Early Retirement

Daniel Brown

Financial ExpertUpdated on October 9, 2023

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What would you consider an early age for retirement? Are you planning to stop working before you start accessing your Age Pension and super fund?   

Jump straight to…

In recent years, early retirement has been trending, with Australia’s retirement age averaging around 55. Are you on track to retire early with a nest egg to last two or three decades? Does early retirement seem far-fetched?   

This article provides all the information you need for an early retirement. It includes determining if retiring early is right for you, how much money you’ll need, and when your super fund is accessible. It also discusses the challenges, myths, and tips related to early retirement.


What Is Early Retirement? 

Australians can now access their Age Pension after turning 66.5 years old. It’s essential to read all retirement prerequisites on the Department of Social Services homepage.

The topic of early retirement typically focuses on the financial independence retire early (FIRE) strategy.

The FIRE strategy encourages people to live below their means, while boosting their income through extreme savings and investments. 

The goal is to have more money to invest towards early retirement. You should still be ready with an emergency fund for unexpected situations.

8 Tips to Help You Retire Early

If you want to make early retirement a reality instead of just a dream, try these tips:
  1. Create a financial plan
  2. Pay off the home loan through extra repayments 
  3. Increase your income through income streams
  4. Do retirement budgeting
  5. Have a plan to cover healthcare costs
  6. Build the best investment portfolio
  7. Boost your super funds
  8. Reduce expenses to reach your savings goal

Guide to Retiring Early: A 2-Phase Approach

It’s essential to include two phases in your retirement planning. These include a pre-retirement phase and a post-retirement phase. 

This process can help you plan confidently for your retirement years, when your annual income is from savings accounts and investments:

Phase 1: Pre-retirement Planning

Vision for an Early Retirement

This process paints a picture of what retirement will look like for you. It will help you take steps in the right direction. 

Many retirees don’t realise they’ll have to replace their 40-hour workweeks with other activities.   

Some options include hobbies, travelling, and volunteer work. It’s essential to figure out your retirement goals.   

Creating a Social Security Strategy

The Australian government is gradually increasing the Age Pension’s eligibility age cap. You can also boost your super funds before retirement.   

  Tapping into your super funds will affect the amount of funds available upon retirement. Besides that, you also might need to invest in private health insurance.

10-Year Financial Buffer

As part of your investment strategy you should set aside funds for the first five years of your retirement, at least five years before your early retirement. 

This action protects your retirement savings from stock market volatility. You could make a funds allocation into cash-based investments like bonds. 

Health Insurance Plan

Many early retirees fail to take out private health insurance before early retirement. Taking this step will help bridge the gap between your retirement date and Age Pension age.   

An important factor is that you’ll lose cover from employee healthcare plans after clocking out for the last time.

Evaluate the costs of private healthcare plans and shop around for the best deal. 

Earning Income

Focus on controlling your time instead of merely stopping work. You can offset living expenses with gig economy work, or part-time jobs. 

The gig economy is a popular term for contract workers, and is based on temporary, flexible, or freelance jobs. 

Earning an income through freelancing can help you reach early retirement much earlier. With the added savings, you’re able to build up funds for your retirement lifestyle faster.

Picking the most rewarding post-retirement work like “side hustles” can help to prevent outliving savings or spending savings.

Early Retirement Housing

While working, you should focus on where you plan to live, such as an apartment, townhouse, or retirement village. Some options include:

  • Downsizing your home 
  • Paying off your mortgage early 
  • Researching affordable dream homes if relocating 
  • Completing renovations in your current home 
  • Making necessary major repairs 
  • Paying off any home equity line of credit (HELOC), which is a secured form of credit where a lender uses your home as a guarantee of payment

Your top priority should be major repairs to your home to avoid spending retirement savings and long-term damage to your investment portfolio.  

Phase 2: Money Management in Early Retirement

Early retirement is like starting a new journey. You can be proactive after you stop working by taking these steps:

Set Spending Guidelines

You’ll need to know how much cash is required to maintain your dream retirement lifestyle. Financial planning is critical. 

Consider creating lean, moderate, and fat budgets. In most situations, you’ll be in the middle. Still, it’s essential to know how much leeway you’ll have down the road after starting retirement.

Doing enough planning can reduce stress associated with spending. You can also spend money on items and activities you want, while staying under budget.  

Adjust the Rate of Return Assumptions

Consider the average rate of return for various investments and then model your portfolio by using a lower rate of return. Examples of investments include:

  • Amazon stocks
  • Real estate
  • Bitcoin 
  • Exchange traded funds (ETFs) 

When making investment decisions, try to choose investments that produce a steady income through historically high-interest rates.

