For many people, early retirement is a dream and life ambition. Work hard now, and then enjoying a long retirement surrounded by family, traveling the world, and indulging any number of new hobbies and experiences while you’re still vibrant and active enough to get the most out of it.
Retiring early isn’t a decision to take lightly. You won’t be able to count on the pension until you reach retirement age, and without an income coming in, you could find yourself in financial distress without forethought. So, how can you go about retiring, and making sure you’re in the financial position to enjoy it?
Work out when you want to retire
The first step is to work out the age you want to retire in the first place. Calculating this age is important because the benefits you can receive and when you can receive them depends on your age. If you were born prior to June 30, 1972, your retirement age is 65.
For those born after that, the retirement age will increase in six-month increments between July 2037 and July 2040 to eventually become 67. Once you reach retirement age you are provided with a pension, regardless of whether you still work or not, or have additional income, through investments and shares.
If you plan on retiring early, then you’ll need to have some kind of income to maintain you until you’re eligible for the pension. This income can’t be your superannuation, either, since all superannuation schemes have strict limits on what you can withdraw from them until you reach retirement age.
Building the budget
Once you know when you want to retire, the next job is to work out how you plan on financing it. Collect together the last year’s worth of bank and credit card statements, as well as last year’s tax return, and go through, working out your monthly and weekly expenses. Split these down according to essentials (food, clothing, housing, taxes, utilities, insurance expenses), non-essentials (streaming TV services, gym memberships, and other subscriptions).
Then work out how much money you’ll have access to, minus your working income, be that your portfolio of shares, your savings, and so on. Divide that number by the number of years between the age you plan on retiring early, and the year that you qualify for the pension and superannuation. That’s the amount you’ll have, at maximum, to live through the early retirement. And don’t forget, you can use awesome online resources to project how much living expenses will be in the near future, like this rent report, for example, from ABODO.
Make sure you’re covered against big, sudden expenses
One of the things that can catch many early retirees out is a big expense that they weren’t expecting. Sudden death in the family can cost $10,000 or more, for example, and hospital or property damage due to disasters can ruin an early retirement budget.
Even a major issue with your car, which might be something that your income could absorb when you were employed, becomes a major issue when you’re trying to stick to a disciplined budget.
This is why it’s so important to be fully and comprehensively insured. At a minimum, you should have health insurance (and a good plan with large coverage for hospital and dental), life insurance, and home and contents insurance.
These all introduce monthly bills to the budget, but that’s exactly the point – they can be budgeted for. A major, sudden bill – the kind of thing that you insure against – can’t be.
Learn to live below your means
Finally, it’s important to acknowledge that once you’ve retired, you will need to adjust how you live. If you’ve budgeted well, you’ll live comfortably and still be able to enjoy the comforts of life, but you’ll want to make sure that you carefully consider every excess.
You’ve got all the time in the world now, for example. Why eat out expensively when you could make cooking a new hobby? If you’re living in a three-bedroom home, but the kids have all moved out, do you really need that much space, or could you “right-size” your home, not only giving your pool of money a boost by selling down, but also reducing the cost of power, heating, cooling, and other utilities?
Also, consider getting rid of the credit card, or at least paying it down to a zero balance and then keeping it on hand for the most critical emergencies only. Once you’re living on a retirement budget, anything you might use the credit card for will be because it sits outside of what you’ve budgeted, which means that it’s not living within your means.
Early retirement is more achievable than you might think. It can be scary to step out there without a working income, and with the pension being years down the track, but with careful budging, it will be possible to enjoy a comfortable, healthy retirement years before the nationally-recognized age. It’s all in the planning, and in making sure that, as far as possible, you won’t be hit with unexpected bills that eat into your pool of savings.
