If you want to retire 10 years earlier, the first step isn’t finding the perfect investment. It’s working out what financial freedom looks like for you, then building a plan around your mortgage, spending and investments to get there.
What would it take to retire 10 years earlier?
Wanting to retire 10 years earlier is a big goal, and simply deciding you want to do it isn’t enough. You need to break that goal down and understand what it will actually take to achieve it.
The first question is whether retiring earlier is genuinely important to you. If you have a partner, you also need to make sure you’re working towards the same goal.
From there, you need to understand how much money you want to spend once you stop working. Someone who needs $70,000 a year will require a very different level of savings and investments from someone who wants $300,000 or $400,000.
James uses a Massey University study as a starting point, which puts a comfortable retirement for a couple living in a major city at $92,000 a year, assuming they have a debt-free home.
Your number could be higher or lower. The important part is knowing what you’re aiming for so you can start working backwards.
Pay off your mortgage to retire 10 years earlier
If you want to retire 10 years earlier, your mortgage can be one of the biggest levers you have to pull.
For many households, a significant portion of their income goes towards mortgage repayments. The sooner that debt disappears, the sooner that money can instead be directed towards building wealth and creating an income for the future.
That can mean making some deliberate trade-offs. A bigger house may mean working for longer, while starting with a more manageable mortgage and paying it down aggressively could bring financial freedom closer.
The cost of carrying a mortgage for 30 years can also be significant. Mike uses the example of a $700,000 mortgage potentially costing around $1.4 million in total over a 30-year term. A $1 million mortgage could mean paying back roughly $2 million.
If early retirement is the goal, reducing the size of the mortgage and maximising repayments can mean paying significantly more principal and less interest over time.
Know exactly what you’re spending
Knowing how much you spend is fundamental to an early retirement plan for two reasons.
First, it helps establish how much income you’ll eventually need once you stop working. Second, it tells you how much surplus income you have today to put towards paying down your mortgage or, later, building investments.
Simply spending less than you earn can put you in a stronger financial position, even without complicated financial strategies.
The problem is that many people don’t know what they actually spend. James estimates that while around half the people he meets believe they’re good with money and know their expenses, roughly 85% are wrong once they start tracking them.
Whether you use a spreadsheet, budgeting software such as PocketSmith or another system, the important thing is having a clear picture of where your money is going.
From there, you can reverse engineer your budget. Work out what you need to save to achieve your goal, incorporate that amount into your regular spending plan and continue reviewing it as your circumstances change.
Build assets once the mortgage is gone
Paying off the mortgage isn’t the finish line.
Once that debt is gone, the money previously going towards mortgage repayments can instead be redirected towards investments. James and Mike describe this stage as the “sprint”.
KiwiSaver is one part of the equation. That means reviewing your provider, fund and contribution levels to make sure your KiwiSaver is working effectively towards your long-term goals.
But the episode also discusses building assets outside KiwiSaver once the mortgage has been paid off.
The approach outlined is to establish a diversified investment fund, focus on keeping costs low and contribute consistently. Rather than trying to predict what markets will do next, the focus is on setting up regular automatic contributions and sticking with the long-term plan.
Markets will move up, down and sideways. The idea is not to try to beat those movements, but to remain consistent over time.
What could retiring at 55 actually look like?
To show how the strategy could work, James models a hypothetical 35-year-old couple aiming to stop working at 55.
Each person starts with $100,000 in KiwiSaver and contributes 4% from both the employee and employer. One earns $150,000 a year and the other $110,000, with both incomes continuing until age 55.
They also have a $700,000 mortgage.
The example assumes annual expenses of $92,000. With mortgage repayments of around $50,000 a year, the household is also able to save approximately $40,000 annually, or around $3,500 each month.
That additional money is directed towards the mortgage.
Instead of taking 30 years to pay it off, the mortgage is cleared in around 12 years. By age 46 or 47, the couple owns their home debt-free.
Turning mortgage repayments into investments
Once the mortgage has disappeared, the example household has considerably more money available to invest.
The roughly $50,000 previously going towards mortgage repayments can be combined with their existing savings, giving them around $90,000 a year to direct towards their investment fund.
By age 55, the example has built approximately $870,000 in inflation-adjusted savings.
At that point, they stop working and begin drawing an income from those savings. Their KiwiSaver remains separate until it becomes available at age 65.
Once KiwiSaver becomes available, their total inflation-adjusted savings increase to approximately $1.5 million. The projection then allows them to continue funding the same lifestyle, with a debt-free home and some additional money remaining in their investment account.
The example uses above-average household incomes because retiring 10 years early is also an above-average goal. It won’t be achievable in exactly the same way for everyone.
Early retirement is ultimately about having options
Retiring early doesn’t necessarily mean never working again.
Reaching financial freedom earlier could mean dropping down to three days a week, travelling more, helping your children onto the property ladder, renovating your home or simply having the choice to stop working.
If retiring at 55 isn’t achievable, the same principles can still apply. You could change the timeframe, adjust how much you expect to spend or reconsider the size of the goal.
The important part is deciding what you want your future to look like, then reverse engineering what needs to happen with each pay cheque to move towards it.
Key takeaways
- To retire 10 years earlier, start by working out how much income you’ll actually need in retirement.
- Make sure you and your partner are working towards the same financial goals.
- Set a target date for becoming mortgage-free and prioritise paying down that debt.
- Understand exactly how much you spend so you know how much surplus income you can put towards your goals.
- Once the mortgage is gone, redirect those repayments towards building investments.
- Review your KiwiSaver provider, fund and contribution levels as part of your long-term plan.
- Build a diversified investment fund and contribute to it consistently rather than trying to predict market movements.
- Break your long-term goal into milestones at five, 10 and 15 years so you can check whether you’re on track.
- If retiring 10 years early isn’t achievable, you can adjust the timeframe or the lifestyle you’re aiming to fund.
Next steps:
If you want to understand what retiring earlier could look like for you, talk to Lighthouse Wealth about building a financial plan around your retirement goals, mortgage, KiwiSaver and investments.
If you’d like to watch more, check out this episode below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
