We’ve got limited time on this big rock and not everyone wants to spend their days working. Wouldn’t it be nice to know how to retire early?
Knocking-off your parents or spouse and claiming on their super and insurance is the obvious approach, but I thought I’d put together some less conventional options, too.
How to Retire Early
There are a few simple ways to retire early, such as reducing expenses and making suitable investment decisions. Here are some of my best early retirement planning tips.
1. Invest With Purpose
It’s amazing how many people overestimate their investment management skills. I’m going to give it to you straight – you are not an investment guru. Stop pretending.
There are tens-of-thousands of investment gurus in Australia with 4 years + education and 20 years’ experience who cannot produce higher investment returns than a basic low-cost index fund. It’s hard to do. You may make some great one-off decisions, you might be a member of online property forums and subscribe to hot stock tips, but you’re not an investment guru. Stick to your day job.
What you really want to do is figure out ways to be excellent at your work. Then, earn more and spend less. That’s what you can control and that’s what you’re good at.
After that, figure out what investment return you need to attain your expense objectives (as per previous point, above). Realistically, you should be thinking of an average long-term annual return of somewhere between 4% and 10% based on your comfort level with risk – anything less is too conservative and anything more is unrealistic and unsustainable.
When you determine the level of return required and your comfort level with the associated risk, you are now investing with purpose. You know exactly why you are aiming for a 7% p.a. average return (as an example), because that’s the return you require to meet your early retirement objectives.
You also know that aiming for a 7% annual return is going to include some good years and bad years and you know that you’re not going to get greedy and invest more aggressively in the good years and you’re not going to get scared and sell everything in the bad years, because you are presumably comfortable with the risks associated and all you need is 7% p.a. on average to achieve what you want to achieve.
2. Build a Passive Income Stream
For every $1,000 you invest, you are creating a passive income stream of $50 per year, increasing with inflation for the remainder of your life.
Now, $50 doesn’t seem like much, but think about the amount of times you could have put $1,000 away over the course of your life.
In Australia, there are around 250 working days per year. If you invest $6,000, you now only have to work 249 days to earn the equivalent amount, based on an annual wage of $75,000.
Invest another $6,000 and you’re down to 248 working days. And that assumes you’re only living off the income of your investment. If you’re happy to draw down on the capital as well and leave nothing behind, then you probably only need 2/3rds of that.
And how do you save $6,000? Stop buying dumb stuff. Or, keep buying dumb stuff, but downsize your home.
3. Downsize Your Home
How motivated are you to retire early? No matter the size of your house or the suburb you live in, there will always be somewhere in Australia that you can buy cheaper, if you’re willing to.
Your home is a lifestyle asset – a creature comfort – it does not provide you with an income and does not help with your intention to retire early.
Downsizing your home can free-up a few hundred thousand which can be invested and produce investment income to cover your retirement expenses – or at the very least, shave another 20-30 working days off your year.
4. Invest in Super
The main benefit of making additional contributions to super is that you are investing in a tax-effective environment. The tax on super earnings is a maximum of 15%, compared to up to 47% if you invest in your own name. You can also get a personal tax deduction for certain super contributions. Less tax means that your wealth can accumulate at a faster rate. However, the downside is that you can’t access your super until age 60.
So, does making extra super contributions allow you to retire early? Well, I guess that depends on your definition of early. Some people consider age 67 to be the retirement age in Australia, others consider 65 to be; so, I guess age 60 could be classified as early for some people.
5. Stop Spending on “Stuff”
Each time you buy something, you are not only reducing the amount that you can save and invest, but you are simultaneously and subconsciously increasing your standard of living.
Think about how many unnecessary things you buy because it’s only $20 or $50 or it was ‘on sale’. Or how many times you upgrade a car, a phone, a watch or an outfit. What you’re really saying is that you value these bargains and objects over your time. The only way you can pay for them is by working more and retiring later.
By increasing your standard of living, you are effectively prolonging your retirement, because the amount of non-work related income that you will need each year is getting higher and higher in order to cover your increasing standard of living. And, once your standard of living increases, it’s very difficult to go back.
So, now you’re in a position where you’re creating wealth slower and also needing it to build to a larger sum to meet your increasing income expectations – it’s a deadly double-edged sword.
Each time you buy something, ask yourself whether you need it or whether you want it. Change your own personal language. You’ll be amazed at how liberated you feel simply by changing a few words.
