35

I live in Denmark. Most people will automatically receive three sorts of retirement incomes. There's the state pension which is universal (you will receive 12.500 dollars pre-tax annually, which can be almost doubled if you satisfy requirements such as having no other income or being single), then there's the ATP which depends on how long you worked for (every full-time employee pays about 15 dollars per month and their employer adds 30 dollars into the same fund), and then there's regular workplace pensions which both you and your employer contributes to. Typically, you get 12 % of your salary put into a pension fund, of which you yourself pay 1/3, and your employer again pays the rest (so, about 4 % of your salary is actually taken from you and put into your pension).

Considering all that, I am wondering how this fits into the general US-based advice given on this site with respect to retirement saving. In particular, I've read that one should be saving 10-20 % of one's income for retirement. I'm guessing that no longer applies for me, but what does then? Should I still be saving at all? And if yes, what percentage should I be aiming for at a minimum?

It's probably worth adding that I pay about 38 % in income tax, ignoring deductibles. VAT is also quite high at 25 %. On the other hand, I have never had to worry about health care, education, and social services.


By saving, I here mean only saving for retirement. I naturally plan other kinds of savings for emergency situations, buying a house and car, etc.

  • 4
    That 10-20% guideline isn't terribly helpful here either, it's all about how much you want/need in retirement vs how much you'll be getting. – Hart CO Apr 18 '18 at 15:02
  • 2
    Are you asking about Denmark in particular, or any country in general? Answers would vary widely, depending not only on how generous (or not) a country's social security income program is, but also on things like anticipated retirement expenses (pay your own health insurance, or not?) tax rates on retirement income, and availability + type of tax-advantaged savings accounts. Add expected rates of return and inflation into the mix. – Chris W. Rea Apr 18 '18 at 16:29
  • The final amount you will need depends on how much you plan on spending in retirement, how those pensions are taxed, how secure the pensions are, and if you plan on paying for private/add-on health care. – StrongBad Apr 18 '18 at 20:07
  • 1
    Can't hurt to save more than you think you might need. If things stay the same then you will have more money in your retirement or may be able to retire earlier. If things take a turn for the worse (could be government pension pay gets cut, or you start to have medical problems before retirement age, or anything really) then having the extra is good. It depends on too many factors and nobody can predict the future but saving more never hurts (unless it starts to really adversely affect your current life). – WhatEvil Apr 19 '18 at 12:11
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    Any relation to this guy? politics.stackexchange.com/questions/30523/… – Pharap Apr 20 '18 at 0:57
34

You give hints, but don't quite answer the key question -

At the time you retire, what fraction of your income will be replaced by the benefits you list? If that amount is your 'happy' number, you really have little need to save for retirement. Or to be clear, you are already saving, just not into an individual account like we tend to think of.

What's also important, is to look closely at how you calculate that number. It's easy to think that since you live on 62% now, that this sum will be enough at retirement. It might. Or, with no work taking up your time, you might develop some expensive hobbies. Only you can know.

  • 7
    It's not "fraction of your income" that matters, but how much you need to live the way you want. – jamesqf Apr 18 '18 at 22:50
  • 4
    "62%" is actually a bit of a red herring here, since all of the pension sources the OP describes are taxable income when they pay out. – Henning Makholm Apr 18 '18 at 22:53
  • Of course, I didn’t know the benefit was fully taxable. OP has to consider that. – JTP - Apologise to Monica Apr 18 '18 at 23:45
  • Why not live like a king in a poor country like Thailand on the pension? You would be the equivalent to a western multiple-millionaire – Cloud Apr 19 '18 at 13:27
  • 4
    @Cloud I live in Norway. It is common for older people to own summer homes in Spain and live there 6 months a year because they like the climate and its cheap there. If they are out of the country for more than 6 months 2 years in a row, they will no longer get their public pension. – Daniel Vestøl Apr 19 '18 at 16:19
32

Making the assumption that social programs will have the same conditions in 30-40 years (or even 5 years) as they do now is a very dangerous assumption to make.

