How Much Do You Need To Become Financially Independent in the Netherlands (Part 3)

FIRE In the Netherlands....

(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.

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.coin5

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:euro-note3

  • 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!

30 comments

  1. I think this series and in particular this post is brilliant. Scenario 3a especially shows the “sweet spot” for FIRE in The Netherlands. So many people tend to hear about the famous “wealth tax” concept and conclude that the only possibility for FIRE is to find a new country. In my own back-of-the-napkin calculations I find it’s just not true. In fact, it’s quite the opposite. Your mapping of Scenario 3a illustrates that clearly.

    Even in a country with more socialist leanings like the Netherlands, there is a class of folk for whom the tax laws are disproportionately beneficial. The challenge of the game is to identify and become one of them. There are opportunities aplenty right now.

    1. Thanks mate! And you are completely right, finding the sweet spot within the taxation brackets is the way to go for FIRE in this country.

  2. Love this series. I’m in the same boat – striving for FI in The Netherlands. Nice to see someone come up with roughly the same numbers. The amount of math used by you also comforts me a bit 🙂

    Question: would you move to a different country if that would mean you could FIRE sooner? E.g. in Switzerland there’s municipalities with a max of 10% income tax. Not accounting the higher living expenses, would you ever consider moving?

    1. Hey Edwin,
      We also need the comfort from others to show that we are on the right track, love the re-assurance!
      As to your second question, Me (Mr CF) would in a heartbeat, but Mrs CF prefers to see Miss CF grow up with family. Let’s put it this way, I’ve used up my “different country” credits when we moved to Canada 😉
      However, we will do some more (hopefully long term) travelling in the future, but I don’t know if emigrating will be considered again.

    1. Can you elaborate? The house we live in will be covered in Box 1 with the normal interest reductions (hypotheekrenteaftrek) and the remainder of the house that is rented out will be allocated to Box 3 (it is actively managed, so is permitted to be allocated in Box 3). This gives the most favourable tax allocation for us.

  3. Thank you for these excellent posts! My husband and I (and our toddler) are, like your family, on the path to financial independence. We are currently based in California. We are considering moving to the Netherlands at some point (my sister is based in Amsterdam, so we have visited there numerous times and love it). I stumbled across your blog while attempting (and mostly failing) to do some research on how the wealth tax works in the Netherlands. Your blog has been most illuminating.

    I do have some follow up questions, and I apologize in advance if they are completely retarded.

    1. Have I understood it right that if all our income is box 3 there are no taxes on capital gains and only tax on total wealth? As a specific example: Assume I have a portfolio of $1,000,000 and I sell some stocks/bonds to withdraw say $30,000 in a year. Let us say that $10,000 of the $30,000 is capital gains. Is it correct that I only pay taxes on the whole $1,000,000 and no taxes on the $10,000 gains?

    2. I’m not sure I understood the heffingskorting correctly (and I _definitely_ cannot pronounce it right!) for box 3. Again, with a sample portfolio of $1,000,000, to calculate taxes is this the correct math?
    2.1 First deduct 42,278 from the total portfolio leaving us with 957722 subject to tax (I know I am mixing dollars and euros right now, but let us ignore that)
    2.2 Then on the first 25,000 we pay no taxes, leaving us with 932722.
    2.3 On the next 50,000 we have to pay a tax rate of 0.87% giving us a tax amount of 435
    2.4 On the remaining 882722 we have to pay a tax rate of 1.41%, giving us a tax amount of 12446.
    2.5 So our total tax due is 435 + 12446 = 12881
    2.6 Are steps 2.1 to 2.5 right? If so is the heffingskorting deduction applied to the 12881 due?

    1. Hey Mrs Bita,
      Cool, love california! Great state to road trip! Very pretty scenery. But very cool that you’ve been here a couple of time. Fun place to visit, eh?

      As to your questions:
      1: yep, correct, there is no capital gains on the €30.000. “Just” the wealth tax on the €1M
      2-2.6: Almost correct, as of 2017, a couple would be exempt from taxes on the first €50.000 (up form ~€42.200 in 2016), leaving €950.000. Of that amount, the next €150.000 would be taxed at (2.923% * 30% = 0.877% tax) and the remaining €800.000 would be taxed at (4.687% * 30% = 1.4062%). My personal spreadsheet comes to ~€12505. Assuming you only have income in Box 3, for 2017, you get €2254 heffingskorting (for highest earning partner) + ~€1000 (lowest earning partner, exact value is currently unknown). This combined ~€3254 you can subtract from the €12505, leaving you with a final tax bill of ~€9.248 or 0.92% overall tax on your wealth. However, the heffingkorting for the partner with the lowest income will be eliminated by 2024. So for your longterm plan, stick with just subtracting €2254 to get a conservative number (taxes are likely to go up anyways).
      Hope this help!

