Do you dream of stopping work earlier? 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 you can secure your financial future. In this blog, we delve into the costs of stopping work earlier and give you tools to calculate what you need. At Vive, we put you and your goals first – let us start by gaining insight into the numbers.
First of all: the official AOW (State Pension) age has increased in recent years and is likely to continue rising. The current AOW age is 67 (and a few months), and this may increase further in the future, as it moves with life expectancy. Retiring earlier therefore means you have to bridge an increasingly longer period before you receive the 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.
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:
By mapping out all these points, you can make an estimate of how much income you need per year if you stop working earlier.
To give you an idea of the costs of early retirement, we look at two scenarios. We take as a starting point an annual 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 earlierYou want to retire at 63, instead of at 67. You then have to bridge 4 extra years. What do you need?
Suppose you want to have this amount by the time you are 63, and you start saving/investing for it at 45. With an assumed return of ~4% per year, you would have to set aside about €268 per month from age 45 to reach €96,000 at age 63. (The earlier you start, the lower this monthly amount can be due to the compounding effect.)
Scenario 2: Stopping six years earlierYou want to stop working at 61, which is 6 years earlier than the AOW age of 67. The calculation:
If you start saving/investing for this purpose at 45, with 4% growth you will need about €435 per month from age 45 to have accumulated approximately €144,000 by the time you are 61.
These examples are simplified! In practice, more factors play a role (such as taxes, precise returns, and inflation). But they give an impression: the earlier you stop, the more capital you must have or the more you must save regularly.
Fortunately, you do not always have to save everything from scratch. Look at your existing own capital: savings, investments, possible equity in an owner-occupied home, or other assets. These can play an important role in financing your early retirement.
Ask yourself: which part of my capital can I use to pay for those bridging years? Sometimes you have an investment account, for example, that you actually have for “later” – perhaps you can use that to stop a few years earlier. Or perhaps you can downsize your home and use the equity as a supplement. Make sure you have a good overview of your assets and think strategically about how you can use them for your pension plan.
Some pension funds and insurers offer the possibility of having your pension pot paid out earlier (for example, with a defined contribution scheme or individual pension policies). This can slightly increase your monthly income in those first years without work, but there are catches:
In short, check the rules of your pension product carefully. Early payment can help a little, but you will often still need your own savings.
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 earlier towards your retirement: you save up leave days (or possibly buy them in 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 therefore stop working up to two years earlier by using leave. This saves considerably on what you have to finance yourself! Discuss this with your employer if early retirement is your wish; perhaps you can make agreements not to take part of your annual holidays but to save them for later.
Employers have the option, under certain conditions, to make use of the Early Retirement Scheme (RVU) to allow employees to stop earlier. This temporary measure (runs until the end of 2025) means that an employer can give an employee a benefit for a maximum of 3 years before the AOW age to bridge the gap. The benefit is capped 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 with this, you could, for example, stop 3 years before the AOW and receive €1,847 gross per month until your AOW starts. This is particularly relevant if you work in a sector where such schemes have been agreed in the collective labour agreement (e.g. education, healthcare, government). It is not a right, but something you must arrange in consultation with your employer.
Stopping work earlier can absolutely become a reality with the right financial planning. Calculate well in advance how much you need annually and start saving or investing on time to accumulate this amount. Make use of all the available resources – from your own capital to leave schemes and any employer contributions – to reduce the costs.