Stopping work earlier 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 possible risks of early retirement. Below, we discuss the most important considerations and how you can manage them. At Vive, we are ready to help you with a solid financial plan so you can enjoy your early retirement without worry.
When you stop working earlier, you will have to live off your savings and pension assets for longer before you are entitled to the State Pension (AOW) 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 could run into problems later.
Tip: Create a detailed financial plan for your early retirement. List all your expected expenses and income for the years leading up to your State Pension. Be realistic and include a safety margin. Consider engaging a financial advisor (like the experts at Vive) to calculate your situation and draw up a feasible plan. This way, you know exactly how much capital you need and if you are on track to be able to retire earlier.
Inflation can have a major impact on your pension assets, especially if you have to bridge a longer 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 therefore need *more* money than the nominal amount today to afford the same lifestyle later.
Tip: Factor inflation into your planning. Choose investments or savings products that try to keep up with or beat inflation. Consider 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.
Life is unpredictable. Unexpected costs can also arise during your early retirement: a medical procedure that is not fully reimbursed, a major repair to your house or car, or other setbacks. If you stop working earlier, you may have less flexible income to absorb such blows.
Tip: Ensure you have 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 might want to err on the conservative side (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 time or getting into financial trouble in the event of setbacks.
If your assets are invested (in stocks, bonds, funds, etc.), you always run market risk. The market can disappoint: price drops or even crashes. If you retire early, you are dependent on your assets. A hefty bear market (falling market) can affect the value of your portfolio and may force you to adjust your plans (e.g., look for work again or live 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 arranging your portfolio to be slightly more defensive as you approach early retirement than during your accumulation phase – this reduces the impact of a market correction on your immediate living expenses. Discuss your investment strategy for and during your retirement with a financial advisor if necessary, so that it aligns well with your goals and risk tolerance. The goal is that you can sleep soundly, knowing that your investments can withstand a shock.
On average, we are living longer. The chance is high that you will live longer than you may 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 must 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: It is better to be too cautious in your planning by assuming a long lifespan. For example, calculate what you need if you were to reach 95 or even 100 years old, instead of, say, 85 years. This way, you build in an extra buffer. Make sure your plan is flexible enough to adapt if you live longer than expected (e.g., slightly lower expenses per year if necessary). After all, it is better to have too much money left over in old age than too little.
When you stop working, you may lose certain allowances or tax credits linked to having income from work. Think of the employment tax credit on income tax – which lapses when 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 you have less net disposable income than your gross planning suggested.
Tip: Make an overview of all financial benefits that cease when you stop working before the retirement age. Examples: no employment tax credit (saves 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 slightly more capital. In other cases, you can actively do something: e.g., temporarily use a bridging arrangement such as the Early Retirement Scheme (RVU) via your employer (where you can receive a payment up to 3 years before State Pension, if your employer cooperates). Get informed about this so you make choices with open eyes.
Early retirement offers you wonderful 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. Set up a realistic plan, adjust it if necessary, and take measures such as building up a buffer and diversifying investments.