Retirement, there are people who don’t look forward to it, who prefer to work well beyond this age. Yet almost everyone I know dreams of retirement. Nobody wants to be old, but the freedom to decide for yourself what you do because you are retired, that seems amazing to almost everyone!
The problem with retirement
There are two problems with retirement. The retirement age is constantly shifting and there are regular reports that (possibly) less pension is being paid out. That’s because life expectancy keeps getting higher and higher. So people receive money from the pension pot for longer. There is also an aging population, so the pension pot is replenished less quickly than is paid out. I do not blindly assume that the pension that I am accruing now will actually be available when I reach the respectable retirement age.
Then there is the General Old Age Pensions Act. This law entitles every Dutch citizen to a basic pension from the state at retirement age. Due to the increasing life expectancy, the state pension costs more and more money. I cannot look into the future and assume that in 40-45 years the state pension will still exist or that this is enough to live off of.
I think it would be great to have freedom of not having to work for money anymore a lot earlier then the prescribed retirement age. Don’t wait until I’m 72 (or whatever the state retirement age may be around that time). Hopefully at 72 I will still be healthy and fit to do what I feel like, but is that worth the gamble?
Time to take matters into your own hands. What are the conditions for retiring? It’s just that you need enough money to live the rest of your life. It would be nice to also leave something to children or other loved ones. So pension is not an age, but an amount! Let’s calculate what that amount is.
The safe withdrawal rate
This calculation will be different for everyone and it is also different in every country. Taxes on equity and savings are different in every country.
To calculate the amount we need, we can turn to the FIRE movement (Financial independence, retire early). People who support this movement save for their pension themselves in order to be able to retire early, sometimes decades before the retirement age. A rule of thumb from the FIRE movement here is to save 25 times your annual costs. That way, you can then spend 4% of your assets every year without losing your assets. This is the Safe Withdrawal rate.
This 4% has been calculated in the so-called Trinity study. On average, Stocks and other investments such as real estate grow about 8% per year. Remove an inflation rate of 1.5% and you are left with 6.5%. So if you were to spend 4% of your assets every year, your assets are still growing every year! In the Netherlands, however, you pay tax on your savings above 50.000 euros. Some people think 3.5% is safer. I can agree with that, but we must not forget that with 4% of your assets to be spent, the chance that your assets will become more valuable is still quite high.
And in addition, you will still receive the General Old Age Pension and probably accrued pension when you hit retirement age. When you retire early, this also means that when you retire, you probably also have a paid-off house, so you will have fewer monthly costs. You also spend less and less with age. So I think that the 4% safe withdrawal rate is safe enough.
How much do you need?
It now depends entirely on how much money you need, how high the pension amount is for you. Are you highly motivated to retire and do you think you can live below the poverty line, for example on 1000 euros per month? Then you need 12,000 * 25 = 300,000 euros. Do you need 2000 euros per month? Then you already need 24,000 * 25 = 600,000. Double!
This is the reason that people working with FIRE are not only focused on gaining as much income as possible but also keeping expenditure as low as possible. It is quite different whether you try to rake 300,000 or 600,000! And living on 1000 euros is very difficult, but if you have a paid-for house and have enough time to do the maintenance, the garden and the cleaning, then it is already a lot cheaper than if you outsource those kinds of things and you still pay monthly rent or mortgage.
There is a chance that you will still earn something during your “retirement”. The idea is not to do nothing but sit in a rocking chair all day. The idea is that you are passionate about working on something that does not necessarily generate money, but where your heart lies. It may of course be the case that it generates money. After your retirement age, the pension will also be credited to your account. That is why you may be able to retire at 200,000, for example. You may spend more than the 4% for a number of years on your saved capital, but you still have enough left to supplement it with the general pension and any accrued pension.
Start early and stick with it
The amounts I mention are of course astronomically high and difficult to achieve. That’s why I encourage you to start early, take full advantage of the interest-on-interest effect, and take advantage of the snowball effect. If you live like everyone else, you will get the same outcomes as everyone else. Spending and saving like everyone else ensures that you retire at the same age as everyone else. Set your own course and set your own goals. I will encourage you along the way!
Until next time,