We all secretly dream of it: stopping work earlier. Long live freedom and fun! But, of course, you need a cushion for that. And you need to save well. How much savings do you need to retire ten years earlier in the Netherlands?
Well, quite a lot, it turns out, based on a handy calculation.
The first step is to calculate how much you'll 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 vacations and outings. A smart way to figure this out is by using your current spending as a baseline. It’s a good idea to get a better understanding of where your money goes. What are your current expenses? Then calculate what you spend in a year.
Example: Let’s say you currently spend €30,000 a year to live a reasonably comfortable life. This amount could be a good indication of what you'll need per year when you retire, although you may spend less because, for instance, you no longer have to commute. But, it’s better to overestimate.
Also, think about unpleasant things like inflation. I never paid too much attention in economics class, but, yeah, you can’t avoid it.
Inflation can have a big impact on the value of your savings. Prices rise on average by about 2% per year, which reduces your purchasing power. It’s important to factor in inflation when making your calculations, so your savings are still sufficient in the future.
Example: If you want to retire ten years earlier, inflation could mean you’ll need a bit more in later years than in the early years. To compensate for this, you should increase your annual required amount by 2% per year. From the age of 67, you'll start receiving your pension, which should be enough to live on. So, you need to think about an amount that covers inflation and your expenses for those years between 57 and 67.
So, how much do you actually need? The rule of thumb is that you need 25 times your annual expenses to comfortably retire earlier. This rule is based on the so-called 4% rule, which says you can withdraw 4% of your wealth each year without running out of savings. With annual expenses of €30,000, you'll need about €750,000 (25 x €30,000) to retire early without having to work.
Quite a bit of money, so. But maybe it’s not unattainable for you. And it's always nice to have something to aim for. Goals are there to be achieved, targets motivate you. So seize your opportunities and start saving. Who knows, you might stop working a few years earlier and see the whole world. That would be a nice prospect, wouldn't it?
