Getting to a financial position where early retirement is a real possibility is not as difficult as it may seem. There are three key ingredients to being able to retire early; spending less, saving more and starting to invest as soon as possible. What makes early retirement simple is that there is a logical connection between these three ingredients. The less you spend, the more you are able to save and the earlier you can start to invest. But the real magic lies in the fact that the less you spend, the less money you need for retirement. The more modest your standard of living, the sooner you will be able to retire.

An example shows this quite clearly. Let’s assume Peter and Sarah are a couple aged forty. They earn $95,000 after tax between them and they have a mortgage with repayments of $20,000 a year. They can save $15,000 a year which is initially used to pay off their mortgage by the age of fifty. Once mortgage free, they can invest $35,000 a year leaving them $60,000 to live on. By the time they are 65, they will have investments of around $660,000 (at 3% net return); enough to maintain their income in retirement at $60,000 a year, including NZ Superannuation of $30,000 a year.

Now let’s assume Peter and Sarah can save $30,000 year. They are able to pay off their mortgage by the age of 45 after which time they can invest $50,000 a year, leaving them $45,000 to live on.  By the time they are 56, they will have total investments of around $690,000; enough to maintain their income of $45,000 in retirement. By saving more, they have paid off their mortgage much quicker, allowing them to start investing sooner, and to retire earlier. Simple!