How I get paid to build up my pension

As discusses here I am a big fan of my current defined contribution (DC) pension and have moved one of my ex-employer's defined benefit (DB) pensions into it to increase my anticipated pension substantially. This post discusses the yearly expense ratio of my DC pension.

What is the yearly expense ratio of a DC pension?

I can only talk about my own pension here as I do not know the numbers for any other DC pension. I currently participate in the Essentiepensioen from Nationale Nederlanden, although it will not be long before it merges with BeFrank. Essentiepensioen offers 3 full-service profiles with different risk profiles (defensive, neutral and offensive). Moreover, participants have an option to run their own show and buy their own funds. 

Fund choice is limited but includes one low-cost index fund, namely the ishares developed world index fund. I put my full pension payment in this fund every month. It has a yearly expense ratio of 0.17%. Very decent, especially considering the fact that all other (actively managed) funds are around 1%. 

Collective discounting brings my expense ratio below 0!

The cool thing is that my company negotiated 0.2% discount on the expense ratio. >95% of people are in one of the full-service profiles so they still pay somewhere around 0.8%. Nationale Nederlanden seems to have overlooked the fact that there might be one or two smarty pants who pick their own funds AND go for a 100% ishares developed world index fund. I guess this is mostly caused by their old-world thinking, you need multiple old-school funds (real estate fund, new energy fund etc.) for diversification purposes. As there is only one cheap option it seems they assumed everyone would also buy at least one of their more expensive funds, averaging the cost to above 0. 

But with the developed world index fund I own stocks of 1000s of companies in the 23 developed countries of the world! No need for further diversification. My costst are -0.03%. I get paid as a thank you for them taking care of my pension!

Costs are killing dreams

Pension funds charging above 2% fees are not unheard of, see a comment by Bart here. Needless to explain the FI community how devastating this is but I still added a chart showcasing just that. Someone with a job paying a bit above the median will pay around €500 of his gross salary into his pension fund. If that pension fund had invested this amount into the MSCI world index 30 years ago, this is what had happened with real returns of that index. Just over €217k down the drain after 30 years by charging 2% fees... This is what happens if you feel a €2 fee for every €100 you want to invest sounds reasonable. You get hammered by the lower interest compounding!

I am happy to show off how well my pension fund is treating me 😉 However, the real point I am trying to make is that it is well worth investigating the different pensions you have from different previous employers and move them to your new employer if this makes financial sense. Unfortunately it is not always easy to establish the cost structure of a pension. A lot is hidden (on purpose?) and I would not be surprised if there is a “pension gate” around the corner even before we have fully dealt with the “woekerpolis” issue here in the Netherlands. It strengthens me in my firm belief sorting out your own financial future is by far the best way to go.

Financial update Q3 2018

With the blog launched and Q3 ending, it is time for the very first update on our personal financial status!

Savings rate

How we calculate our savings rate is explained in this earlier post. Our monthly savings rate has been steady at 35% in 2018. Great to see we invest 1 out of every 3 euros in our future rather than stuff we don’t need. Considering the non-regular money coming in, we used the holiday money for holidays and the tax return is still parked in a saving account. We probably will “invest” the tax return in a mortgage hack that I will blog about in the near future (UPDATE: see here). If we do so the yearly saving rate will drop below 35% but will certainly stay above 30%.

The mortgage

As reported here we have been investing in paying off the mortgage with most of our money until the beginning of 2018. We have paid off approximately 30% of the initial mortgage by now. See a great post here doing the math of mortgage down payments vs. index fund investing. We have reached the tipping point. Our mortgage payments are comfortably low and include annuity payments anyway. The mortgage will take care of itself in the coming 26 years. The money locked up in the house is not included in the journey to FI number, it just helps to keep the FI number low as a future paid-off house will mean we need less money for a comfortable life.

FI percentage

Dedicated investing in the low-cost exchange traded fund VWRL will be the way to go from here! Our FI number consists of our emergency cash fund, VWRL and my defined contribution (DC) pension. Have a look here why I feel I can include my DC pension in the FI number. That being said, our current FI percentage hovers just above 16%. With the bull market raging for a decade now some head wind would not be unlikely in the years to come which would only make the journey more interesting to follow. 

It's all relative 

The inset of the figure above presents the relative amounts of our net wealth in real estate (house WOZ value – mortgage), our cash emergency fund and ETFs. We are aiming to get the ETF percentage up but the booming housing market is not helping 😉

Accumulating the American dream pension

A defined benefit (DB) pension is most common in the Netherlands but defined contribution (DC) pensions are becoming increasingly popular. Here you can find a guest post I wrote for cheesyfinance.nl explaining why I love the DC pension at my current employer and how I moved one of my DB pensions from an earlier employer to my current DC one. This post discusses why I allow myself to include the value of my DC pension into our net worth which speeds up our journey to FI. 

