For most Australians who want to retire early, the youngest age you will be able to access all your superannuation benefits is at age 60. However, if you wanted to retire sooner than age 60, what would you need to do?
Some people may have heard of the FIRE movement, which stands for Financial Independence and Retire Early. While this sounds like a fantastic thing to achieve, there can be a number of baby steps you need to do first.
In this article, we will explore some of the options available to you to help you retire early.
Firstly, Define Your Retirement Goals
Retiring for the sake of retiring can be a futile exercise unless you have a predefined goal in mind. It might be to spend more time doing the things you love, getting your health back, travelling and living overseas, volunteering, and helping your family, to name a few. But if it is to just stop working so you can sleep in and binge watch television programs, you can be left disappointed, unfulfilled, and depressed. This is the result of having no purpose, direction, or mission in life.
It’s important that you have a plan of what you would like to do in your retirement, and to also establish a routine of different activities to occupy your days, weeks, months, and hopefully many years after you stop working.
Assessing Your Current Financial Situation
Getting an understanding of your current financial situation is an important first step. Because if you don’t know your numbers, you do not know what you can and can’t achieve.
For example, what are your weekly, monthly, and yearly expenses and outgoings. What are your current loan amounts (i.e., mortgage, car loan, credit cards, investment loans)? What are your current income sources (i.e., employment, interest, dividends, rent)? What are your current investments (i.e., savings, shares, property, managed funds, superannuation)? Knowing what these amounts are allows you to form the foundation of your own retirement savings plan.
Create a Retirement Plan
It all starts with having a plan; this means taking the time to identify what is important to you. The next step is to consider when you would like to retire and what you expect your expenses and outgoings will be at that time. You can then work out how much will you need to fund your expenses and outgoings at retirement age.
For example, if you calculated that your cost of living expenses are $80,000 per annum, and you have a Term Deposit paying 5.0%, you would need $1,600,000. You would also need to consider any income taxes you would need to pay, investment income and the effects of inflation.
In 10 years, with a rate of inflation of 3.5% you would need $112,848 to maintain the same purchasing power as $80,000 today. So, your investment strategy needs to also grow by at least the rate of inflation to maintain your real purchasing power over time.
Reducing Expenses and Increasing Savings
You may have heard that “a dollar saved is a dollar earned”. By reducing your current expenses, you can increase the amount of money you have available to invest, repay debts or save. There may also be times when you consider working overtime or even a second job so you can increase your savings to reduce debt and invest. These can all assist you with retiring early.
Without knowing where your money is going, it can be hard to identify where you can make some savings. It can be useful to have a savings or spending plan so you can track where your money is going each week or month. There are many tools available to do this, including this link to a budget planner. Once you have completed this exercise, you may have found additional funds that you can save each month, which can now be used to reduce debts and to invest so you can retire early.
Most people who “Win” with money have a budget and stick to it!
Managing Wealth & Growing Your Investments
If you find yourself lost on how to not spend money and get your financial situation back on track, Dave Ramsay a famous American radio personality provides some useful money tips to help people “Win” with money. He has developed the 7 Baby Steps to help people take control of their money.
Step 1: Save $1,000 for your starter emergency fund.
Step 2: Pay off all debt (except the house) using the debt snowball.
Step 3: Save 3–6 months of expenses in a fully funded emergency fund.
Step 4: Invest 15% of your household income in retirement.
Step 5: Save for your children’s college fund.
Step 6: Pay off your home early.
Step 7: Build wealth and give.
While this might not be possible for everyone, it does provide some useful steps on how to get ahead financially and also possibly assist you with your financial freedom after retiring early.
A sensible and regular investment strategy over time is one of the easiest ways to grow wealth.
When considering how to build your wealth, it’s also important to consider how you will diversify your investments. A diversified portfolio, with different types of investments and asset classes, can protect your wealth and provide you with opportunities to invest in many different things. Risk is reduced, as it is unlikely that all of your investments will go bust. However, as with all investments, there will be volatility, which can range from a little to a lot. It’s important to know that volatility also provides you with additional investment opportunities.
Planning for Healthcare and Insurance
As healthcare costs continue to increase, it’s important to ensure that you maintain a fit and healthy lifestyle for as long as you can. Once you start to lose your health, it can be difficult to regain it.
Private Health insurance can be an important expense for people once they retire, as this is a stage of life when medical procedures become more of a necessity. Having the choice of doctor, hospital, and medical treatment can also mean the difference between life and death for some people. If you had private health insurance during your working life, you will know that it also gets more expensive every year.
While some people may not have private health insurance, they will still be covered by Medicare, but they will be subject to public hospital waiting lists and can vary for medical conditions. Alternatively, there is also the option to self-insure and fund your out of pocket medical expenses personally.
Most people hope to stay in their home as their health diminishes. For some people this will not be possible and will need to move into assisted living or age care facilities. These further healthcare costs are additional costs which need to be considered when planning your retirement, especially if there is a history of medical decline in your family.
Legal and Estate Planning
It is surprising that many people do not have a basic “Will” or Enduring Power of Attorney (EPOA) in place. If a “Will” cannot be located, it is usually presumed the deceased died ‘intestate’. This means without a will. This then means that the State will determine who will inherit your estate assets upon your passing. In some instances, this could mean that someone you don’t like will inherit your assets.
If a person does not have an EPOA in place and is no longer able to make their own personal and/or financial decisions, an application to the Queensland Civil and Administrative Tribunal (QCAT) can be made for the appointment of an administrator (for financial decisions) and/or guardian (for personal and health decisions). The person making such an application should be aware it can be a time-consuming and costly process. By having an EPOA in place, you can save everyone a lot of time, effort and money.
To ensure that your wishes are followed in the event of tragedy, it’s important to have up to date estate planning and legal documents in place.
Lifestyle Considerations
Many people don’t plan or know what their current lifestyle expenses are for a 12 month period. For retirement planning, they then try to work out how much money they will need in retirement without any reference to their current costs. As a short cut, many people rely on what is called the Retirement Standard for guidance. While this can be a useful guide, many people will spend either much more, or much less than these amounts.
Modest vs Comfortable Retirement Living
The Retirement Standard is broken down into a number of subcategories, which include:
ASFA Retirement Standard for Couples Aged 65-84
Modest & Comfortable
$47,387.00 per year & $72,663.00 per year
ASFA Retirement Standard for a Single Person Aged 65-84
Modest & Comfortable
$32,915.00 per year & $51,630.00 per year
Source: Association of Superannuation Funds of Australia (ASFA) – Retirement Standards, March quarter 2024
As you can see in the above tables, you are either thinking that’s not enough, or that’s too much.
Starting to build wealth from nothing requires taking a deep look at your current financial situation and arrangements. You need to evaluate your spending habits and income for the last several years. Depending on where you’re starting from, this may seem impossible and require some out of the box thinking. However, if your goal is to retire early, these are some of the things you will more than likely need to address to ensure that you do not run out of money.
Learn More About How We Can Help You Realise Your Dream of Early Retirement
As you can see from this article, there are many things to consider when planning an early retirement. Everyone is different, so it’s important to ensure that whatever option you use aligns with your longer-term goals and financial plan.
The most important thing to get in place first is an understanding of your goals and objectives. Once these have been determined, you can then set out to establish the foundations of your financial plan for the future.
If you would like to explore possible retirement planning options or to enhance your current retirement income, we can help! Getting started is very easy, simply contact our office or book a consultation with one of our financial advisers.
