Early retirement is a dream of many as it paints a lovely picture of a relaxed, trouble-free life. You have more opportunities to travel, spend time with family, or pursue hobbies. In fact, there is a whole campaign advocating for this life plan. It is called FIRE, which means “Financial Independence, Retire Early.”
This guide will provide you with the pros and cons of retiring early. You are going to learn how to successfully retire on your terms. Moreover, you will find out how to save and invest, and how to make the best of your retirement.
What Is Early Retirement?
Voluntary or early retirement (ER) is the complete exit from a long-term organizational employment history or career path. It is a decision made by individuals in mid or late career before they reach mandatory retirement age. This is done to reduce attachment to work and finish the process of psychological separation from professional life.
In certain contexts, the terms “retirement” and “financial security” can be interchangeable. You can retire and enjoy financial security only if you have enough funds in your retirement savings.
The FIRE (Financial Independence, Retire Early) movement has people retiring as early as 35 or 40. As this may be somewhat extreme for many, your next best choice would be to retire a bit later, for example, at 55.
What Is the History of Retirement?
Retirement officially started in the 1930s. Before that, people were generally supposed to work for their entire lives. If they could no longer work, their families were to care for them.
In New Zealand, people dream they can retire anytime they choose to. Unfortunately, statistics suggest a lot of Kiwis have not saved enough to stop their employment contract at 65.
However, you do not have to be part of this group. If your goal is to ensure a pleasant retirement, you should probably make a few lifestyle improvements. The main idea is to set aside a reasonable share of your income and invest it so you can enjoy financial independence upon retirement. Some suggest you save at least 10% of your salary, but in fact, the figure is more complicated.
What Are the Benefits of Early Retirement?
Early retirement may sound appealing if you have been dismissed from a job or simply feel like you have had enough and need a change. However, it’s crucial to weigh the pros and cons before you make a decision.
Take time to analyse carefully how you are going to manage financially and how your lifestyle might be affected. Evaluate the advantages of early retirement below.
1. It will have a positive effect on your health
More sleep, fresh air, and sunlight will do anyone some good. Plus, there will be no more gulping meals at your desk; instead, you can enjoy a long lunch on a terrace.
2. You’ll have free time for things you love
The most compelling argument in favour of early retirement is that it gives you more opportunities to travel, spend time with friends and family, relax on the sofa with a good read, go fishing, or visit the theatre. It is a strong motivator that persuades young people to save enough money for their retirement.
3. You will be motivated to increase your income
Once you start planning for early retirement, you’ll be more driven to make smart investments and diversify your portfolio. You could also work extra hours to raise additional income. It could mean taking part-time paid work aside from your full-time employment contract. Working harder may cause additional stress, but it will pay off later.
4. You can find opportunities for smaller expenditures
Most seniors are not spending as much as they used to because they have more opportunities to explore fair deals. It’s not hard to find ways to save your earnings if you learn how to look for discounts and negotiate prices.
5. You can invest in family and personal relationships
If you are on your journey to early retirement, odds are your hard work is costing you time with your family and loved ones. By retiring in your early fifties, you can compensate for all the long hours at the office. You can be better parents to your children throughout their teenage years and early adulthood. You will also have the chance to once more bond with your spouse, who had been managing the home while you were spending all your time at work.
Investing quality time in loved ones has benefits for the whole family.
What Are the Disadvantages of Early Retirement?
1. You may get bored and miss your job
Most seniors have a rough time moving from the demands of full-time jobs to the unstructured retirement lifestyle. They may miss their former coworkers or even their boss and wish to come back. Unfortunately, it is not easy to return from retirement, whether you left willingly or otherwise.
2. You may live longer than you expect
If you’re healthy and your family has a history of long-living members, you may be looking at 30-plus years of retirement even if you’re not leaving the workforce early. Early retirement could drive that to 40 or even 50 years, which means you’re going to need significant funds to cover many years of living expenses. It may seem like you have plenty of money; but is it enough for living without another income for 50 years?
3. Lost income
Another disadvantage of early retirement is a loss of income. Contributions to the retirement funds also end when you hit retirement. That can lead to financial losses if the retired person has not saved enough money before retiring.
4. Underutilisation of obtained skills
It is commonly known that human capital is an essential element for all commercial enterprises. Early retirement negates the return on investments you have made in professional education and training.
For example, to obtain an MBA from a top institution, you may need to pay the equivalent of 3-4 years’ your gross annual income. Premature retirement prevents the possibility of receiving a full return on your investment. The lost opportunity costs are unquantifiable regarding career chances and obtaining recognition.