Withdrawal rate of a DC pension

A DC pension is like a 401k in the USA. At least mine is, I have full control in the sense that I buy a low-cost ETF every month and I can login to check the current net worth of my portfolio. Most Americans striving for FI include their 401k in their net worth calculations. I do the same with my DC pension.

On specific websites like this one you can check how much pension you can purchase from a lump sum that you have saved in your DC pension throughout your working career. By modifying your date of birth you can mimic different retirement ages. E.g. if you have €100,000, the best deal I can currently find pays €5448/year from 68 years of age onward. Applying the 22.95% after-pension tax bracket will leave you €4198 in hand. In other words you have a withdrawal rate of 4.2%. It is perfectly save as it will be paid until you die. Nothing left for your heirs afterwards though. Sounds pretty similar to the 4% you are supposed to maximally withdraw yearly from your personal stock account after reaching FI.

Adding up the numbers

To see how far we are in the journey towards our FI number I add up our emergency cash fund, our personal ETF position, AND the value of the DC pension (consisting of an ETF). Like many, I consider a 4% withdrawal rate on the total position safe. I could access the DC fund earlier than at 68 but this will be taxed in a higher bracket so this is not the plan. 

By the time we reach FI the personal stash is twice the size of the DC pension and there is around 15 years to bridge before the pension payments kick in. So if we would ignore the DC pension, I am withdrawing 6% from the personal stash which has a 99% chance of being OK for 15 years in a 50% stock - 50% bond portfolio according to the Trinity study. We’ll  be fine until the DC pension kicks in! At least the chance of dying at work accumulating more money is bigger than the chance of ever running out of money, time to take the plunge! Especially considering the fact we are still ignoring state pensions (AOW) and DB pensions we have as well. We just made the journey to FI shorter!

Travelhacking in the Netherlands

Credit cards are very commonly used in countries like the USA. To lure new customers in most credit card companies have very good welcome bonuses, typically consisting of points for major hotel chains or airlines. Many people in the USA FI community are into travel hacking and are constantly on the lookout for the best credit card deals. Credit card use is much less common in the Netherlands. Most people have one credit card through their bank. Without competition the welcome deals are usually non-existing and there is no travel hacking. There is one amazing exception, keep on reading!

KLM Flying blue

If you travel regularly with KLM I would advise you to obtain a free flying blue card to collect miles and XP points. Buy flights and earn miles for free flights and XP points to get silver/gold/platinum status with all sorts of benefits at the airport (queue jumping, free check-in luggage, free seat selection etc.). This year we earned around 10,000 miles and 44 XP points. Bit of a bummer is that you lose your XP points if you don’t collect enough before the end of the year to get a status upgrade. Keep on reading, there is a happy ending!

KLM  Flying Blue AmEx card

You can connect an American express card to your KLM flying blue card. This is very helpful as you can now earn miles from other purchases than airplane tickets. For instance Jumbo, Tango and bol.com except this card. There is different level credit cards (silver/gold/platinum) that earn you different levels of miles per euro spend. 

And there are great welcome bonuses! We just received our platinum cards. Say what, platinum cards in the FI community!? Yup, the welcome offer includes half price for the card the first year, still a whopping €25 per month. That is a not-so-frugal €300 euro for the first year. But what does it give us? We get 20,000 welcome miles which covers a free flight within Europe (€150). We'll get another free flight from using the card for groceries, fuel etc. We get a 60XP welcome bonus. For an upgrade to silver flying blue status you need 100XP so we made it!

No more waiting in line, no payment for check-in luggage and free reserved seats to keep the family together in-flight (we spend around €100/year on extras). On top we get free rental car insurance. Last year we rented twice and spend €80. No more surprises at the car rental counter! You get the point by now, we are making money while getting better treatment at airports.

Don't use your credit card for credit!
Obviously you should pay your full bill at the end of each month to avoid the insanely high interest rates to be incurred on your debt. With the KLM AmEx cards this is the only option you have, no worries!

What's in it for you?

If you have our traveling habits you could obviously repeat what we did. However, a silver and gold card are worth considering as well, do your homework at the KLM website. A silver card is for free the first year and gives you 5000 miles. A gold card costs €85 with 20,000 welcome miles and 30 bonus XP.

