Early retirement is a goal for many – extra time to travel, spend more time with family, or simply pursue hobbies. Early retirement sounds great but in reality, is often somewhat different. Whilst it’s not impossible to retire early, often it simply isn’t worth the sacrifice. Here are eight reasons you should reconsider that dream of early retirement: -
1) You have to save a lot of more of your income
In theory, the more you save, the earlier you can retire. However in reality, retiring early means that you have less time to save and of course, whatever you do save loses much of the benefit of compound interest.
2) You can’t receive NZ Super before age 65
No matter how early you retire, NZ Superannuation does not come in to play before age 65. This means that if you pursue early retirement, you have to fund all your income expenses from other assets.
3) Annuities shouldn’t be bought in your 50s
An annuity is a way to turn a lump sum of money into a guaranteed pension for life (the benefit of which is you won’t run out of money in retirement). If someone was to purchase an annuity in their 50s, the reality is that they would receive a poor annuity rate
4) It’s hard to get your KiwiSaver funds paid out before age 65
KiwiSaver hardship rules are very complex. Only if you can provide evidence that you're suffering significant financial hardship, may you be able to withdraw some of your KiwiSaver savings. Significant financial hardship includes if you're unable to meet minimum living expenses or you’re unable to meet mortgage repayments on the home you live in. Unless one of these few requirements are met, you will not be able to enjoy your KiwiSaver funds before age 65.
5) You’ll have less time to pay off a mortgage
If you are planning to retire early, the last thing you will want is to have a mortgage hanging over your head. That means you will need to be more frugal in your choice of housing and be more aggressive in getting rid of any mortgage debt you may have.
6) You’ll need to be smarter about investing
If you are wanting to retire early, there is more emphasis on getting your investment right. This likely means no tolerance for poor market returns, serious investing mistakes and of course, there isn’t as much time to recover from errors during your career. Furthermore, don’t forget that you’re also dependent on market returns for a much longer period of time.
7) Early retirement can impinge on lifestyle decisions
The desire to retire early might preclude you from a lower-paying job you may enjoy more, stop you from getting that boat you’ve always wanted or purchasing a second home. One thing I have learnt from my industry is that life is short - you never know when tragedy or accidents will occur and as such, it is so important to live in the moment (within reason).
Taking all these things into consideration, it really becomes impossible for the 50-year-old retiree to have as much in retirement as the 70-year-old – except in incredibly rare cases. Not only do you have to live a more frugal lifestyle during your working life but you’ll need to continue it in retirement.
If early retirement remains a goal for you (or someone you know), ensure that you get the right type of advice. Head to our website to find out more about retirement planning and see what we can do to you (www.foresightfinancial.co.nz/retirement-planning). Alternatively, get in touch with us directly for a chat. Our advice is free and without obligation.