For example, how do you think the folks in the mid 1920s thought their retirements would be? Many of those folks in the 1960s weren't even in the same country anymore, and nearly all of them had very different governmental and social programs.

In the US, we have "social security", which is more or less the equivalent of what you describe where the employee and employer pay in. But it may not have the same conditions in 10 years, not to mention 40 - the fund is running low due to an imbalance of (retirees vs payers).

To me this is similar to the 'Traditional vs Roth IRA' discussions that come up fairly often in the US (pre-tax and then further taxed vs post-tax but not further taxed); many of them assume that the tax rates in 2040 will be the same as those today. Guess what, they probably won't be.

My advice would be to save some significant amount on your own regardless of the social systems available. Perhaps you don't have to save as much as if you lived in a country with no social systems like that; but still saving 5-10% of your income is a good idea. Worst-case scenario, you have a nice amount to pass to your children when they grow up.

  • 18
    In fact, it is extremely unlikely that Denmark would be able to maintain their social security system for so long due to plunging birth rates. – JonathanReez Supports Monica Apr 18 '18 at 21:23
  • 13
    +1 Diversification doesn't apply just to buying different stocks. Not saving anything is basically investing everything in Denmark. – Acccumulation Apr 18 '18 at 21:35
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    Note that the OP implies that he is actually saving, in the form of the 12% pension fund contribution from payroll. This is broadly similar to what's called 401(k) in the US -- not a social program but a personal savings account with a private-sector financial institution. – Henning Makholm Apr 18 '18 at 22:51
  • 4
    @JonathanReez It's not that unlikely. That's what has happened until now. The ratio of workers to retirees is much smaller now than it was in the 1970s and yet both workers and retirees are doing OK, arguably better than they were then. The key variable is productivity. – Relaxed Apr 19 '18 at 0:00
  • 9
    Example: Slovakia found its retirement program unbearable so retirement age is now rising every year. There is option to retire early with lower pension – Piro says Reinstate Monica Apr 19 '18 at 5:57
9

Should I still be saving at all?

It sounds like you are in fact saving already, in the form of the 12% pension contribution you speak about. Whether that is enough savings for your wishes depends on what your wishes for your old age are.

8%+4% is, in my unscientific experience, slightly on the low side compared to many other workplace pension schemes, so if you have money to spare now it might be a good idea to start paying some into a privately-established pension savings account, which either your bank or the institute that manages your workplace savings would be able to create for you. This will let you reduce or eliminate the drop in spendable income you'll suffer when you retire.

If haven't already been to https://www.pensionsinfo.dk/ to get a prognosis for what your current savings arrangement will add up to in the end (the majority of Danish banks and pension funds contribute data to this shared portal), that will be an excellent starting point for further decisions.

You could of course also just live frugally and hope that the surplus will add up in the end -- but there are some nice tax benefits to get from saving in a dedicated pensions construction instead. In particular, the investment return earned on dedicated pension savings is taxed significantly less than returns on free funds.

4

It's all income and capital. It just so happens paying taxes now gets you an income later - just like paying into a pension does in other countries. So work out what you would need as an annual income in retirement, and if the state pension isn't enough, make a plan to get enough.

Things to consider:

  • How reliable is your income (taken altogether)? How much might it vary based on politics, economics, whatever the situation is N decades down the line? Will it be eroded by inflation? Will the public finances be in a good enough state to pay a state pension when you retire? This is the same for any pension fund, only you can't fire the government and move your money elsewhere. Do you have a backup plan in case the government won't pay (as much) for some reason? (see examples in other countries where that has happened)
  • Will the amount of money change based on your decisions? For example, you decide to retire early, or work for another 5 years? In some funds you can take money earlier, but you get less per year. If there's a fixed date, will you need funds to cover a gap between early retirement and the official date?
  • What happens if your circumstances change? For example, you get married/divorced or you get ill. Will that affect how much you get, or how much you need?
  • Do you own somewhere to live, or will you have sufficient to rent a place? Will you have the funds to move or adapt if your needs change (for example, stairs become difficult or you can no longer drive)?
  • How much flexibility do you need? For example, your house needs major repairs or you have an unexpected child. How sensitive is your budget to the unexpected? Might a need for serious future expenditure (property, healthcare, education, legal) happen at some point?