We can help each other out to make the deal even better! AmEx provided me with a link. If you use my link you get a gold card for free and 22000 miles! It helps me as well as I also receive 22000 miles! There is better deals for silver and platinum cards through the link as well (more miles than the standard offer).

Once you have a credit card AmEx should provide you with a link as well so you can do the same and invite your friends to grow your miles. Let's travel hack together? Get your card through this link.

Backtracking 2016 & 2017; paying off the mortgage

With both of us working 4 days a week we had found a nice balance between family and work life and more than enough money was coming our way. 

How low can you go?
Our mortgage interest rate had a risk increase of 0.4% because of our loan to value (LTV) of 90%. Inspired by Gerhard Hormann it seemed silly to be considered a risk by the bank and we started using our savings to pay off the mortgage. Helped by the booming housing market our LTV decreased below 67.5% in mid-2017 which meant the 0.4% was alleviated from the mortgage, leaving us at a handsome interest rate of 2.9%. The urge to pay off the mortgage faster than the annuity vanished (the house will be paid off in 30 years anyway).

The FI journey really starts
At this point in time I had found the FI concept and read everything I could. I am a logical thinker and a number fetishist; finding the stock series by Jim Collins and Karsten’s save withdrawal rate blog posts tools sealed the deal, as  these tools allowed me to do the math to establish the most sensible plan and stick to it. That’s why from now on you’ll find that most of our savings are directed towards the low-cost exchange traded fund VWRL.

Backtracking 2008-2015; growing up while financially screwing up

After some initial hick ups (imagine my first Monday morning stuck in traffic after 12 months of traveling) the routine of working life kicked back in. A decent income led to some sort of a savings rate that cannot be backtracked precisely. 

How not to invest

I had had an earlier bad experience with a financial advisor (for you Dutchies; think woekerpolis!) so at least I was aware I would be better of sorting myself out. This kept the costs of my investments down so at least I got that right.. However, it turned out I suck at stock picking and timing, which I now know is true for almost everybody. Arguably, the market nose-dive because of the financial crisis was not helping and I chickened out disillusioned around 2010.

What really matters 
I was more successful in other areas of life and had met my girlfriend (by now FI partner in crime) and by 2013 we had our first child (the count is stuck at two at the moment). We initially rented a small and expensive house but in 2014 the financial crisis had drawn down housing prices and interest rates by so much that an annuity mortgage on a semi-detached house would work out cheaper than renting. Whether that is really true when you include maintenance can be debated but we took the plunge and bought our family home and don’t regret it one bit. 

The money we had been able to save from 2010 onwards was used to pay for the costs involved in purchasing the house (tax, mortgage, formal documentation etc.) and to pay 10% of the house in cash. The leftover cash was mostly used for renovations. With 90% loan-to-value (LTV) our mortgage had a 3.3% interest fixed for 10 years.

Backtracking 2004-2007; working abroad and traveling the world

My first full-time job was abroad on a tax-exempt status. At that time I had a clear financial goal; traveling the world for a year after the two year contract had finished! I decided to simply not spend the roughly 1/3 of my income that would have otherwise gone to the tax office but rather put that money into a savings account. After 2 years this allowed me to take a year of and, as I spend roughly the same amount of money during my travels as I did during my working life, I came back from this life changing experience without any money left.

The aftermath 

My perspective on several things had changed dramatically. I had only possessed 12 kg of stuff in a backpack for a year and not missed anything materialistic. Although with my income I consider myself among the fortunate within the Netherlands, on a worldwide scale this is even more true. Hence, I saw absolutely no reason why I would not be able to save a substantial amount of my income from now on. This nicely matched with my ambition not to spend the rest of my life working as a year is not nearly enough to see the world! 

On my trip I had traded all my money for all the time in the world to only do what I like; a saving account is not a very sustainable strategy as I spend all the money I could save in 2 years in just 1 year. Disregarding social securities, this implies that to enjoy life for 25 years I would have to work for 50 years, e.g work from 20-70 and enjoy from 70-95 years old… At this point in time I was 33 so this did not seem a feasible route to take, I needed an investment strategy with higher returns that would work for me when I was not anymore. 

How we calculate our savings rate & FI number

Let's have a look at the math behind the two most important numbers on our journey to FI; our savings rate and our FI number.

What's in?
Your savings rate is simply what you have left at the end of the month divided by what came in at the beginning of the month. Our net income consists of 2 (after-tax) salaries and child support (in Dutch: “kinderbijslag”). 

We do not consider the subsidy for the daycare bill (in Dutch: “kinderopvangtoeslag”) income, as this amount is directly coupled to a specific expense. We have an annuity mortgage which will make sure we have paid of our house in 30 years. Hence, we pay the bank interest and a down payment that lowers the remaining mortgage debt every month. The down payment combined with the portion of our income we don’t spend, is our monthly savings rate. 

