What does early retirement in Australia look like? If you're striving to be financially independent, retiring early is a great goal. Let's take a deeper look at strategies, practices, and tips to help you achieve this outcome.
Many Australians feel that early retirement is unattainable— or extremely difficult at best. Like many things in life, you're likely to fund that proper planning (and ideally starting early) can position you to retire far earlier than you may have expected.
If you're making early retirement plans, you have to prepare as soon as possible. That means developing a clear idea of what you would like early retirement to look like, getting the necessary advice you need from experts, doing your own research, and making high-quality financial decisions.
You might be in your forties thinking of an early exit, or in your fifties preparing for your transition to retirement. Whatever your situation, we have proven strategies and best practices that can help you achieve early retirement. This guide will walk you through the most crucial ones. Let’s dive in.
The Concept of Early Retirement
Although there's no specific date that qualifies as 'early retirement', we consider this to be simply stopping work the typical retirement age in Australia, which is 67. This age is most common because this is the point where many Aussies will qualify for Age Pension, effectively enabling a new income source which may offset the loss of income from leaving the workforce. Sadly, the age to qualify for Age Pension has been gradually increasing over the years - just a few years ago you would qualify for a pension from age 65.
Despite the Age Pension taking longer to qualify for, many people are continuing to retire in their 50s. Recent research from the Australian Bureau of Statistics shows that the average age of retirement for over 4.2 million retirees is around 56.9 years old (although we note that this data is distorted by couples where a low-income earner retires in their 40s or early 50s). Either way, it's clearly not all about the Age Pension.
Why do Australians want to retire in their 50s – or even 40s? We find that the main driver for our members is that they are seeking more freedom and independence. Leaving the workforce may enable you to do more travel, enjoy quality time with your loved ones, and spend more time on the things which you enjoy. For others, health is a major reason - people want to enjoy their healthy years rather than working until a time where they're perhaps less active or mobile.
Whatever the motivation, early retirement can lead to a comfortable, happy, and fulfilling life. Getting there means planning for multiple income streams, smart spending habits, and designing your lifestyle to ensure a no-surprises retirement.
The FIRE (Financial Independence, Retire Early) Movement
The F.I.R.E. movement, or 'Financial Independence, Retire Early', has gained popularity in Australia as a way to escape the 9-to-5 routine. The idea is to save and invest aggressively - to the extent of often making significant financial compromises now - to achieve financial independence earlier.
While the idea of FIRE is enticing, it's not for everyone. Many people struggle with the idea of living well below their means, and it can require very high levels of discipline to keep costs down over the long-term. Here are some pros and cons to consider:
Pros:
- Financial independence - Having the option to not work is a powerful thing!
- Early retirement - Having the ability to leave the workforce earlier is a big motivator for many.
- Higher growth on your income - The movement promotes saving and investing more aggressively to build wealth faster. Reducing your personal expenses - and then investing these funds - is a fantastic way of building discipline and improving your financial situation.
- Reflecting on your lifestyle - The commitment to save a very high proportion of what's earned means that you need to be far more selective with the money you do spend each week. This encourages deeper thought on what you value, and what you can easily go without.
Cons:
- Extreme lifestyle sacrifices - To achieve FIRE, you'll need to make some serious sacrifices in your spending budget. Some people find this easier than others, but it certainly means higher compromises now.
- Investment risk - Aggressive investing means taking on more risk, which can be detrimental if the market corrects.
- Social factors - The FIRE movement may require you to say 'no' to many of the costs / events your friends are saying 'yes' to. What's more, a very early retirement may result in you being ready to enjoy your retirement plans while your friends are still working. Both of these scenarios can create some social isolation.
Our take is that there's a good deal to learn from this movement, although we don't subscribe to the 'maximum sacrifice' model that often comes with the FIRE movement. We promote saving aggressively, but don't feel our members should be sacrificing your life and happiness in the process. In most cases we find the best outcome is a balance of good discipline, and high-quality planning (i.e. 'live for today, but plan for tomorrow').
Calculating Your Retirement Needs
The key to early retirement is knowing how much money you need. How do you calculate the income you'll require in retirement?
A general rule of thumb is to assume your investments will grow by 5-6% each year. This means a $1,000,000 portfolio could generate around $50,000 per year without eroding the original $1,000,000 balance. Keep in mind this is a rough estimate, and you'll need to have a financial plan which provisions for market corrections and other setbacks.
