Are you thinking about retiring early? You are not alone! Many Dutch people are considering retiring before the official state pension age. Whether you plan to travel the world, start working as a 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 to consider if you stop working earlier.
Mapping out your expenses
Before taking the plunge, it is important to properly understand your current and future expenses. Start with your current cost picture and consider what it will look like when you are in early retirement.
Fixed costs: These are 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. (Keep in mind 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 together per month.
- Gas, water, electricity: Your energy bills and water bill per month.
- Annual costs: Such as municipal taxes (property tax, waste collection charges) or, for example, maintenance of your home (reserves 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 costs are now about €1,100 per month. If your house is paid off by your retirement, that €750 would expire – then you know your fixed costs could be lower later.
Private expenses: These are variable costs that you control yourself and which relate 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.
- Relaxation 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, dinners, and shopping in the past three months, then note €200 as monthly private expenses for free time. Do not automatically multiply such costs by the number of extra free days – you really will not be eating 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 there be once you have stopped working? And which ones might drop away?
- Travel expenses: Are you planning 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 (is not always reimbursed) or have higher personal contributions. Your health insurance premium may also rise with age.
- Children or grandchildren: Perhaps you want to pay for a child’s studies or extra treats for grandchildren (by then).
- 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 expenses soon 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 retiring earlier?
Stopping work earlier has a few direct financial consequences that you may not immediately feel, but which will have an effect in the long term:
- Less pension accrual: If you stop earlier, you also stop accruing pension via 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 retirement age. Ask your pension fund what the difference would be between working until 67 or stopping at, say, 63. They can often calculate this.Example: If you worked until retirement, you would receive a pension of €2,000 per month. If you stop three years earlier, this might become, for example, €1,500 per month, because the pot is less full and has to be divided over extra years.
- Full tax rate until AOW age: As long as you do not yet receive AOW (State Pension), you pay the regular (higher) income tax rate that applies to those working on your pension income, because you are not yet eligible for the AOW tax discount. Only when you reach the AOW age do you receive a lower income tax on your pension.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 from that €2,000 gross. You therefore have to cover the difference yourself in those first years.
- Less mortgage interest deduction (possibly): If you stop working, your income falls. This may mean that you fall into a lower tax bracket, which reduces the value of your mortgage interest deduction. It is also possible 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 paid tax.Example: During your working life, you paid enough tax to get 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 reimbursement 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 retiring earlier is not only knowing what you spend but also critically looking at where you can save – both now and later when you have stopped. Here are some saving tips:
- Check subscriptions: Are you paying for things you hardly 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 the 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 house more energy efficient so that you spend less later.Example: Insulate your home, perhaps install solar panels, replace old appliances with energy-efficient ones. This will lower your gas/electricity costs. Moreover, consciously turn the heating down a degree now and save immediately.
- Budgeting: Practice now living on the budget you expect to 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 when you retire, you want to spend €100 per week on groceries and small outings. Try to get by on €100 per week now for a few months. Does that work? If not, where do you spend more and can you cut back there later?
- Planning major purchases: Think ahead about larger expenses that are coming up. Perhaps you need another 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 wise to do that now while you have income, so you do not have to make a major expenditure from your pension pot later.
What extra costs should you take into account?
In addition to your normal expenses, there are extra costs or investments you should think about when planning an early retirement:
- Supplementing your own pension accrual: If you stop working earlier and therefore stop your pension accrual, it may be smart to save or invest extra yourself for your pension. This is actually not an “expense”, but an amount you must set aside now for later.Example: You decide to deposit an extra €200 into a pension investment account every month from age 50 to 63. You miss this amount now as an expense, but it ensures that you can withdraw, for example, an extra €2,000 annually from your retirement age, so that your early stop damages the later payment less.
- Reserving holiday pay: Once you are retired, you may still receive annual holiday pay (depending on your pension fund), but if part of your income comes from your own capital, you must take care of your holiday budget yourself.Example: You would like to continue spending €2,400 annually on holidays. This 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.
- Medical expenses and care: As mentioned, your medical expenses may increase 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 you could, for example, spend an extra €50 per month on health costs (on average) by then. 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 retire early, and the average inflation is 2% per year, then you will need approximately €1,828 per month for the same lifestyle in 10 years. So, do not plan too tight with current prices, but slightly increase your target amount every year.
By including these extra items, you prevent overlooking things that could cause financial setbacks later. Better to plan too much than too little.
Retiring earlier 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.
