Early retirement is a dream for many Australians pursuing Financial Independence. But the biggest question remains: do I have enough? Dave and Hayden look at an Aussie FIRE listener's finances to help them find out.
For those in the FIRE (Financial Independence, Retire Early) community, reaching the point where work becomes optional requires careful planning, strategic investments, and a solid understanding of expenses.
In this Aussie FIRE episode, Dave and Hayden explore a real-life case study, where a listener seeks advice on whether they can retire early based on their financial position. They break down their situation, assess the numbers, and discuss the mental and financial aspects of making the leap into early retirement.
Case study: a listener's early retirement plan
An Aussie FIRE listener recently submitted their financial situation for evaluation. They are in their 40s, single, have no kids, and currently hold:
- $450,000 in superannuation
- $700,000 in ETFs
- A fully paid-off home
- A $110,000 annual salary (which is taking a toll on their health)
Their main concern is whether they have enough money to retire early and live off their investments until they can access their super. They also worry about whether they could return to a high-paying job if needed and how to overcome the “just one more year” mindset.
Assessing financial readiness for early retirement
Dave and Hayden discussed how the listener's financial situation stacks up. The key factor in determining readiness for early retirement is expenses. Without a mortgage, the listener's expenses could be relatively low, potentially making early retirement more viable.
Dave notes that the best way to assess feasibility is to calculate potential income from investments:
- If the listener spends around $50,000 per year, their $700,000 ETF portfolio could generate enough passive income when combined with dividends and some asset sales.
- A rough calculation shows a 99% success rate in maintaining this lifestyle for the next 15 years until they can access their super.
- At 60, their super could be worth nearly $900,000 (adjusted for inflation), which should comfortably sustain them through traditional retirement.
Overcoming the “just one more year” mindset
One of the biggest mental barriers in early retirement is the fear of not having enough. Many people delay retirement because they think earning for just one more year will provide extra security.
As Dave explains: “People create this mental hurdle of thinking that if they have a little bit more, they'll be a bit safer. And then [they're] coming up with reasons to stay at work when they might have hit their goal already.”
The key to overcoming this mindset is understanding the numbers and having a solid plan. Here are some practical steps that might reduce fear:
- Model worst-case scenarios : Look at historical market downturns and assess whether your portfolio could still support you.
- Build in flexibility : Be open to reducing expenses if necessary or working part-time for a short period.
- Identify meaningful activities : Many people fear an empty calendar. Planning hobbies, projects, or part-time pursuits can make the transition smoother. (You’ll find some more ideas on what to do with your time once you retire early here !)
Addressing the fear of running out of money
One concern the listener raised was whether they could return to a high-paying job if needed. While this is understandable, Dave points out that it's unlikely they would need the same level of income again.
“You might need a job, but you definitely don’t need anywhere near the same level of income because you're already in an excellent financial position.”
By focusing on income flexibility, rather than an all-or-nothing approach, early retirees can find peace of mind. Even earning a small amount from part-time work or consulting could significantly reduce the need to draw down investments.
Transitioning into early retirement
The transition from full-time work to Financial Independence is a significant lifestyle change, and as Dave suggests, it might be easier to do it gradually.
“Instead of going from 100 to 0, think about transitioning out of full-time work more slowly to switch to a part-time job," he says.
Beyond the financial benefits of transitioning into part-time work rather than quitting outright, individuals can give themselves a better shot at adjusting to their new lifestyle.
The role of superannuation and home equity
Superannuation plays a crucial role in early retirement planning. By the time the listener reaches 60, their super should provide ample financial security. Additionally, they mentioned a willingness to tap into home equity if necessary, which adds another layer of flexibility.
Dave summarises:
“There are other places they can get money. And then if all else fails, they're pretty close to getting the pension after that anyway," he says.
"So, I mean, it looks pretty good.”
So, is early retirement achievable?
Based on the listener's current financial position, it appears they may be in a position to retire early. Their ability to succeed will depend on:
- Expense management : Keeping annual expenses at a sustainable level.
- Investment returns : Ensuring their ETF portfolio can generate enough passive income .
- Flexibility : Being open to minor lifestyle adjustments if needed.
Hayden reinforces this by saying:
“If your work is taking a toll on you, there's a very good chance that you're in a strong enough situation where you can start putting yourself first.”
For those considering early retirement, this case study highlights the importance of careful financial planning, mental preparation, and a willingness to adapt. Have a similar situation and need guidance? It may be helpful to chat to a financial adviser or run your own retirement projections to see where you stand.
We're always keen to hear your thoughts and topic suggestions, so hit us up at hello@aussiefirepod.com . Head over to Pearler for resources, calculators, and community insights that complement what we chat about on the show.
Until next time, keep dreaming big and living on your terms. Catch you on the next one, and happy long-term investing.
Dave and Hayden
