You need this much savings to retire ten years earlier
We all secretly dream of it: stopping work earlier. Long live freedom and fun. But yes: you need to have a buffer. And save well, too. How much savings do you need to retire ten years earlier in the Netherlands?
Well, quite a lot, as it turns out from a handy calculation.
The first step is to calculate how much you need annually to live comfortably. This includes all fixed costs, such as rent or mortgage, insurance, groceries, transportation costs, and all the fun things you do, like your vacations and outings. A handy way to determine this is to take your current spending pattern as a basis. Smart, then, to first have a bit more insight into your expenses. Where is your money going now? And then calculate what you spend in a year.
Example: Suppose you currently spend €30,000 per year to lead a reasonably comfortable life. This amount could be a good indication of what you need per year when you retire, although you might spend less because, for example, you no longer have commuting costs. But well, then you have some left over. Prefer to calculate generously.
Do keep in mind unpleasant things like inflation. I never paid that much attention in economics, but yes. You can't escape it.
Inflation can have a significant impact on the value of your savings. Prices rise on average by about 2% each year, which decreases your purchasing power. It is important to take inflation into account in your calculations so that your savings will be sufficient in the future.
Example: If you want to retire ten years earlier, inflation may mean that you need a bit more in the later years than in the earlier years. To compensate for this, you should increase your annual required amount by 2% per year. From the age of 67, you will also receive your pension, which you should be able to live on comfortably. So you need to think of an amount that is enough for inflation and for those years from your 57th to your 67th.
Okay, so how much do you actually need? The rule of thumb is that you should have 25 times your annual expenses to retire comfortably earlier. This rule of thumb is based on the so-called 4% rule, which indicates that you can withdraw 4% of your assets each year without running out of your savings. With annual expenses of €30,000, you need about €750,000 (25 x €30,000) to retire early without having to work.
That's quite a bit of money, then. But yes, maybe not unachievable for you. And always nice to have something to strive for. Goals are there to be achieved, targets motivate you. So seize your opportunities and start saving. Who knows, you might stop working just a few years earlier and see the whole world. That would be a nice prospect, wouldn't it?