Assuming you're investing, you're investing in just the same markets as the rest of us. The means of generating income and capital growth doesn't change, even though your local sources of employment and government income - and taxes - might.

2

Some precautions for political risk are worthwhile.

The UK also has a significant welfare state and state pension (including basic and income-based) but provision has changed a lot over the last few years. In many cases this means a reduction or delay in the pension. It's easier for the government to change the terms of their provision than for financial institutions. I assume your workplace pension is held in the latter, but of course it's still subject to legislative changes. We all have some (though less than a few years ago) restrictions about how you can take your pension.

So a savings fund that is intended for retirement but not subject to pension rules is probably a good form of diversification. This would allow you access if you found yourself between a job and a pension, for example. You should try to find a tax-efficient way of doing it, and consider your risk profile and age. This extra fund will also help if you have a break in contributions to one or more of your pensions.

As for how much, well that depends on your level of trust in what you've already got. With workplace pensions and state provision you're already quite diversified so you may not need much extra, given that neither is likely to be completely wiped out (assuming Denmark still has an economy).

  • but UK personal pensions get tax relief (retrospective for three years) so bear that in mind as well as the maximum you pension fund can grow to. – Neuromancer Apr 20 '18 at 13:13
  • @Neuromancer, that's true, but pension income is taxed. So you'd have to take into account your current and expected post-retirement marginal tax rates (and the latter can only be a guess). On the other hand ISAs don't attract tax relief on the investment but the income from them (and/or capital gains) is untaxed. If the tax position of ISAs/pensions changes you can re-arrange your money more easily starting from an ISA than a pension (using ISAs as an example). If early or phased retirement starting early is a possibility the flexibility of non-pension investment may be key. – Chris H Apr 20 '18 at 13:26
  • And I assume that all matched contributions are taken: I can and do pay an extra contribution into my pension which is matched by my employer and benefits from tax relief. This beats all other realistic investments. – Chris H Apr 20 '18 at 13:28
2

The Danish situation is beyond complex.

Firstly there is the pension paid by the government. That comes with a base amount all get if they apply for it. Well actually not all, if you work and earn over about DKK 300,000 you don't get the base amount. Then there are several additions if you do not have other pensions or other income or large savings.

Then there is private savings for pensions. The two most common types are rate pensions and life rate pensions. The common 8% + 4% of the salary from employer/employee usually goes into these. The current max on contribution into a rate pension is DKK 50,000 a year. The money paid into these pension types are pre-tax.

Rate pensions are paid out in a period over 10-20 years after retirement. In case of death the remaing amount goes into the estate.

Life rate pensions are paid out for the rest of your life, but what is left does not go into the estate.

Then there is ATP a small amount paid each month, same amount for all full time employees, into a central pensions fund. An amount is paid out from this each month after you retire.

That might seem simple.

Firstly there are the tax bracket you get into when you retire. If you mainly have rate pension you can easily get into the top tax bracket even if you spread out the payments over 20 years if you had a well paid job. So if you have been working for many years in a well paid job, you need to put a larger portion into life rate pension to avoid using a large part of your savings paying taxes.

Secondly you should either go just below the limit for the additions to the base amount of the goverment pension or make sure that you are way above that limit. As these additions are on/off going DKK 1 above will cost you thousands each month.

Thirdly the companies that hold the money for your pension savings are not all good. Most allow you to choose an investment strategy, though usually you can only invest in bonds and investment funds, not directly in shares. Some companies do not allow this and even enforces a solidarity clause restricting how much you can get from your pension if you earn more than the rest. You cannot always choose which company to use, especially the later type of companies are forced by agreements between employers and unions. (You can easily get caught in the situation under 'Secondly'). ATP is notorious for being an extremely clever investor.

