How do I retire early in Australia?

“How do I retire early in Australia?” you ask. If you’re asking this, there is a good chance you are experiencing mental and physical burnout due to working longer hours to meet increased productivity targets expected by our employers. We work increasingly to keep up with our neighbours, mindlessly feeding our consumer addictions continuously stimulated by social media algorithms that keep us spending. We buy more stuff to “improve our lives” when working more to buy more reduces the very thing that will improve our lives immeasurably – TIME. With more time, we can share more experiences with friends and family, strengthen our community by building networks, and, in turn, improve our state of mind and overall well-being.

But how do we break free of the “grind” you ask? How do we escape this modern slavery devised to feed consumerism and build wealth for multinational corporations? The answer is simple, but it takes some willpower to recognise that the gratification associated with buying new stuff is short-lived and that the escape we seek is achieved by doing the opposite. Tranquillity is achieved by understanding the difference between wants and needs, spending our money mostly on needs, spending sparingly on wants, and realising that we have options with less to spend our money on.

For some, the answer is working less and enjoying life more, and for others, the answer is to continue the grind a little longer and then exit the grind permanently. This financial independence bucks the trend but ironically relies on others continuing their consumer lifestyle to feed the compound growth of assets accumulated by those who have chosen to invest rather than live large.

Financial Independence Retire Early (FIRE)

These philosophies align with the Financial Independence Retire Early (FIRE) movement, which involves a disciplined approach to saving, investing, and managing expenses. The journey begins with setting clear financial goals and creating a detailed budget to understand spending and control spending clearly. Key strategies include maximising income through career advancement or side hustles, minimising unnecessary expenses, and living below one’s means. Investing aggressively in diversified assets, such as stocks, real estate, and retirement accounts, is crucial to building a substantial nest egg. Regularly reviewing and optimising investments for growth and tax efficiency helps accelerate the process.

Additionally, maintaining a frugal lifestyle and avoiding debt ensures you can channel more savings towards investments. The ultimate goal is to accumulate enough wealth to cover living expenses through passive income, allowing one to retire early and enjoy financial independence. Learn more about the FIRE movement on my previous “What is Fire?” blog.

For those of us who have followed the FIRE movement for some time, we know about the 4% rule, which requires a detailed understanding of how much it costs you to live per year and then you multiply that by 25, which gives you a conservative estimate of how much wealth you need to cover your yearly expenditure, allowing for inflation, for 30 years. There is some conjecture about this rule, however, it is seen as relatively conservative and most who have followed the rule increase their wealth over these 30 years.

How to calcualte your FIRE Number in Australia?

You must carefully calculate how much capital you will need to fund your living expenses before accessing the Australian Aged Pension or Superannuation. To calculate the required total, you must understand your annual living expenses and then multiply that figure by 25. For example, if you expect to need $40,000 per year to cover your living expenses, you would require $1,000,000 in retirement savings ($40,000 x 25).

Below is a simple table that shows how much capital you will need to retire if you follow the 4% rule:

Annual Income AllowanceCapital Required
$30 000$750 000
$35 000$870 000
$40 000$1 000 000
$45 000$1 125 000
$50 000$1 250 000
$55 000$1 375 000
$60 000$1 500 000
$65 000$1 625 000
$70 000$1 750 000
$75 000$1 875 000
$80 000$2 000 000
Table 1

The Age Pension and Superannuation

While the above is a guide, there are many things to consider. For example, if you are eligible in Australia, you will have access to a full or partial Australian Age Pension and/or Superannuation, provided you or your employer contributed to a superannuation scheme. I am not an expert on the Age Pension or Superannuation so I reccomend you do your own research. You can find more information at Services Australia – Age Pension and Australian Taxation Office – Superannuation.

How to calculate your FIRE number including Superannuation and the Age Pension?

If you anticipate being able to access the Age Pension, then the numbers are all different. Suppose you anticipate having $300,000 in your superannuation account by the time you reach preservation age (age 60); you plan to retire at age 55 and will access the aged pension at age 67; you need to ensure you have enough savings and superannuation to cover the 12-year gap.

If your annual expenses are $40,000 and there is a 12-year period before you can access the Age Pension and five years before your preservation age of 60, you would need a minimum of $180,000 (($40,000 per annum costs x 12 years until you can access the pension = $480,000)—$300,000 superannuation) to cover your living expenses. Assuming you need $40,000 x 5 years ($200,000) until age 60 may be safer. After age 60, you can access superannuation until you can access the aged pension at age 67, provided you meet eligibility criteria.

If you can access the full Age Pension and are single, the maximum you could be paid is approximately $29,000 as of July 2024. In this case, you would need further savings to cover living expenses of $40,000 annually. These are simplistic calculations and do not allow for the impact of taxation and inflation, so you should seek the advice of a financial advisor to assist with developing your personal plan.

While it is unlikely that we will be able to access the Age Pension, you can access our Financial Independence numbers in our Coast Fire article.

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