In conversation with... Daniel Dickens
Insight | 14 minute read
Out of 8,000 people surveyed by the Australian Bureau of Statistics for the most recent Retirement and Retirement Intentions data release (May 2020), the average age people said they intended to retire was 65.5 years.
But, what about those who are currently in the workforce and are targeting an ‘early’ retirement?
The same ABS data release revealed that the average retirement age in 2018-19 was 55.4 years –considerably earlier than the ‘average’ intended retirement age.
This poses an interesting question: is early retirement an achievable reality for the masses – particularly in the current volatile economic climate – or is it just a pipedream, reserved for the lucky few?
For the purposes of this article, “early retiree” refers to a person who has, or intends to, permanently cease employment earlier than 55.4 years – the average retirement age in 2018-19.
In October 2022, an independent survey commissioned by finance platform money.com.au found that roughly a quarter (26%) of people aged 35-44 want more than $100,000 annually during their retirement (this is compared to only 20% of 45-54-year-olds and 10% of 55-60-year-olds).
Early retirees would arguably have an extended ‘active’ phase of retirement, meaning they’d have additional time to enjoy things like exercise, hobbies, overseas travel, home renovation, volunteering, and family gatherings.
The fact that these people would be spending more money on leisure items and activities for a longer period is surely reflected by the younger survey respondents’ desire for an annual retirement income in excess of $100,000.
The risk associated with this, of course, is that people burn through their savings during their early retirement, without budgeting for non-discretionary items – food, medical bills, housing – in later life.
In the previous edition of Insight – Edition 40 – we examined longevity risk as a crucial consideration for anyone entering retirement, regardless of their age. Significant social and medical advancements mean that Australians are living longer, healthier lives, which require more financial resources – people are living longer, so individuals need more money in retirement.
A healthy Australian retiree at 50, for example, could be expected to live well into their 80s, meaning that individual would need to be assured of more than $3 million ($100,000 x 30 years) to comfortably fund the remaining years of their life.
Interestingly, the Australian Government is currently proposing doubling the tax rate on earnings from super investments for balances above $3 million. The proposed changes would see the tax rate rise from 15% to 30% for people who are still adding money to their superannuation. If implemented, this tax change would need to be an additional key consideration for those considering early retirement.
As a broad rule, Australians can access their superannuation from 65 years old, or when they reach the preservation age – depending on the year they were born – so, our 50-year-old retiree would have to live self-funded for at least 15 years before a superannuation income stream became a reality.
Given that the household savings ratio (via ABS) was 6.9% for the June-September 2022 quarter – and 90% of all employees reported earning less than $2,720 per week (90th percentile) – the reality of a self-funded early retirement may be a stretch for many.
Despite the challenges, there are genuine opportunities for savvy individuals to retire before their peers. Factors like longevity risk – as well as other variables like inflation and interest rate fluctuations – will always exist, but these can be mitigated with appropriate strategies.
In the case of those aspirational early retirees, there may be additional considerations before permanently leaving the workforce. Some suggested considerations are highlighted briefly below, though individuals are encouraged to consider their own personal circumstances.
1. It’s important to determine lifestyle
It’s often hard to plan next month’s activities, let alone those in 10 years’ time; however, deciding on the kind of life you want to live post-retirement is seen as the essential, foundational step to preparing for early retirement.
2. Planning is essential
Once you’ve settled on your chosen lifestyle choice, a comprehensive retirement plan is a good next move – this involves laying out everything from potential timelines to mock budgets, and more. According to the Australian Government’s Retirement planning, saving and attitudes: survey report 2020, only 32% of respondents had a retirement savings goal – this is despite a wealth of resources available to assist you in planning your financial future.
3. Evaluate your current situation
Examine your current financial situation. Once you’ve decided on your lifestyle and created a plan, you can work forward by evaluating your financial situation; your starting point. Be realistic in your assessment.
4. Determine your retirement age
At the completion of these first three steps, you may have enough information to determine the age at which you can retire and live the life you want.
5. Budget, budget, budget
Almost half (47.1%) of Retirement planning, saving and attitudes: survey report 2020 respondents said they don’t have enough income to save for the long-term – including their retirement. ‘Tightening the belt’ by budgeting, reducing expenses, and cutting out luxuries is a critical step if early retirement is your goal. Paying off debt early is another key consideration when reducing your expenses.
6. Earn more money
Easier said than done, yes, but increasing your income can be the difference between retiring at 60 or retiring five years earlier. Additional income streams might include investing wisely in shares or property that is likely to appreciate – as well as income-producing assets.
With high inflation rates presently impacting savings, having a diversified investment portfolio can be seen as a smart way to mitigate investment risk – and a way to make your money work for you as you prepare for retirement. Commercial property, for example, is regarded as an inflationary hedge – and tends to fare well in times of high inflation.
The Retirement planning, saving and attitudes: survey report 2020 revealed that roughly 35% of respondents invest their savings in other ways than super, though only 8.3% of respondents expected shares or a property portfolio to be their highest valued asset when they retire.
7. Track your progress
There’s no use setting a plan in motion if you don’t know where you are on the journey! Regular, routine progress checks allow you to pivot your plan of action if required, and let you know whether your tactics are working.
While early retirement may not be the norm – only 2.3% of Retirement Planning Survey (2020) respondents say they intend to retire between 50 and 54 – it certainly is achievable for those who plan to make it happen.