Planning your great escape Susan Edmunds

Looks at the practicalities of early retirement.

Having a tough week? These are the times you daydream about chucking it all in. Handing in your notice, spending your days lounging in the sun.

But if you are fantasising about an early retirement, there’s some bad news; you’ll probably need more than just your wages.

First things first...

You will be hard-pressed to retire if you have debt.

Focus on getting rid of loans, especially your mortgage. A freehold house is a big step on the way to retirement.

‘‘Otherwise you are going to erode your savings at some crazy

Work out how much you need

Assume you’re a couple, both aged

45, with $50,000 each in KiwiSaver already, that you’ll be eligible for the pension when you hit 65 and that you will live until you are 90. You each want to leave $50,000 when you die.

If you want $20,000 a year on top of your pension for the rest of your life, you need to save about

$520,000 between you – or about

$6200 each a year from age 45.

If you want to retire at 60, you will need $745,000. That will provide $50,000 a year before the pension kicks in from the time you are 65. That means you have to save $15,600 each a year.

To retire at 55, you need about

$958,000 between you – or $70,913 saved a year. If you want to retire at 50, you’ll need $1.162 million in the bank, or $194,308 saved a year between you.

‘‘The earlier you retire, especially before super kicks in, the more you need to have saved. It gets to the point where it’s impossible to save out of just your income,’’ said financial adviser Liz Koh.

McQueen said most people could aim to save 20 per cent of their income, at best.

Financial adviser Martin Hawes said it was possible for high earners to retire early just on their salary.

‘‘The professions, senior management... if they live well within their means, save and invest well, they can do it. The key is high income with really good savings habits.’’

But many high-income earners were not good at putting money aside,’’ Hawes said.

‘‘These people are pressured, they are working long hours at fairly intense jobs. They end up spending a lot of money, taking expensive holidays, they are timepoor.

What are your options?

Koh said most people would need to borrow to invest if they wanted to generate those sorts of lump sums. ‘‘You’d need to set up a business or borrow to invest in property. That’s the only way.’’

That has an added layer of risk – ‘‘and not everyone has what it takes or the inclination to set up a business or get into property investment. You could borrow to buy shares but that’s the riskiest strategy of the lot because shares are so volatile.’’

Hawes said a business or property investment portfolio would involve hard work, too, and the concentration of risk. ‘‘The only lazy way to riches is to marry it, inherit it or steal it.’’

Jonathan Beale, ASB’s general manager of wealth, said some of the customers his team dealt with who were retiring early had sold successful businesses they set up.

‘‘Equally we had a lady who left the bank recently who had worked

25 years, saved hard and paid off her mortgage fast.’’

McQueen said that from a leverage perspective, property was the standout.

‘‘If you needed $1.6m, you would need to buy a property by 25, so you have two property cycles under your belt before you retire.

‘‘Let’s say you purchased a property for $500,000, 10 years later it’s supposed to be worth $1m, and

10 years after that $2m.

‘‘It’s not quite as simple as that, but you can see that it is possible to have created $1.5m of equity from owning one property when you are 25, but you hold it for

20 years.

‘‘The reality is you would need at least two investment properties and then you further leverage off them to get your home. Doable? Absolutely. The challenge however is most 25-year-olds aren’t doing this, and they are not really getting into it until 35 or 45.’’