    2. Thank you!

      A follow up question: how do dividends play into this? Is dividend income treated the same way as capital gains in question ‘1’ above? Or are there additional taxes on dividend income?

    3. You pay dividend tax (15%) for dividend received in the Netherlands (you may have other withholding tax as well in country of origin!). This tax is compensated within Box 3 taxes. I.e. if you already paid dividend tax, you can subtract from the wealth tax you owe the government. This system avoid double taxation on your wealth.

  4. Sorry to complicate things a bit :-D. I think that what you’re trying to do is really great! Unfortunately, the tax law is pretty complicated, which is the reason that I actually never tried what you’re trying to do… Looking forward to your future posts on this!

    You can find some of my thoughts about this reduction of the heffingskorting below for each scenario:

    For scenario 1 & 2: it does not seem to affect anything. Great!
    For scenario 4: the height of the algemene heffingskorting for the most earning partner is indeed 2242 euro, but for the least earning partner it currently depends on his/her age. If the least earning partner is born before 1963 (older than 53) than the algemene heffingskorting is 2242, but if he/she is younger than that it is about half (1047 euro). In addition, the algemene heffingskorting is slowly reduced to zero for the least earning partner in 2024, which means that this scenario will become less attractive as time goes by.
    For scenario 3: I couldn’t find if the ‘algemene heffingskorting’ (aanrechtsubsidie) is actually paid if BOTH partners do not work. It seems mainly to be a subsidy for working people, which would unfortunately mean that the calculations from ‘part 2’ of your post are closer to the truth.

    Just came to my mind: it may be possible to fill in each of the scenarios in the ‘Belastingdienst’ taxation software (both for people older and younger than 53) to see what happens with the arbeidskorting and the heffingskorting exactly.

    1. No, I sincerely appreciate the feedback. And you are right, the Dutch tax system is a bit of a challenge! It’s like trying to hit a moving target….:-(

      But your assessment is right, we did some more calculations yesterday as a result of your comment and would have to agree. Still, our target FI number dropped by about €75000 or so (assuming only one person will receive the full €2242 by 2024), not bad. But not nearly as good as we had hoped….It only moved FI by about one year forward, instead of nearly two based on the above assessment.

      I was actually trying to find a download or similar to run those scenarios for the most recent tax year. But appearently we can now only fill out the assessment online for the 2015 tax year (which we already did….). Might take another look at 2014 to see the effects. Will keep you posted.

  5. Maybe I’m missing something but to my knowledge the heffingskorting is slowly being reduced to zero for the least earning partner in 2024. So if I want to FI, but my girlfriend keeps working, that means that she will still get it and I will not… Doesn’t this make the scenarios above overly positive?

    See for example the page below:
    http://www.belastingdienst.nl/wps/wcm/connect/bldcontentnl/belastingdienst/prive/inkomstenbelasting/heffingskortingen_boxen_tarieven/heffingskortingen/algemene_heffingskorting/afbouw_uitbetaling_ahk_2016

    1. Hey Breeze,
      thanks for the critial look at the post, we actually are aware about the reduction in heffingskorting for the least earning partner. However, we were not able to find out what happens if both earn the same or both have no income at all (as defined in for Box 1) before uploading the post. Still wanted to have another closer look into this, but you beat me to the punch.
      I think you are very much correct, it could very well be true that this estimate has swong over too much and is now optimistic rather than conservative. I’m affriad that I’m not going to be able to give a definite answer to this question.
      Thanks for the comment.

  6. Interesting series CF. I thought most Western European countries have assured pension income and guaranteed medical, so with these two covered, I wonder why so much of income generating assets are needed, other than of course for discretionary expenses. In US, we have no such luxury so our portfolio has to cover for everything until some SS kicks in.

    1. I wish that was true, but we pay for medical care these days at a rate of about €160-250 per months for a family of 3 (4 would be the same as kids are automatically insured), subject to coverage levels. Assured pension income is also not an quarentee, as it depends on the number of years you have been working and the fees paid into this system. Which in case of people getting out early may be limited. Social Insurance payments still exist, but they may become lower in future years depending on how the economy is doing.
      In short, the states may actually be a cheaper place to become FI.

  7. I recently broke out my finances and I too found out that I was much closer than I anticipated. Isn’t it amazing how when you actually start digging into your finances how much clearer your goals become and how much closer you potentially are.

    Thanks for sharing the update.

