How much does early retirement cost annually? Discover the true costs

Do you dream of stopping work sooner? More time for your hobbies, family, or perhaps travelling the world? It sounds fantastic. But before you take that big step, it is important to know how much early retirement actually costs and how to secure your financial future. In this blog, we delve into the costs of stopping work sooner and give you the tools to calculate what you need. At Vive, we focus on you and your goals – let's start by understanding the figures.

The delayed retirement age

First of all: the official state pension (AOW) age has increased in recent years and is likely to continue rising. Currently, the AOW age is 67 (and a few months), and this may increase further in the future, as it moves in line with life expectancy. Retiring sooner therefore means that you have to bridge an increasingly longer period before you receive your AOW. You will have to finance those interim years yourself. At Vive, we help you to bridge that period smoothly, but it requires good planning.

How much money do you need?

It is essential to have a good insight into your monthly expenses and how many years before the AOW age you want to stop working. Here are the most important factors to consider:

• Monthly expenses: What do you currently spend each month and which of those costs will continue during your retirement? Think of housing, groceries, insurance, leisure time. Do not forget to also factor in inflation over the years – the cost of living usually increases.
• Mortgage and debts: Will your mortgage and other debts be paid off by then? If not, you must also include those monthly costs in your planning for the period that you stop sooner.
• Lifestyle: How do you want to spend your extra free time? Plans such as travelling, taking holidays more often, or expensive hobbies can entail extra costs. Budget for these desired activities.
• Wealth tax: If you will have to live on saved capital, remember that capital gains tax (box 3 tax) applies above certain thresholds. That is also an annual 'cost' of having wealth.
• Allowances and benefits: Which income-dependent allowances or benefits (such as healthcare allowance) will you lose when you stop working? And can you still get a benefit or allowance for something? For example, some people receive a pre-pension benefit or spousal maintenance – these count as income.

By mapping out all these points, you can make an estimate of how much income you need per year if you stop working sooner.

Example calculations

To give you an idea of the costs of early retirement, we look at two scenarios. We take as a starting point an annually required amount of €24,000 (i.e. €2,000 per month in expenses) and a (simplified) constant return on capital of 4% per year on your savings/investments. We also assume someone who starts saving specifically for early retirement at the age of 45.

Scenario 1: Stopping four years soonerYou want to retire at 63, instead of 67. You must then bridge 4 extra years. What do you need?

• Number of bridging years: 4 years
• Annual expenses during these years: €24,000
• Total amount required: €24,000 * 4 = €96,000 (in addition to what you will receive in regular pension/AOW later).

Suppose you want to have this amount by your 63rd birthday, and you start saving/investing for it at the age of 45. With an assumed return of ~4% per year, you would have to set aside approximately €268 per month from your 45th birthday to reach €96,000 by your 63rd. (The sooner you start, the lower this monthly amount can be due to the return-on-return effect.)

Scenario 2: Stopping six years soonerYou want to stop working at 61, so 6 years earlier than the AOW age of 67. The calculation:

• Number of bridging years: 6 years
• Annual expenses during these years: €24,000
• Total amount required: €24,000 * 6 = €144,000.

If you start saving/investing for this goal at the age of 45, with 4% growth you will need approximately €435 per month from your 45th birthday to have built up around €144,000 by your 61st.

These examples are simplified! In practice, more factors play a role (such as taxes, precise returns, and inflation). But they give an impression: the sooner you stop, the more capital you need to have or the more you need to save regularly.

Use your own capital

Fortunately, you do not always have to save everything from scratch. Look at your existing own capital: savings, investments, potential equity in a house you own, or other assets. These can play an important role in financing your early retirement.

Ask yourself: what part of my capital can I use to pay for those bridging years? Sometimes, for example, you have an investment account that you actually have for “later” – perhaps you can use it to stop a few years sooner. Or perhaps you can move to a smaller home and use the equity as a supplement. Ensure you have a good overview of your possessions and think strategically about how you can use them for your retirement plan.

Drawing your pension sooner

Some pension funds and insurers offer the option of drawing your pension pot sooner (for example, with a defined contribution scheme or individual pension policies). This can increase your monthly income slightly in those first years without work, but there are catches:

• Often, if you start drawing sooner, the monthly benefit amount will be lower because it must be spread over more years.
• For an individual pension product such as an annuity (for example, via BrightPensioen or bank savings), statutory rules apply: if you start drawing sooner, the benefit period must last at least 20 years after the start date if you begin before the AOW age. You cannot simply empty your entire pot in 5 years; the law wants to prevent you from running out of money before your AOW starts.

In short, check the rules for your pension product carefully. Drawing sooner can help a little, but often you will still need your own savings.

Taking leave

Did you know that you can also use (unpaid) leave as a stepping stone to early retirement? Since 2021, there has been a scheme that allows you to save tax-free leave for up to 100 weeks (more than 2 years!). This is intended, for example, to stop sooner towards your retirement: you save up leave days (or possibly buy them with salary), and use them at the end of your career. In this way, you are, as it were, paid with your own saved leave while you are no longer working.

Important to know: this is only possible with your current employer, and if you change jobs, you cannot take those saved leave days with you. But if you plan it well in advance and you work for an employer where you stay for a long time, you can stop working up to two years earlier by using leave. This significantly reduces what you have to finance yourself! Discuss this with your employer if early retirement is your wish; perhaps you can make arrangements not to take a portion of your holiday days each year but to save them for later.

Early Retirement Scheme (RVU)

Employers have the possibility, under certain conditions, to make use of the Early Retirement Scheme (RVU) to allow employees to stop sooner. This temporary measure (runs until the end of 2025) means that an employer can provide an employee with a benefit for a maximum of 3 years before the AOW age to bridge the period. The benefit is maximised at approximately €1,847 gross per month (which is equal to the net AOW benefit), and the employer pays a special levy on this (which is temporarily exempt up to this amount, hence the maximum).

In practice, this means: if your employer cooperates, you could, for example, stop 3 years before AOW and receive €1,847 gross per month until your AOW starts. This is particularly relevant if you work in a sector where these kinds of schemes have been agreed upon in the collective labour agreement (e.g., education, care, government). It is not a right, but something that you must arrange in consultation with your employer.

Stopping work sooner can absolutely become a reality with the right financial planning. Calculate how much you need annually well in advance and start saving or investing on time to accumulate this amount. Make use of all the resources available – from your own capital to leave schemes and any employer contributions – to keep the costs down.

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