Today I was browsing through the newspaper when my eyes caught an article that read “Belgium has the highest tax burden of the 34 OECD member countries.” Immediately I sat up straight and pricked up my ears. Some of you might not know this, but whenever I read about the tax rates on labour income on your blogs, I always turn jealous at how low they are. Yes, actual jealousy. I know, horrible characteristic.
Why? Because the average worker in Belgium is faced with a tax burden on labour income of 55.8%, according to a recent OECD study. Guess who earns almost exactly the average gross income? You guessed right!
However, I don’t want to turn this post into grumble fest 2K14. What I do wan’t to talk about is how such a high tax rate factors into the financial independence game.
The downside to Belgian taxes
My personal tax rate is about 55%, compared to 31% should I decide to move to the United States, for example. That’s a 24% lower net paycheck every month. When saving 50% of my salary every month, I’ll be stuffing away 12% less of my income than my American counterpart.
Consider the scenario where I invest my savings on a monthly basis and let them compound at a 6% rate annualy for 15 years. The power of compounding interest will increase the savings gap between my Belgian and American self even further. After 15 years my Belgian net worth is only 65% of my American net worth, a significant difference.
For argument’s sake, I obviously didn’t consider the difference in cost of living. The above is only to show that building wealth over the long-run is much more difficult in a high tax situation, clearly a downside of the Belgian tax system.
The upside to Belgian taxes
Every downside has its upside, of course. Even though my tax rate sounds like a lot – it truly is a lot, trust me – it doesn’t tell the full story. On top of my monthly paycheck my employer offers full health insurance, pays for my commute and provides me with a wide variety of fringe benefits.
But that is not all. I’m also building personal rights to a pension at the age of 65. Even though I expect that age to be much higher by the time I can apply for official retirement and even though the level of my monthly pension is subject to political randomness, that’s still a big plus. If I did the standard 9-to-5 until you’re 65, I’m entitled to a pension worth 75% of my average salary from the last ten years of employment.
Great, you would say! Except I don’t think working until 65 is an option for me. If I worked full-time at my current employer until the age of 40, which is 15 years in total, the pension rate would go down to about 25%. Obviously, my 10-year average salary will also be lower now than 30 years from now.
Considering that I’m currently trying to save 50% of my net income, which makes the 25% pension rate effectively 50% of my spending pattern, that’s still a boost of 50% to my safe withdrawal rate when I turn 65. As a result, I can build a freedom fund that’s less than 25 times my annual spending and still be safe.
The above is great and all, but I have absolutely no clue yet on how to deal with it. At the moment there are too many uncertainties. Will there still be a pension when I turn 65? Will the official age for retirement remain at 65?
Because I don’t like uncertainty, I’ve decided to ignore the pension for at least another 15 years. In the meantime, I’ll try to build my net worth and portfolio to the point I can fully sustain myself with passive income.
What do you guys think? Are you allowed to call yourself financially independent when you rely on a far off monthly government pension to make early retirement happen?
For seasoned financial independence practitioners and frugalists it’s probably pretty clear what I should do. Since the high tax rate makes boosting my income difficult, I should focus on lowering my expenses. Indeed, a lower spending rate is a sure-fire way to speed up your progress towards early retirement.
That’s why I’m excited to find out my savings rate for the first month of truly living on my own in a couple of days. It’ll give a clear indication of how attainable financial independence and early retirement is in Belgium, the country with the highest income tax worldwide. And if it turns out to be possible in Belgium, it should be possible anywhere!