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.
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))
- 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.
The following yearly expenses are assumed (based on our own experiences and assumptions above)
|Scenario 1: “Poverty” Option|
|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|
|Scenario 2: Base Case Option|
|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|
|Scenario 3: “Luxury” Option|
|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|
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
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
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.