A look at post-retirement income

This is according to an analysis on retirement savings adequacy which DNB conducted for an Interdepartmental Policy Study (IBO) on pension accrual. In the IBO, officials from various ministries examine whether pension accrual is ‘balanced’ and propose policy options to improve it. The DNB Analysis presents the results of the calculations underlying this IBO. 

Average retirement income

Our analysis considers the median household in the distribution of retirement incomes: 50% of households have higher retirement incomes, and 50% have lower retirement incomes. For the median household, gross annual retirement income from the first three pension pillars (state pension, occupational pension and voluntary pension products) is around €33,000, or 60% of their 'average pre-retirement income' after retirement. This percentage is referred to as the replacement rate. If we include savings and investments, expected gross annual retirement income rises to €37,000, representing a replacement rate of 63%. In addition, some people choose to use their private wealth – e.g. home equity – for retirement. Including total wealth– increases the figures to €50,000 and 78% for the median household. We converted private wealth to retirement income by dividing it by the number of expected remaining years of life following retirement.

For most households, retirement income at least equals state pension 

Anyone who has lived or worked in the Netherlands receives state pension from the central government as a basic income provision upon reaching retirement age. Around 10% of households have an expected gross retirement income from the first three pillars that is below the level of full state pension. These households have accrued incomplete state pension benefits as a result of living abroad and have insufficient retirement income from the second and third pillars to exceed the level of the state pension. This does not, however, automatically imply that these households actually fall below the poverty line in retirement. They can claim a supplementary income provision (AIO).

To which degree can households maintain their living standards?

To answer the question of retirement income adequacy, we also look at the change in income after retirement. Is retirement income high enough to maintain living standards? Figure 1 shows that lower-income households are able to replace more than 80% of their former income with retirement income from the first three pillars. For this group the state pension (the first pillar) is the main source of income after retirement. For higher-income groups, occupational pension (the second pillar) is a relatively important component (Figure 1). The same applies to wealth (the fourth pillar). Wealth consists of financial assets, such as savings, which can be released relatively easily, and other types of assets, such as home equity or business capital. Relatively few people use voluntary pension products (the third pillar). As a result, they are barely distinguishable in the chart.

Figure 1. Low income groups mainly rely on income from state pension; high income groups on second pillar and wealth

Note: The replacement rate is expected retirement income divided by pre-retirement income, where pre-retirement income is the average household income between 2018 and 2022. Households in income percentiles 38 and above tend to be couples and have higher state pension benefits than singles. The first four percentiles are not shown in the graph due to outliers.

It can be difficult for the self-employed in particular to maintain their living standards in retirement without depleting their wealth. Their expected retirement income from the first three pillars is 46% of previous income, compared to 59% for employees. By depleting their higher home equity or business capital to supplement retirement income, the median self-employed can achieve roughly the same replacement ratio as the average employee.