5. Reduced activities may lead to health issues
It would be challenging to fill your hours without the job to support you with assigned tasks. While you may have lots of expectations, not everyone thrives without organisation and the social interactions workplaces offer.
Boredom can lead to depression or other health problems. It could also prompt you to overspend while finding ways to have fun. Thereby it increases the risk of running out of savings.
6. You can’t receive NZ Super before age 65
No matter how early you retire, NZ Superannuation doesn’t come in before the age of 65. It means that if you seek early retirement, you will have to fund your spendings from other resources.
7. It’s hard to get your KiwiSaver funds paid out before age 65
KiwiSaver hardship laws are rather complicated. You can withdraw some of your KiwiSaver funds only if you can give proof that you are suffering significant financial hardship.
Significant financial hardship includes not being able to meet minimum living expenses or mortgage repayments on your house. Unless you fulfil these conditions, you won’t be eligible to access the KiwiSaver funds until age 65.
Step-by-Step Guide to Successfully Retiring Early
Step 1: Start Planning for Early Retirement Now
If you want to retire early, you need to get organized. Formulate a good plan, take control of your expenses, and make sure you have savings outside retirement accounts.
Retirement preparation can be daunting. Yet no matter how old or what stage of life you are in, there are many different choices. One of the choices is called phased retirement — a tool that lets employees work part-time while preparing for their retirement.
Your final retirement decision will vary depending on your age,stage of life, goals, and expectations.
Here are some general recommendations that can help you choose the best retirement process.
a. Understand Your Time Horizon
Your age and projected retirement age provide the fundamental basis for a successful retirement plan. The longer the period between today and retirement, the higher the risk level your investment portfolio can handle.
b. Get Started on a 10-Year Plan
Ten years is sufficient time to attain a stable economic condition. With adequate planning, you might be able to build a small fortune in your savings account, especially if you use the services of trusted finance websites.
c. Start Early
The first thing to do is to begin as soon as possible. Starting early works for you for several reasons. It allows you the freedom to take in risks by engaging in high-risk reward investments, which promote wealth accumulation. Use retirement planning tools like phased retirement and other applications. These are available online or on your smartphone to keep you on track to retire.
Step 2: Work Out How Much You’ll Need
Based on the lifestyle you prefer, figure out how much you’ll need to set aside in your savings account for your retirement. Plan ahead for how much you will need and from where your money will come.
Here’s a simple rule of thumb you can use to decide how much money you’ll need when you’re retired. Multiply your current yearly expenses by 25%. That’s the amount that should be available in your fund so that you can comfortably take out 4% every year for your living expenditures.
a. Use the Retirement Calculator Tool
There are retirement calculator tools. These tools help you figure out how much money to have in your savings account each month for a comfortable retirement. Additionally, they will measure your monthly retirement income.
If you’ve wondering how much you need to invest for retirement, or how many years you need to work to retire peacefully, this calculator will help. Use this method for a quick calculation. The further you are from your retirement, the more approximate the results will be and the more choices you will have to fix any issues.
b. Create a Budget for Your Retirement
A monthly budget takes the stress out of the retirement finances. Make the time to create a retirement budget to ensure you are on the way to meeting your financial ambitions and to calm your mind. To create such a budget, you should compare your income to your expenses.
For your overall income, collect your financial records, list your monthly fixed expenses and variable payments, factor in non-recurring costs, and expected retirement income. Regularly review your budget to ensure you’re on track.
Step 3: Develop an Early Retirement Strategy.
One of those situations we all wish won’t come true is running out of retirement savings. Outliving your resources brings unwanted uncertainty at a time when you are already financially insecure. Moreover, the situation is difficult to recover from without a daily revenue source and with minimal job prospects.
There’s no reason to pick between a personal fund and KiwiSaver — they fit together well. When you retire early, a fund will keep you going until you can access your KiwiSaver savings and receive NZ Super at 65. Another option is to go on phased retirement from 55 or 60. It is a part-time basis that allows you to draw on your managed fund whenever necessary.
Here are more tips to help you develop a strategy to ensure your wealth lasts a lifetime or longer.
a. Release Equity
The most common type of equity release is to sell your house and buy a cheaper or a smaller one, or one in a more affordable area. This way, you can free up some money while still enjoying the advantages of owning a home. There are other ways to release value from your property: renting out a room, taking in a boarder, or subdividing your house.
b. Decide to Live on a Lot Less Than Before
If you use this approach, you can save money at a quick rate. The less cash flow you need to survive on, the more savings you can make. There are different factors here as well, but if you are very good at cutting your living costs, you can retire earlier than 55.
c. Build a Passive Income
One secret to accumulating wealth is learning how to invest your money. Investing allows you to create a passive income additional to your primary one. Stocks, shares, and real estate are conventional channels of increasing wealth.
