Episode Details

Episode 48 – the 10 worst things you can do to prepare for retiring early

So your financial autonomy goal is to retire early. For some that might mean retiring at age 35 and for others age 58. Often, especially for those looking to retire at the younger end of the spectrum, it will mean ceasing their current role, but still engaging in some income producing activities. So retiring early looks different for each of us.

We usually talk about what you should do to achieve your financial autonomy goal, but today I thought I'd flip it and instead look at what you should avoid.

Want to ensure your early retirement plans never come to fruition? A good place to start would be to have no handle on your cash flow. Achieving any sort of retirement goal is a dollars and cents equation. If you boil it down, you need to solve how you will have enough money to meet your living costs. Now if you don't know what your living costs are, how can you possibly know whether retirement is possible, how much you need to save, and whether you have enough saved to last the rest of your life?

So to ensure failure, don't have a budget, and don't in any way monitor what you spend.

Next, since you aren't paying any attention to what you spend, just put it all on the credit card. It's easier now than ever before, just tap and go. Come on, you need those purple Converse runners. And why have last night's left overs for lunch when you could have a burger bigger than your head, with fries on the side? Just keep slapping that credit card down and if the bank that gave it to you starts making life difficult by asking you to actually pay it off, well just go to the next bank and ask for another card – what could go wrong?

If only it was as easy to pay off a credit card as it was to build up a credit card debt!

The next thing you could do to help ensure your early retirement dream never becomes a reality is to not save. Spend every cent you earn. Saving? Isn't that something my grandparents did?

So don't put aside money in a bills account. Don't put money aside for emergencies or a holiday. And certainly don't even think about building up enough money to make any investments.

Which leads nicely into number 4 on the list of the worst things you can do to prepare for retiring early – don't invest.

Compounding? That's got something to do with chocolate hasn't it? What a foolish idea it would be to have your money actually earn new money without you having to even get out of bed.

But let's say you've overcome this mental barrier. The next thing you can do to help torpedo your chances of early retirement success would be to invest too conservatively. Just leave all of your savings in the bank, or maybe you really stretch yourself and take it up a notch with a term deposit.

To illustrate just how bad a decision that would be, if you had $20,000 saved and you left it in the bank at call earning 1.5% interest – which is actually a pretty good rate on at call money at the moment – in 20 years that $20,000 would grow to $26,937.

If instead you used that $20,000 to purchase a growth investment such as an exchange traded fund or managed fund, and it earned 8% per year, your $20,000 would become $93,219. So your decision to "play it safe", cost you over $66,000.

Armed with this knowledge then another good way to lock in early retirement failure is to ignore your superannuation. Now it may be that in your mind super has nothing to do with early retirement because you can't access it until you're old anyway. If you think that way I can only assume you're planning on dying before age 60. Because if your hope is to live long and prosper, then Australia's superannuation system is too generous to ignore. Zero tax on earnings and drawings, plus enormous flexibility as to how much you take o