Surprisingly, expenses don't drop significantly off in the first few years of retirement. Many people find they spend just as much, if not more, than they did while working. This is because retirement is a time to enjoy hobbies and travel, and you will also have more time each week to than when you were in the workforce.
A solid retirement budget should therefore cater for budget for adjusted lifestyle expenses and healthcare, plus factor in a buffer for different life stages.
Investment and Income Strategies for Early Retirement
So what are the common investment and income strategies to help you retire early? Here are the most common:
1) Accessing Your Superannuation Early
You can access your Superannuation before pension age in certain circumstances. We recently wrote a guide on applying for early access to your Superannuation. Feel free to read that blog next to learn more about early access to your Super.
If you're not able to access your super (typically people anyone below 60yo), you'll need to explore other income sources such as supplementing your retirement savings with a TTR pension.
2) Investment Properties and Debt Recycling
Investment properties is a popular strategy for generating investment income for retirement. Rental income isn't passive, although it will likely require less work and attention than your job, so you get to enjoy your golden years while still generating recurring revenue from your properties.
Another popular strategy is debt recycling - essentially borrowing money to invest, and then using the income from your investments to clear non-deductible debt. This 'recycling' process of converting non-deductible debt into deductible debt can have meaningful long-term benefits in your financial situation.
3) Leverage in Share Markets
Leveraged investments in share markets can significantly amplify your investment returns and can accelerate wealth building. However, it requires a high-risk tolerance and a long-term perspective, as using borrowed funds will magnify both the gains and the losses for your investments.
Geared investments, such as leveraged exchange-traded funds (ETFs), can enhance returns but also increase volatility. We highly recommend that you understand the dynamics of leveraged share investments and consider getting some advice before venturing into these investments.
4) Using Companies and Family Trusts
Family trusts and companies offer distinct advantages for asset protection and income distribution. Family trusts allow retirement income to be distributed to various family members, providing flexibility and protection against creditors. This structure ensures that assets are not directly owned by individuals, offering a layer of separation that can safeguard wealth in the event of financial difficulties.
Companies, on the other hand, offer tax advantages and flexibility in profit retention. While companies do not benefit from the capital gains tax discount available to trusts or individuals, they provide opportunities for tax-efficient profit distribution and retention. Balancing the benefits and drawbacks of each structure is essential for optimising asset protection and income flexibility - and especially if you are a business owner.
Aggressive Saving and Smart Spending
Achieving early retirement will likely require some aggressive saving (and lifestyle adjustments) to boost your overall wealth in the leadup to retirement. Here are three keys to help you build that habit:
1) Prioritise Saving
To retire early, you should be saving first and then spending - not the other way around. That means saving the correct amount each week or month and where required, making compromises to maintain this savings rate.
Some popular strategies include
- Limiting your discretionary spending
- Being deliberate about your household budgets
- Prioritising savings over some luxury expenses like travel, car upgrades etc
A disciplined approach to saving can help you accumulate the necessary capital to support early retirement.
2) Prioritise 'Experiences' vs. 'Things'
Preparing for early retirement doesn't mean saying no to every luxury expense. Your desire and discipline to save should be in balance with the need to enjoy life. But we also encounter people who are putting too much emphasis on expensive purchases. In many cases these expenses may be driven by a desire to keep up with social norms rather than a true understanding of what you value.
We encourage that our members focus on meaningful experiences over material possessions, and there's plenty of studies which indicate this approach does more for your overall happiness and wellbeing.
3) Have Clear Financial Priorities and Values
Your financial priorities and personal values significantly influence your saving habits. Understanding what truly adds value to your life helps in making informed decisions about where to save and where to spend.
For many, working toward retiring early is about demonstrating financial discipline. But your sacrifices do not have to detract from your overall life satisfaction. Aligning saving strategies with personal values helps you achieve your early retirement goal while also living a fulfilling life today.
Ready to take control of your financial future? Schedule a free retirement planning consultation with Northeast Wealth today! Talk to our team and we'll tailor a retirement strategy which aligns with your individual goals and ambitions. Don't wait—plan your dream retirement now!
Tips for a Better Overall Lifestyle when Planning for Early Retirement
Tips for a Better Overall Lifestyle when Planning for Early Retirement
As much as we want to be pragmatic about retirement planning, it's impossible to separate the emotional considerations. We're not robots. Your money and spending will affect your overall well-being.
Here are some tips to improve your overall well-being when planning for retirement:
1) Find Purpose and Fulfilment Outside of Work
Sometimes, retiring early can make people feel like they have no more purpose, especially since many of us find so much meaning in our work. But your retirement years can be just as fulfilling and purpose-driven as your professional life.