Sadly this only scratches the surface.

If you are well paid then in general, remember to put part of the contribution in life rate pension, don't contribute more, pay down your morgage and your car.

If you are middle/low income beware of the trap ('Secondly above'), especially if your pensions company is one of the bad ones, and either get below it or contribute to a life rate pension (you should be able to create one in your bank) to move you well above the limit.

  • "As these additions are on/off going DKK 1 above will cost you thousands each month" that would apply to political decisions changing the limit by ± that DKK 1 as well, right? – cbeleites supports Monica Apr 19 '18 at 20:21
  • 1
    Yes, but there is a consensus in all political parties not to change too much for people close to retirement. So the limit is not about to change from one day to another. But you really have to know if you are well below, well above or too close for comfort and act accordingly. – Bent Apr 19 '18 at 21:15
  • Well, just down south in Germany, we had some changes that came as quite unpleasant surprises to people - even if they are also not too sudden for people close to retirement: IIRC since 2005 pensions are subject to income tax (I'm talking the governmental system pensions), and of course the pension age going up... – cbeleites supports Monica Apr 19 '18 at 21:26
0

I would be cautious and advise to save some of your own money, as 1) The amount of money you get could drop when the funds backing it are insufficient, e.g. because people get older and older, so the backing money needs to cover a longer time span 2) The cost of living usually rises over time (rents, new and expensive technology), so what you will get may seem reasonable now, but might not be enough to cover your future costs of living.

-4

As much as you can. There is absolutely no guarantee that there still will be a pension system by the time you retire or that you will get back anything close to what you paid in to it. Looking at ever increasing national debts, more and more people on welfare, rising inflation, insane amounts of unfunded liabilities amassed by governments and the continuous shrinking of the productive part of the population and various other highly problematic developments in the west, you will be lucky if your country goes bankrupt only 2-3 times in your lifetime. Unless you retire within 10 years, you probably won't get back any money from what you handed over to the state.

  • 1
    Welcome to the site. This answer does not add much that the other answers have not stated. You may want to provide examples of what you are referencing (countries going bankrupt) and relate it to what the user is asking (how much to save). "As much as you can" is not especially helpful advice; it could end up well exceeding what is actually needed for a comfortable retirement at the expense of enjoying a comfortable existence pre-retirement. Also, there is greater precedent for citizens receiving pensions than not, why do you assume OP "probably won't get back any money" from social security? – CactusCake Apr 19 '18 at 13:57
  • 2
    Denmark doesn't have a significant debt or unfunded liabilities problem , the DKK doesn't suffer much from inflation, so it appears you are projecting US problems on DK. – MSalters Apr 20 '18 at 7:38
  • 1
    As far is I know, Denmarks relatively low national debt (as a percentage to gdp) is only kept in check because of very high taxes. I'm not projecting US problems, I'm simply observing general trends. I assume that OP might not get back his/her money from social security, or to be ore specific, from the pension system, because to my knowledge, no pension system has been around long enough, that a relativley young person today could be sure that it will still be there 40-50 years from now. Couple that with a generelly aging population, and the outlook is not good. – joecro Apr 20 '18 at 10:16
  • If you're going to speak about national debt, note that the capital under investment by the largest of the employer-sponsored pensions systems alone (which, by the way, has been around since 1917) exceeds the entire gross state debt. – Henning Makholm Apr 20 '18 at 12:07
  • joecro: Denmark's relatively low national debt has more to do with coming close to default in the early 1980s (after 2 decades of unsustainable economic policy). Since this near-death experience there has been consensus across the entire political spectrum on budget discipline, incentivising savings (e.g. for pensions) and disincentivising building up debt (e.g. removing tax breaks). I think the same happened in Sweden a decade later (but I don't know much about that). – Peter Mortensen Apr 20 '18 at 17:25

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