  8. Looking forward what the cheesy index looks like taking algemene heffingskorting into account!

    Some remarks: I am not sure about your statement of effective taxation of 0% for case 3A with assets worth 358.000 euro. That would result in little 170 euro monthly taxation according to 2017 box 3 tax levels. You start paying wealth tax with assets over 212914 euro’s.
    You also might want to be precautious with stating that 7% ROI results in 358.000 required assets to be FI. Sure, you define ROI as returns after inflation, but that would leave you to a ROI before inflation of 9-10%. You might want to use SWR instead of ROI.

    1. I don’t get it exactly with the 3A scenario. You aren’t planning to take out 7% (but 4%?) of your nestegg, are you? Using a 4% SWR scenario 3B will “your” scenario?

    2. This scenario is to give an indication how much you would need if you portfolio would produce a net ROI of 7%, and you would be able to use a 7% SWR on this portfolio. This is obviously pushing it a bit, but there are folks able to produce such returns on investments (think people whom inherited dividend stock or real estate). You’d be done and ready for FI really quickly in this scenario, which was the point I was trying to make.
      Take care!

    3. Hello Mr. FOB, the scenarios are for a couple which means double the heffingskorting (each getting €2242). In that case you can have over €400k without paying taxes. Therefore if you would have a very high yielding portfolio, and you can actually manage a safe withdrawal rate of 7%, would be done pretty quickly. That’s the point I’m trying to make with this scenario.
      Please remember that the safe withdrawal rate of 4% in the States and 3.5% in the Netherlands is based on a stock and bond combination. When you put real estate in the mix, or if you have been very successful in very long term dividend stock investing, the safe withdrawal rates can be higher.

    4. Thanks, I get your point.
      Still I am wondering what you mean with the term “dividend” in your last sentence. Did you find evidence that “dividend stocks” with focus on paying high dividends, like Shell, typically outperform regular stocks (paying dividend or reinvesting earnings instead of paying dividend)? I have not seen any positive correlation between dividend percentage and long term overall stock performance so far.

    5. I agree, this does not exist (the correlation). Should have explained differently, I was aiming for dividend stock of a company you perhaps own. Say you own a franchise of some sort and pay yourself dividends. These ROI’s can be significantly higher than those for publicly traded stocks.

    6. Interesting point here. Because whenever I do my calculations, it is inflation that is killing me. It may be low now, but it was 2.2% on average in The Netherlands over the last 25 years. And that eats away the purchasing power of my income in no time…

    7. Hey Geldnerd,
      Absolutely, inflation can be a killer in your FI plans. Actually, that 2.2% is lower than I though, believe it is even about 3% when you consider the last 30 years. This is also what we keep in mind for our calculations.

  9. Good evolution… I look forward to the new number you have.

    Case 3A is an interesting one. In Belgium, there are some ways to reach this as well. For now, capital gains on trackers (including options) are not taxed. I wonder how long this will last. Making 7pct with options and some trackers that pay dividend is not that impossible. It does assume you have a cash buffer for major market craches where you loose money on the puts..

    In Belgium, you can also earn income up to 7K without being taxed. This is per person. So, as a couple, we could make 14K tax free. At the average wage of 3500 in Belgium, that is only working 2 months. Where can I sign?

    Assume we need 25K to live, this means earning only 11K per year via investing or having a portfolio of 275K… Sounds interesting to start a dream. Sadly, we currently need way more per year, mainly due to the mortgage and the costs of 2 kids…

    I probably would factor in the need to work 104 days per year to keep pension buildup towards early pension. SO, work 6 months, travel 6 months…?

    1. Good Day ATL,
      That is not a bad deal in Belgium when you get 7K each exempt of taxes. It’s somewhat similar to the heffingskorting, which technically provides you with €6134 income that is not taxed. Guess I have to move south of the border during FI 😉
      As for the cost of the mortgage, you could sell the house and rent (in a lower cost of living area obviously). Assuming it’s not underwater.
      Good luck determining the right scenario for you.

      P.s. love the last scenario, in the case where you like your work, it may be a very nice combo!

  10. Really looking forward to your next update to see how much closer you are to FI now CF!

    It is quite difficult to know exactly how close or far away you are to FI when the economy can change, rules & laws can change, and you might not even know all the rules that apply. I’m really pleased for you that it’s worked out well for you (imagine if you’d come across a rule where you’d be a lot further away).

    Australia keeps changing its pension account laws, so that’s annoying for people in retirement or approaching it – how are you supposed to know what to do?

    Tristan

    1. A very good point indeed Mr Tristan, maybe worth a post as to how to reduce risk on potential unknown changes and/or how to deal with this uncertainty. Thanks for the inspiration 😉

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