How compound interest is fueling the road to Financial independence

Compound interest explained

If I asked you for 10000 EUR and there was a 100% guarantee that I would give it back in one year, would you give it to me? Probably not. Even if you got it back what would be your benefit of giving me 10000 EUR?

What if I asked you for 10000 EUR. However, I would not give it back but instead I would keep it for you, for as long as you like and give you 7% in cash every year I have it for the rest of your life. Would you do it? Actually this time you might be persuaded to do it. You might think you would live another 30 years and so you would not only get your original 10000 EUR back, but also your additional investment.

And if I told you you could give me as much money if you liked? On whatever I give you I will give you back 7% every year. You are free to add money whenever you like.

It does get complex. It gets easier when we put it in visual. In this case you give me 10000 EUR and the 7% I give you every year you actually give back to me so I can give you more each year.

Source: https://moneysmart.gov.au/budgeting/compound-interest-calculator

What we see is that after 25 years with just one contribution the money would have grown to 57.000 EUR that you can take back at any time. You would also be getting 3390 EUR of interest each year, almost your initial investment. Even more if you would wait another 25 years you would end up with a grant total of 327.000 EUR and 22.890 EUR a year.

You can see near the end how fast it starts to grow every year. The key is the faster you start with it the more profit you will gain.

You can accelerate this even more. Apart from your initial 10000 EUR, what if you would add 1000 EUR every month.

What we see now is that with just adding 1000 EUR every month after 25 years I now have 867.000 EUR and would be getting 60.690 EUR yearly interest. For a lot of people this is more then enough to live off every year. If you can continue to save for another 10 years you will be a multimillionaire reaching 1.9M EUR! The key? Start early! Get a student job from the age you are able to and invest whatever you can.

Even if you just deposit just 200 EUR every month, you will have 1M EUR, starting at age 16 by the time you reach official European Retirement age. Keep in mind most of that 1M EUR is pure compound interest. You didn’t had to do anything for this apart from investing! Key is the earlier you start the easier it will be, but remember its never to late to start. The best time to start was yesterday, but the second best is today!

7% will probably seem high for people that are used to keeping their money in their bank account and get an interest of 1% per year on the really good ones, however it is not. There is lots of investment methods where you can get this income: real estate (rentals + value increase of the property), peer to peer and also the stock market (by average the stock market grew 6,73% in the last 30 years). The only thing you can be sure of, if you leave your money on your bank account it will lose value. Additionally with all the discoveries waiting just around the corner, AI, self driving cars, green energy, job automation, huge medical discoveries, … can you really afford not to be in the stock market?

I know I have said this before, but its just crucial to know and believe this information.

I wish I knew what I know now 5 years ago, I was a really good and conservative saver, but not a good investor. If I had invested monthly without emotion right now I would be earning a massive amount of passive income every month.

How I plan to leverage compound interest

Lets examine my current situation, and find out when I could retire. As you know I am aiming for a 15% peer to peer and 85% ETF portfolio. Peer to peer is just to new to figure out how much it will make me in the long run, so for now I will base the income on 100% ETF situation with a return of 6.4% yearly, a bit lower then the market return but keeping in mind some minimal costs.

Lowering my retirement age using compound interest!

The official retirement age in Belgium is 67 years. From then on you will get a government pension. But of course nothing stops you to stop working earlier. Let’s find out when I could quit!

My pension at 67 years would also be slightly higher because I am buying off the years I studied as years worked! Something I highly recommend to do if you live in Belgium and are aiming for FIRE!

To calculate what is realistic I decided to calculate it for 3 windows: 10, 15 and 20 years.

Whats my current situation?

I currently have about 54.000 EUR in liquid investings (peer to peer and ETFs). I invest 2500 EUR every month (I don’t know if I will be able to keep up this amount, as I am looking for a house, but for the sake of the exercise I will assume I will).

Lucky ETFs are almost tax free in Belgium so a 6.4% is really safe to assume!

I also have one real estate property that I will talk about a bit later but that I will not include in this calculation.

