Quitting work earlier: how many expenses will I have?

Are you thinking of retiring early? You're not the only one! Many Dutch people are considering retiring before the official retirement age. Whether you plan to travel the world, work as a caregiver, or simply want more free time, it's crucial to know how to make ends meet financially. At Vive, we want to help you make your financial future clear and worry-free. Read on for practical tips and an overview of things to consider when you stop working early.

Charting your expenses

Before you take the plunge, it's important to understand your current and future expenses. Start with your current expense picture and consider what that will look like when you are in early retirement.

Fixed expenses: These are the recurring expenses that recur every month (or year) regardless of whether you work or not. Make a list of:

• Housing costs: Rent or mortgage. List the amount you pay monthly for your home. (Keep in mind if your mortgage is paid off by this time or not).
• Subscriptions: Think phone, internet, TV, gym, streaming services (Netflix, Spotify, etc.). What costs do you incur per month on these?
• Insurance: For example, your health insurance, home insurance, car insurance - all those policies added together each month.
• Gas, water, light: Your utility bills and water bill each month.
• Annual costs: such as municipal taxes (ozb, garbage collection) or, for example, maintenance of your home (reservations for this). Divide these by 12 to get a monthly amount.

Example: Say you pay €750 rent, €50 for your phone, €100 on various insurances and €200 on gas/water/electricity per month. Then your fixed expenses are now about €1,100 per month. If your house is paid off by retirement, that €750 would be dropped - then you know your fixed expenses could be lower later.

Private Expenses: These are variable expenses that are within your control and are part of your lifestyle. List:

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

Example: If in the past three months you have spent an average of €200 per month on outings, dinners and shopping, record €200 as monthly private leisure expenses. Don't automatically multiply such expenses by the number of extra days off - you really don't go out to lunch every day - but keep in mind that more free time may lead to slightly higher leisure expenses.

Future costs: Think ahead: what additional costs will arise once you stop working? And which ones might fall away?

• Travel expenses: Do you plan to travel a lot during retirement? Calculate what that would cost approximately per year and divide by 12 for a monthly estimate.
• Health: As you age, healthcare costs may increase. You might go to physical therapy more often (not always reimbursed) or have higher co-payments. Your health care premium may also increase with age.
• Children or grandchildren: You may (by this time) want to fund a child's college education or perks for grandchildren.
• 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 vintage 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 additional item.

Listing all these expenses will give you a clear picture of your total monthly expenses during your early retirement. This is the basis for determining what income you will need to make ends meet without working.

What are the financial implications of retiring early?

Quitting work earlier has some immediate financial consequences that you may not feel right away, but they have long-term effects:

• Less pension accrual: If you stop earlier, you also stop accruing pension through your employer earlier. Your pension pot has to be spread out over more years. Specifically, the monthly pension benefit you eventually receive will be lower than if you had continued working until retirement age. Ask your pension fund what the difference would be between continuing to work until 67 or retiring at, say, 63. Often they can calculate that.
  Example: You would get a pension of €2,000 a month if you continue working until retirement. If you stop three years earlier, this could become, say, €1,500 per month because the pot is less full and has to be spread over additional years.
• Full tax rate until AOW age: As long as you are not yet receiving AOW, you pay on your pension income the regular (higher) income tax rate that applies to working people, because you are not yet eligible for the AOW tax credit. Only when you reach state pension age will you receive a lower income tax rate 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 will keep ~€1,260 net. Once you reach AOW age, your rate drops (e.g., to ~19%), you would be left with perhaps ~€1,460 net of that €2,000 gross. So you have to make up the difference in those first few years.
• Less mortgage interest deduction (possible): When you stop working, your income drops. That could mean you fall into a lower tax bracket, reducing the value of your mortgage interest deduction. Also, if your income gets low enough, you may not be able to take full advantage of that deduction. In addition: if your retirement income is lower, you may pay less tax, and mortgage interest deductions are only refunded on taxes paid.
  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 pay hardly any tax; your mortgage interest deduction allowance drops perhaps to €50 per month. That effectively means €150 less cash flow per month.

What can you save on now and later?

Good preparation for quitting earlier is not only knowing what you're spending, but also taking a critical look at what you can save on - now, as well as later when you've quit. Here are some savings tips:

• Subscription check: Are you paying for things you barely use? This is the time to review those expenses.
  Example: Do you have three streaming services but really almost only watch Netflix? Consider canceling the others. It will save you €10-€20 per month per service. Every little bit helps and adds up over years.
• Sustainable living: Investments now can save on monthly expenses later. If you work a few more years now, you can use that income to make your home more energy efficient, so you'll spend less later.
  Example: Insulate your home, possibly get solar panels, replace old appliances with energy-efficient ones. This will reduce your gas/electricity bills. And consciously turn down the heating one degree and save money immediately.
• Budgeting: Practice right now living on the budget you think you will soon have. Set yourself a weekly budget for variable expenses and try to stick to it. That way you will notice where the pain points are and you can make adjustments.
  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 a week for a few months now. Is that possible? If not, where do you spend more and can you cut back on that later?
• Plan big purchases: Think ahead to bigger expenses coming up. Maybe you need a new car in five years, or you want to take a big trip. If you know this now, you can save for it or buy now.
  Example: Your car is 12 years old and you expect to have to replace it in a few years. You might want to do that now, while you have an income, so that you don't have to take a large expense out of your pension pot.

What additional costs should you consider?

In addition to your normal expenses, there are additional costs or investments to consider when planning an early retirement:

• Supplementing your own pension accrual: If you stop working early and thereby stop your pension accrual, it may be smart to save or invest extra for your own retirement. This is not actually an "expense," but rather an amount you should set aside now for later.
  Example: You decide to put an extra €200 each month into a retirement investment account from age 50 until age 63. You miss this amount as an expense now, but it ensures that you can withdraw an extra €2,000 each year from retirement age, for example, so that your early stop doesn't hurt the later benefit as much.
• Set aside vacation money: Once you are retired, you may still get annual vacation pay (depending on your pension fund), but if part of your income comes from your own assets, you have to take care of your vacation budget yourself.
  Example: You'd like to continue spending €2,400 for vacations each year. That means you actually need to set aside (or have in your budget) €200 every month to keep taking those trips, even without work-related vacation money.
• Health and Care Costs: As mentioned, as you age, your health costs may increase. Consider higher premiums (supplemental insurance you take because you are getting older), or things that are not reimbursed (glasses, hearing aids, dental costs).
  Example: Reckon that by this time you could be spending, say, €50 extra per month on health costs (on average). Maybe less if you are very healthy, maybe more if you need medicine or help.
• Price increases (inflation): Remember that €1,000 now does not buy the same as €1,000 10 or 20 years from now. Plan some sort of inflation buffer in your budget.
  Example: Suppose your monthly expenses now (in current prices) come out to €1,500. If you have 10 more years until you want to retire early, and inflation averages 2% a year, in 10 years you will need about €1,828 a month for that same lifestyle. So don't plan tightly with current prices, but increase your target amount a little each year.

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

Quitting work earlier can be a great step toward greater freedom and a more enjoyable life - provided you prepare well. Careful financial planning is essential: map out your expenses, see where you can save or adjust now, and build buffers for unforeseen expenses. At Vive, we are happy to help you secure your financial future so you can enjoy your well-earned leisure time with peace of mind.