Living off of your private income: how to ensure a guaranteed income for life
Living off of their private income is undoubtedly what a lot of people say they would like to do later. Do you have to win the Lotto or EuroMillions to do this? Not necessarily. Below we explain exactly what the idea of living off of your private income is and how to do it.
Once you retire, your income will decrease significantly. Your statutory pension will be significantly lower than your last gross salary. According to the OECD, for your pension you will receive on average only 66% of your pre-pension income. In Belgium, there are many differences between the different statuses (self-employed, employees and civil servants). To get a relevant estimate in your case, you may visit Mypension.be.
In any case, you will certainly have to draw on your savings once you reach retirement age, if you want to maintain your standard of living. The objective will be to be able to withdraw a certain amount from your savings (in addition to the payment of your statutory pension) to be able to continue to live comfortably. Think of it as an extra monthly salary that you will pay yourself. It is also convenient as you are already used to living with a monthly salary.
How to set this type of monthly budget
First, calculate your expected monthly expenses. Be aware that some fees may increase over time. For example, think of expenses for medical care, for a nursing home, etc. Then, determine the exact amount of income expected from your pension. This may be done at Mypension.be. The difference between the expected amount of your pension payment and your anticipated costs will represent the additional monthly budget you will need. Do not hesitate to visit an insurance broker if you wish to build up a reserve which will allow you to pay yourself this monthly bonus. He or she will explain all of the options and draw up a tailor-made plan for you.
How much should you have saved once you have reached the age of retirement?
This is of course the key question, especially since you have no idea how long you will live. You also know that life will become more and more expensive (inflation), but you do not know how quickly this increase will take place.
It is therefore very important to look for a solution which will guarantee an income for life and prevent you from being left without money at some point. You want to be able to maintain your standard of living after retirement, and preferably for your entire life.
Based on your anticipated expenses and the expected amount of your pension, your broker will be able to calculate the additional income you will need and what it will represent in terms of the amount you will need to save. Always bear in mind that your retirement may be long. The OECD calculated that in 2016, the average length of retirement was 21.3 years for Belgian men and 26.1 years for women.
How can you build up enough savings?
If you have group insurance or a pension fund through your employer, the payment of the final amount will already represent a valuable contribution. The same applies to self-employed people who have taken out a PSPS (Private Supplementary Pension for the Self-employed), a PCS (Pension Commitment for the Self-employed), an INAMI contract or an IPA (Individual Pension Agreement). Pension savings are also a possibility.
Other possibilities include an inheritance, a donation or the proceeds from the sale of property. If you are an only child and your parents own property, then you know that it will certainly belong to you later. If you do not have such prospects, another solution is to start investing on your own in time. But this will not be without risk and will require a certain amount of knowledge. Another option is to use the rental income from property (but in this case you would have to own at least a second home) or simply do nothing. But with the latter solution, you will never have savings for your retirement.
You are retired. Now what?
Once you retire, the question will be how to ensure sufficient financial resources throughout your retirement, and not only for the first few years.
What will you do with your savings?
If you have built up a good amount of savings, the main question will be what you will do with it. Leaving your money in a savings account would not make much sense. If you take inflation into account, you will lose more money than you earn. Not to mention that you also run another significant risk in the sense that if you squander your savings too quickly, it will disappear at some point. You will therefore need to be able to exercise great discipline in organising your finances.
You can invest your savings yourself, but do you have enough knowledge to do so? Are you aware of the risks and are you able to distinguish a good deal from a bad one? Another option would be to buy property and rent it. This would ensure additional monthly income. But on the other hand, this rental income would not be guaranteed and the rental may be accompanied by many costs and hassles. Think about it.
If investing on your own is not an option and you do not wish to invest in property, another interesting solution could be an annuity product.
Annuity product: a branch 23 insurance solution
Investing in solutions offering a guaranteed rate (branch 21) will only provide you with a limited return. A branch 23 insurance policy will allow you to expect a higher return. Your return in this case will depend on the performance of one or more underlying investment funds. But if the funds in question do less well or lose value, you will be responsible for your expenses. This, however, should not be a concern with certain insurance solutions.
Some annuity products guarantee a lifetime annuity. Once your capital is invested, you will receive a fixed income each month for the rest of your life. Depending on the insurer, the results of the underlying funds will be reviewed at certain times and the payable annuity may be increased. If the funds have not performed as well as expected, it remains to be seen whether your annuity will be revised downwards. This would not be the case with the insurer NN. The annuity promised initially is maintained. The risk will therefore be very limited and you will have peace of mind. Even if the reserve of your contract has been used up, the insurer NN will continue to pay you your monthly annuity.
You do not have to worry about low rates either. You will continue to receive your income each month, and if the underlying portfolio performs well and your reserve has increased, your income will also increase.
A very real risk would be that of the insurer's bankruptcy. In this case, the payment of the annuity may be stopped, and there is no certainty as to whether the available reserve of your contract would be paid. However, insurers are strictly controlled by the FSMA (Financial Services and Markets Authority) and the National Bank of Belgium, which makes bankruptcy very unlikely.
What if you die at a relatively young age?
In this case, the annuity payments would stop, and your relatives would receive the remaining balance of any available reserve. You must therefore not worry that the remaining balance would simply disappear in the event of death. Your loved ones would receive any available reserve. This would not be the case with traditional lifetime or temporary life annuities.
Is this monthly annuity taxed?
No. With the insurer NN, you do not pay taxes on the initial annuity. If the annuity increases, the difference between the new amount and the original amount is then taxed at 30% (plus additional percentages).
Can you still request the available reserve of the contract?
This depends on the exact product taken out. With some insurers such as NN, you can request the available reserve at any time. With others, this is not possible. A partial request is also possible. The exact terms and conditions may vary from one insurer to another.
Would you like to know more?
Contact your insurance broker. He or she will be happy to answer all of your questions. Find out here how NN can provide you with a lifetime annuity.
