Picture this. You will soon reach retirement age and what turns out: in all those years of hard work, you have 40% less pension Then build up your partner or, if you are single, your neighbor. This, even though we know that women live on average six years longer than men. The reason for this ‘gender pension gap‘ lies mostly in the part-time work of women in the Netherlands. But we also earn 14% less salary in the same professions as men which can lead to a wealth gap that can reach up to a million! Fortunately, we see that the gap is narrowing. Women are increasingly moving away from traditional roles, going to work more, negotiate their salaries and start investing. But we are not there yet. What to do ladies? How do you build enough retirement for yourself?
How do you build up a sufficient pension?
You can do this in a few steps:
- Create insight into your financial situation. Elfin membership can help you do just that.
- Download your pension statement. This can easily be done through this website. Costs you 10 minutes, but then you have good insight.
- Then go through this tool from Brand New Day to see if you have a pension gap and how much you need to build up additionally. Pension party Bright also has helpful tools, check them out here.
- Calculate your annual margin. This is what you are allowed to accrue extra in retirement with tax benefits. Read more about annual allowance here.
- Open a special retirement account to take advantage of the tax benefit, and deposit your annual allowance here. There are several pension advocates, choose a party that suits you.
- Sit back, relax and repeat this every year.
- Grow old healthy and enjoy your accumulated wealth!
In the article below, we will explain the above steps in more detail.
Step 1: Create an understanding of your financial situation.
First of all; understanding your finances. It is important to have clarity on what your financial picture looks like. So what comes in and what goes out? What can you save, what can you invest? Financial overview is the first step in taking charge of your finances.
What do you have, what do you want?
So understanding your financial situation is step one. The next step is to put next to your current financial situation, your desired situation. What are your long-term goals? Maybe this is:
- saving for a trip around the world;
- plans for a sabbatical;
- working less;
- starting your own business;
- fill in the blank!
What about “later?
Nothing like dreaming of your own business, that sabbatical or world trip, but don’t forget about your old age! Because when you’re soon enjoying that well-earned margarita on your beach chair at 67, you’ll want to make sure your credit card works when you checkout. And last but not least, that it works when you get home and you can still enjoy your life carefree. What you don’t want is a drop in income after age 67 because you have a pension gap.
Step 2 and 3: Download your pension statement and see if you have a pension gap
In addition to an overview of your annual income and expenses, it is also wise to know how you are doing in terms of retirement income. Your pension provider has a handy overview for this where you can see exactly what you have accrued in pension so far and what the gap is. Go to this website and find out what you have already accrued in pension. Next, you want to put your current situation next to your desired situation. What should you put in and do extra for a good retirement? Brand New Day has a very handy tool where you can calculate in minutes how much you are building up now, how much you will need later and what you would need to build up additionally.
Step 4: Calculate your annual margin
If you accrue pension through your employer, you will receive a Uniform Pension Statement (UPO) every year. This statement shows how much pension you accrue through your employer. Often, in addition to the pension you accrue through your employer, you may set aside a little extra for later. Exactly how much this is depends on your – here it comes! – annual space. The annual margin is based on your income and the pension you accrue through your employer. If you have annual allowance, you can deposit this amount in an escrow retirement account. Part of the deposit you then get back through your income tax return.
Check out this article to learn more about your annual allowance.
Step 5: Open a special retirement account
If you want to invest or save for retirement with tax advantages, you must open a special account to do so. You have some parties in the Netherlands that offer this, think Brand New Day, Bright, ABN Amro, Degiro and more. Lieke and Puck of Elfin do this at Brand New Day. There are Elfin members who do it at Bright and we also hear good stories about other forms. There is no right or wrong choice, the best provider is one that suits you (and complies with regulations, read more about that in this article).
Building a pension
Retirement…this may sound a long way off, but it makes sense, then, to build up additional pensions in addition to your current retirement. There are several ways to build up supplemental retirement. There are those who invest in real estate and want to create an income to live on in the long run. Or some invest heavily in dividend stocks for a passive income source. Separately, you can also save and – invest retirement. Why go to all this trouble? Aside from the fact that as women we need to take extra good care of ourselves, financially, there are a few more reasons to get started building retirement.
Tax benefit
If you decide to set aside money in a dedicated retirement account, you’ll benefit NOW through tax advantages. Here’s the thing.
If you go for retirement investing, the government helps you by making it very attractive from a tax point of view. Much of the money you deposit into your retirement account will be returned to you by the Internal Revenue Service. It works pretty much the same as with mortgage rates. On the retirement income later, you pay (hopefully a substantially lower) income tax.
A calculation? Suppose you earn €36,000 gross per year. Then you pay 37.06% tax on your income. Your employer helps you and contributes €200 euros per month to pension with you. However, your annual margin shows that you are allowed to add another €1850. This is what you do. And because the IRS wants to reward you, you can get part of that €1850 back from the tax. How much? That 37.5%! That means you put €1850 into your pension for later, and get €694 in return NOW! You may offset that while doing your income tax.
Suppose you had had no employer pension, you could deduct as much as €3000 and even received €1120.50 back.
Suppose you earn €36,000 gross per year. Then you pay 36.93% tax on your income. Your employer helps you build your pension, and together you contribute €200 a month.
However, your annual margin shows that you may add another €1850 to your pension pot this year. And because the IRS wants to reward you, you get tax back on that €1850.
How much? That 36.93%! That means you deposit €1850 in your retirement account now for later, and get €683 back for it on the upcoming income tax return round. You may offset that during your income tax return.
Please note that this example is illustrative. What your tax return looks like has to do with more aspects than just your pillar 3 pension contributions.
3 pillars
When it comes to your retirement, the Netherlands has 3 pillars:
- AOW pension. This is our beautiful social system, and we all get AOW.
- Collective Retirement. This is the pension you accrue when you are employed.
- Supplementary pension. Here’s what you can do yourself that will help you close your retirement gap.
So to close that 40% pension gap compared to our beloved men, we need to get to work in pillar 3. And in the meantime, we are fighting for more income so that Pillar 2 also becomes more successful for us, of course.
How can you close your pension gap?
So to supplement your retirement, to avoid experiencing such a harsh drop in income in the future, you can turn a few knobs yourself. You may choose to start investing in products that give you a passive source of income, such as real estate or dividend investing. It may also be smart to additionally deposit money in Pillar 3 each year and thus start retirement investing. In any case, it is important not to bury your head in the sand now and think “he who lives, he who cares. Building a wealth to live on later takes time. The earlier you start, the more you benefit from the so-called compound interest effect.
Tell me more?
This still sounds pretty complex: annual margin, pension gap, tax benefits. Ai, this scares me. But don’t worry: it’s easier in practice than it sounds. Read this article on the 5 most important retirement terms you need to know and follow this roadmap to build more retirement yourself.
