Mary Holm: Can you really retire before your 40s?

Another possible advantage of a low-spending lifestyle: more time with your children. Photo / 123RF

OPINION:

Q: I'd like to draw your readers' attention to the FIRE — financial independence, retire early — movement and its advantages, with a quick story of how it has worked for me.

I have always been naturally frugal. But for years I imagined retiring at 65 with a massive fortune and fulltime cruising the globe.

This all changed in 2014 when I stumbled upon an online article about the math behind early retirement. I realised that with a few extra cuts to areas that don't add long-term happiness to our lives, we could easily retire in our mid-late 30s and do life without employment for 40-plus years.

I watched where every dollar went for a while and identified the pointless. Got rid of the second car, lived in a smaller house, cut back on movies (we were seeing 10 to 15 a year and could remember two or three) and we buy technology two or three cycles behind the cutting edge — if we decide we even need it at all.

We are not "there" yet, but decided to take a break from accumulation and enjoy life early.

I work part-time and my wife is on a career break, so we can spend most days with our toddler and each other. Our investment returns cover more than half our base living costs.

We will have to go back to earning for a few more years at some point, but life is pretty awesome right now. And it wasn't even particularly hard to do.

A: The FIRE movement intrigues me.

The basic idea, as I understand it, is that you save really hard and invest wisely until you have saved 25 times the amount you spend each year. Then you can retire, and live on 4 per cent of your savings each year.

That savings goal sounds impossibly high. But if you cut your spending back to, say, $20,000 or $30,000 a year, the goal is a reachable $500,000 or $750,000. And the amount you save each year will be higher, and boosted by compounding returns.

FIRE seems to turn frugality into a challenge, something to be proud of, rather than a way of life that feels like deprivation.

Most of us do so much "necessary" spending that isn't really — on extra clothes, home furnishings, restaurant meals, new cars ... And your examples are all thought-provoking.

Why must we be in fashion, or playing with the latest toys? It's often about what others think — or what we think they think. But do we really like someone more because of their clothes and their stuff? Arguably, we might like them less.

I expect most FIRE participants still have some pricey treats, but they get used to splashing money around less often and are just as happy. I know of a woman who, for several years, wore the same simple black dress everywhere. She must have bought two or three of them I suppose. But she enjoyed making her "statement".

Tricky issues for FIRE fans might include how much you spend on wine or other gifts when the recipient has spent a lot on you. But perhaps you can spend more time or creativity on what you give back to them.

When I wrote about FIRE in this column in February, I was worried that participants might become too absorbed in money because they consider it all the time. Also, some people who retire young get bored. Work gives many people added purpose in life.

But I don't suppose these things matter. If you change your mind, you can just go back to saving less and retiring later. You'll have a large retirement nest egg built up, and if it's too big you can always give some to charity.

Meantime, I can only applaud your decision to spend lots of time with your wife and little one. Be prepared for some challenges when your child is older and wants all the stuff the other kids have. But I'm sure you'll cope. Giving the child a budget for fun stuff might help.

Other readers can see the article you refer to at tinyurl.com/FIREMaths.

By the way, you — and more and more people these days — refer to "math" rather than "maths". American English is sneaking into New Zealand, which appals some, but does it really matter?

Health insurance costs

Q: I've had Southern Cross health insurance for about 30 years, but my premium is now over $300 per month. To go that low I've had to choose a plan which doesn't provide much unless I get cancer or need an operation.

I'm 67, have high blood pressure and type 2 diabetes, but still wonder whether I need to pay such a huge amount out of my Super each month to keep this going. What are your thoughts?

A: I think it's worth having that basic cover.

Health insurance costs more as you get older simply because you are more likely to claim. If you develop further health problems, the last thing you want is financial problems as well.

I've said before that it's best to be a loser with insurance — you pay more in premiums than you get back in claims — because that means you've had a good run. But I've changed my mind. Even the lucky people are not really losers. Their premiums have bought them peace of mind, which is no small thing.

Property or shares?

Q: I am a 48-year-old woman who left employment 16 years ago to become a fulltime mum. Like many women, I haven't had a KiwiSaver account getting employer contributions etc. so am on the back foot for a comfortable retirement that will be largely reliant on the national pension.

I have recently benefited from an inheritance and want to use that money to improve my retirement funds, so am looking to purchase property and shares or KiwiSaver.

I am getting rather sick of the property investor bashing that is going on in the media, and instead would like to hear these people who object to the likes of me purchasing an investment property, making suggestions of other ways I could improve my income at retirement.

