Planning for early retirement can be a complex and daunting task, but with the right strategy, it's definitely achievable. Here's a comprehensive guide to help you understand how much you need to save and what factors to consider for a successful early retirement.
The Retirement Savings Conundrum
Many New Zealanders are concerned about the prospect of working until later in life due to the country's aging population and the pressure it puts on finances. However, for those who aspire to retire early, the question arises: How much do you really need to save?
Calculating Your Retirement Needs
One approach to early retirement is to accumulate a substantial amount of money, allowing you to draw on it annually to replace your income. This strategy is similar to how most people plan to utilize their KiwiSaver funds.
However, early retirees may require a larger sum since they won't have the support of NZ Super until they reach 65. Rupert Carlyon, founder of Koura, suggests starting by analyzing your current expenses and identifying which costs might decrease or disappear if you stop working. Then, consider any new expenses you might incur during retirement.
Once you have a weekly budget in mind, you can work backward to determine the lump sum required to generate sufficient income to cover those expenses. Carlyon recommends drawing down 4% of your investment portfolio's value annually, which could be around 20 times your desired annual income.
For instance, if you aim for an annual income of $100,000, you'd need approximately $2 million in savings. However, this calculation doesn't account for the availability of NZ Super from age 65, which could provide a portion of your desired income.
Ana-Marie Lockyer, CEO of Pie Funds, provides more specific figures based on a 'no-frills lifestyle' as outlined by Massey University's Retirement Expenditure Guidelines. For retiring at 60, the estimated savings range from $350,000 to $500,000, while retiring at 55 would require $550,000 to $700,000.
Lifestyle and Location Considerations
Lockyer emphasizes the impact of lifestyle expectations and location on retirement savings. A comfortable retirement may require significantly more than a basic one. Additionally, living in major cities like Auckland, Wellington, or Christchurch can be more expensive than provincial areas.
Alternative Income Sources
Some individuals may choose to live off the income generated by their investments, such as rental properties. Steve Goodey, an investment coach, suggests that people can retire when they have a substantial portfolio of properties, ideally four to five, with low or no debt.
Preserving Your Savings
Claire Matthews, author of the Massey University guidelines, highlights the importance of considering your retirement goals and whether you plan to work during retirement. Additionally, deciding how you want to manage your savings is crucial. Owning a debt-free home or adopting a minimalist lifestyle, like living in a campervan, can significantly impact your retirement expenses.
Relying on Government Support
While it's possible to retire and live off government support, it's generally not advisable or enjoyable. Basic JobSeeker benefits for a single person amount to only $361.32 per week after tax, and there are asset limits that prevent access to additional supports like the accommodation supplement.
The Role of Financial Advisers
Consulting a financial adviser is crucial for accurately calculating your retirement needs and managing your savings effectively. Ed McKnight, an economist at Opes Partners, advises people to run the numbers and understand how their spending will change once NZ Super kicks in, providing the confidence needed to make the leap into early retirement.
The Bottom Line
In summary, achieving early retirement requires careful planning and a realistic assessment of your financial needs. By considering your expenses, lifestyle preferences, and potential income sources, you can determine the amount you need to save and develop a strategy to make your early retirement dreams a reality. Remember, it's never too early to start planning for this significant life transition.
