Wednesday, March 15, 2017

How to plan for an early retirement

Have you thought about what age you want to retire, how much you will need and the possibility of retiring younger?

It is something I think about regularly. I live my life in such a way that I plan to be financially free soon, allowing me to work if I want but also have diverse investments enabling me to retire if I so choose.

That freedom and flexibility is important to me and while many view early retirement as an unachievable dream, if you set a goal for it, work towards it and live accordingly, it is doable.

1.) How much do you need?
What are your annual expenses? How can you reduce them and what amount do you really feel you'd need to live a lifestyle you want in retirement?

If you own your home outright, that significantly reduces your annual expenses. Not going into work reduces clothing, wear and tear on the car as well as petrol bills, coffee/cafe visits etc.

Write down the expenses you have now and the expenses you would expect in retirement.

Next, what age do you want to retire? What income will you have in retirement - superannuation, shares, property, a business? How much you need per year, how long you expect to live after your retirement age and what investments you have will all impact when you retire and the lifestyle you have.

I have read the average advised superannuation is between $500,000 and $750,000 for a couple with a 7% return on their investments. Personally, I plan a little differently.

2.) How do you get enough to retire?
If you work, you have superannuation which depending on when you start paying into super, what your wage is, if you add more than your employer contributes, how your super is invested etc will determine how much superannuation you have.

I believe in planning for retirement in other ways, not just superannuation. Invest in shares, invest in property, create passive income streams and look at businesses you could have that don't require you.

For example, in my area, I can buy an apartment for under $250,000 and rent it out for $25,000+ per year. This unit is positively geared from the beginning if rented out continuously. If you choose to invest in property, I recommend looking for positively geared properties (not as common as negatively geared) and working to build a portfolio. Do extensive research, buy in areas that are tipped to increase in value, pay a deposit when you purchase and keep track of everything. Have a plan in mind of how long you want to hold properties for, how many properties and what sort of income you want and do not go into more debt than you can service.

For shares, I am a conservative investor. Again, do your research, only invest if you feel comfortable and realise that no investment is a sure thing.

Choose an investment option you are comfortable with, then focus on putting as much money into it as you can, while reducing your living expenses, paying off your mortgage and working towards an overall financial plan.

3.) How can I reduce my living expenses and invest for retirement?
Go over every area of your budget and look for ways to cut back. For example, refinance your mortgage to a better deal, compare all insurance and other services providers to make sure you get the best prices for all of them, get rid of services you don't need, start tracking where you spend your money to see where the leaks are in your budget.

As you reduce your expenses and start saving more, split the savings between paying off your mortgage and investing in your future. How you do that is your own choice. The sooner you pay off your mortgage (or any debt) the sooner you have more money to invest, however, the more you invest, the more compound interest works in your favour, so hedge your bets.

4.) Increase your income
If you are serious about retiring earlier, you need to look at increasing your income. This can be done through:
- Asking for a pay rise (if you deserve it).
- Looking for higher paid work.
- Creating some side hustles such as freelancing, domestic chores like cleaning/ironing/lawn mowing on weekends.
- Increase your training/qualifications or skills to increase your job options and income.

What age do you plan to retire and how? 

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