Are you dreaming of an early retirement, but unsure if it's financially feasible? Well, buckle up, because the path to early retirement might be more challenging than you think, especially for New Zealanders.
The financial landscape in New Zealand is shifting, with warnings that the retirement age may rise due to the strain an aging population puts on the country's finances. But what if you're determined to retire early? It's a bold move, and one that requires careful planning.
The first step is to calculate how much money you'll need. One strategy is to accumulate a substantial sum that can be drawn upon annually to replace your income. This is similar to the approach many take with KiwiSaver, but retiring early means you won't have the NZ Super safety net until you turn 65, so you'll likely need a larger amount.
Here's the twist: you need to consider your current expenses and predict future ones. Rupert Carlyon, founder of Koura, suggests identifying expenses that would cease if you stopped working, and then factoring in new expenses you might incur. Once you've crunched these numbers, you can determine the lump sum needed to generate the required income.
And here's where it gets interesting: how much is enough? According to Carlyon, a common rule of thumb is to multiply your desired annual income by 20. For instance, if you want $100,000 per year, you'd aim for $2 million in savings. But this doesn't factor in the NZ Super, which would contribute to your income from age 65 onwards.
Ana-Marie Lockyer from Pie Funds offers a different perspective. She suggests that a 'no-frills' retirement at age 60 would require $350,000 to $500,000, while retiring at 55 would demand $550,000 to $700,000. These figures assume mortgage-free home ownership, which significantly reduces costs. However, they don't account for varying lifestyle expectations and the higher cost of living in cities like Auckland, Wellington, and Christchurch.
Another strategy is to generate income from investments, such as rental properties. Investment coach Steve Goodey suggests that owning a portfolio of properties can enable early retirement. He recommends having at least four or five properties with low or no debt, and potentially selling a couple to reduce debt when you're ready to retire.
But here's the catch: your retirement goals and plans for work during retirement also influence your savings target. Claire Matthews, author of the Massey University retirement guidelines, emphasizes the importance of deciding whether you want to deplete your savings or preserve a portion. For instance, owning a debt-free home can be advantageous, but early retirement might also mean embracing a simpler lifestyle, such as living in a campervan and traveling.
And what about other sources of income? Opes Partners economist Ed McKnight points out that some people might rely on a partner's income or rental properties. However, most New Zealanders will depend on liquid assets like cash, shares, or managed funds, which can be accessed before the KiwiSaver funds become available at 65. These assets often come from selling investment properties or businesses.
McKnight shares an intriguing example: one of their clients draws $60,000 annually from a managed fund, maintaining a steady balance due to strong returns. He emphasizes the importance of consulting a financial adviser to ensure your savings can sustain your retirement plans.
But here's the part most people miss: even if you own your home, there are unavoidable costs like rates and insurance, which can add up to thousands of dollars annually. This means your expenses might not drop as much as you'd hope, especially if you plan to stay active during retirement.
So, can you rely on government support? Technically, yes, but it's not a desirable option. The basic JobSeeker benefit for a single person is just $361.32 per week after tax, and there are expectations that beneficiaries actively seek work.
The question remains: is early retirement a realistic goal for the average New Zealander, or is it a financial pipe dream?
