Who wouldn’t like to retire earlier and use that extra time to travel, pick up hobbies or spend more time with family and friends? In this blog, we explain happy to explain to you whether it is possible to retire early, how much money you will need for your retirement, and we give a few tips on how to retire early.
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Retire earlier, should you want to?
We at Elfin are fans of the FIRE movement: financial Independence & retire early. In other words, retire early. As far as we’re concerned, the fire movement is one that you can completely bend to your will and fill in as feels right for you. Maybe you’re very much on your money because you don’t so much want to retire early as you want to travel the world for a year in 5 years (mini-retirement, hello, we see you!). Or want to build your own house. Or starting your own business. Or get retrained.
Being Fire has the biggest focus for us around the FI: financial independence. Being financially independent, some money in your pockets, make life enjoyable. And whether you want to retire early or build a good pension for later, to work we must. Read on quickly, in this article we will give you information on how to build a good pension and how to possibly retire earlier!
How is your pension accrued?
Let’s start at the beginning. Before you can figure out how to retire early, it’s good to know how retirement works in the Netherlands. Your pension can be made up of three different pillars: the AOW benefit (pension from the government to which every Dutch citizen is entitled), the employee pension (if you work in salaried employment, chances are you accrue this) and supplementary pension, which is your own contribution. Are you self-employed? Then you have to work in that third pillar anyway! Most of the money you set aside for retirement will not be received until you actually reach the legal retirement age.
If you start building up extra retirement now, or if you are self-employed and MUST do so anyway, our government has come up with a nice reward: tax breaks. Hallelujah, they finally do make it a little more fun 😉 Here’s the thing:
Accruing pension tax benefits
Suppose you earn €36,000 gross per year. Then you pay 36.93% tax on your income. It turns out that you may add an additional €4000 to a special retirement account. That means you can deduct that €4000 from the €36,000. So you only pay income tax on €32,000. The benefit you gain from this can amount to several hundred euros! That was earned quickly.
Read all about how the pension system in the Netherlands is structured here
Is it possible to retire early in the Netherlands?
For a long time (from 1957 to 2012), it was established that everyone would receive state pension benefits from age 65. Then they started shifting with that age. And because the state pension age is linked to our life expectancy, it will now also continue to rise a little each year. Right now the retirement age is 67 years and something more. And if you are nowhere near sixty, the question is at what age you will receive your state pension.
The fact that you may soon receive AOW only from age 75 does not necessarily mean you have to work that long. In 2006, for example, the average retirement age in the Netherlands was 61. So one went on a nice early retirement four years before they received AOW. That has diminished in recent years, though. In 2018, the average age at which Dutch people retired was 65.
So, yes it is possible to retire early, but you have to make sure that you are financially independent of the state pension and employee pension for a few years. Do you want to retire early? Then you need to start saving heavily, investing, paying off your home, you name it. Multiple roads leading to Rome that can help you get through several years.
How much money do you need for retirement?
Most people need less money during retirement than when they were still working. You should be able to get by on about 70% of your last salary.
What you need later differs for everyone. Some have dreams of traveling and others want to live self-sufficiently in a tiny house. However, there are a few things you should probably keep some money in reserve for, such as healthcare expenses, supporting your (grand)children and maintaining your home or rent.
How can you stop working earlier?
If you want to retire early, your own contribution is an important pillar of your pension accrual. This is where you have a lot of influence. There are several ways to retire earlier, herewith summarized our tips:
- You can save or invest with a retirement product with tax benefits, delve into this and start doing so. Often, though, if you start saving for retirement in a special account, this money is fixed until your state retirement age. But, still smart to do so, because if you stop working earlier you miss several years of pension accrual;
- You can build wealth with your home. By having your own home on which you repay, you end up living, if you live there long enough and keep repaying, for free;
- You can start investing yourself to build wealth and create an additional passive income source that you can live on. Investing yourself may sound like a far cry from your bed show, but it can be easier than you think.
These 5 steps are not to be skipped
- Get insight into your finances
- Calculate how much you need to live on
- Build equity
- Create an additional source of income
- Pay off extra on your home
1 | Gain insight into your finances
What comes in, what goes out? If you want to become FIRE, the goal is to make the gap between your income and expenses as big as possible (in a positive sense, lol). Therefore, be aware of what you are spending money on (unnecessarily). Do you really need that cute 100 euro dress? See which expenses are really necessary, and which ones mainly thwart your goal of retiring earlier. In fact, the money you save can be invested, giving you more returns in the future.
2 | Calculate how much you need to live on
A tricky calculation, but an important one: how much money per month can you make ends meet as a retiree? If your goal is to stop working five years earlier, and you expect to live comfortably on about 2,500 euros a month, then it’s 12 x 5 x 2,500 = 150,000 euros. That means you want to have 150,000 euros in assets around age 62.
3 | Build power
Building wealth (and getting that 150k, that is) is not necessarily done by saving, but by investing! In fact, by investing, you can take advantage of the interest-on-interest effect. This is because the money you earn from your investment portfolio can be reinvested, eventually growing your wealth exponentially. Sounds complicated, but it’s not. You can also build wealth by investing in real estate.
4 | Create an additional source of income
Do you want to secure income for yourself in addition to your investments? Then create an additional source of income! A side hustle, that is. With a small business, such as a blog, a web shop or an Airbnb account, you can already secure yourself an extra amount per month. And you guessed it, you can invest that amount again, bringing your retirement closer and closer. Here we give you 11 side hustle ideas to start from home, easy does it.
5 | Pay off your owner-occupied home
An oddball, this tip, but no less valuable. When you are retired, you want to have as few fixed expenses as possible. And let your mortgage be one of them. Paying off extra on your mortgage is reflected in your costs in several ways. So your monthly amount goes down, and at some point the bank treats you to a lower interest rate. And are interest rates very low in the current period? Then you can also get your mortgage refinanced.
Know that investing takes risk and that you may lose some or all of your investment.
