After a rough day at work, how many times have you fantasised about throwing in the towel and retiring early?
Across the globe, groups of 30 and 40 year olds have turned this fantasy into reality, embracing the radical ‘FIRE’ movement (Financial Independence, Retire Early) – enabling some to retire in their 30s with $1 million in the bank.
Far from living a glamorous lifestyle, these millennials are incredibly frugal, but enjoying their freedom from work.
Whilst their lifestyle may not be your cup of tea, it is the ultimate example of how planning early can help you achieve your retirement goals.
How do you know you’re ready to retire?
The first box you’ll need to tick when it comes to planning for retirement is whether you’re eligible to access your superannuation, or Aged Pension.
You can access superannuation from age 55 to 60 depending on when you were born, and you may be entitled to the Age Pension from age 65 to 67, also depending on when you were born.
Although you may be able to access your super or aged pension, there’s more to transitioning to retirement than just finances. Many people find the change from employment to largely unstructured time, throws them into an emotional loop.
So, the next few boxes you’ll need to tick will help ensure your retirement is purposeful, enjoyable and will enable you to achieve your retirement goals.
Your Life Choices suggests you reflect and ask yourself the following questions before retiring:
- What will you do with your spare time? Do you have activities that will give you purpose and make you feel valued?
- Do you have any goals, or items on your bucket list that you’d really like to tick off in retirement?
- Have you shared your retirement plans with your partner/nearest and dearest? Are your retirement goals complementary?
- Are you in good physical and mental health?
Ultimately, your primary consideration should be your finances, and making sure you’re financially ready.
Many clients I’ve worked with felt very ready to retire, but realised they wouldn’t have enough money to live on without working. A gradual transition to retirement is a fantastic option for many people.
It enables you to wind back your working days over a few years, so you can become accustomed to a reduced workload, develop hobbies or interests for later in your retirement, all while accumulating a larger nest egg.
A transition to retirement income stream, or pension, is also a great option – you can draw down your super to supplement your employment income when you reduce your working hours. A transition to retirement pension can be used in conjunction with increased concessional (pre-tax) super contributions to save tax in the lead up to retirement.
The retirement decision triangle
At Advice SA, we use the ‘retirement decision triangle’ to help our clients assess their readiness for retirement, and to help ensure they’re able to achieve their retirement goal.
At each corner of the triangle sit three factors:
- Annual Income
- Accumulated Wealth
- Retirement Age: whether it is planned, unplanned (poor health, redundancy etc.) or determined by your Age Pension age.
The consequence of deciding to prioritise one of the factors is that the other two factors may need to be variable.
Once you decide the factor most important to you, a financial adviser can then calculate the variable for the other factors – this becomes your ‘retirement goal’.
With this knowledge, you can then decide if the variables are within an amount that is acceptable.
For more information watch our video.
As illustrated, if you require a fixed amount of annual income you will need to budget while earning an income to accumulate sufficient wealth. If you don’t have sufficient wealth, you will need to work longer to save it.
Conversely, if you are fixed on retiring on a certain date, you will limit the amount of wealth you can accumulate (as you will no longer be saving but drawing on your wealth). Limiting the amount of wealth you have accumulated means you need to receive less income from your wealth to ensure that you maintain it throughout your retirement.
It’s never too early to start planning your retirement. Let Advice SA help you take the first steps, by booking a free consultation with us today to find out what’s possible for you.
Mark Bastiaans is an Authorised Representative #296627 of Guideway Financial Services Pty Ltd ABN 46 156 498 538 AFSL 420367.
The information provided above contains general advice that does not take into account your financial situation, specific needs or objectives and is not intended to be personal financial advice and should not be relied upon without written advice from Guideway Financial Services Pty Ltd.