Segment Your Savings

This step of splitting up your income can include the “bucket savings method.” The process can leverage markets while saving money for the near future. Consider using five-year portfolios.

Enjoy Early Retirement

A retirement savings plan can help you enjoy your wealth. Consider a retirement income plan customised for your spending goals to enjoy retirement life more.   

Issues to Consider When Planning an Early Retirement

Is 55 too early to retire? What factors can affect your retirement plan?

You’ll need more planning than usual for early retirement. Here are some issues to consider: 

Focus on Your Expenses 

The process of estimating retirement expenses is more about expenses than savings. What you’ll need to spend will affect how much money you’ll need for retirement.  

You could consider the normal retirement age as 66 years old since it’s the earliest Australians are eligible for the Age Pension. 

However, Australia has no fixed retirement age. In some cases, you can receive your super before the standard preservation ages of 55 to 60. 

Retiring at 55 would be less challenging if you live a somewhat inexpensive retirement lifestyle. 

However, it becomes more difficult due to higher “lifestyle inflation.” The reason is that when income rises, spending increases. 

Estimating Life Expectancy

Make sure not to underestimate your life expectancy – the statistical age for how long you’ll likely live based on data.  

Due to today’s average lifespan, your retirement savings will have to last longer.

If you retire at 55 years old and live to your 90s, you could spend more time in retirement than in the Australian workforce. 

Therefore, it’s essential to be disciplined about retirement saving and investing.  

Stress-test Your Early Retirement Plan

Several factors can affect your plan, including:

  • Markets
  • Cash flow
  • Expenses
  • Taxes

Consider hiring a brokerage company or other financial adviser to help you with financial planning. Online tools like an early retirement calculator can also help you determine how much you need to save to retire comfortably.  

A financial planner can help you stress-test your plan to factor in market downturns, like the coronavirus pandemic.   

Doing number-crunching in a stress test can help you understand the pros and cons of retiring early and what your best options are based on goals and needs. 

Challenges and Downsides of Early Retirement

Retiring early is feasible, although it also involves dealing with some common challenges. The main ones you’ll have to face include:
  • Having to pay a 10% early withdrawal penalty from most tax-deferred accounts if you retire before 60 
  • Age pension eligibility starts in your 60s
  • Reducing saving years and accessing savings earlier
  • Generating income before withdrawing money from your super funds
  • Paying for private health insurance to supplement your cover
  • Extending how long your retirement funds must last

Do You Have Enough Money for Retirement?

The Association of Superannuation Funds of Australia (ASFA) has estimated that to live a comfortable retirement, generally healthy homeowners will need to save this much per year:

  • Singles: approx. $44,400 
  • Couples: approx. $62,800 (combined)

A comfortable lifestyle is one in which you can enjoy various recreational and leisure activities. This feature is in addition to meeting cost-of-living needs such as:

  • Household goods
  • Decent clothes and car
  • Various electronic equipment
  • Holiday travel 
  • Private health insurance

How Early Can You Withdraw Your Super?

You can access your superannuation in a lump sum after reaching the preservation age of 55 to 60.

If you retire early, some financial situations will grant you early access to your superannuation. Your super fund will inform you if you have this option for your retirement account. 

Myths and Lies About Retiring Early 

The negative claims you might hear from a lot of people about retiring early are untrue, and here some of them: 

1. Living cheap is a life of destitution – Retiring early can make you financially independent and provide more choices. It can mean having no mortgage, credit card debt, or high utility bills. 

2. Earning money post-retirement disqualifies your retirement – Many early retirees stay productive and still earn money. The difference is that they’re not working to sustain their lives. 

3. You must cut spending to save money – A happy retirement isn’t just about how much you’ve saved. That’s because spending affects your needs.  

4. You’ll be bored all the time – Early retirement allows you to do the activities you love. The process will take different amounts of time for different retirees.  

5. $1 million isn’t enough for retirement – Living below your means can result in more efficient spending. Here are some ways you could retire with a $1 million net worth:

  • Use short-term savings for living expenses
  • Maintain frugality 
  • Stay completely flexible

Retiring early can provide you with financial freedom, and time for enjoying your favourite activities. 

Preparation starts with having a retirement plan to quit full-time work earlier than normal. Find out the best options for savings and investment accounts. 

What if you could tap into the wisdom of an experienced financial adviser instead of taking the all too common ‘hit-and-hope’ approach?  

Many people may be unaware of this…but just like you, 41% of Aussies intend to get financial advice rather than going it alone, according to an Australian Securities and Investments Commission (ASIC) report.

Looking for more ways to save everyday? 

If you feel overwhelmed by a tidal wave of options and don’t know where to start, you can reach out to your MMS Money Mentor to help get your money sorted.
Manage your money better by having a quick chat with your MMS Money Mentor today!

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