How to retire early
Ahh to retire early... no daily grind, barking bosses or stress. But is retiring early really doable? Here's what you need to consider.
Early retirement is often seen as the holy grail after decades of work – a fast-track to endless leisure. And with experts telling us that we should be thinking about working well into our 70s in order to build up enough super, it's no wonder that the thought of retiring earlier seems so appealing.
However, is it a realistic goal? Consider these points:
Plan ahead carefully
It's fine to fantasise about retirement days blissfully filled with café lunches, exotic travel and hobbies, but you need the funds to back it up.
Latest figures from the Association of Superannuation Funds of Australia (ASFA) estimate that to live comfortably in retirement a couple needs $61,909 a year, and a single requires $43,687. This budget assumes you own your home outright and you are relatively healthy.
To determine the amount you need over 30 years or so, be honest about the lifestyle you're envisaging. Do you really want to retire early if it means eating baked beans and travelling no further than the local caravan park? Probably not! If your finances look grim, you may be better off working for longer to ensure a higher quality of life when you retire.
Write a plan containing your goals, savings capabilities, timelines, and cash flow streams such as superannuation and investments. Read up extensively on the subject and consider consulting a financial planner.
Make sure your mortgage is paid off
Financially it's a good idea to get rid of your mortgage – your "good debt" before retirement. This will give you an asset you can draw down on in the future if you need to. Plus, the family home is exempt from the assets test when calculating the age pension.
If possible, pay your mortgage fortnightly. "If you pay 26 payments per annum rather than 12, you're getting ahead because you're making more payments, chipping away at the interest," says Anouska Linz from homeloans.com.au.
"People tend to reduce their home loan repayments when their interest rates are lowered, but that's crazy. The smarter thing is to keep payments in line with higher interest rates, because you never know when they'll come back up again. Throw as much spare cash as you can at your mortgage so you can pay it off that much sooner."
Clean up bad debts
If you've got bad credit card debt, you could end up working longer than the Queen. If you have multiple cards, cut up the ones with the highest interest rate and pay them down asap. Live strictly with one credit card or none at all. Get a low interest rate card and whatever you do, don't just pay off the minimum.
If you're royally in the red, consolidate all debts into a personal loan, which generally offers better interest rates than credit cards, or sign up for a debt agreement.
Save as much as you can now
If you're serious about retiring early, there's no easy way to say this: stop spending money now. Save furiously, then invest the extra savings to create future wealth.
Cut back on everything. Spend less on groceries, shop at cheaper stores, find economical service providers and eat at less expensive restaurants. Switch your spending to a "needs" rather than a "wants" basis. You might even be pleasantly surprised at how much lighter your life feels with less stuff and simpler choices.
You'll never retire early simply by stashing cash under the bed. Consider these investment strategies:
Property: Buy an investment property – preferably positively geared in an area where prices have increased yearly. The longer you hold a property the better, so investigate this option well before you want to retire.
Super: Make sure your fund is a good performer. Firstly, check how much money you have and how much money you're paying in fees. Assess with an advisor whether you're happy with your investment strategy, which should be optimised to suit your age bracket. If your super's barely risen, consider switching funds, and also consider whether you need to be salary sacrificing additional money to your super above the mandatory 9.5% that your employer contributes, or whether there are any tax benefits to sharing super with a spouse. If you're 40, then putting in an additional $50 a week would result in an additional $129,513 by the time you retire. Note: depending on when you were born, you may not be able to access your super until you're aged 60 (your "preservation age") and you've retired from work. If you were born before 1 July 1960, your preservation age is 55, however if you're 40 years old now, your preservation age is 60. You can find more information on preservation ages here.
Shares: Purchase shares through a trusted wealth management organisation. They can assess the level of risk you're comfortable with and invest your money accordingly.
Retiring early is possible if you do your homework. There is an entire movement called ‘Financial Independence, Retire Early' (FIRE) that is dedicated to helping people hang up their employment hat earlier by saving and investing up to 70% of their annual income. But do it for the right reasons. Don't retire early just because you don't like your job. It's better to retire into a life that inspires you, rather than retiring just to get away from a life you dislike!
The opinions expressed in this article are the opinions of the author(s) and not necessarily those of homeloans.com.au. The above is general commentary only and is not advice tailored to any individual's financial situation. We recommend seeking advice from a finance professional before implementing changes relating to your finances.