With retirement comes the golden years we are promised when we get to do what we have always wanted. No more meetings. No more work hours. No more stress.
Early retirement is something many Australians want to achieve, but few plan for it sufficiently. The assumption may be making as much money as possible, but there is more to it than that.
Consider the following points if you are interested in retiring early.
Where is the money coming from?
Irrevocably, we need money to survive. In Australia, you can only access your super at age 60. Everyone born before 1964 is past their preservation age. Therefore, to retire early, you must build enough wealth to cover expenses between retirement and age 60.
If you have been researching, you might have heard of FIRE – Financial Independence, Retire Early. FIRE is the act of building up passive income streams to cover living expenses to retire early.
The movement promotes saving up and investing as much money as you can. Your investments can theoretically generate enough passive income to cover your living expenses.
The consensus of advice is to aim for an average annual return between 4% and 10% based on your comfort level with risk. Anything less is too conservative, and anything more is unrealistic and unsustainable.
Removing your reliance on traditional income is the first step to retiring early. However, it would be best if you were disciplined with balancing your budget and investments. No investment is 100% guaranteed to be profitable, and one must have a certain risk level to deal with the loss margin.
What must the money cover?
To know how much you will need to have, you must have a comprehensive idea of all expected expenses. Read our previous article: How Much Super Do I Need For A Comfortable Retirement?
The target is typically higher for high-income earners due to accustomed lifestyle expenses. Here’s a simplified approach to calculating your retirement nest egg:
- Calculate your annual expenses by tracking your current spending and projecting future costs. Consider housing, healthcare, travel, hobbies, and other lifestyle factors.
- Inflation factor: Adjust your estimated expenses for inflation to ensure your purchasing power remains intact over time.
- Determine your retirement duration: Estimate your life expectancy and plan for a retirement that could last 30 years or more.
- Use the 4% rule: Many financial advisors recommend following the 4% rule, which suggests withdrawing 4% of your initial retirement portfolio in the first year and adjusting for inflation in subsequent years. Ensure your retirement savings can support this withdrawal rate.
- Seek professional advice: Consult with a financial advisor to create a personalised retirement plan that factors in your specific circumstances, investments, and risk tolerance.
When should you retire?
Technically, you can retire at 40. Australia has no restrictions or rules around the age at which you can withdraw. However, if you were to retire at 40, you would need around $1 million to cover expenses of $50,000 per year or $2 million to cover the costs of $100,000 per year.
Many retirees don’t realise they’ll have to replace their 40-hour workweeks with other activities. Some options include hobbies, travelling, and volunteer work. It’s essential to figure out your retirement goals.
You can start by transitioning into retirement by dropping hours or going part-time. This allows you to start doing more of what you enjoy while still having some work involvement. Only you know the best balance of productivity and rest for you.
What are the benefits of retiring early?
Retiring early offers several appealing benefits:
- Early retirees have extra years to pursue hobbies, travel, and spend quality time with loved ones.
- Early retirement can alleviate the pressures of a high-stress career, potentially leading to improved physical and mental health.
- With financial security, you can choose how you spend your time, whether starting a new venture, volunteering, or exploring new interests.
- In Australia, individuals aged 60 and over may be eligible for tax concessions on their superannuation (retirement savings).
What are the risks of retiring early?
Retiring at 50, for example, comes with certain risks, especially for high-income earners:
Longer retirement duration:
Early retirees may need to fund a longer retirement, increasing the risk of outliving their savings. If you retire at 55 and live to your 90s, you could spend more time in retirement than in the Australian workforce.
Therefore, it’s essential to be disciplined about retirement saving and investing.
Healthcare expenses can rise as you age. Ensure you have adequate health insurance coverage and provisions for unexpected medical costs.
Inflation can erode the purchasing power of your savings over time. It’s essential to invest wisely and consider inflation-adjusted income streams.
Market fluctuations can impact your retirement portfolio depending on your investment strategy. Diversification and risk management are crucial.
Would You Like To Retire Early?
Retiring early as an Australian professional is attainable with diligent financial planning and a clear understanding of your retirement goals and risks.
Start early, seek professional guidance, and remain flexible to ensure a secure and fulfilling retirement journey.
With careful preparation, you can enjoy the benefits of early retirement while safeguarding your long-term financial security.
If you would like to discuss a retirement plan tailored to your specific circumstances, contact our team of financial planners.