Your super is available from age 60. But what if you wanted to retire earlier?
Perhaps you dream of leaving the normal full-time paid work force at age 40 and working as a fishing guide six months of the year in Northern Australia. Or helping your daughter care for your grandkids. Maybe you want to become an independent film maker.
Early retirement does not mean retiring from life. Rather it's escaping the captivity of the workforce and spending your time as you wish.
I've come up with five things you could do to gain the financial autonomy needed to retire early.
1. Understand your livings costs
Is all of your spending really necessary? For you to be in a position to quit your job, you need to know how much money you require to live. Is it $30,000 per year or $80,000 per year? Here's some overly simplistic maths for you, just to illustrate:
If you wanted to build up a portfolio of investments that would generate $30,000 per year for you to live off, rising with inflation, and with a high level of confidence that it won't run out in your life time, you would need investments worth approximately $750,000.
If instead you needed $40,000 per year, that would rise to around $1million. So to have just an extra $10,000 per year, you need to save an extra $250,000.
To flip that, if you could reduce your living expenses by $10,000, the amount you need to save to retire early is reduced by $250,000. How much sooner could you escape your current employment captivity?
It's one of the simplest financial rules around yet one so many of us struggle with it - you must spend less than you earn.
Know how much you have coming in, after tax. Check that against your expenses. What is the surplus? Now put this to work. This is cash flow management.
Savings could involve extra payments on your home loan, or building up cash to invest.
First you save, but then what to do with those savings? Sure you could leave it in the bank, but with minimal interest, and tax on that interest too, you're going to have to do a lot of heavy lifting to get yourself to the point of financial autonomy and early retirement. There are all sorts of considerations here around investment time frame, the use of debt, and diversification, and so it is really important that you seek out professional impartial advice.
But a key concept to grasp is that risk and reward are always linked. You can take no risk and leave your money in the bank. But if you had the capacity to save $2000 a month and you wanted to build up $500,000 in savings to become financially independent that would take you about 21 years.
If instead you invested in a share portfolio that earned 7 per cent a year on average, it would take less than 14 years to reach the same goal. So you are achieving your goal to retire early seven years sooner by taking some risk. Or to flip it, if you want to take no risk, the price you pay is seven years of your life.
4. Minimise or avoid debt
To clarify straight up, not all debt is bad. Most of us could never buy a house in Australia without borrowing. And because any gains made on the increase in value of your home are tax free, usually borrowing to buy a home is a financially wise thing to do if that's affordable for you. Similarly sometimes debt to help fund good quality investments can make sense.
But the debt to avoid is debt to fund consumption. Credit card debt to buy clothes or a holiday. A loan for a new car when maybe something a few years old would have done.
As touched on earlier, if you are to retire early, you need to get your expenses down and your savings up. Loan repayments push against this objective.
5. Downsize or tree change
I know of several people who have achieved financial autonomy by selling their inner-city home and moving to a rural area or just a smaller home.
In some cases such a move resulted in them becoming debt free, which reduced their living costs and granted them considerably more freedom.
As the NBN rolls out, there should be more and more scope for people to work outside of the big cities. When self-driving cars arrive, longer distance travel may be less of an issue too.
Mortgage repayments or rent tend to take up a large part of people's budgets. As already mentioned, the lower you can get your living costs, the easier it will be for you to retire early.
As a final thought, consider what you will be doing in your early retirement. Is there any chance that what you want to spend your time doing could earn you some money?
As shown earlier, $10,000 of income needs something like $250,000 of investments to produce it on a sustainable long term basis. So if you can earn $10,000 in your early retirement, that's $250,000 you don't need to save. Early retirement could be that bit earlier!
Paul Benson is a licensed financial planner and creator of the podcast Financial Autonomy. Pbenson.email@example.com
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this article.