However, you can also receive passive income through business activity like silent partnerships or royalties from intellectual property, such as eBooks or online learning. Think of passive income as money that will help support your lifestyle after you stop working actively.
Step 4: Start Saving for Your Early Retirement Today
Ask anyone who’s retired, and they will say you should start saving for retirement as soon as you can! Even if it seems far in the future, it is important to start thinking about retirement early. How much we need to save will depend on our circumstances, but the sooner we start the process, the better the position we’ll be in when we stop working.
NZ Super (the government pension) can provide the essentials, but it is your savings account that will help make your retirement pleasant. You can save for retirement with the help of different tax-advantaged and taxable accounts.
Some are offered by your employer, while others are available through a brokerage firm or bank.
How You Can Save for Early Retirement
1. Create a Plan and Set a Goal
Having a plan and a set of goals to work towards is the quickest, most straightforward way to place yourself on the path to a future of financial freedom. That is, you need to know how much you’re going to have to save, and how you’re going to achieve it.
2. Make Automatic Retirement Contributions Each Month
When your retirement savings are withdrawn from your payslip automatically, you’ll have the opportunity to raise your funds without having to think about it.
3. Examine Your Budget
You can negotiate a lower rate on your car insurance or save by bringing your lunch to work instead of buying it. You can also use a cash flow calculator. It can help you determine where your personal finances are going and find ways to reduce spending, so you have more to save or invest.
4. Focus on Your Physical Health
Due to high medical costs, concentrating on improving your health is important in retirement. Healthcare expenses are often neglected by retirees.
Step 5: Start Investing for Your Early Retirement
Meet With a Financial Advisor
You do not have to have a lot of money to invest it. Consult with a financial advisor about financing opportunities or visit finance websites so that you can provide additional income for your family.
Invest in Your Financial Intelligence
Your capital growth largely depends on the level of your financial knowledge. In finance, you must always learn before you can earn. It is possible to gain a return on investment in any market condition if you know your way around. All your investments in financial intelligence will guarantee dividends for a lifetime.
Invest in Real Estate
Real estate is one of the most profitable investment platforms that can create you or destroy you. If the investment is done correctly, you can start to get returns right away. However, a lot will depend on your initial capital.
Diversify Your Investments to Survive Market Declines
A stock market slump at a bad time can put your investment portfolio, which is your primary source of income in retirement, at risk regardless of the age at which you quit the conventional 9-5 work scheme. It’s even worse if the downturn occurs in the early days of your retirement. That’s why a smart approach is to establish other income streams so you’re not pressured to sell off your investment.
Consider Fixed Investment Vehicles
Fixed investment vehicles — for example, annuities — ensure a consistent stream of additional income. They provide additional financial help to individuals who retire early.
Step 6: Clear Your Outstanding Debt
Another method to reduce your spending after you retire is to clear all your debt. Debts prevent you from saving and stop you from living a full life in retirement. You should clear debts with the highest interests first.
Begin by placing any extra cash towards your outstanding debts. Do not take on any additional credit card debt. Other frequent debts in retirement are mortgages, car payments, and parent loans for children’s education. You can try to make larger payments on your mortgage to clear it more quickly or sell your vehicle and change it for something cheaper to save money and acquire extra investment property.
Step 7: Put Your Early Retirement Plan to a Test
Develop a retirement plan with the help of a financial planner. This individual can give guidance on even the most complicated question regarding your financial situation and retirement goals. If you wish to feel comfortable about your decision to retire at 55, you should include a Monte Carlo in your plan to account for market volatility. This way, you will be able to stress-test your retirement plan and see if it will work.
Step 8: Create a Backup Plan
Your plan may seem perfectly efficient to you, but things could still go wrong in today’s unpredictable world. You may see that you hate the unorganised days of retirement and wish to return to your job. The economy may go down and affect your savings and you would have to cut your spending. When your livelihood is in question, it is important to consider all possible scenarios.
When Can You Retire Early?
Early retirement is possible for employees who have saved sufficient funds on top of retirement accounts. It is also an option for individuals who have established additional income sources. Early retirement could also be an offer made by employers who wish to cut costs; they encourage highly paid specialists to end their employment contract by retiring early. Usually, such cases of early retirement are accompanied by financial benefits.
