Retiring earlier: how many expenses do I have then?

Are you thinking about retiring early? You are not the only one! Many Dutch people consider retiring before the official state pension age. Whether you plan to travel the world, start working as a voluntary carer, or simply want more free time, it is crucial to know how you can make ends meet financially. At Vive, we want to help you make your financial future clear and carefree. Read on for practical tips and an overview of things you need to consider if you stop working early.

Mapping out your expenses

Before you take the leap, it is important to properly understand your current and future expenses. Start with your current cost picture and consider what that will look like when you are in early retirement.

Fixed charges: These are the recurring costs that come back every month (or year), regardless of whether you work or not. Make a list of:

• Housing costs: Rent or mortgage. Note the amount you pay monthly for your home. (Take into account whether your mortgage will be paid off by then or not.)
• Subscriptions: Think of telephone, internet, TV, gym, streaming services (Netflix, Spotify, etc.). What are your monthly costs for these?
• Insurance: For example, your health insurance, home insurance, car insurance – all those policies added up per month.
• Gas, water, electricity: Your energy bills and water bill per month.
• Annual costs: Such as municipal taxes (property tax, waste disposal tax) or, for example, maintenance of your home (reservations for this). Divide these by 12 to get a monthly amount.

Example: Suppose you pay €750 rent, €50 for your telephone, €100 for various insurance policies, and €200 for gas/water/electricity per month. Then your fixed charges are now approximately €1,100 per month. If your house is paid off by the time you retire, that €750 would no longer apply – then you know your fixed charges could be lower later on.

Private expenses: These are variable costs that you control and that belong to your lifestyle. Make an overview of:

• Groceries and daily expenses: What do you spend on average per week/month on food, drink, household items?
• Transport: Costs for car (fuel, maintenance, road tax, MOT) or public transport costs, etc.
• Recreation and hobbies: Eating out, cinema, sports clubs, hobby materials, gifts, and so on.
• Clothing and personal care: Average expenditure on clothing, hairdresser, cosmetics.

Example: If you have spent an average of €200 per month on outings, dining, and shopping in the past three months, then note €200 as monthly private expenses for leisure time. Do not automatically multiply such costs by the number of extra days off – you are not really going to have lunch out every day – but keep in mind that more free time *can* lead to slightly higher leisure-time expenses.

Future costs: Think ahead: what extra costs will be incurred once you stop working? And which ones might disappear?

• Travel costs: Do you plan to travel a lot during your retirement? Calculate what that would cost approximately per year and divide by 12 for a monthly indication.
• Health: As you get older, healthcare costs may increase. Perhaps you will go to physiotherapy more often (which is not always reimbursed) or have higher personal contributions. Your healthcare premium may also rise with age.
• Children or grandchildren: Perhaps you want to pay for a child's education or extras for grandchildren (by that time).
• New hobbies: If you plan to take up a new (perhaps expensive) hobby with your free time, map out those costs. For example, photography (camera, lenses) or restoring a classic car (materials).

Example: You expect to have €300 per month in travel costs because you finally want to take long trips. Add this to your calculation as an extra item.

By lining up all these expenses, you get a clear picture of your total monthly expenses during your early retirement. This is the basis for determining what income you need to make ends meet without working.

What are the financial consequences of stopping work early?

Stopping work early has a few direct financial consequences that you might not immediately feel, but which do have a long-term effect:

• Less pension accrual: If you stop earlier, you also stop accruing a pension through your employer earlier. Your pension pot must be spread over more years. Specifically, this means that the monthly pension payment you ultimately receive will be lower than if you had worked until the state pension age. Ask your pension fund what the difference would be between working until 67 or stopping at, say, 63. They can often calculate that.Example: If you continued to work until retirement, you would receive a pension of €2,000 per month. If you stop three years earlier, this can become, for example, €1,500 per month, because the pot is less filled and has to be divided over extra years.
• Full tax rate until AOW age: As long as you do not yet receive the AOW state pension, you pay the regular (higher) income tax rate that applies to workers on your pension income, because you are not yet eligible for the AOW tax discount. You only receive a lower income tax on your pension when you reach the AOW age.Example: Suppose the tax rate on your pension income is 37% before you receive AOW. If you receive €2,000 gross pension per month, you are left with ~€1,260 net. As soon as you reach the AOW age, your rate drops (e.g., to ~19%), then you might be left with ~€1,460 net of that €2,000 gross. So you have to absorb the difference in those first years yourself.
• Less mortgage interest deduction (possible): If you stop working, your income drops. This may mean that you fall into a lower tax bracket, which reduces the value of your mortgage interest deduction. It can also be that if your income becomes low enough, you cannot fully utilise that deduction. Moreover: if your pension income is lower, you may pay less tax, and you only get mortgage interest deduction back on tax paid.Example: During your working life, you paid enough tax to receive all the mortgage interest deduction (say €200 per month back). In early retirement, your income drops and you hardly pay any tax; your mortgage interest deduction refund might drop to €50 per month. That effectively means €150 less cash flow per month.