We encourage that our members start identifying their hobbies, volunteer work, or other meaningful activities before they have left the workforce. Engaging in activities which align with your interests and values can help you to pursue new areas of personal growth and promote quality of life once you've left the workforce. Maintaining a sense of purpose contributes to overall wellbeing and prevents feelings of isolation or feeling 'rudderless'.
2) Set Realistic Expectations for Your Early Retirement Life
Setting realistic expectations can help you avoid disappointment and achieve a smoother transition to retirement. Early retirement should be seen as a phase of life that offers flexibility rather than a complete cessation of work.
Consider the merits of gradually shifting away from full-time employment while maintaining some level of professional engagement, rather than jumping off the hamster wheel at full speed!
3) Build Family and Social Connections During Retirement
Maintaining strong family and social connections will contribute to your emotional well-being during retirement. The best way to do this is to engage with family and community.
It's highly valuable to focus on relationships and social interactions. Beyond being financially stable, retirement should also be emotionally enriching. Building and nurturing your most important connections are key to your long-term happiness and personal fulfillment.
4) Invest in Your Health and Wellness
As you age, your health should be one of your highest priorities. In your later years, you may begin to observe that your body doesn't operate like it used to! Still, you can invest in yourself and aspire to improve your health and wellness even toward the later stages of your life.
Being regularly active has the double-sided benefit of offering daily endorphin hits, whilst also supporting your mobility over the long term.
Need more tips and insights on early retirement? Watch this podcast now.
Frequently Asked Questions (FAQs)
What is the early retirement scheme in Australia?
An early retirement scheme in Australia is a plan that employers use to encourage employees to retire earlier or resign. The scheme must meet certain conditions and be approved by the Australian Taxation Office (ATO) before payments can be made.
Requirements for an Early Retirement Scheme:
- The scheme is designed to help the employer simplify or reorganise their operations.
- Employees who fit into a specific category, as approved by the ATO, can take part in the scheme.
- The Commissioner must give the green light in writing for the scheme before it can be rolled out.
How much to retire early in Australia?
As per the Association of Superannuation Funds of Australia (ASFA), a single person needs around $595,000 in savings, and a couple needs around $690,000. This assumes you own your home and are in reasonably good health.
The amount you need to retire early in Australia depends on several factors, including:
- The lifestyle you want to live in retirement
- How much you spend each year
- How much you can earn on your investments
- When you want to stop working
The Association of Superannuation Funds of Australia (ASFA) has a Retirement Standard that can help you estimate how much you'll need to retire. You can access that here.
What happens if you retire early in Australia?
Retiring early in Australia can have a number of challenges, including:
- Reduced access to superannuation and the Age Pension - People under 55 are not typically eligible to access their superannuation. You'll need to wait until A67 to apply for the Age Pension.
- Depleting your assets - Retiring early can result in your personal wealth depleting more quickly, especially if you retire before age 60. This should be considered as part of a broader financial plan.
- Tax implications - Special rules apply to payments received from an early retirement scheme, employment termination payment, or genuine redundancy payment.
- Seniors' benefits - You may be eligible for some seniors' benefits before age 67, such as discounts on government services and business discounts through a state or territory's Seniors card program
Is there a penalty for retiring early?
In Australia, there is no direct penalty for retiring early. You may face financial consequences like reduced superannuation benefits if you access your retirement funds before reaching your preservation age, and you won't be eligible for Age Pension until you reach age 67.
Some employers may offer early retirement schemes with specific tax benefits depending on your situation and length of service. Moreover, there will be some individuals who can afford to retire earlier through the other earning strategies mentioned above.
Final Thoughts
Early retirement in Australia is possible with the right strategies and planning. To achieve financial freedom and retire early, you need to understand your financial needs and consider various investment options. By adopting a lifestyle of aggressive saving, balancing risk, and focusing on your emotional wellbeing, you can create a retirement lifestyle you'll love.
If you're looking for additional guidance, don't hesitate to contact our team for expert advice and support. We're here to help you achieve financial independence and retire early with confidence. If you ever need any more help, feel free to reach out to our team for expert advice and community support. We're here to guide you on your path to financial independence and early retirement.
James O’Reilly is the Director of Northeast, a fast-growing financial advice firm that empowers clients to achieve meaningful financial progress and well-being. He's also the co-host of the Australian Retirement Podcast, one of Australia's fastest-growing podcasts.