After 10 years of compound interest investing..

If I manage to keep this up to 10 years I would have 520.000 EUR. This might be enough for a “lean FIRE”. To be honest I MIGHT be able to retire on this, but it would be very risky, because if there is a stock market crash right after I might not even be able to last until the official Belgian retirement age.

After 15 years of compound investing

After 15 years of compound investing I will have reached 893.000 EUR. I will be 50 years old by then. This would be a more safer path to retire and I really consider this a possibility. It should be enough to not only keep my lifestyle but should even continue to grow my investments

After 20 years of compound investing

After 20 years I will be 55 years old. This would be the absolute last date that I would want to be financially free! I would have 1.4M invested by then which would give me a really comfortable FIRE in Belgium, perhaps even what they would call a FAT FIRE. Additionally I would expect to live in a house that’s paid off by then. Currently the loan I pay off is lowering my savings rate.

Real estate

I do own my own apartment. My plan is to buy a house and leverage the rent of my current apartment to contribute to my loan. This way I would be paying almost the same amount as I was before.

After 20 years I would actually have paid off the loan on the house, and all the rental income would go towards FI

If I would rent out my apartment today I would (after taxes and costs) earn about 470 EUR / month. With a 4% average rent increase yearly. Of course I would not actually have access to this rent until after 20 years.

10 years15 years20 years
Rent per year83401015212348
Rent per month6958461029

It’s hard to include that for the time being, since I have not actually yet bought my house, but it could add to my retirement age being set at 50.

What are the advantages of FIRE in Belgium?

At the age of 67 you will get a government pension. Assuming I retire at 50 and I keep my current job and income I would get 1470 EUR income per month. Additionally the pension I have been saving for personally and the pension of my work would come free that I could re-invest in the stock market giving me more extra income.

Lastly medical costs are largely covered by the government although I could get an additional insurance for a very low fee (probably under 50 EUR per month), so I’m covered everywhere in Europe and even have a somewhat decent coverage worldwide!

So what is my Financial Independence age?

Its just to early to say right now. I know I am working in the right direction, but I want to wait for a few more things before I can really say: I want to have at least one house where I could see myself grow old, and I want to have a better view on my savings rate. My data is just to limited and I feel there is still places I can budget more.

Nobody knows what the future holds

I can’t really predict what will happen. I will meet someone at some point and have children, this will no doubt have impact on my target age. At the same time I might have a wage increase, or who knows a decrease if I decide to work less or change to a less fast paced job at some point. At the same time I will probably have a partner with an income as well if there are children that would make it easier to have more rental properties.

Also moving to another country might influence the retirement age. Thirty percent taxes on interests in Belgium is quite a high number. In Portugal you actually pay 0% the first 10 years.

Lastly taxes tend to change with the wind and are very unpredictable in Belgium. The tax climate could change overnight make it most likely more difficult to reach FIRE.

In any case doing this calculation gives me the strength to hold the course and transfer 2500 EUR to investments every month.

Writing this down will help me to track my progress, to see if I am doing better or worse then I predicted. Just remember until the time is there is important that you keep enjoying life. Its fine to be frugal but don’t be stingy! Still show your friends you care, go out and do activities, care about family and donate to charities. Do not stay hidden inside to save every penny, as then you will just watch your life go by and have no stories to tell when you finally do retire. Invest what you can and go on your roadtrip to Fire but don’t forget to enjoy every minute of the trip.

Now start to plan YOUR path to financial freedom!

I hope my roadtrip is also offering some perspective for yours. Let me know what your plans are for FIRE and check out the compound interest calculator here to calculate your roadtrip to financial freedom!

If you are interested to know more about how I end up then follow me and learn from my successes and mistakes on my Roadtrip to Financial Freedom!

Early Retirement

Increase your pension and lower your retirement age

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.

Green = legal retirement age, orange = actual retirement age

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.

Second Pillar

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.

First pillar

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.

Some things I have experimented with and still am:

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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