What risks are there with early retirement?

Stopping work early sounds like a dream come true for many – more time for hobbies, travel and family. But before you take that step, it is important to understand the potential risks of early retirement. Below, we discuss the key points of attention and how you can manage them. At Vive, we are ready to help you with sound financial planning, so you can enjoy your early retirement worry-free.

Financial Uncertainty

When you stop working earlier, you will have to live off your savings and pension assets for longer before you are entitled to the AOW (state pension) and any supplementary pension. In other words: your bridging period until the official retirement age is longer, and you need a larger financial buffer to finance these extra years. If you underestimate this, you may run into problems later.

Tip: Create a detailed financial plan for your early retirement. List all your expected expenses and income for the years until your AOW. Be realistic and include a safety margin. Consider engaging a financial advisor (such as the experts at Vive) to calculate your situation and draw up a feasible plan. This way, you will know exactly how much capital you need and whether you are on track to stop earlier.

Inflation

Inflation can have a major impact on your pension assets, especially if you have to bridge a long period. Inflation means that the purchasing power of your money decreases: over the years, you can do less with the same amount. If you stop working 10 years earlier, prices will be higher at the end of that period due to inflation. You will therefore need more money than the nominal amount now to afford the same lifestyle later.

Tip: Take inflation into account in your planning. Choose investments or savings products that try to keep up with or beat inflation. Think of investments that have a higher expected return than inflation – for example, a well-diversified stock portfolio, real estate, or inflation-linked bonds. This way, your assets retain more of their value. Adjust your budget annually with an inflation percentage, so your plan remains up-to-date.

Unexpected Expenses

Life is unpredictable. Unexpected costs can also pop up during your early retirement: a medical procedure that is not fully reimbursed, a major repair to your home or car, or other setbacks. If you stop working earlier, you may have less flexible income to absorb such blows.

Tip: Ensure an emergency fund (buffer) that is large enough to cover unexpected expenses, separate from your pension pot. A common rule of thumb is 3-6 months of expenses as a buffer, but in the case of early retirement, you may want to err on the side of caution (e.g., towards 12 months of expenses) because your income can no longer be supplemented by working. This emergency fund prevents you from having to sell your investments at an unfavourable moment or running into financial problems in the event of a setback.

Investment Risks

If your assets are invested (in stocks, bonds, funds, etc.), you always run market risk. The market can be disappointing: price declines or even crashes. If you retire early, you are dependent on your capital. A strong bear market (falling market) can erode the value of your portfolio and may force you to adjust your plans (for example, looking for work again or living more frugally).

Tip: Diversify your investments to spread risk. Make sure you don't have "all your eggs in one basket"; invest in different types of assets (spread stocks across sectors and regions, some bonds, etc.). Also, consider making your portfolio slightly more defensive as your early retirement approaches than during your accumulation phase – this reduces the impact of a market correction on your immediate living allowance. If necessary, talk to a financial advisor about your investment strategy before and during your retirement, so that it aligns well with your goals and risk tolerance. The goal is that you can sleep peacefully, knowing that your investments can withstand a shock.

Longer Lifespan

We are generally living longer. Chances are you will live longer than you might have originally estimated. Early retirement means your pension assets must last even longer. For example, if you stop working at 62 and live to 90, you have to bridge 28 years – significantly longer than someone who stops at 67 and lives to 90 (23 years). Underestimating your lifespan can mean you run out of money later in life (in your 80s).

Tip: Be cautious in your planning by assuming a long lifespan. For example, calculate what you would need if you were to live to 95 or even 100 years old, instead of, say, 85 years. This way, you build in an extra buffer. Ensure your plan is flexible enough to adapt if you live longer than expected (for example, slightly lower annual expenses if necessary). After all, it is better to have too much money left in old age than too little.

Reduced Allowances and Tax Benefits

When you stop working, you may lose certain allowances or tax credits that are linked to having income from work. Think of the employment tax credit on income tax – which expires if you no longer have a salary. You also no longer accrue new pension rights through an employer, which is indirectly a kind of missed "bonus". In addition, you may face higher healthcare premiums (your employer no longer contributes) or you may miss out on the accrual of holiday pay. All these factors can mean that your net disposable income is less than your gross planning suggested.

Tip: Make an overview of all financial benefits that disappear if you stop working before the retirement age. Examples: no employment tax credit (reduces net income), possibly no longer entitled to certain allowances because your assets increase when your pension is paid out (e.g., housing benefit may be lower if your savings exceed a limit). Consider how you can compensate for this in your plan. Sometimes the answer is simply that you need a little more capital. In other cases, you can take active steps: e.g., temporarily make use of a bridging arrangement such as the Early Retirement Scheme (RVU) through your employer (where you can receive a payment up to 3 years before AOW if your employer cooperates). Be informed about this so you make your choices with open eyes.

Be Realistic

Early retirement offers you a wonderful amount of free time and freedom, but it is crucial to be aware of the financial risks associated with it. The good news is that with sound financial planning and a few precautionary measures, these risks are very manageable. Draw up a realistic plan, adjust it if necessary, and take measures such as building up a buffer and diversifying investments.

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