If you google ‘retire early in Australia’ you’ll probably come across a handful of stories about people in their late 20s and early 30s who have managed to become financially independent and retired before even hitting 40.
There is no reason you couldn’t strive to do the same thing. There’s no one-size-fits-all approach to achieving financial independence earlier in life, but here are five things you can do which may get you closer to an early retirement:
1. Take a look at your budget
Creating good financial habits and sticking to them over the long term is crucial if you want to set yourself up for early retirement. So your first step towards financial independence should probably be looking at your monthly financial affairs and taking note of your earnings, expenditure, bills, and savings for that period.
After having done that, you may be able to trim some fat from your monthly expenditure, or make other changes that affect your monthly financial affairs for the better. We have handy guides covering:
You may also want to compare savings accounts to try to make sure you’ve got your current savings in the best vehicle possible. You can compare savings accounts and see if you can find the right option for you with Canstar.
Hopefully one or more of these may be able to help you save more, which in turn may give you more money to invest with. Speaking of investing…
2. Consider investing
A common theme in some of the aforementioned stories about successful early retirees is that they retired with the help of dividends.We have a handy guide to dividends here, but the short story is dividends are the portion of a company’s profits you may become entitled to once you buy shares in said company.
That being said, something we mention in our dividend explainer is that not all publicly traded companies pay dividends to their shareholders. Additionally, buying shares for the dividends you may reap as a result is just one share-based investment strategy; you may also choose to buy shares in the belief that they’ll increase in value, and you could then sell them for a profit.
If you did decide to buy shares for the dividends, you’d need to have a reasonably impressive investment portfolio in order to be able to survive off the dividends it generated, however most investors start small. The general idea is that you take the money you (hopefully) freed up after step one, and invest some or all of it every month – in time, your ongoing contributions and the magic of compound interest will see your portfolio grow.
Even if you never reach the point where you can survive entirely off the dividends your portfolio generates, they may end up being a key part of your journey towards financial independence. However, it’s important to do your own research here; as mentioned, not all companies pay dividends to their shareholders, and some may even decide to stop paying them if times get tough.
One more thing to consider if you’re interested in investing is your current life stage. While everyone’s circumstances are different, it’s generally taken as a rule of thumb that younger investors can afford to take on more risk with their investments, whereas older investors who might be closer to retirement may want to invest more conservatively, in options such as ETFs (exchange traded funds).
That being said, only you can decide what investments are appropriate for your circumstances and life stage. You may be a risk-averse young investor, or you may be an older investor who’s more than happy to take on a bit of risk – it’s entirely up to you.
3. Check your super
If you retire early it might end up being a while before superannuation comes into the picture – your preservation age might be as low as 55, but unless you’re already in your mid-50s your preservation age at this stage is 60. That being said, paying careful attention to your super in your 20s and 30s can end up making a serious difference – a difference potentially worth thousands of dollars when it comes time to cash out some or all of your retirement benefit.
You can read about how to do a 5-step superannuation health check here, but some key things to keep in mind regarding your super are:
- Make sure your superannuation is invested in line with a risk profile appropriate for your circumstances
- Weigh up the pros and cons of consolidating your super if you have multiple accounts
- Make sure you’re with a super fund that offers you the best value possible
If you want to find a better-value fund to switch to, you can compare funds with Canstar. The table below displays some of the funds on our database but you can make your own comparison if you want to view products that may be better suited to your personal circumstances.
4. Think carefully about taking on more debt
One of the easiest ways to throw yourself off course when you’re travelling towards financial independence is taking on debt. While there can be ‘good debt‘ and ‘bad debt’, anything dragging on your income can be an obstacle to achieving financial independence.
If you’re currently saddled with a mortgage or significant credit card debt, you’ll want to think carefully about the possible ramifications of taking on any further debt. You may also want to read our guides to getting out of debt, and then either separating or consolidating your debts, depending on which option is more appropriate for your circumstances.
If your debt is of the credit card variety, a balance transfer may be a good option if you use it wisely. You can compare different balance transfer offers and see if you can find the right one for you with Canstar.
The table below displays a snapshot of credit cards with 0% balance transfer offers on Canstar’s database, with links to providers’ websites. These results are sorted by the length of the 0% balance transfer period (longest to shortest), then provider name (alphabetically).
5. Stay flexible
At the end of the day, we can’t tell you how long it will take you to reach financial independence. That said, it may help you in the long run to be flexible with your finances. If your expenses go up, think about saving and investing a little less over that period, and if your expenses go down, perhaps it is time to save and invest a little more. The ability to adapt to any changes to your immediate financial situation will likely serve you better in the long run than a locked-in plan, and even if you don’t end up retiring early you may end up in a reasonably good financial situation regardless.
It may also be worth considering what you actually want out of retirement. While there are probably people out there who’ve managed to retire early and maintain their lifestyle, it seems for the most part that retiring early goes hand in hand with frugality and fiscal responsibility. So if your ideal retired life includes holidays and fancy restaurants, you might be better off working until at least your preservation age, to build up a super balance and investment portfolio which could support that kind of lifestyle.
Subsequently, the silver lining of either being unable to retire early, or simply deciding not to do so, is that you’ll have much more time to grow your superannuation in preparation for the point at which you do retire. But as we said, it’s important you make sure your retirement benefit is with the right fund, sooner rather than later. You can compare super funds to seek a great-value fund for you with Canstar.