Am I too late for early retirement?

I’ve been doing a lot of reading – and thinking – about retirement for a new project. In the last few posts, we’ve looked at net worth (including your home), and retiring. But what is the difference between ‘traditional‘ and ‘early‘ retirement? In this post – the 100th post on Enrichmentality! – we’ll tackle this question.

As we saw in the previous post, most people do not retire at the ‘traditional’ retirement age of 65.

Why retire?

People have a variety of reasons for retiring, not all of which are controlled by the individual.

‘Push factors’ are those undesirable conditions which push people out of work. These reasons include poor health – either your own, or that of a loved one you need to care for. And health issues certainly don’t wait until the arbitrary age of 65 to strike.

Some find themselves made redundant through downsizing, and have difficulty finding another job.

But there is another side of the equation that we don’t talk about often enough:

‘Pull factors’ are those conditions that draw people to life beyond work. These might include being creative, traveling, raising a family, spending more time with your partner or friends, or simply, enjoying life.

The definition of ‘retirement’

The English word ‘retire‘ comes from re- (back) + the Old French tirer meaning ‘to draw’, and literally means ‘to draw back’ or ‘withdraw’. The term was originally used to describe the retreat of an army. But by the 1640s it came to be used in relation to retirement from work in the sense that we use it today.

The ERE blog has some interesting thoughts on the different definitions possible for the word ‘retirement’:

  1. What you do when you can no longer work.
  2. A period of fun when at age 60 (or 65) you start doing the things you always wanted.
  3. When you no longer need to work for income and no longer do so.

This last definition is the happiest of them all. Not being pushed out because of ill health. Not putting off what you truly want. But having the freedom to make your own decisions about what is best for you.

Strategic retreat

We can learn a lot from the origins of the word ‘retire’. Retirement can be a strategic move. It’s not the same as ‘giving up‘.

In summary, your retirement age is a function mainly of the nature of your work, your attitude towards it, your abilities, and your financial preparedness.

It has remarkably little to do with ages set by the government.

And your financial preparedness cannot be measured solely by your superannuation balance. It’s a combination of your super balance or other retirement savings in countries outside of Australia, your net worth, and your budget.

While we hear a lot about the retirement savings we will all need, we hear remarkably little about the need to reduce debt before retirement. Probably because there isn’t as much money in selling the story of debt reduction.

But as my posts on net worth, and retirement time frames demonstrate, your level of debt at retirement will have a big impact on what super balance you will need.

The same is true of your budget. The less money you spend, and the less debt you have, the less money you will need to save for retirement.

An alternative to the traditional retirement

Even though most people do not or cannot wait until they are eligible for superannuation or pension payments to retire, we rarely hear about alternative pathways.

Financial independence is one such alternative.

There are two ways to approach this.

Firstly, you can focus on gaining financial independence throughout your working life by reducing your living expenses, saving the difference, and investing outside of super. As this post explains, to work out a rough figure of how much you might need to invest, you can multiply your living expenses by 25.

Imagine, you’re 30 and you have an average (for an 18-34 year old) annual income of $42,000 (all figures in these examples are after tax).
Your living expenses are $15,000 per year, leaving you $27,000 to invest.
$15,000 x 25 = $375,000.
Saving $27,000 a year, it would take you almost 14 years to save $375,000.

But let’s say you want to retire in under a decade, before you’re 40.

There are three variables you can play with: your income, your expenses, and the time frame. If you want to retire faster, you will need to improve your performance on at least one – or ideally both – of the other variables.

Let’s take a look at each of them in turn:

Increasing your income

Say you get a raise of $3,000 a year, and are now earning $45,000.
Your living expenses remain the same at $15,000 a year, but you now have $30,000 to invest.
$15,000 x 25 = $375,000
Saving $30,000 a year, it would take you just under 13 years to save $375,000.

Decreasing your expenses

Let’s say that instead of getting a raise of $3,000 a year, you reduce your expenses by $3,000 a year.
Your income remains at $42,000 a year, but you are now spending just $12,000 a year.
$12,000 x 25 = $300,000
And, just like in the above example, you now are now able to save $30,000 a year as well because of your reduced expenses.
Saving $30,000 a year, it would take you exactly 10 years to save the reduced $300,000 you now need.

Free money

Of course, investing in interest-bearing assets is vital for you to be able to eventually live on the income from your principal. You should actually be earning money on your savings that will speed the process up even further. But the point to take away from above is that it is often better to reduce your expenses by $1 than to earn $1 more. Reducing your expenses will give you a double boost – by reducing the total amount you need to save before you can quit work, AND giving you more money left over to save whilst you’re still working.

Increasing your income and decreasing your expenses

So now, imagine you’ve managed to wrangle a $3,000 a year raise or take on a second job, bringing your income up to $45,000, AND reduced your annual expenses by $3,000 to $12,000.
$12,000 x 25 = $300,000
Saving $33,000 a year, it will take just 9 years for you to reach financial independence even before taking into account interest earned.

In countries like Australia where superannuation savings are mandatory for almost everyone, it is likely that most workers will have some superannuation to claim when they turn 65. If you have saved and invested enough outside of super to gain financial independence before this date, then you will simply go on as is, living off the interest on your principal, and enjoying a cash injection on your 65th birthday.

