Legal versus actual retirement age in OESO countries
When we look at the actual retirement age versus the legal age, we can see that the real age is in most countries, especially Western countries, bellow the legal age. The government cannot force anyone to work, but at the same time they are not required to provide a pension (until the legal age) when you decide to stop earlier.
I live in Belgium, in Belgium the age to retire is 67, although the real retirement age is 59 (average) in Belgium. So you can decide to stop earlier, but then you face some consequences:
- The pension you receive at 67 will be lower
- You need to provide your own funds to bridge the gap between when you get a government pension and when you actually retire
The majority of the Fire blogs are aimed at getting enough funds so you are self-sufficient when you retire. Up to at least until you get a legal pension, and preferably even beyond (as there is no certainty the government will not be bankrupt when you reach 67).
It also pays to look at how you can increase your legal pension when you reach age 67.
First its good to know that a standard retirement exist out of what we call three pillars. The basis here (like in the picture) is very similar in most countries.
- Official pension from the government – first pillar
- Employer sponsored pension funds – second pillar
- Personal pension funds – third pillar
- There is also a fourth pillar, which is basically anything you have personally saved up or invested. The fourth pillar is actually what most Fire blogs are focused on but they forget about the first three!
The third pillar
I am going to start at the back. The third pillar you can increase only by adding funds to an official refinement funds. It is your personal funds, but you cannot access it until you reached the retirement age (unless you pay a fee).
In the case of Belgium, a total of 1270 Euro per year can be deposited here, and can be withdrawn from your taxes for 30%.
Basically you really should max this out every year. The 30% is just to high to ignore. Ideally you deposit it in January. This really is the best time. If you do not do it in January the second best is depositing it monthly. December is the worst timing to do it.
If you deposited in January, you have potentially 6,5% more profit at the end of the ride. Bellow you can see the difference for a period of 30 years, depending of when you deposit.
The second pillar is harder to control. You usually need to be lucky with your job that your employer has what they call a group insurance. It has a fiscal advantage in Belgium (you keep about 75% after taxes, while with normal wage its about 30% – yes taxes are huge in Belgium), but still not all employers do this. If 3-4% of your wage goes to a group insurance its usually considered quite high.
The first pillar is the legal pension. Most people think the only influence they have on this is the age they retire and the wage of the last years they worked. In Belgium you can actually increase it further, especially if you retire before the legal retirement age this is beneficial.
On my pension of the Belgium government, you can actually request (against a fee) to make 4 years that you studied part of your pension, so they count as if you were working this year. This costs about 1500 euro per year that you request this for, but you do get 50% back from taxes. So for 4 years it in total costs you about 3000 Euro.
If you decide to retire at the legal age of 67 and you have a high wage, this is most likely not beneficial for you. But if you decide to stop working before the legal age, this will actually have a huge effect on your pension.
On mypension of the government I did the calculation. If I retire at age 67 without buying the years I would earn only 13 euro/month more then when I decided not to buy the years. This would then take me 19 years to get the 3000 back. Obviously I can invest my money myself much better then this.
However if I retire at the age of 52, so 15 years earlier then the legal age, I would make about 50 EUR/month more. So it would take me 6 years to get my money back and anything after that is pure profit. You could argue that if I invested 3000 euro myself, at a compound interest of 5% this would be about 6800 euro at age 52. But nothing is certain in investing, and its good to spread your investments and diversify. The fact that I probably will retire before 67 and this made me decide to invest some money in this plan.
What do my pillars look like so far?
- I invest the full 1270 EUR every year as early as possible (I recommend to start doing this as early as possible when you start working)
- My first employer, a job that I did for about 4 years, invested about 1% in the first pillar
- My current employer invests about 3% (I am doing this job for a little over 5 years)
In my case I have 65% in the second pillar (spread over 2 jobs) and 35% in the third pillar. The first pillar, is the legal pension as you know.
Now you can also see the difference between 1 and 3%. So it does matter a great deal of how much your employer is investing there. To be honest when I see this graph I am even amazed of how fast my second pillar at my current job is growing compared to the third pillar.
Unfortunately you can only access these funds at age of 67, however they are invested into funds, and will benefit from compound interest. Even after you withdraw them from your account it would be wise to invest them into Dividend EFTs/Stocks/Funds to make sure you get a regular income from them (and maybe they grow a bit more).
How do I plan to bridge the gap, if I were to retire, at say age 52? For that take a look at my goals page and check how I slowly plan / experiment to increase my passive income, at a reasonably young age (I am 34 at time of writing), to fully utilize compound interest.
- Dividend EFTs
- Peer to peer lending
- Investments in Startups
What about you? Let me know if it works different in your country, or what your plan is to increase your pension at the legal retirement age. Also any other tips would be welcome!
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