Diana Clement: So you fancy an early retirement

Do you dream of hanging up your work clothes and retiring early? Photo / 123RF

Do you dream of hanging up your work clothes and retiring early? It's a common desire, but few people make over the finish line before age 65 for many reasons ranging from lifestyle expectations to their (in)ability to budget.

If you want to retire early then you need a plan that is more than just working nine to five, upgrading your home every time you have so-called "spare equity", taking holidays on tick, and saving the minimum into KiwiSaver if that.

Retire early plans usually have some numbers worked in. A common rule of thumb for retiring early is to have 25 times your estimated annual expenses invested. So if you need $40,000 a year to live on, you'll need $1m invested over and above the house you live in.

Or so the rule goes. Everyone's reality is different. Some people need copious amounts of fuel for their boats, or five-star hotels on their overseas trips. Others live handsomely on modest sums of money.

NZ Super kicks in at age of 65 and you'll receive $22,039 at current rates for a single person living alone or up to $33,906 as a couple. At that point the rule of thumb is having investments of 10 times annual expenses invested.

Early retirement for some means doing a retirement job or finding other ways to bring money in. Maybe that's part-time work, or managing your own rental properties.

It could be housing international students, when the borders open and they head back to New Zealand. You could be one of the grey nomads in New Zealand who travel the country doing seasonal work, such as picking kiwifruit. Or those that head overseas to teach English.

You need to make a plan. Photo / 123RF

If you rent your house out to travel post-Covid, whenever that is, you'll probably have a small weekly sum to spend. A good chunk of rent is eating up by management fees, maintenance, rates, insurance and tax. Or downsize to free up capital. That could involve moving to a cheaper location, or to a smaller home locally.

A hobby business that at least pays its way is not a bad idea. Maybe you're a collector, or want to be, and will sell off some items to pay the cost of keeping others.

Here are some tips:

Create a plan

Work out how much you need in terms of lump sum, how you intend to get there, and how the money will be invested. A term deposit isn't going to cut it.

Make it work with a budget

That's both a budget for now to save for your early retirement and also a dummy early retirement budget to see if you'll survive. Some people underestimate what it will cost to live in retirement. Your budget needs to spell out exactly how much you will spend in each category with room for inflation. Some expenses, such as rates, house and medical insurance are only going to go up. Big expenses such as upgrading the car and painting the house will come along as well.

Change your lifestyle

If you're going to live on a reduced income you need to get used to it. It's normal human behaviour to expand your spending to fit your salary AKA lifestyle inflation. It's better to save your bonus and pay rises and keep your expenses the same.

Watch out for tax implications

If you are wheeling and dealing or trading shares, for example, you'll need to pay tax on your gains. Consider tax efficient investments such as Pies (portfolio investment entities) so you won't be stung with a huge tax bill.

Finally, beware of the retire early gurus who want you to pay to attend their seminar or be mentored. They're often not as successful as they appear, which is why they need your money. There are, however plenty of books that can help you along your way. The Barefoot Investor series of books are good, or you could go for something aimed at retiring early such as Playing with Fire (F.I.R.E. stands for Financial Independence Retire Early).