Can Kiwis Retire Early?
To retire at 55, you’ll have to create a set of plans. It is difficult to do one without performing the others as well. Yet if you can keep it all going in the same direction, you can quit working at 55 or earlier. Note that the process of planning for early retirement is long-term.
Important Retirement Statistics You Should Know
1. The Financial Education Center at Massey University conducted research on how much people spend during retirement. It is much more than NZ Super provides. According to the researchers, a single person living in the city with a “choice” lifestyle requires $754 a week, and a couple needs $1.092.
2. According to international research, you should have at least 70% of your pre-tax income when you retire if you want to have a comfortable retirement.
3. An average retired couple has $60,000 in savings, according to New Zealand statistics.
4. The 2013 census shows that 75% of people over 65 own the residence in which they live. The average net worth of retired people over 65 is $288,000 per capita. The figure has probably increased significantly since then due to the rise of property prices.
5. Kiwis over 65 years of age will double from 650,000 to 1,286,000 by 2039, which will incrementally cost the nation $10 billion per year.
6. The NZ Super Fund has about $34 billion, which is not sufficient. In 2009, the Government stopped contributing to it. It needs to be increased to $150 billion to be able to cover all the costs.
7. The retirement age will progressively increase from 65 to 67, starting in 20 years. This decision makes sense due to the increase in life expectancy.
KEY TAKEAWAYS
1. Decisions on retirement time are challenging, and it isn’t even an issue of money. Your family responsibilities, health, and personal preferences are all included into this matter.
2. You can retire early through the FIRE programme.
3. Retirement preparation includes the identification of time horizons, estimation of spending, forecasting of necessary after-tax returns, evaluation of risk tolerance, and estate planning.
4. If you plan to retire early, you should aim at investing or saving between 25 – 30 times your yearly expenses. This number may be smaller or larger depending on the lifestyle you choose.
5. Cut down expenses and increase your income; buy investment properties and maximize your pension accounts to reach your target number.
6. Try to pay off all high-interest loans before retirement. It may require early payment of your mortgage. Don’t hesitate to set up a contingency plan.
Final Thoughts
The path to early retirement is not an easy one. It takes time and discipline to make, set aside and invest all this money. For most people, the safest way to retire early is to save way ahead of their ideal retirement date. You’ll have to save a lot and find ways to live on less money. You are not too young to start planning. Do your research and seek the assistance of a financial advisor to help you enjoy retirement.
FAQS
1. How much can you spend in retirement?
You have saved diligently for your retirement. Now you can turn these funds into a paycheck. But how much can you allow yourself to spend? When you have too many expenses, you will face deficits later. But if you spend too little, you might not enjoy the retirement you have worked so hard to reach. A widely used rule of thumb for retirement expenditures is spending 4% of your savings yearly.
2. What is the 4% rule?
It’s simple: you add up all your investments and withdraw 4% of that total sum in the first year of retirement. For coming years, you change the amount you withdraw in dollars to compensate for inflation.
3. Do early retirees live longer?
Studies indicate that when you retire early, you can live longer. Early retirement may extend your life. In a 2017 report, economists at the University of Amsterdam confirmed that retirement provided people with more freedom and time to invest in their health.
4. What is a typical early retirement package?
Most deals for early retirement include a severance payment. It depends on your annual salary and years of work with the company. For example, for each year of service, your employer may offer you the one- or two weeks’ salary (or even one month’s salary).
5. Is retiring early a good idea?
By the time some employees hit their 50s and early 60s, they start feeling worn out. Retirement before the standard age of 65 will feel revitalising. Men usually retire at 64 years, while the average retirement age for women is 62.
6. Is early retirement a good idea?
If you’re healthy and have people in your family who live long lives, you could look at 30-plus years of retirement even if you don’t stop working early. Making an early retirement decision could drive this to 40 or even 50 years. Plan a long retirement from the beginning to reduce the risk of going bankrupt prematurely.
7. What are the rules for early retirement?
The main rule is that you should have 25 times your annual spending invested to fund 30 years of retirement. For example, you’ll need $1.5 million in savings and investments if you plan to spend $60,000 a year on retirement. Consider the number your target for early retirement savings.
8. How much money should you have when you retire?
Most analysts suggest that your regular retirement income should amount to 80% of your last pre-retirement pay. Which means, if you make $100,000, you need at least $80,000 per year to have a stable lifestyle after you terminate your employment contract.
