The difference between US and Belgian Retirement plans
The FIRE movement in the US is a big supporter of all kinds of retirement plans such as 401k, IRA, Roth IRA and many others. Retirement plans have a good reputation mainly because of their tax benefit. Sometimes that’s justified (as in most US schemes) but Belgian schemes are not all in the same boat.
Let me compare popular plans in both countries. I take my personal situation as an example: 52 years old, retirement age is 67, 15 years to save before retirement.
These are the plans I compare. They are actually sorted from worst to best for each country:
- BE VAPZ. See post here
- BE IPT (TAK 21 = “Safe” interest savings account ). See post here
- BE Pension Saving: individual pension savings plan: post here
- BE index fund: outside of any tax beneficial plan, investing your after-tax money in an index fund
- BE IPT (Stock. Fund) (TAK 23 – agressive stock fund). See post here
And for the US:
- US index fund: outside of any tax beneficial plan, investing your after-tax money in an index fund
- US 401k: retirement savings plan, where you and your employer can contribute (up to 19 k / year (2019))
- US IRA: generic retirement savings account, comparable to BE Pension Saving, up to 6 k / year
Let me walk you through the rows of this table.
1000 from employer (pre-tax money)
Some of these plans deal with money contributed by your employer. The employer can choose to pay a part of your salary as salary or bonus or as a contribution to a savings plan. In order to make all plans equal, I start from a bag of money from your employer. At the bottom line, I can compare the end return of each plan compared to the employer’s initial input: ROI (on employer pre-tax) and CAGR (on employer pre-tax). In each plan, your employer has 1000 (EUR or USD) available for you.
A very rough approximation of what is left for you after income taxes. In Belgium there is actually much less left because of a huge social security tax. Income taxes in Belgium will be 45 or 50 %, plus other taxes; and probably 30 % in the US.
Some plans allow to get a tax refund; examples are Belgium VAPZ and Belgium Pension Saving. You actually receive the tax refund 1,5 years later but in the scope of a 15 years retirment savings plan I count that as ‘immediatly’ and give you the tax refund at the start of the plan.
Saved into plan
This is the money actually going into the piggy bank account. There are bank commissions going to the bank (typically 3 %) before the money reached your account.
15 years pass by…
This is what is in your account after 15 years. I add your initial contribtion and all increases of 15 years together.
Final Tax & Final tax (on dividends)
This is what is going to taxes at the end, when you take the money out your account. In some cases, a seperate taxation is raised on dividends. Obviously, this is all generalised and simplified, each case is different, depending on the specific content of your account, your specific personal situation, the return of your funds etc.
Simple: your savings account after 15 years minus all taxes. What you receive in your hand when you retire.
ROI (on employer pre-tax)
Return On Investment = (Net Result / 1000 of your employer)
CAGR (on employer pre-tax)
Growth Rate per year: this is the ROI, but per year (during the 15 years). Compounding Annual Growth Rate.
CAGR (on employer pre-tax)
Growth Rate per year, but compared to the net amount. This is more meaningful for money you already have post-tax, for example your net savings invested in an (taxable) index fund.
CAGR on Net Income inflation adjusted
This is the above number, but after inflation correction. This is the real return you have, the real increase in purchase power. It’s expecially meaningful if the number is below zero: this means that you actually LOSE money using this savings plan.
To make it visually clear: three plans illustrated
The worst: BE – VAPZ
You start by paying your 50 % income tax. Then you get a tax refund of 50 % on the remainings, which leaves you with a bit less than 75 % of the original gross income. You lost 25 % before you even got started. Then you lose purchase power each of the consecutive 15 years. As if that wasn’t enough, you lose to additional taxes at the end. It’s a series of red bars from start till end.
A fair investment in BE: after-tax index fund
You lose a horrible income tax at the start, but from then on you gain average 5 % per year after inflation. Dividends are taxed. No taxes at the end.
The best: US – IRA
No taxes at the start – taxes are deferred till the end. No taxes during 15 years. High returns in a good index fund. Taxes at the end, but usually at a much lower tax bracket.
We shouldn’t copy the advice of the US – FIRE community that all pension plans are very useful and must first be ‘filled’ before anything else. It’s valid for the US, not for Belgium. Belgium is a champion in taxes and is fooling us with some of their pension plans. Do your homework and check what makes most sense.