A guide to early retirement in New Zealand

People dream of the day they can finally retire. They imagine all the hobbies they will explore, perhaps painting or, of course, golf. They picture a slower pace of life and spending more time with the people they love. The pension (“superannuation”) currently kicks in at 65 years old in New Zealand, with many people aiming to end their working life around the same age however, many people would also like to spend less time in the office before then.

How Much Money Do You Need to Retire?

Unless you magically know exactly how long you will live, it’s impossible to determine how much of a nest egg you need to fund your retirement. Of course, we all still need to plan to ensure our funds last as long as we do and make a few assumptions to figure things out.

If you’re retiring at 65, some say you need a lump sum which totals an average of 25 times your annual expenditure. Then if you retire earlier, add on an annual expenditure per year. For example, if you retire at 55, you’ll need 10 more years of annual expenditure saved. It’s not quite that easy though, as this broad-brush rule:

• Assumes you’ll live to age 90 and spend the same amount each-and-every year (90 years old less 65 years old = 25 years’ worth of expenses).
• Ignores New Zealand superannuation (commonly called “the pension”), and other social welfare for over-65’s such as Winter Energy Payments.
• It also doesn’t factor-in some investments which can be left alone to grow in value over the decades you are retired (e.g., house).

If you want to retire early, ideally, you’ll:

1. Own a freehold home (have no mortgage owing) so you can eliminate one of the biggest expenses for most households: rent or a mortgage repayment.
2. You’ll also have no personal debts owing (this includes credit cards, car loans, or other long-term finance options).
3. Have a great nest-egg full of a diverse range of investments you can live from, including passive income. The reality is that the quality of your retirement really depends on the lifestyle you want to live, and expenditure required, so clearly planning is crucial.

10 Helpful Steps

1. Invest outside of KiwiSaver – including multiple passive income streams

Most people see their KiwiSaver fund as their retirement savings, which is normal. However, the problem with that is you can’t access your KiwiSaver balance before the age of 65 (with the expectation of buying your first home or if you face extreme financial hardship). So, if you want to retire early, you’ll need to have another nest egg providing cash flow to live from.

Creating a diverse investment portfolio is a fantastic way to prepare for retirement as it will provide you with multiple passive income streams. Investing large portions of money into shares or managed funds that pay regular dividends is a great idea. And if you can afford to buy an investment property outright, then having a rental income is also a smart move.

1. Planning and building a diverse investment portfolio early is critical to retiring early.
2. What you want to invest in depends entirely on your level of risk, how much money you have to invest and what age you want to retire at. Talking to a financial adviser – including our team here at Become Wealth – is a great idea in this situation.
3. Managed funds can offer decent returns depending on what you choose, and you can withdraw funds at any age.

2. Use term deposits to your benefit

Term deposits aren’t exactly lucrative investments, but they are a means to securing a safe, guaranteed return. They are also a great idea for a small portion of overall wealth, as they are less volatile than the share or property market.

• It’s good practice to keep a minority portion of your retirement funds in term deposits, perhaps 10 percent, and to treat that cash as an emergency fund – that way you don’t need to take on debt if something unexpected and expensive crops up.  
• Top tip: shop around banks to get the best deal on your money.

3. Invest most of your wealth into managed funds

Pre-retirement, aggressive or growth investments are critical to growing a nest egg big enough to retire early on. It’s unlikely that simply saving a portion of your income in the bank – including with term deposits – will set you up with enough cash to retire comfortably unless you earn millions. Managed funds offer this aggressiveness whilst also offering flexibility to withdraw money when you need it without penalties.

Once you start getting close to retirement, that’s when a reassessment is needed to determine your risk and return, other sources of income or wealth, and overall income needs. Based on this, adjusting your managed funds will need to be a priority – accumulating wealth requires a different investment mix to decumulating wealth.

Nearly all non-KiwiSaver scheme managed funds have great withdrawal options, such as a free monthly withdrawal of a fixed amount. This can provide some or all of your retirement income needs.

If you’re wealthy enough, you might also have some of your overall wealth held in real estate – an investment property or two – and perhaps your own holdings of direct investments such as stocks. These investments can also sustain your retirement income needs by providing income in the form of rent (for property) and dividends (for stocks).

4. Get out of all debt

This is a non-negotiable step for early retirement. If you retire with debt, it makes things so much harder to afford a comfortable and stress-free lifestyle. Be proactive with your debts, particularly as you approach retirement. If you only make minimum repayments, you can find yourself burdened with long-term debt. Not having enough money is a serious issue that pensioners in New Zealand face, and soaring living costs have not helped.  

