Quantity required for pension savings in Denmark: what's the figure?
Retirement planning in Denmark involves considering multiple income sources to maintain a comfortable lifestyle after retiring. The pension system in Denmark typically provides income from the state pension, compulsory occupational (labor market) pensions, and private savings.
Understanding Your Pension Needs
To estimate the amount of pension savings needed, it's essential to consider your expected post-retirement lifespan, desired lifestyle, and other retirement income sources like the Danish state pension and occupational pensions.
Calculating Required Pension Savings
To fully fund a retirement without significant income from other sources, aim to have saved about 12 to 15 times your annual expenses at retirement. This gives you a rough estimate for a 20–25 year retirement.
[ \text{Required Savings} = \text{Annual Spending Gap} \times \text{Years in Retirement} ]
Where: - Annual Spending Gap = your expected annual living expenses minus your expected annual state and occupational pension income. - Years in Retirement = expected lifespan after retirement (e.g., 15, 20, 25 years).
For instance, if you expect to retire at 67 and live until: - 82 years old (15 years retirement): save for 15 years of needed income replacement. - 87 years old (20 years): save for 20 years. - 92 years old (25 years): save for 25 years.
Practical Considerations
In Denmark, your state pension depends on retirement age and contribution history, with the minimum income threshold for work and pension contributions regulated annually. As the retirement age rises towards 70, you may have fewer retirement years to fund privately, but should adjust savings for longevity risk as people live longer.
Employer pension contributions reduce the gap you need to cover with personal savings.
In Summary
- Calculate how much income you need yearly after pensions.
- Multiply by your expected years in retirement (life expectancy minus retirement age).
- Factor in expected investment returns and inflation for more precise planning.
Without precise personal data, the general guidance is to ensure pension savings that can fund between 15 and 25 years of retirement income after other pensions, corresponding to typical life expectancies past retirement in Denmark.
It's important to remember that incomes received from both the state pension and ATP are taxable. The current age of eligibility for Denmark's state pension, or folkepension, is 67, but it is set to rise gradually to 68 in 2030 and to 69 in 2035. Denmark recently adopted plans to increase its retirement age.
According to economist Brian Friis Helmer, to maintain the same living standard in retirement, a person needs their pensions to pay out around 80 percent of the amount they earned while working. A pre-tax salary of 45,000 kroner per month is used as the basis for calculating pension savings.
Lastly, it's crucial to pay attention to your pensions throughout your life, especially in your fifties and sixties, as it is still possible to adjust savings if they are too low or too high. The cost of several expenses (like labor market contributions, unemployment insurance, trade union membership, and transport) no longer apply in retirement. Denmark is planning to increase its retirement age, with the age for drawing a state pension set to reach 70 by 2040. The basic state pension in Denmark is 7,198 kroner per month. The amount of pension savings needed to maintain the same living standard in retirement decreases as life expectancy decreases: 1 million kroner for a life expectancy of 70 years, 3 million kroner for 80 years, and so on.
Articles and personal finance news can offer insights on strategies to fund a comfortable retirement in Denmark. For instance, an article might discuss how to calculate the required savings for a desired retirement lifestyle, taking into account various income sources such as personal savings, the Danish state pension, and occupational pensions. Another article might delve into the rise in Denmark's retirement age and its implications for personal-finance planning, providing tips on adjusting savings to account for longevity risk.