Aside from miraculously developing a business that would generate a good income, what else is there? Or am I supposed to be hard-up and state-reliant in my old age?

A: Of course not. You're perfectly entitled to make whatever investment you choose.

However, I do worry that new investors in rental property might underestimate the risks of buying in the current buoyant housing market.

Earlier this year, pretty much every economist predicted Covid disruptions would push house prices down. So far the opposite has happened. But over the long term the mismatch between average incomes and house prices has got to adjust.

The average price of a New Zealand house has risen from about three times household income in 2002 to more than seven times income. In Auckland the rise is from four times household income to more than 10 times. Logic tells us that can't go on forever.

And what if mortgage interest rates rise? Maybe they won't for a while, but it's hard to imagine rates staying this low for years.

Still, if you stick with your property investment for the long haul, you will probably do at least okay and maybe really well.

Another option you suggested, which is less time-consuming and just as likely to bring in strong returns over the years, is shares. Like rentals they are risky over the shorter term, but diversified shares always do well over a couple of decades.

The easiest way to invest in shares is through a managed fund, in or out of KiwiSaver. You don't have to worry about which shares to buy and sell, or handling dividends, tax and so on.

If you choose a higher-risk aggressive or growth fund, most of your money will be in shares. If you want something less volatile, pick a balanced fund — although your average returns over the years will be lower.

I suggest you use the KiwiSaver Fund Finder on sorted.org.nz, and choose from the funds charging lower fees. If you would prefer to have access to your money before you are 65, ask the provider if they have a similar non-KiwiSaver fund. They probably will.

What if you want to do the share investing yourself? You could do it relatively cheaply on one of the online share buying platforms — Hatch, InvestNow or Sharesies. But if you do that, buy and hold a wide range of New Zealand and international shares, and don't try to gain by trading. Most people who frequently trade do worse than the quieter ones.

One more complication. Whether you choose a rental property, shares or a managed fund, I strongly suggest you also join KiwiSaver and invest at least $1042 each year to receive the maximum $521 government contribution. The easiest way is to set up an automatic deposit of $87 a month.

If you can't afford to do that from other income, you could transfer the money out of a non-KiwiSaver or share investment. But if you are putting your inheritance into a rental or a KiwiSaver fund, you may need to set aside some of the inheritance for the KiwiSaver deposits. Perhaps keep it in bank term deposits.

Is this worth bothering with? Well, if you invest in a low-fee KiwiSaver growth fund you might average a return of 5 per cent a year after fees and tax. By the time you reach 65 you should have about $40,000.

Without the government KiwiSaver contribution that would have grown to about $27,000 elsewhere. You might as well have $13,000 extra for retirement fun.

KiwiSaver overseas

Q: A family member who has been working overseas for eight years has not been paying into their KiwiSaver during this time.

I would now like to pay in $1042 a year to enable the maximum annual government contribution, until they return to work in New Zealand. This could be some years.

Are there any controls on paying into another person's KiwiSaver account? And are there timing issues on a single, or multiple/monthly/quarterly deposits? For example, by year-end 31 March or 30 June?

A: Anybody can contribute to anyone's KiwiSaver account.

On timing, to get the maximum $521, the member or somebody on their behalf must contribute at least $1042 during the July-to-June KiwiSaver year. The contributions can be in any pattern. But as mentioned above, it works well to automatically deposit $87 a month.

But — and this is a big "but" — your relative is not eligible for the government contribution while they are living out of New Zealand.

How will their KiwiSaver provider or Inland Revenue know, if the relative hasn't sent in a change of address?

They probably won't in the short term. However, "when you apply for NZ Super at retirement you have to sign a statutory declaration declaring all of the periods that you were overseas," says an adviser to the KiwiSaver industry. "To keep the government contributions therefore for those periods you would have to lie or conveniently have memory loss.

"Also, these days with technology the IRD will be able to look at periods that you paid no tax in New Zealand and ask questions. Likewise the IRD administers the student loan scheme and so picks up details of departures." When you're lining up for NZ Super, it's not clever to start fibbing.

Adds the adviser, "The real question is: does the person, probably a parent, want the poor people in South Auckland to have to pay higher taxes so that the person overseas can get a government contribution, when they are not paying taxes here or contributing to the economy? " But he's leaping to conclusions. I'm going to assume that you will play fair.

None of this stops you from contributing to the KiwiSaver account anyway, to help build up your relative's nest egg. But that person should tell their provider they are overseas.

- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.