5. Form good money habits

If you want to retire early, you need to get a handle on your spending habits. Buying the necessities, not the luxuries is crucial, if you have a liking for the finer things in life then you need to make sure you have plenty of money to retire on.

A good idea is to analyse your spending habits and create a detailed overview of where your money is going, then look at what you can cut down. It may seem drastic, but if retiring early is your goal, you need to take ownership of your money habits.

Budgeting apps and websites such as mybudgetpal are a great way to take control of your spending and get a detailed analysis of it.  

The younger you want financial freedom, the more frivolous wants you’re probably going to have to give up. Expensive European cars and designer clothes might be nice, but they do cost – and the higher your lifestyle expectations, the bigger the nest egg you’ll need to retire early. It’s also a good idea to look at how costly your hobbies are. Do you like boating? If so, that right there is an expensive hobby. Are you a regular fine diner? Again, this isn’t conducive to living on a limited income.

Luxury expectations are fine, they just need luxury levels of investment and effort.

Related material:

• Early retirement pitfalls and how to avoid them
• Why the experts think your retirement plan is broken
• Your guide to financial wellbeing in retirement

6. Avoid get rich schemes

As some people approach retirement age, they can become susceptible to get-rich-quick schemes when they realise they don’t have as much money saved as they thought. Some of us might be tempted by potential “big earnings” from property development, an FX trading or crypto scheme, or a not-so-well-thought-out small business purchase.

It pays to be very careful and always check for red flags before investing significant sums of money in schemes that seem too good to be true. Most of the time, the only surefire way to be wealthy is through long-term investments and good planning.

If you are in a situation where you realise you don’t have enough money to retire comfortably on, your best bet is to look to bolster your income and save or invest that money wisely, not putting the existing savings you have at risk. Picking up a side hustle or even changing careers can help increase your potential earnings.

Your best bet is to always stay in paid employment until you are certain that you can live comfortably off your savings and investments.

7. Downsize your home

If you retire living in a family home, or a property that is bigger than your needs, then downsizing can be a fantastic way to gain some extra capital which you can then invest wisely.

If you’ve spent your life living in the city for work, retirement can also provide the opportunity to move somewhere cheaper with a slower pace of life.

8. Avoid getting divorced (if you can!)

Anyone who has been divorced will tell you that it is really expensive! What’s interesting is that money can often be a contentious issue in relationships that cause divorce itself. That’s why it’s important to understand your partner’s financial goals and dreams before tying the knot. If you are seeking early retirement and a simple lifestyle yet they want to buy Dior handbags and travel lavishly, you may not be the best fit.

People who divorce in their 40s, 50s and 60s can struggle to retire early, as they often need to take on a new mortgage after selling their family home. With New Zealand’s housing market being so expensive, this is not an ideal situation. Paying down a new mortgage can seriously eat into any retirement savings and push out the goal post of early retirement.

9. Don’t treat your home valuation as a cash machine

House prices in New Zealand have rapidly increased over the past few decades, leaving many people with valuations far beyond what they originally paid for their home. Whilst leveraging your home value can be a good idea for investment purposes, it’s seldom a good idea for the likes of fancy renovations, new cars, or holidays – not if you want to retire early!

The reality is your gains are unrealised until you sell. Buying back into the same property market means there is much less profit than you think when you do finally sell. People who live exuberantly aren’t generally those who retire early. Prioritise paying off your mortgage and only leverage capital gains for investment purposes.

10. Do a job you like, and work hard to maximise your salary and opportunities

Generating surplus earnings and putting that surplus to work in the form of investment assets is crucial to fund an early retirement. Earnings are key.

Doing a job you like is critical to your ability to do it well. If you want to be a high performer and high earner, you should probably be passionate about the work you do. There is no point sitting at a desk doing a job you hate. In fact, feeling down at work can lead to spending money for dopamine hits. If you love what you do, you will thrive and find it easier to build a fruitful career.

The Bottom Line: earn well, save hard, invest wisely, get out of all debt

Retiring early requires good earnings, careful planning and smart investing. If you want to live the life you envision for your golden years, it’s critical that you are debt-free. To support your lifestyle, you’ll also need a diverse portfolio that generates passive income. Clear goals and sticking to your plan is all retiring early comes down to!  

It’d be the pleasure of one of our trained professionals to help you work through any of the topics mentioned above, so get in touch today.