Episode Details

Many people that I speak to seek freedom from the need to clock on and clock off. To not be answerable to a boss. To not having to devote time and energy to things that they're not passionate about, just for the pay. The dream therefore becomes to retire early, and the sooner the better. In Australia superannuation is the primary vehicle that we use to save for retirement, and access to superannuation is available from age 60. So, when we're talking about early retirement, we're referring to retiring earlier than age 60. But what does being retired before the age of 60 actually mean? Does that mean sitting at home all day looking at the TV? I certainly hope not. Of the people I talk to with the ambition to retire early, I believe their goal is to have choice and freedom. To be able to say no to things they don't want to do in a work sense. Early retirement links very strongly with financial independence, and that is where we will be focusing the attention of today's podcast. So your dream of early retirement might be leaving the normal full time paid work force at age 40 and working as a fishing guide 6 months of the year in Northern Australia. Perhaps it's leaving the paid workforce to help your daughter care for your grandkids. Or you want to become an independent film maker. The point is, early retirement isn't about retiring from life, rather it's escaping the captivity of the workforce and spending your time as you wish to. It's recognising that we don't have a limitless life span, and so the sooner we can pursue the things that make us happy, the better. If you are to retire early, you need to develop a plan to support yourself. I've come up with 5 things you could do to gain the financial independence that you need. They are:

1. Understand your livings costs.
2. Save
3. Invest
4. Minimise/avoid debt
5. Downsize/tree change

Let's take a look at each in a bit of detail:

1. Understand your livings costs.

Is all of your spending really necessary? You need a budget and a cash flow management plan. For you to be in a position to quit your job, you need to know how much money you require to live. Is it $30,000 per year or $80,000 per year? Here's some overly simplistic maths for you, just to illustrate: If you wanted to build up a portfolio of investments that would generate $30,000 per year for you to live off, rising with inflation, and with a high level of confidence that it won't run out in your life time, you would need investments worth approximately $750,000. If, instead of $30,000, you needed $40,000 per year, that would rise to $1million. So to have just an extra $10,000 per year, you need to save an extra $250,000. (Note that I haven't allowed for tax here, this is just a really simple illustration). So to flip that, if you could reduce your living expenses by $10,000 per year, then the amount you need to save to be financially independent and retire early is reduced by $250,000. How much sooner would that mean you could escape your current employment captivity? You may have heard of the book The Millionaire Next Door. It's quite US focused, but it has some interesting insights none the less. The two authors studied households whose net-worth (ie. assets minus debts) exceeded one million US dollars. One really interesting finding was that millionaire households were disproportionately clustered in blue collar and middle class suburbs, and not in the higher income, white collar, more affluent suburbs that you would assume. Digging into why this was the case, the authors found that the higher income earners devoted more of their income to luxury items and status symbols, often funded with debt. These people tended to neglect savings and investment. In order to retire early you are going to need to build some wealth. It may not need to be millions, that depends on your goals, but owning a roof over your head is probably a minimum starti