The beginners guide to retirement part 2:When can I retire?

Can I retire early?

If I am being honest, I never thought that early retirement used to even be a possibility on an average middle-class income. I thought we HAD TO go to university, get a job for 45 years and then retire. End of discussion.

But I am here to tell you early retirement is a definite possibility and I have the numbers to show you how, based off Four Pillar Freedom's early retirement grid

*** See table notes at the end of the article

*** See table notes at the end of the article

This is a calculation that shows how many years it will take you to be able to retire based on your savings rate. It works for either individuals or households. How much you spend in comparison to how much you earn. The bigger the gap between your spending and your earning, the faster you can reach financial independence.

For example, if you are earning $70,000 per annum (after tax) and spending $60,000 per annum on expenses, then it will take you 34 years to have enough money to live on. Whereas, if your income was still $70,000 but you could cut spending to $40,000, then it will take you just 17 years to have enough. Just by decreasing your annual expenses by a third you have managed to cut in half the amount of time it will take you to retire.


The key is your savings rate = ((After tax income - expenses)/After tax income) x 100   

In our earlier example, our savings rate would be:

$70,000 (income) - $60,000 (expenses) = $10,000

$10,000/$70,000 = 0.14

0.14 x 100 = 14% Savings rate

With the average household savings rate in New Zealand hovering around a paltry 1%, it is no wonder I thought working 45 years was a given. At that rate of savings there is no option but to work. What if we get made redundant or our health takes a turn for the worse? A 1% savings rate will not save us.

If you can increase your income, decrease your expenses, or both, you can make dramatic inroads into the number of years it will take you to be financially independent and not have to worry about your money or working a job you hate. You will have the freedom to decide what to do.


Do you want it though?

Not everyone wants to retire early. Some people enjoy their jobs immensely. If you are one these people, then you are fortunate to be in a job that you are passionate about. Early retirement will not be on your radar and that is fine. I don’t want to retire early either. I want to be in fulfilling work. But on my terms though.

Getting to our financial independence number is not just about retiring early. It is more about reaching that number so that if circumstances do change then we don’t have to put up with it anymore. The question should not be do you want to retire early, but do you want the ability to retire early.

If your job is no longer enjoyable, or a family members health deteriorates and they need your full-time support, knowing you have that freedom to drop work is a wonderful thing. When we don’t have enough money, we can’t afford to say no to work. When we can afford it, the call becomes ours.

If you are like the majority of workers in New Zealand though, you will not be that passionate about your job and if given the choice would leave. No more working Monday to Friday. Or shift work if that is your gig. Most jobs start off enjoyable and challenging and then slowly become a daily grind again. Most businesses pressure you into working harder to get more out of you. Bosses and co-workers can be frustrating. Then you may have all the office politics or the increasing piles of administrative paperwork for policies or health and safety. We then spend money to feel better about ourselves but the fact remains, 5 out of 7 days belong to someone else. And they will continue to unless we get out of the earn spend cycle.

This was all the motivation I needed to ramp up my income, decrease my expenses and start my accelerated journey to financial independence. How strong your willingness to achieve financial independence is will determine how many years you will take to achieve it. For someone very willing, they would drastically cut expenses and maybe get a second job. Someone who enjoys their job and doesn’t care will continue to work regardless of their financial situation. You may be somewhere in between.

In my next article, I will explain how much you will need saved for your retirement.



The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here


*** Table notes:

A few assumptions made in the calculation are:

1/. You are investing the difference between your income and spending, and earning 6% per annum after inflation

2/. Your expenses after retirement will only increase with inflation

3/. You will withdraw 4% of your retirement portfolio per annum