But I’m over 40…!

Maybe you are thinking that early retirement and financial independence are fine if you’re in your 20s or 30s, but it’s too late if you’re in your 40s or 50s already.

Not so.

A second version of financial independence for those with a super fund is as a stop-gap to traditional retirement.

If you have sufficient savings in your superannuation to meet your needs in retirement, you don’t need to calculate a target that is 25x your annual spending. The 25x annual spending figure is the figure that (theoretically!) should permit you to live off of the interest of your investment without having to touch the principal indefinitely (of course, this is not guaranteed!).

But if you are not looking to provide for your needs indefinitely because you have already taken care of your post-preservation age lifestyle, you can simply multiply your annual expenses by the number of years to your superannuation preservation age.

Stop-gap financial independence

This time, let’s say you’re 50 instead of 30. You’ve already saved enough in your superannuation to provide for your life after retirement, but you won’t be able to access it until you’re 60.

You’ve been working a bit longer, so you have a higher income – about $52,000. And you’ve managed to reduce your living expenses to $12,000 per year too.
Working with the 25x rule, you would be looking to save $300,000.
Saving $37,000 a year, it would take you just over 8 years to save that target. Which would give you just 2 years of freedom before you reach preservation age.

Two years of your life are very valuable. But you might not think it’s worthwhile to sacrifice your lifestyle now. There is a lot you could do with that $300k to make your work life more pleasant I’m sure.

But if you have already taken care of your post-preservation years through your superannuation savings, you only need to save your annual expenses multiplied by the number of years left until your preservation age:

Preservation age (60) – current age (50) = 10 years.
$12,000 x 10 = $120,000.
Saving $37,000 a year, it would take you well under 3 years to save that target.

Allowing you to retire at just 54, and enjoy an extra 6 more years of retirement.

Quantity and quality

And it’s not just about quantity of years. It’s about quality too.

Is your health more likely to permit you to travel at 54 rather than 64? Will you be able to make more of a difference to the world through the charity work or the creative pursuits you want to achieve in your younger years?

What type of retirement are you aiming for? Let me know in the comments below!

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Today’s featured image is a little symbolic. The image is one of my husband’s ties, which we ‘hung up’ for travel. It also features our tickets to Romania. I would have included a photograph of my uncomfortable work shoes, but they’ve been binned for real!

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4 thoughts on “Am I too late for early retirement?

  1. Congratulations and thank you for your 100th article!

    Interesting post.
    Aiming for ‘early’ retirement is always a matter of what we manage to achieve versus what we’d end up doing if we weren’t actively working towards it, so I think that while it’s easy to feel behind others, it’s good to acknowledge being ahead of our alternate-universe-selves. *back pats all round* 🙂

    1. Thanks for your comment & your congratulations Anna!
      Yes, I completely agree – a ‘balancing act’ is the PERFECT way to describe this.
      I tend to lean towards giving more encouragement for people to make sacrifices, to save, to invest, and to push themselves purely because there’s already a LOT of encouragement for people to spend, spend, spend out there, and most people don’t need extra persuasion to jump on the consumerist bandwagon. But it is definitely worthwhile balancing your sacrifices with some fun, for at least 2 reasons, I think:
      1) None of us ever know how long we will have to live, or how long we will be able to enjoy the company of our loved ones. It would be a dreadful shame to devote all/most of your time working towards a future you never got to enjoy without having some fun along the way, and
      2) I really believe that people are usually more successful when they balance their savings with fun. It’s a bit like dieting. If you try to be too extreme, it’s easy to fall off the cart, and just give up. If you reward yourself from time to time – whether that be with a meal out, a trip to the movies, a weekend away, whatever – it’s so much easier to keep up the good behaviour of saving the rest of the time.
      Thanks for making me address these important aspects – I certainly don’t want to be one-sided!
      And thanks for your support of Enrichmentality, I really appreciate it!! ^_^

  2. Great piece!

    I wish I had known earlier what I do now, and I might have retired sooner than at 54. Folks don’t realize the potential they have in making money and investing so that they don’t have to work and work and work and work.

    My Dad never actually retired. Oh, he retired from IBM in 1987, but went right back to work with them “Part Time” at almost 40 hours a week. Ten years later, 1997, he said he was retiring. He didn’t get to. He had to stop working because of heart issues and didn’t make it through 1997.

    I wasn’t going to go that route, so we decided I’d retire, after heart surgery, at 54 and live a leaner life style to make it possible. It’s all about what you want to do and if you’re willing to live on less, or make more to be able to live on more.

    Always Yours, in the battle against the Money Taboo.

    1. Thanks so much Keith! I think we can all wish we knew more earlier 🙂 I was watching a high school student’s video yesterday on how she sets out her daily planner, and I was so impressed to see that already she had financial independence goals and research tasks – incredible!
      I’m glad you were able to retire early after heart surgery and make the most of life. I totally agree that if you’re willing to live on less, or to find a way to earn more, there’s so much you can do.
      All the best for a long, happy, and healthy retirement!!

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