We also keep track of a yearly savings rate that includes the non-monthly extras  (annual tax return, extra salary payments). However, we like the simplicity of the monthly number as there is no reason why that would vary. We use part of the extras for larger non-monthly expenses (typically maintenance of the house & holidays) and save at least the monthly savings rate on it to keep that number afloat.

Are we there yet? Are we there yet? 
Not surprisingly, we calculated our FI number based on our anticipated spending after retirement using the 4% rule of thumb. We plan to retire at the same age, not the same point in time. This means the first 7 years of my retirement the lady of the house still brings home a salary. In fact we are half FI for that time period. 

By the time we are both FI there is around 15 years left to bridge to my pension payments starting to kick in. We might like our jobs longer than the numbers require or start a side hustle that brings in cash we don’t need. Taken together, the 4% rule feels very safe to us especially considering that the time span we both fully depend on this passive income source is relatively short (the original Trinity study looks at 30 year retirement periods, the update even longer periods). 

Anyway, all the 4% rule does is provide us with a number to work our way up to, we’ll sort out the details when we get closer to FI.

What we do

Financial independence (FI) is a state in which a household has sufficient wealth to make income from any form of employment optional. People in the FI community typically own assets that generate passive income, e.g. stocks that pay dividend or real estate that generates rental income. 

For now our focus is on stocks, but this is a personal choice and others are doing fine with real estate. I suck at timing the stock market and at predicting which stocks will outperform. Turns out most people do!

Low-cost ETFs

The good news is there is no need to do either, simply invest in a low-cost exchange traded fund (ETF) every month. The Vanguard fund VWRL holds over 3000 companies worldwide and in my opinion is one of the best choices if you live in the Netherlands, especially considering the fact you can purchase VWRL for free every month if you use DeGiro as your broker. To acquire these assets people safe a significant portion of their monthly income, typically aiming for a savings rate of at least 30%. 

Needless to say that the higher your savings rate the shorter the journey to FI. This is even more true than you might intuitively think; it is a double edged sword, if you safe more you spend less so the amount you need to retire also goes down.

From wealth accumulation to wealth protection

Above is all the essential background information to build a plan for the wealth accumulation phase, the strength is in the simplicity! Once you start living of your assets, you enter the wealth protection phase, meaning the main goal is not to accumulate more assets but to be as sure as one can be that you don’t run out of money before you run out of life. 

A widely used rule of thumb is the 4% rule of thumb, implying you can spend an inflation-adjusted 4% of your initial portfolio value every year without ever running out of money. The other way around, you should save up 25x your anticipated yearly expenses in retirement. Your exact safe withdrawal rate will depend on your personal circumstances and there are great tools to crunch the numbers. For people in the accumulation phase of the journey, the 4% rule of thumb is all you need. 

It helps to set a concrete goal and nicely reveals that while many people would guestimate you need millions to retire, in fact you “only” need €600.000 when your monthly expenses would be €2000. Such FI number is achievable if you save €500 a month for 30 years and invest in VWRL, assuming a ROI of just over 7% which is realistic looking at historical returns. 

You'll have more chance to make it to FI compared to someone ignorantly spending all his money every month, guaranteed! Start when you are 20 and you are done at 50! If you want to save less per month you’ll have to start earlier or arrive at FI later. If you wish to be there faster you’ll have to increase your savings rate, unfortunately I can’t change the math for you.

That’s all folks!
Don’t spend all your money and invest what is left to generate passive income to support your future life. That’s how simple the basic principle is. All other posts on this blog are discussing nothing more than the details.

Who we are

We are working parent with two small kids living in the Netherlands. We love our jobs but have too many other ambitions and dreams to feel comfortable with the ever more realistic risk that we will be obliged to work until 70, only to hope we get a decent pension by the time we get there.

Financial independence
We joined the small but rapidly growing financial independence (FI) community which is filled with people that do not (only) complain about the slowly deteriorating Dutch social system but have  identified opportunities to sort their own financial future out. In this blog I will keep track of the financial steps we take on our journey to FI, while the lady of the house has better things to do than filling a blog 😉

The blog started with a few posts backtracking our story so far and from October 2018 onwards will keep track of the details of our personal journey to FI. I plan to blog about investing, pension, traveling and mortgage-related stuff I come across, as well as any other FI fun. I Hope you enjoy reading it! Feel free to leave a comment or reach out to us via DutchjourneytoFI@gmail.com.