Unfortunately the term ‘need’ gets thrown around all too loosely these days. It’s important to remind yourself how this word affects your decision making processes.
“I need a new car”
“I have to go to work today”
“I need a holiday”
Try to change this language into
“I would like to use $10,000 to buy a new car” or “I am choosing to go to work today because…”
Once you begin consciously telling yourself that you actually have a choice, your decision making becomes that much easier and you’ll achieve your end goal much sooner.
6. Get Through to Age 60
If you want to retire early, you really only need your investments to cover your expenses from when you decide to retire, until when you reach age 60. At age 60, you will have access to your superannuation, which can then take over to help you cover expenses and may even be supplemented by Age Pension payments by the time you are 67.
Your first step is to project what your super balance is expected to be at age 60. Then calculate how much income this will provide you with throughout retirement, in conjunction with any Centrelink Age Pension payments. If it’s enough, then you’re halfway there. If not, contribute as much as required to super until the projected balance at age 60 is enough.
The next step is to then build enough wealth outside of super to cover expenses between now and age 60. Remember, you’ve got your super and the Age Pension covering you from then on. Therefore, you need to be focusing on investing your surplus income to a point that will get you through to Age 60. The less you spend on stuff, the more you save and the quicker you get to retirement.
7. Retire Overseas
This World Bank report shows that the cost of living in places such as the Philippines, Thailand, Indonesia and Vietnam are much lower than the cost of living in Australia.
Fancy a change of scenery? By moving to South-East Asia, you should be able to retire earlier, because you need a lower sum of money to provide the level of retirement income to cover expenses. Better yet, all of these countries are located conveniently close to Australia, meaning you can still pop back for weddings, funerals and the Grand Final.
Benefits of Early Retirement Planning
There are a number benefits of early retirement planning. These include:
Needing To Save Less
To build up wealth of $200,000, you either need to put $5,000 away each year for 20 years (total of $100,000) or $15,000 away each year for 10 years (total of $150,000). As you can see, the same outcome is achieved, based on the same investment return of 7% p.a., but by starting a savings plan earlier, the longer time horizon means you need to put less in due to compounding returns.
Predictable Investment Returns
Short-term investment returns are unpredictable and volatile. No-one knows what their investment returns will be in any given year. However, predicting what returns will be from certain assets over a longer time horizon, such as 10 years, will give you more confidence in knowing what your average long-term returns will be, making retirement planning much easier.
Most importantly, early retirement planning gets you into a good habit of prioritising investing over spending, where appropriate, so that the “sacrifices” made over time seem insignificant.
Frequently Asked Questions
Here are some frequently asked questions around early retirement planning.
What Is the Best Way To Retire Early?
The best way to retire early is to reduce your standard or living costs to the lowest amount that you are comfortable with, so that you can invest more of your surplus income and eventually require less investment income to cover your standard of living costs.
How Much Do You Need To Retire Early in Australia?
The amount you need to retire early in Australia is around $1 million if you would like to receive an income of $50,000 per year, increasing with inflation for the remainder of your life, without accessing the capital. This assumes an investment income return of 5% p.a. and a growth return of 3% p.a.
Can You Retire at 40?
Yes, you can retire at 40. 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 expenses of $100,000 per year. In Australia, there is no restriction or rules around the age that you are able to retire.
Can I Retire at 60 With 500k?
Yes, you can retire at age 60 with $500,000. Retiring at age 60 with $500,000 would allow a single person to cover retirement expenses of $42,000 p.a. (increasing with inflation) until age 95 and a couple to cover expenses of $52,000 p.a. The Centrelink Age Pension would supplement income from age 67 onwards.
What Is the Best Age To Retire in Australia?
The best age to retire in Australia is age 60. This is when you have unrestricted, tax-free access to your superannuation. Also, if you convert your superannuation to an income stream, all investment earnings within super will also be received tax-free.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
You Might Also Like These Articles:
- How Super Do I Need To Retire?
- How Long Will My Money Last In Retirement?
- How Much Does A Couple Need To Retire?
- Early Retirement Checklist
- Nakamura, S, Harati, R, Lall, SV, Dikhanov, YM, Hamadeh, N, Oliver, WV, Rissanen, MO & Yamanaka, M 2019, ‘Comparing Costs of Living across World Cities’, The World Bank Economic Review, vol. 34, no. Supplement_1, pp. S79–S88.
- https://www.aph.gov.au/Docu e mentStore.ashx?id=04b744d5-783e-4983-82ba-8c73effcb980&subId=691105