5 tips for retiring early
We all want to retire early, but how do you actually do it?
You might have heard about the FIRE movement ("financial independence, retire early") and are inspired to put some of these ideas into action.
But where do you start?
It's not easy to retire early; it takes a lot of planning, sacrifice and dedication, but it can be done.
Here are 5 tips to get you on the right track towards an early retirement:
- Reduce your expenses to save more money
- Pay down your debt
- Start investing (or invest more)
- Sort out your super
- Contribute more to your super
1. Reduce your expenses to save more money
The first step to financial freedom is analysing your expenses so you know exactly what's coming in and what's going out. Look at how much money you're bringing in from your salary or wages, any side hustles you have plus investment income like dividends and rental payments. Then comes the hard part; what money is going out, and where exactly is it going?
Take a look at your transactions for the last few months to understand how much you're spending on living costs versus everything else (the Finder app can help you do this). Living costs are things like rent or mortgage payments, groceries and your energy bill. Things like eating out, going to the movies, your Netflix subscription and weekends away aren't living expenses, they're things you want rather than need.
You might think you're already fairly frugal and that you don't have any unnecessary expenses. However, when it's all laid out in front of you in black and white, I can almost guarantee that you'll find areas where you're overspending and where you have capacity to save. Once you've found them, it'll be easier to make a conscious effort to save that money instead.
2. Pay down your debt
While you're reducing your expenses and finding more ways to save, it's important to start paying down any debt you may have. This is especially true with high-interest debt like a personal loan or credit card – try to use any extra savings you make to pay down these debts first.
If you've got a mortgage, thanks to record-low interest rates, this isn't necessarily an urgent debt to pay down. That being said, if you don't have any high-interest debt, it could be a good idea to make an extra repayment towards your home loan or look at refinancing with a lower rate.
3. Start investing (or invest more)
If you want to retire early, you need to look for ways to increase your wealth and get your money working harder for you. The share market is one way to do this. Chances are if you've got a FIRE mindset and you're actively looking for strategies to help you retire early, you've already started investing in shares (if you haven't, here's a 6-step guide to buying shares online).
Investing in ASX-listed companies offers a unique opportunity for income in the form of franked dividends. But if you're only invested in Australian shares, you could be missing out on a lot of opportunities for growth. Plus, your portfolio might not be as diversified as it could be given the ASX's huge exposure towards financial and mining stocks.
4. Sort out your super
In Australia, your superannuation will likely end up being one of your most valuable financial assets when you retire, so it pays to put in a bit of time right now to get it sorted.
The first thing to do is check if you've got multiple super funds. If you do, you should consolidate these into the one fund so you're not paying multiple sets of fees. If you've only got the one fund open in your name, compare it against other super funds in the market. Look for a fund with high long-term returns and low fees (annual fees that are around 1% or less of your total balance are considered to be relatively low).
While you're looking at your super, it's also a good time to consider if the investment option you're in is right for you at your stage of life. Generally speaking, most people can afford to be in a high-growth investment option while they're young and have plenty of time to ride out any market volatility.
5. Contribute more to your super
The best time to start contributing more to your super was yesterday, and the second-best time is today. Making personal contributions to your super on top of the super guarantee your employer is required to pay has many long-term benefits.
Firstly, by making the extra contributions from your pre-tax income in the form of salary sacrifice, that money will be taxed at the lower super tax rate of just 15%. At the same time, by diverting more money into your super before it lands in your bank account, you're also reducing your taxable income, meaning you'll pay less income tax.
But the biggest benefit of all is how much it can help you grow your retirement savings. You can retire with tens of thousands of dollars more in your super by adding small amounts from your monthly pay while you're working.
For more ideas, tips and inspiration on retiring early, take a look at our in-depth guide to the FIRE movement.