What can you save on now and later?

Good preparation for stopping early is not only knowing what you spend, but also critically looking at where you can save – already now, and later once you have stopped. Here are some saving tips:

• Check subscriptions: Are you paying for things you barely use? This is the moment to review those expenses.Example: Do you have three streaming services but actually only watch Netflix? Consider cancelling the others. That saves €10-€20 per month per service. Every little bit helps and adds up over years.
• Sustainable living: Investments now can save on monthly costs later. If you still work for a few years, you can use that income to make your home more energy efficient so that you spend less later.Example: Insulate your home, possibly install solar panels, replace old appliances with energy-efficient ones. This way, your gas/electricity costs will go down. Furthermore, consciously turn the heating down a degree now and save immediately.
• Budgeting: Practice living on the budget you think you will have later. Set yourself a weekly budget for variable expenses and try to stick to it. This way, you notice where the pain points are and can adjust.Example: You decide that, once you have stopped, you want to spend €100 per week on groceries and small outings. Try to get by on €100 per week for a few months now. Does that work? If not, where are you spending more and can you cut back on that later?
• Plan major purchases: Think ahead about major expenses that are coming up. Perhaps you will need a different car in 5 years, or you want to take a big trip. If you know that *now*, you can save specifically for it or buy it now.Example: Your car is 12 years old and you expect to have to replace it in a few years. It might be useful to do that now while you have an income, so you do not have to make a significant expenditure from your pension pot later.

What extra costs should you take into account?

Besides your normal expenses, there are extra costs or investments you need to think about when planning for early retirement:

• Supplementing your own pension accrual: If you stop working earlier and your pension accrual stops as a result, it may be smart to save or invest extra for your pension. This is actually not an “expense”, but rather an amount that you must set aside now for later.Example: You decide to deposit an extra €200 every month into a pension investment account from your 50th to your 63rd year. You miss this amount now as an expense, but it ensures that you can withdraw an extra €2,000 annually from your retirement age, for example, so that your early stop damages the later payment less.
• Reserving holiday allowance: Once you are retired, you may still receive an annual holiday allowance (depending on your pension fund), but if part of your income comes from private assets, you must provide your own holiday budget.Example: You would like to continue spending €2,400 annually on holidays. That means you actually have to set aside €200 every month (or have it in your budget) to keep making those trips, even without work-related holiday pay.
• Healthcare costs and care: As mentioned, your healthcare costs may rise as you get older. Think of higher premiums (supplementary insurance you take out because you are getting older), or things that are not reimbursed (glasses, hearing aid, dental costs).Example: Expect that by then you could be spending, for example, an extra €50 per month on healthcare costs (on average). Perhaps less if you are very healthy, perhaps more if you need medication or assistance.
• Price increases (inflation): Do not forget that €1,000 now does not buy the same as €1,000 in 10 or 20 years. Plan a kind of inflation buffer in your budget.Example: Suppose your monthly expenses now (in current prices) amount to €1,500. If you still have 10 years until you want to take early retirement, and inflation is on average 2% per year, then you will need approximately €1,828 per month for that same lifestyle in 10 years. So do not plan too tightly with current prices, but slightly increase your target amount every year.

By including these extra items, you prevent overlooking things that will later cause financial setbacks. Better to have planned too much than too little.

Stopping work early can be a great step towards more freedom and a more pleasant life – provided you prepare well. Careful financial planning is essential: map out your expenses, look at where you can save or adjust now, and build up buffers for unforeseen costs. At Vive, we are happy to help you secure your financial future, so you can enjoy your well-deserved free time with peace of mind.

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