How to create a pathway to early retirement
The road to retiring early isn't easy. It takes time and incredible discipline to earn, save, and invest as much as you possibly can during your working life so that you can be comfortable in your retirement.
That said, early retirement comes in various shapes and sizes and what it looks like to you will determine exactly what you need to do to get there. In general, here are the steps you can take:
1. Decide what early retirement means for you
Many early retirees define it as not having to work to live — i.e. financial independence — but maybe you want to leave your corporate job for something more creative where you can make your own hours. Or perhaps you'd like to focus only on non-income producing hobbies, or freelance and travel in between.
The first step on the path to early retirement is figuring out exactly what that phrase means to you. Establishing your ideal day-to-day will make it easier to plan for — but just so you know, it will probably evolve over time.
2. Evaluate your current position
The first step for any aspiring early retiree is to complete an asset and liability statement together with a household budget.
Two things you’ll need to know in order to make a plan for the future is what your net worth is. This can be done simply by subtracting your total liabilities from your total assets.
Next thing you need to know is how much you spend. You can use loansHub’s free budgeting tool to help you calculate your cost of living.
3. Work out what you need in retirement
After outlining your version of early retirement, it's time to establish how much money you need to make it a reality.
For this part, you can use a retirement needs calculator.
4. Adjust your current lifestyle
It's very difficult to build substantial, long-term wealth if you currently spend more than you earn. When working toward early retirement, focusing on reducing your biggest expenses, which are probably housing, transportation, and food, can go a long way in the effort to increase your savings rate.
Check how your home loan compares
5. Manage your cashflow
It's crucial to keep your spending in check, but you can only cut back so much. Cutting your expenses and daily spending takes continued effort, it's a short-term solution.
Whereas increasing your positive cash flow is a long-term solution as you can use the extra funds for other investments, dependent on your risk profile of course.
If you have a home loan, the easiest way to increase your cashflow is by refinancing. Don’t believe me, how about ACCC’s home loan price enquiry? Which found that mortgage holders potentially start losing up to $5,000 per year after being with their lender for 12 months due to interest rate differences.
6. Build your Super
Oftentimes the best way optimize your retirement savings is through your Super.
Not only Superannuation provide unparalleled tax advantages and the long term return on investment beats most retail fund managers.
An early retiree under 55 years of age is not able to access superannuation or the Government Age Pension so another source of income is needed. People aged 55-64 years may be able to implement a transition to retirement strategy.
7. If you have a mortgage, consider paying it off
On your journey to early retirement, paying down and closing consumer debt with high interest rates should be a priority. With home loan rates at record low levels, for some, money saved in interest payments would pale in comparison to potential investment returns.
For others, having a great retirement is mental. Being mortgage free as you retire or within a few years of retirement certainly adds another level of mental freedom.
8. Have a plan B
No matter how foolproof your plan may seem, consider what could go wrong. You may find retirement to be boring. Or another pandemic hits the economy, taking your net worth south with it.
Will you be willing to return to full time employment and will you have room to cut expenses? Having a plan B for potential worst-case scenarios is essential when you don’t have regular income anymore.
Finally, if you want to work towards an early retirement put plan A into action but don't forget to live in the present, be kind and reward yourself as you hit milestones along the path.
Tell us: Enjoyed this article? Don’t forget to like and share.
And while you’re here, take our mortgage shredder challenge and discover how much you can save on your home and investment loans by using loansHub technology as your personal mortgage manager. To discover why loansHub and what we do, click here.
This article via BI does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.