Annual pension savings target in Denmark
In Denmark, discussions about the increasing retirement age have been a topic of concern, as reflected in the article titled '70 is old': Danes reluctant to embrace future retirement age. This shift is linked to the rising life expectancy in the country, with the retirement age being phased upwards to 70 by 2040.
To maintain the same living standard in retirement, it's essential for a person's pensions to pay out around 80 percent of the amount they earned while working. However, the amount of pension savings needed to achieve this goal decreases with a shorter life expectancy. For a life expectancy of 70 years, it is approximately 1 million kroner, while for 80 years, it falls to 3 million kroner.
The Danish pension system is multi-pillar, consisting of the state pension, mandatory labor market pensions, and individual pensions. These contributions help to mitigate the amount an individual must save personally. The current retirement age for Denmark's state pension is 67, but it is set to rise gradually, reaching 68 in 2030 and 69 in 2035.
Incomes received from both the state pension and ATP, a Danish pension fund, are taxable. ATP can provide no more than 26,000 kroner per year, depending on the years spent on the Danish labour market. Today's 67-year-olds have an average of 17 years for men and 19.5 years for women remaining in their lifespan.
Economist Poulsen, from Danish pension fund PFA, advises being interested in one's pension throughout life, and actively thinking about it in one's fifties and sixties to adjust savings if necessary. If a person feels healthier than average, they should consider saving up to cover even more years. On the other hand, if a person expects to live to the age of 90, they will need pension savings of 4 million kroner by the age of 67 to maintain the same living standard throughout retirement.
Economist Brian Friis Helmer of Arbejdernes Landsbank suggests avoiding withdrawing from pension funds too early to maximize pension savings. The basic state pension in Denmark is 7,198 kroner per month.
In summary, the total pension savings required at retirement increase proportionally with the retirement years (p). Denmark’s legislative shift linking retirement age to life expectancy aims to balance the length of retirement and contribution years, thus controlling the total savings need. Using a simplified model, if someone works 40 years and retires for 25 years with a target replacement ratio R of 0.65, they would need to save around 28% of their salary annually to sustain their standard of living in retirement. Adjustments are needed depending on actual replacement ratio targets and life expectancy changes. Denmark recently adopted plans to increase its retirement age, making it crucial for individuals to plan and save accordingly.
- Given the rise in Denmark's retirement age, an individual might need to pay additional attention to their personal-finance and savings, particularly in relation to personal-finance strategies for retirement, as highlighted by economist Poulsen from Danish pension fund PFA.
- As the retirement age in Denmark moves towards 70 by 2040, it's important to keep an eye on changes in the financial news, as they could impact one's art investments or personal-finance plans, particularly in terms of pension savings.
