How much does early retirement cost annually? Find out the actual cost

Do you dream of retiring from work earlier? More time for your hobbies, family, or perhaps traveling the world? It sounds great. But before you take that big step, it's important to know how much early retirement actually costs and how to secure your financial future. In this blog, we dive into the costs of retiring early and give you tools to calculate what you need. At Vive, we put you and your goals first - let's start by understanding the numbers.

The shifted retirement age

First of all, the official state pension age has gone up in recent years and is likely to continue to rise. Currently, the AOW age is 67 years (and a few months), and it may increase further in the future, as it moves with life expectancy. Retiring earlier therefore means that you will have to bridge an increasingly longer period of time before you receive AOW. You'll have to fund yourself for those intervening years. At Vive, we help you bridge that period smoothly, but it takes good planning.

How much money do you need?

It is essential to have a good understanding of your monthly expenses and how many years before state pension age you want to stop working. Here are the key factors to consider:

• Monthly expenses: What do you currently spend each month, and which of those expenses will continue during retirement? Consider housing, groceries, insurance, leisure. Remember to include inflation over the years - the cost of living tends to rise.
• Mortgage and debts: Will your mortgage and other debts be paid off by then? If not, you should also include those monthly expenses in your planning for the period you stop earlier.
• Lifestyle: How do you want to spend your extra free time? Plans such as traveling, going on vacation more often or expensive hobbies may involve additional costs. Budget for these desired activities.
• Wealth tax: If you will soon have to tarnish on saved assets, remember that above certain thresholds, capital gains tax (box 3 tax) applies. That too is an annual "cost" of having assets.
• Surcharges and benefits: What income-related supplements or benefits (such as healthcare benefits) do you lose when you stop working? And can you still get benefits or allowances for anything? For example, some people get pre-retirement benefits or spousal support - these count as income.

By mapping out all these points, you can estimate how much income you will need per year if you stop working early.

Sample calculations

To give you an idea of the cost of early retirement, we'll look at two scenarios. We assume an annual required amount of €24,000 (or €2,000 per month in expenses) and a (simplified) constant return on assets of 4% per year on your savings/investments. We also imagine someone who begins targeted saving for early retirement at age 45.

Scenario 1: Quit four years earlier
You want to retire at 63 instead of 67. You then need to bridge 4 extra years. What do you need?

• Number of bridging years: 4 years
• Annual expenses during these years: €24,000
• Total amount needed: €24,000 * 4 = €96,000 (in addition to what you get in regular pension/AOW later).

Suppose you want this amount by age 63, and you start saving/investing for it at age 45. With an assumed rate of return of ~4% per year, you would need to set aside about €268 per month from age 45 to reach €96,000 by age 63. (The earlier you start, the lower this monthly amount can be due to return-on-return effect.)

Scenario 2: Stop six years earlier
You want to stop working at 61, i.e. 6 years earlier than the state pension age of 67. The calculation:

• Number of bridging years: 6 years
• Annual expenses during these years: €24,000
• Total amount needed: €24,000 * 6 = €144,000.

If you start saving/investing for this purpose at age 45, at 4% growth you will need about €435 per month from age 45 to have accumulated about €144,000 around age 61.

These examples are simplified! In practice, more factors come into play (such as taxes, precise returns, and inflation). But they give an idea: the earlier you stop, the more capital you need to have or the more you need to save regularly.

Use your equity

Fortunately, you don't always have to save everything from scratch. Look at your existing equity: savings, investments, any excess value in a house you buy, or other assets. These can play an important role in financing your early retirement.

Ask yourself: what part of my assets can I use to pay for those bridging years? For example, sometimes you have an investment account that you actually have for "later" - perhaps you can actually use it to retire a few years early. Or maybe you can move down in size and use the surplus value as a supplement. Get a good overview of your assets and think strategically about how to use them for your retirement plan.

Having your pension paid out earlier

Some pension funds and insurers offer the possibility of having your pension pot paid out earlier (for example, in a defined contribution plan or individual pension policies). This can increase your monthly income slightly in those first years without work, but there are snags:

• Often, if you have an earlier payout, the benefit amount per month becomes lower because it must be spread over more years.
• With an individual pension product such as an annuity (e.g. via BrightPensioen or bank savings) legal rules apply: if you start paying out early, the payout period must last at least 20 years from the start date if you start before AOW pension age. So you can't empty your entire pot in 5 years without more; the law wants to prevent you going broke before your AOW starts.

In short, check the rules for your pension product. Earlier payouts can help a bit, but often you will still need your own savings.

Taking leave

Did you know that you can also use (unpaid) leave as a stepping stone to early retirement? Since 2021, there is a regulation that you can save tax-free leave up to a maximum of 100 weeks (over 2 years!). This is intended to stop earlier towards retirement, for example: you save up leave days (or purchase them with salary, if necessary), and use them at the end of your career. In this way, you get paid with your own accumulated leave, so to speak, while you are no longer working.

Important to know: this can only be done with your current employer, and if you change jobs, you can't 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 taking leave. This saves quite a bit in what you have to fund yourself! Discuss this with your employer if early retirement is your desire; perhaps you can make arrangements to not take some of your vacation time each year but save it for later.

Early retirement scheme (RVU).

Under certain conditions, employers have the option to use the Early Retirement Scheme (RVU) to allow employees to retire earlier. This temporary measure (runs until the end of 2025) means that an employer can give an employee a benefit to bridge the gap up to 3 years before the state pension age. The benefit is capped at about €1,847 gross per month (which is equal to the net state pension benefit), and the employer pays a special tax on it (it is temporarily exempt up to this amount, hence the max).

In practice, this means: if your employer cooperates on this, you could stop working, for example, 3 years before AOW and receive €1,847 gross per month until your AOW starts. This is especially relevant if you work in a sector where this kind of arrangement is agreed upon in the collective bargaining agreement (e.g., education, healthcare, government). It is not a right, but something you have to arrange with your employer.

Retiring earlier can absolutely become a reality with the right financial planning. Calculate well in advance how much you will need annually and start saving or investing in time to raise this amount. Make use of all the tools available to you - from your own assets to leave arrangements and any employer contributions - to help keep costs down.