Need more security? Maybe a 3% rule is more appropriate (i.e. assets 33X your expenses), this would lead to the following required assets.

  • Based on scenario 1 you would need (at the 3% rule): €779.000
  • Based on scenario 2 you would need (at the 3% rule): €1.178.000
  • Based on scenario 3 you would need (at the 3% rule): €1.414.000

Conclusion

You need a lot of income producing assets to become financially independent in The Netherlands. The primary way to get there faster, is to spend as little as you possible have to (while still enjoying your life!), and thus allow for more investing.

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