The goal for many in the Financial Autonomy community is to retire early. Early retirement means different things to different people, but as I always talk about, Financial Autonomy is about gaining choice. So whether you’re early retirement consists of lying on the beach in Fiji at age 40, or traveling around Australia with your caravan when you’re 55 and picking up odd jobs as they crop up, this post is for you. I haven’t gone into a tonne of detail on any of these 6 ideas, because to my mind, a hack means a short cut, and so that’s what I’m delivering here today.
1. Work out your expenses
Start by determining what you spend now. The banks are coming up with good tools to help you in this area. There’s also a good tool at the MoneySmart web site.
Once you’ve figured that out, create a second version with what you would expect that to become once you retire. Will you travel more? Will you go down to one car in the household. Perhaps the kids will be off your hands and so food costs will decline. Maybe you’re planning on a tree change which will see your mortgage wiped out.
The point is, when they wanted to put a man on the moon, they didn’t just shot rockets up randomly and see what landed where. They had a clear goal and then they worked towards that. For you, your equivalent of the moon landing is being able to meet your expenses for the life that you want to lead. Unless you quantify what that number is, how can you possibly take steps that will deliver success?
For a more detailed look at this topic, check out episode 31 – What’s your number.
2. Figure out a debt plan
Sure, it may not be essential to be debt free when you retire, but in my mind, if you still have debt, then you can’t afford to retire yet. So the next early retirement hack is to figure out how you will be debt free by the time you pull the plug on your current day to day way of paying the bills?
That could be as simple as working to a schedule of paying money off each month until the debt is cleared. That’s the most typical way debt is paid after all.
If you’ve got high interest debt, such as credit card debt that you’re not clearing regularly, then perhaps your debt plan is to refinance that into a lower interest loan and then pay that off as quickly as possible.
Or perhaps your debt plan is a bit bolder. Maybe it is to sell the inner city home and buy something out of town for a fraction of the cost, with the difference between the 2 prices providing funds for debt clearance and maybe also income in retirement.
A tree or sea change may not even be necessary, perhaps you simply downsize. If you’re in a large family home, there’s likely a time in your life, when the kids are off on their own journeys, that a smaller home or unit might be better suited to your needs.
So there’s all sorts of ways you can be debt free at your early retirement – figure out your plan.
3. Invest aggressively
In bringing your early retirement aspiration to life, it’s highly likely that you will build up some investments that will provide passive income when you enter your early retirement phase. Now you could build up these investments in your bank account but you will have to do all of the heavy lifting through contributions. A better option is to invest in growth assets such as shares and property to gain the benefits of higher compounding returns. Now of course these assets have volatility and risk, as discussed in episode 35 Investing – how to get started, but that can be managed through appropriate time frames and asset allocation mixes.
As I explored way back in episode 7, if you wanted to build up savings of $500,000 and could afford to save $2,000 per month, you could deposit your savings in a bank account and it would take about 21 years to reach your goal. If instead you invested it in such a way that it earnt 7% each year, your goal would instead be reached in 14 years.
In short, you can retire earlier if you invest aggressively, by which I mean holding a mix of growth assets, not only investing in cash.
4. Don’t ignore your super
I know it’s tempting, when thinking about early retirement, to dismiss superannuation as something only people on the traditional work path need worry about. You want to retire EARLY, and Australia’s superannuation system isn’t built for that.
But that thinking is wrong headed. Regardless of what age you retire, you need to generate income to meet your expenses throughout your life. The less tax you pay on that income, the more money that is available to meet your expenses. Australia’s superannuation system provides a way for you to generate tax free income after age 60. Your early retirement plan needs to contemplate how your income needs will be meet after age 60, and I’d suggest you’d need your head read if you didn’t consider superannuation as at least part of this solution.
If you haven’t already downloaded it, grab our Early Retirement for Australians – the multi phase solution PDF where we have glide path diagrams illustrating how superannuation can be an integral element of your early retirement plans.
5. Plan other income sources
You’re working towards escaping your current cubicle captivity and so perhaps the thought of earning employment income in your early retirement appears to be an oxymoron. But earning income doing something because you have to is very different from earning income doing something that you want to do.
Let’s say you determined that for you to achieve early retirement you need to meet expenses of $50,000 per year. Now to do that through passive investment income alone, you’d need investment assets of something like $1.25million. For most of us, that’s going to take a long time to save.
But what if you could be a ski instructor 3 months of the year, something you love doing anyway, and pick up a handy $20k towards your expenses? It could be driving a school bus, doing some consulting, or serving on a company board.
If you could cover some of your expenditure from earnt income, you will be able to retire so much earlier. It may also make your life more fulfilling and purposeful.
6. Understand sequencing risk
This final early retirement hack is a bit technical, but it’s well worth a mention here. Typically, when you run projections thinking about how long your investments will last, you assume a certain rate of return. Maybe it’s 4% maybe 8% – it depends on how much risk you will take with your investments and how conservative you want to be with your projections.
But the often overlooked reality is that real life returns aren’t steady year to year. Your average estimate may well be right. It could even be conservative, but if the sequence of your returns is such that you have bad outcomes in the first few years of your retirement, those projections could be totally blown up, even if it ultimately proves that your long term estimates are right because there are high return later on that balance things up.
The problem here is that if you have to sell down investments to meet your expenses when valuations are down, the fact those values later rise doesn’t help you – you already sold.
Armed with an understanding of this risk, you can plan to hold enough cash or similar investments to get you through those early years of your early retirement. Perhaps, if share markets were having a really terrible time you could cut back your expenditure for a year or two. Maybe you could pick up some extra paid work. The key is, you want to be able to avoid having to sell down your investments at an unfavourable time.
Well there you have it, 6 powerful early retirement hacks for you. I’d love to hear your thoughts – leave a comment on the Financial Autonomy Facebook page, or contact me through the contact page.
Resources & Links
- Podcast Version
- Budget Planner
- What’s your number? Episode 31
- Investing; How to Get Started Episode 35
- Early Retirement for Australians