It sounds like a dream, doesn’t it? Hanging up the figurative tool belt earlier than the standard Australian retirement age of 65.
For some, dreams such as these do come true.
The question is, how do you balance your life goals and financial skills with the bumps that happen along the road to retirement, many of which hinder your ability to save efficiently?
Here are our tips to retiring early.
Unless you earn a very high income, saving all you will need to retire comfortably is going to take time. Likely your whole life, if you’re consistent.
Considering time is a major factor in building your nest egg, laying its foundations and beginning as soon as possible is the best way to maximise it. Though you shouldn’t make yourself unhappy by avoiding all of life’s luxuries, making sure you put aside a little bit extra money, in addition to your guaranteed employer contributions, will help you save more right from the word go. For someone aged 45, forgoing that one coffee a day and putting the money in your super could mean an extra $21,000 for their retirement nest egg.
Know what you’ll need
It might be a few decades off, and currencies and prices will definitely change between now and then, but having an estimate of what you will actually require each year during your comfortable retirement will mean you have a goal set in place to save for.
Knowing how much you’ll need to retire will largely depend on the type of life you wish to lead, but how long it will last plays an important role too. Once upon a time it was feasible that retirement would only last 10 years or so. However, these days it can be upwards of 30! As we continue to advance medical science and people become healthier overall, the average retirement will likely last even longer.
In fact according to research by Mercer, people are living longer than they expected.
“Retire at 60 and you will have to fund at least another 25 years on average. Our research into the life expectancies of public sector workers reveals if you’re a white-collar worker there’s a high chance you’ll live much longer than the average and have to fund another 35 years.”
Children are gone – time to prepare
When your children move out and their various costs disappear, or at least become more minimal, your ability to save changes once again. This is just in time for a last big push to bolster your super account, ready for the preservation age (see below).
Your maximum concessional contributions limit rises as you pass 50 years old, meaning you can contribute an extra $5,000 per year to your account. If you’re going to retire at 65, that means you have the opportunity to save an additional $75,000 before turning 65, which could make your retirement just that little bit more comfortable.
And don’t forget your non-concessional contribution limits, otherwise known as after tax contributions. With the kids gone, this might be the perfect time to move some savings money into your super and take advantage of the lower tax environment. You can find out more on non-concessional contribution limits here.
The Australian preservation age – that which you can begin to access your Super fund – is earlier than the standard retirement age. Your preservation age is determined by the year of your birth. See the ‘Life Changes’ tab of our FAQ for more detail..
Most superfunds offer a service known as transitioning to retirement. This is where you are able to keep working and salary sacrifice a larger portion that you would normally put into your Super. You can then supplement your income by taking a portion of your Super and converting it into a pension. While this might not sound like a good idea, it can actually boost your retirement savings and save you tax. Check out the Governments case study on transition to retirement here.
What would you do with an early retirement?