Many people dream of handing their notice to their boss and taking off on a global trip, in pre-Covid times, or just not having to wake up to an alarm clock every morning.
But what would it take to retire at 50 or just be financially independent enough to stop working the day job when you want to?
Joseph Darby, chief executive of Milestone Direct and a financial adviser, says the key is building up enough assets and investments to live off for the rest of your life.
He says a starting point is to master the basics of sticking to a budget, avoiding bad debt and minimising expenses.
“The earlier you retire the larger the chunk of investments you need.”
What you can do in your 20s and 30s
The two big ways to get this are to generate a lot of income to invest while keeping expenses low as well.
“It doesn’t matter where you live in the world the big four expenses are taxes, housing, food and transport. If you can minimise those in some way it’s a good start.”
That could mean living closer to work, ditching the car for public transport and shopping at the likes of Pak n Save.
“Avoid the avocado on toast and coffees, nightclubs and lavish spending.”
When it comes to generating income Darby suggests those who have ambitious goals also think outside the box for work too.
“There are still fly in fly out positions in the mines at an entry level in Australia for A$90k (NZ$97k) a year. Just looking at roles like that. Everything is a trade off. If you want to retire early and that is your big thing then you need to start sacrificing now.”
In general, Darby says professional careers pay more so building up qualifications and experience at a young age or becoming a business owner/entrepreneur could be the key to retiring younger.
“There are a lot of people making money online selling things or through TikTok and Instagram generating pretty good sums.”
Once you get the basics down pat the gap between your expenses and income can be used for investment.
Darby says property is one way to go.
“The reality is the very low interest rates we are seeing – most commentators think they are going to continue for at least a few years and nearly nobody thinks the interest rates on a mortgage are going to go up to their historical averages – something like 7pc -because that would just break the country – the whole economy would fold. That is one of the factors that does underpin property still being a great investment.”
Sharon Cullwick, chief executive of the New Zealand Property Investors Federation, says it is possible to use property investment to retire younger.
“A prime example is you look on the New Zealand Rich List you will see a lot of people there made it through real estate.”
She personally knows of a handful of people who have been able to quit their day job through property investment.
“It is really hard to retire just off your rent. I only know about three or four that can actually retire. It is hard to get the yield and the ones that do often have cheap living arrangements themselves.”
In the past investors were able to get a rental yield of 10 or 12 per cent but now a good investment would be more like 5 or 6 per cent, she says.
It’s tougher to get into property at a young age as often people come out of university with student loan debt and property prices are much higher.
But Cullwick suggests buying outside the main centres to get a start and paying down the debt as quickly as possible to allow further investment.
She was living in Australia when she bought her first property in Hawke’s Bay at 28 years old.
“At least then you are in the market, once in the market you have still got the capital growth that happens over time. That can help you to purchase a second property so often you don’t need to save as much for your deposit on your second property because you have got your equity in your first property.”
But she says yield is the key rather than capital gains.
“You need to be able to cover your costs the whole time.” Those include rates, insurance, maintenance and a property manager if you go down that route.
“If you buy something and it is costing you each week and then lose your job then there goes the property.”
Darby says property has downsides like centralising your wealth in one part of the world – little old New Zealand.
It is also fairly illiquid which means it can be hard to cash up if something goes wrong. “You are vulnerable to shocks in the New Zealand economy and natural disasters.”
That’s why Darby advocates for a mix of property and share investments.
“There are a bunch of tools now that make it a lot more accessible than before. All these apps, websites – you can invest in low cost ETFs [exchange traded funds] or actively managed funds. Even 10 years ago we didn’t have as many options available.”
Get rid of debt
Christopher Walsh, Senior Researcher at MoneyHub, says one of the keys to an early retirement is getting rid of debt.
“You can’t leave work with debt because the debt needs to be served – that is a big thing people don’t realise. If you retire with a mortgage then you need to pay for that – you are going to have to find money to service that.”
He says a lot of people can’t retire even at 65 now because they have debt and some who can’t keep working have little choice but to take out a reverse mortgage.
“So they have to do the opposite of retire early and take a reverse mortgage where you are now working for the bank through your house – that is pretty much what I see it as.”
Walsh says being debt free comes down to not spending more than what you earn and building a lifestyle that is cost effective.
“You have to be more realistic.”
While it takes debt to buy a house Walsh questions whether people need to keep upsizing their property.
“There are two schools of thought – one is buy the most expensive house that you can and hope that it appreciates. But I see that as putting all your eggs into a house.
“My view is buy something affordable.” Then pay it off as soon as you can.
“A lot of people just set and forget. But you can do it smarter than that.”He says shopping around for the best rate every time the mortgage needs re-fixing can help.
“Even though interest rates are low it still adds up.”
Walsh says those who are financially independent often own property, have shares in private business and invest in managed funds or shares.
It’s also about doing the research to figure out what the best options are for investments like KiwiSaver.
Walsh says the most popular KiwiSaver fund is a conservative default fund but that won’t be the right fund for most of those investors.
“People want to make a lot of money but are not prepared to understand how to do it.”
And yet there is a lot of information freely available to people who want to know more.
“Make some sacrifices, make long term decisions and don’t short term it – people will crystallise losses by moving in and out of stuff.Just look for the best. You don’t have to be disappointed if you just do the research.”
Walsh says it is probably not that realistic for the average employee to retire at 50 but for a business owner who sells up it would be doable.
“In terms of business you can cash out there – people like cash-generating businesses and the market is quite strong. So I think you can if you are a business owner or investor in a few businesses you could retire early.
“I think it is harder if you are used to the lifestyle of an employee because with that comes a lot of routine, friendships, a lot of support and then you go off the grid – I think that is unrealistic – I think the euphoric high is followed by an oh know what do I do now?”
He says not many people want to admit to early retirement because they don’t want people to think they are not contributing or doing anything.
“I think some people just won’t retire and if they do retire they will have things on the side. I think early retirement is more of a concept of freedom and opportunity than an actual lifestyle.”
Tom Hartmann, personal finance lead at the Commission for Financial Capability, says being able to retire young comes down to your savings rate.
“It is like a spectrum if you are not saving at all if you have no savings rate you will never be able to retire [early] – if you are spending everything that you earn – and of course many of us do that going from pay cheque to pay cheque and even spend more than what we earn and fall backwards into debt. If you have no savings rate there is really no plan to retire.”
He says that is what KiwiSaver is about – building up a stash of money over a lifetime of work and then using it to live off.
KiwiSaver is locked in until 65 but there are similar investment products called managed funds that allow people to save and invest without locking their money up.
Hartmann says his top tips for retiring early come down to two things; figuring out how much you are able to earn and how much you are able to live off.
“The relationship between those two numbers is fundamental if you want to figure out how and when you can retire earlier if that is your goal.”
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