Building individual pensions: what you need to know.

At Vive, we believe that everyone deserves financial freedom, especially during retirement. The Dutch pension system offers many options, but sometimes that's not enough. That's why it's smart to build up an individual pension. In this article, we explain why this is important, what options there are, and how you can get started today.

What is financial freedom?

Financial freedom means having enough money and financial stability to live the lifestyle you want without depending on a salary. It means having control over your own finances. This allows you to provide for yourself, pursue personal goals and solve emergencies without undue stress. 

In practice, this means, "I can pay for anything I want within normal limits." It does not mean that you no longer have to work - or that you can just buy a car. If so, you are already more advanced. 

But then why the link to retirement? 

The link between financial freedom and retirement is that retirement planning provides long-term stability and independence. By saving or investing enough for retirement, you can retire earlier and avoid financial stress. Retirement provides choice in your future lifestyle and contributes to well-being and health. Investing for retirement helps grow your wealth and protects against inflation. In short, a well-planned retirement is an important part of the path to financial freedom.

Why build individual pensions?

Your pension consists of three pillars: AOW, collective pension and supplementary pension (you can also optionally invest yourself in stocks, your house, et cetera, which we also call the fourth pillar). Although the first two pillars provide a basic income, this often cannot support your desired lifestyle. Therefore, it makes sense to build your own individual retirement for more financial security and freedom. But what then are the options for building an individual pension?

1. Supplementary pension (through your employer, for example).

Some employers offer the opportunity to build up individual pensions through voluntary contributions. This can significantly increase your pension pot and offers tax advantages. For example, the employer can bear the cost of the individual pension pot, this encourages you to put money into your pension. The employer helps the employee with their future(read our other blog on the second and third pillars to learn more about this).

‍Example: Suppose you work at a company that offers an individual retirement savings system. You can choose to automatically deposit a portion of your salary into this fund, which over time yields a nice sum.

2. Bank savings

Bank savings is a safe and easy way to save for retirement. You deposit money periodically into an escrow account that is not released until you retire. After it is released, you can withdraw it in installments. This money is tax deductible. However, you do get low interest here compared to investing. 

Example: Each month you deposit €200 in a special retirement account at your bank. This amount is blocked until your retirement age. You get a low interest rate on your total deposited money. 

3. Pension investing

Retirement investing is a way to build up individual wealth for retirement by investing, often through an escrow investment account.

Retirement investing offers the chance for higher returns than saving, but it also comes with risks and costs. Like any form of investing, this can be because the investments - stocks, bonds, funds - may become worth more or less. That depends on the market. 

Despite this, retirement investing has become more popular. That's because of the possibility that your investments will be worth more in the future. Which gives you a higher pension. In addition, because you can enjoy tax benefits.

Example: You decide to invest $150 a month in a pension fund that invests in funds. You do this with the estimation (and perhaps expectation) that the final amount will come out higher than, say, a savings account. This is exactly what Vive does for you. 

Tax benefits

One of the biggest advantages of building an individual pension is the tax benefits. With both bank savings and retirement investing, you can take advantage of tax deductions. This means you get money back from the IRS on the amount you've already paid income tax on. You don't have to pay this amount because it is tied up until your retirement age. When you then have the money paid out, you often pay a much lower income tax rate. Until then, you can use the recovered money to earn additional returns.

Tools and Calculations

It's important to understand how much retirement you need and how much you need to save. Use tools such as pension and annual allowance calculators (you can find the definition of annual allowance here) to get a clear picture of your financial future. 

If you want to simply figure out what you should have for retirement, you need the following information anyway (aside from any calculators):

1. Current income: Your current annual gross income.
2. Desired retirement income: The amount you think you will need annually after retirement. A rule of thumb is 70-80% of your current income.
3. Retirement Age: The age at which you plan to retire.
4. Life expectancy: How long you expect to live after retirement.

Example: Use an annual margin calculator to calculate how much extra you can save tax-free for retirement. This will help you create a financial plan.

You can find the government's annual margin calculator here: Calculate your deductible annuity premium (as of 2016) (belastingdienst.nl)

What do we hope you learned from this?

Building up an individual pension is important for financial freedom. The Dutch pension system provides a foundation, but often not enough for your desired lifestyle after retirement. By saving extra through supplementary retirement, bank savings or pension investing, you provide more financial security. These methods also offer tax advantages, helping you get more out of your saved money. Use tools such as retirement and annual allowance calculators to create a clear plan for your financial future. And remember, financial freedom is different for everyone.