How much money do you really need to retire early?

Source: Radio New Zealand

Friends That Invest founder Simran Kaur recently told her online networks that she had retired at age 29.

She said she worked out that she should be able to do so when she could draw down enough from investments to cover her annual expenses at around $150,000 a year.

She was not available for media interviews but said she was still working on the business – but out of choice rather than need.

It’s a situation that influencer Zephan Clark is hoping to find himself in by the time he’s 50. The 24-year-old is currently working on a disciplined financial strategy focused on consistent, long-term investing.

“I’m trying to make the money I have work for me. Retirement to me is not necessarily stopping work, but it’s more so having enough money aside or money and investments to pay for the living expenses and everything that life costs, just so I can https://www.rnz.co.nz/news/business/588776/reverse-mortgage-or-retirement-village-which-will-give-you-the-retirement-you-want have more freedom].”

He said he had picked up all of his investment knowledge online. “Scaling my income is a big one because, you know, the more income you have, the more you can obviously invest. Anybody can invest. You can invest with $20 a week, right?

“Obviously the more consistent you are and, and the more aggressive you are at a young age – I’m only 24 – hopefully the better returns you can possibly get.”

He said he had 8 percent or 10 percent growth per year in his investments so far and was happy with the prospect that some years were down and some up. “As long as I’m beating inflation I’m pretty happy with my return.”

Clark said he was relatively frugal with his other expenses while he worked towards his goal.

“I don’t go out on the weekends, although sometimes I do, I might go out with some of my friends … I’m more aware that I could spend money on silly things like Uber Eats and so I’m like, no, I have food at home, right? And then boom, now I have some, a bit more money to invest every week.”

Research from Stake showed almost half of New Zealanders aged 18 to 24 thought owning assets was more important to getting ahead than having a high salary.

But if your goal is to retire at 40, 50 or even 60, you might be wondering how much money you need to be able to do that.

University of Auckland senior finance lecturer Gertjan Verdickt said a good way to work it out would be to think about how much you need to spend.

Someone who wanted to fund 30 years of retirement, not including any impact of NZ Super, would need an amount 25 times their annual spending. For 40 years, they would need 28 times and for 50 years, 31 times, he said.

This calculation does not include NZ Super, which at the moment would add about $30,000 in income to a single person living alone, before tax, once they were 65.

It means that someone who wants to be able to retire at 40 and live until 90 would need to save $2.3 million, not accounting for NZ Super.

Ralph Stewart, founder of Lifetime Retirement Income, ran the numbers taking the mid-point between the median wage and average wage after tax each year of $66,000, plus inflation of 2.5 percent.

He assumed someone retiring at 50 would want 80 percent of that amount each year until they were 60, then 70 percent of it until they were 75 percent and then 60 percent to age 95.

“Ignoring Super, he would need at age 50 about $1.5 million, at age 55 $1.25 million, at age 60 $950,000 and at age 65, $700,000.”

Including NZ Super, from 65 he would need $500,000 and at 70 would need $400,000 to achieve that income level.

Stewart said those calculations included a small amount of inflation and it could be higher.

“What we try to say to people, rather than work out what the sum is, work out what you think you’re going to have and bung it into our calculator or Sorted’s calculator and it’ll tell you. So you solve for how much you need to live on, not how much capital you have … we find most people, 30 percent or 40 percent more than NZ Super is about the average we solve for.”

He said 80 percent of 60 year olds were still working and 40 percent of 70-year-olds. Only about 2 percent of people would not be working at 50. “It’s a fun thing to think about but it’s not realistic. Don’t get scared.”

Actuaries often talk about a 4 percent rule, which means that people can draw down 4 percent of their investments in a year. But Verdickt said it could be inefficient even when it worked.

He said research had shown funding constant spending with volatile investments meant retirees typically died with 10 percent to 20 percent of their initial wealth unspent, plus another 2 percent to 4 percent lost to paying too much for the spending pattern itself.

“The practical takeaway isn’t to throw out the multiplier approach – it’s still the right heuristic, but to note that rigidly spending the same real amount every year is the real flaw. Retirees who flex their spending down a bit in bad markets can often get away with a smaller nest egg than the multipliers above suggest.”

Opes Partners chief economist Ed McKnight said another option was the rule of 6 percent.

“This is where you need 16.7 times your income to retire early. So on $50,000 that’s $835,000. The catch with this though is that you can’t increase your spending with the cost of living. So you need to be more careful.”

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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand