What’s your idea of early retirement in Australia?
Some would say retiring before the Age Pension age of 65. Others would say retiring before the superannuation preservation age of 55. And then there are those from the younger generation who espouse the FIRE movement.
FIRE stands for ‘financial independence retire early’. It’s a growing trend that advocates extreme savings and investment to achieve financial independence at the age of 40 or younger.
Regardless if you plan to stop working at 40, 55, or 65, you’ll learn something new as this article will:
- Run you through the pros and cons of retiring early,
- Discuss the factors you need to consider before deciding to retire early,
- Give tips to achieve early retirement successfully, and
- Show you the early retirement policies and programs available to you in Australia.
Pros of Early Retirement
Increased freedom and flexibility
With early retirement, you are no longer bound to a specific work schedule or place. You’ll have more time and energy to devote to the things that truly matter to you, and you’ll be able to follow your passions with the greater freedom and flexibility that comes with retiring early.
Pursuing personal interests and hobbies
When you retire early, you’ll have more time to devote to causes you care about, pursue hobbies, learn new skills, or even start a business.
If you retire early, you can take time off to travel or relocate to a place where you can more easily pursue your passions.
Improved health and well-being
Retiring early can have a positive impact on your health and well-being in various ways.
The stress associated with a busy work schedule can be reduced, resulting in better mental and physical health. You can also focus on physical activities, which can enhance your health and emotional state, as well as enable you to maintain your independence into your senior years.
You can establish a regular sleep routine, which can lead to improved sleep quality and overall health. Additionally, having more time to plan and cook healthy meals can contribute to improved health and well-being.
Enjoying time with family and friends
Early retirement helps you prioritise family and friends, making life more rewarding.
With more quality time, you may make memories and strengthen relationships with loved ones. You can travel together, attend family events and take care of family members. Early retirement allows time for shared interests, and strengthening relationships.
Cons of Early Retirement
Decreased income and financial insecurity
If you retire too early, you may end up with less income, which leads to financial insecurity.
Early retirement means less time for superannuation contributions and lower retirement savings. You must rely on personal savings and investments since you’re not yet eligible for the Government Age Pension. Furthermore, early retirees may not qualify for government-funded healthcare until age 65, which can result in additional healthcare costs or the need for a comprehensive private health insurance policy.
Early retirement can result in reduced social interactions with coworkers and friends, leading to loneliness. Having more free time than others who are still working can make it difficult to socialise and increase feelings of isolation. Retirement can also make individuals question their identity outside of work and struggle to find new hobbies or purposes.
Negative impact on mental health and well-being
Work provides social interaction and a sense of community that can positively impact mental health. Early retirees may feel lonely and isolated without these social connections. Additionally, financial difficulties can arise if retirees have not saved enough money, leading to stress and mental health issues. Work routines and structure can improve mental health, and early retirees may struggle to establish new routines, leading to feelings of anxiety and disorientation.
Reduced access to employer benefits and support
Retiring early can result in losing important benefits offered by some Australian firms, such as salary packaging.
Early retirees may miss out on training and development opportunities that employers provide to help employees acquire new skills and advance their careers. Additionally, employee assistance programs that provide support for mental health and personal issues may not be freely available to early retirees, making it harder to manage personal challenges.
Factors to Consider When Deciding to Retire Early
Retiring early is a complex decision that requires careful consideration of various factors. You need to consider your lifestyle goals, financial situation, retirement income, health, social connections, and work opportunities. Evaluating these factors will help determine if early retirement is the right choice for you.
Consider your retirement goals and corresponding expenses before deciding on retirement age.
Lifestyle factors include where you want to retire, how much you shop, dining out, travel, and whether you want to downsize your house.
One rule of thumb is to spend 70% of your pre-retirement income in retirement, however, this may not match your retirement lifestyle. You can use a retirement calculator to determine how much money you need for a modest or comfortable lifestyle.
Your financial situation also influences your retirement decision. This includes your expected income over time, your savings rate, and your debt.
As people get more experience, learn useful skills, and move up in their jobs, they usually earn more. If your career pays well early on, you could retire in your 40s or 50s if your salary improves progressively.
Your savings rate is the percentage of pre-tax income you save each month. Higher savings rates can mean earlier retirement. Your savings rate includes money flowing into your superannuation, investment accounts, and high-interest savings accounts.
If a worry-free retirement is your goal, paying off all your debts can help you keep a lid on your retirement expenses and allow you to be more flexible with your lifestyle. Debts include student loans, credit card debt, personal loans, and mortgages.
Early Retirement Income
You can look into diversifying investment options such as shares, bonds, managed funds, exchange-traded funds (ETFs), and property. But don’t forget to contribute to your superannuation as income from it ensures a comfortable life even after 20 to 30 years past preservation age.
You can’t enjoy early retirement if you’re not healthy enough to do the things you want. Exercise regularly, have a healthy diet, and get enough sleep to maintain a healthy lifestyle.
It’s critical to account for rising healthcare expenditures in your long-term retirement budget because these expenses may become more significant as you age, especially since life expectancy has become much longer.
Personal and Social Connections
Where you decide to retire will dictate how many personal and social connections you get to keep. Although you can always make new friends when you’re socially active. Picking a place with many clubs and activities can be good for you socially and mentally.
You may find yourself bored a few years into early retirement, or you may want to have a part-time job. In any case, you need to ensure that your skills are up to date so that you can get the type of work you want to do and remain flexible with your time.
Tips for Successful Early Retirement
Now that you know what factors to consider for early retirement, let’s look at the ways you can address these concerns to meet your retirement plans. Your retirement plan will need an investment strategy that can provide you with an annual income to meet your needs and wants.
Have a Financial Plan
A detailed plan that outlines your financial objectives, costs, and obligations is a smart idea so you always know where you stand. A thorough financial plan will also help you stay on track with your objectives because you can routinely check to evaluate how your funds are doing and how major expenses might derail you.
Have a Budget in Place
Creating a budget or adopting the FIRE plan (Financial Independence, Retire Early) of living simply, saving heavily, and investing correctly may help you reduce your consumption and increase your savings. This is cutting back on current expenses to save more for a nest egg, thus allowing you to enjoy those years of inactivity more extensively.
Pay Off Your Mortgage
You generally don’t want to carry a home loan into retirement, so you may wish to consider whether paying off the mortgage is a priority when it comes to increasing your financial freedom. If you are successful in doing this, you won’t need to use all of your retirement assets to pay off your home loan. Additionally, you might end up paying less interest overall if you pay off your mortgage early (without incurring fees from your provider). Before making any adjustments, be careful to enquire with your provider about the maximum early repayments and speak with your financial adviser to assess the impacts of this option.
Increase Your Super
While you may not be able to access your super right away, boosting your super savings while you’re working is like paying your future self. When you can manage to set aside more money, you might want to try adding lump-sum payments to your retirement account.
Make a Retirement Spending Plan
Retirement planning includes determining how much you would require in retirement. Even while your living expenses may be lower, you wouldn’t want your standard of living to drastically decline. Consider separating your living expenses into necessary expenses like groceries and utility bills and optional expenses like travel and updating your car. And think about how you’ll pay for costs like home repairs and renovations.
Boost Your Earnings
In the years before retirement, are there any ways you could raise your income? Could you work more hours in your current position or take on more responsibility? You could try anything, such as asking your manager for a wage raise or occasionally working a few extra hours.
If neither of these is an option, could you commit to a side hustle to bring in additional income?
Create a Suitable Investment Portfolio
To meet your financial objectives and increase your wealth for retirement, be sure you’re investing in the appropriate asset mix. You might consider talking with a financial adviser about creating an investment plan suitable for your individual situation and your goal to retire early.
Prepare to Pay for Medical Expenses
Your long-term retirement strategy must account for increased healthcare costs as you age. Check what health services and products are covered by Medicare if you retire early. This should help you decide the type of private health insurance you need.
Early Retirement in Australia: Policy and Programs
If you’re retiring before reaching the Age Pension age of 65 to 67 years or your superannuation preservation age of 55 to 60 years, you may have to source your early retirement income somewhere else.
The Age Pension is intended to help elderly Australians maintain their basic living standards. It is distributed to those who meet the age and residency requirements.
As seen in the table below, the pension age has been steadily increasing from 65 to 67 years.
Age Pension benefits vary in amount depending on whether a person is single or partnered. To account for changes in the Consumer Price Index, the Department of Social Services examines these rates regularly. The sums listed here represent the highest rates for each fortnight. Depending on your situation, you can receive a payment in advance.
Superannuation, also known as “super,” is money that your employer has set up for you to live on after you retire from employment.
Your super payments may be tax-free if you are 60 or older. You may obtain your super benefits in the following ways:
- a super income stream – a series of regular payments from your super provider made at least once each year, or
- a super lump amount – you might be able to withdraw some or all of your super in a single payment if your super provider permits it, or
- a mix of the two
Superannuation funds typically cannot be accessed until the owner reaches preservation age. The table below can be used to determine your preservation age.
Saving money is crucial for you since the more you do it, the more you’ll have for retirement. You may make additional contributions to your super to boost your savings through Concessional contributions and Non-concessional contributions.
Concessional contributions come from pre-tax income. Concessional contributions include employer contributions and salary sacrifice payments made to your super fund. Once the concessional contributions are in your super fund, they are taxed at a rate of 15%.
Non-concessional contributions are ‘after-tax’ contributions because they come from income that has already been taxed. These contributions are not taxed once received by your super fund.
Just remember that there are contribution caps on your super throughout a financial year. You might owe more tax if your contributions exceed these limits.
Medicare provides health coverage for a wide range of healthcare services and products. You can use your Medicare card to get medical treatments, public hospital services, surgical services, prescription prescriptions, vision tests, pathology testing, imaging, and scans.
Some private companies also offer early retirement schemes. Employers implement these schemes to entice particular groups or types of workers to retire early or to resign.
The number of years that you worked for your employer determines how much of the early retirement scheme payments are tax-free.
Plan Your Retirement with Central Coast Financial Planning Group
Early retirement gives you more time to spend with family and friends, and what you want for a happy and fulfilling lifestyle. Like any other life choice, retiring early also has drawbacks financially and health-wise.
If you plan to retire earlier than the super-preservation age, it would be a good idea to start saving, invest early in a suitable asset mix, as well as boost your superannuation.
Consider all factors that can affect your retirement, such as social factors, financial stability and your health before deciding to retire early.
Retirement is a significant life milestone that allows you to rest and enjoy the fruits of your hard-earned labour. However, it’s not a one-size-fits-all plan, and since everyone has specific needs and wants, hiring an expert retirement adviser can help you plan a secure and comfortable retirement.
If you want to enjoy retirement with peace of mind knowing there is a financial strategy to take care of the future, speak to the team at Central Coast Financial Planning Group. We help our clients enjoy their dream retirement through personalised financial advice.
DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.