Episode Details

I have noticed that more people are attracted to seeking out work that they have a personal connection with, particularly since the beginning of Covid. That is, for a growing number of people, the emotional rewards (satisfaction) that their work offers is becoming more important than the financial rewards. This might include working in the not-for-profit sector, working for a socially conscious organisation or starting their own business.

Of course, not everyone has the flexibility to immediately resign from a high paying job. But of course, you can put a plan in place that allows you more freedom and flexibility in the future. I wanted to discuss the common considerations we tackle when working with clients in this regard.

Three phases of wealth accumulation

It is important to recognise that there are typically three phases associated with becoming financially free as illustrated below.

Phase one: Accumulation – this phase involves accumulating the required quantum of assets needed to fund retirement. That could include acquiring investment property(s), making additional contributions into super, investing surplus cash flow into shares and so on. This phase typically requires you to contribute as much cash flow as possible i.e. to maximise your earnings and minimise your expenses.

Phase two: Income flexibility – the main aim of this phase is to give your investment assets enough time to benefit from the power of compounding capital growth. This phase requires you to earn enough income to pay for living expenses and maintain your investment portfolio. That is, you may have flexibility to earn less during this phase either through changing roles or not working full-time.

Phase three: Retirement – it probably goes without saying that this phase doesn’t require you to generate any personal exertion income. All living expenses are funded from your investment/asset pool.

Therefore, if you would like to get yourself into a position where you have more choices regarding the type of work you do (i.e. less pressure to maximise your income), what you must do is focus on accelerating phase one.

This is a less aggressive version of FIRE

FIRE is an acronym that stands for a movement called Financial Independence, Retire Early. The idea behind FIRE is that you must minimise your expenses as much as possible to allow you to save and invest more, so that you can retire a lot earlier than a traditional approach allows.

The approach I have discussed above can probably be best described as a less aggressive version of FIRE. That is, my approach requires you to maximise your income and minimise expenses for a finite period (could be anywhere from 5 to 15 years). This allows you to reduce your personal exertion income for the next period (could be another 5 to 15 years) as long as it’s enough to cover your living expenses. By doing so, you delay the need to ‘eat into’, your financial resources. It allows your investments to benefit from compounding growth until you can start to draw on your superannuation (from age 60).

Maybe you don’t need to earn as much as you think

One of the advantages of formulating a plan is that it quantifies what income you need to generate and for how long in order to reach yo