Whenever I mention I want to retire at 55, no one believes me.
The most common reaction I get is an eye roll, followed by “Yeah, right! In your dreams!”
And then the inevitable ‘What are you going to do all day? You don’t like being bored!’
No one ever, ever asks me how I am going to achieve it. They assume that I am kidding because retiring at 55 seems such an impossible task. And simply dismiss it as another wacky idea.
While it seems that 55 is a bit old for a FIRE blogger to retire, it is early(ish) for a late starter. I only discovered the FIRE concept 18 months ago. And 55 is a full 10 years before what is perceived as traditional retirement. And a good 12 years before the government will consider giving you a pension.
I have a PLAN. And since no one in my real life wants to know about it, I will share it with you instead.
What is the PLAN?
First of all, I must declare up front, that I did not come up with this plan at the beginning of my FIRE journey.
No, I stumbled around. Lamenting about lost opportunities. Berating myself for not starting earlier. Regretting my spend, spend, spend lifestyle. Blah, blah, blah.
Then I just got down to it and started with the basics.
I found out my net worth and monitored it every month.
I made sure I invested the gap between my income and expenses.
And now, 18 months later, I have a PLAN.
There are 3 phases to my plan – Pre super*, Post super* and The end.
*Super = superannuation, our retirement account in Australia
Since I plan to retire at 55, I have 5 years before I can access my superannuation. This is an advantage of pursuing FI later in life – you have less years to plan for, until you can access funds locked up in retirement accounts. If you retire at 30, you need sufficient funds for 30 years before you can access your super.
So Phase 1 (Pre super) of my plan involves being able to survive this first 5 years. Phase 2 (Post super) kicks in when I turn 60, when I can utilise my superannuation funds. And Phase 3 (The end) will be activated when I need to move in to an aged care facility (unless there is another option).
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Phase 1 - Pre super
Tracking my net worth shows me that the majority of my net worth (a whopping 92%) is tied up in fixed assets ie my house and superannuation. Which will be useful for Post super and The End phases.
Not useful at all for the Pre super phase. I need sufficient investment outside of superannuation to ensure I survive the first 5 years of retirement.
Investment outside of superannuation for me means a share portfolio and cash.
Right now, I have a fully funded emergency fund and various sinking funds – for travel and annual expenses, held as cash in online high interest saving accounts.
My biggest expense at retirement is to purchase a car, as I will no longer have access to a company car from work. So I am conscious this is something I need to start saving for.
I will need a cash buffer, preferably 2-3 years of living expenses to counter sequence of returns risk, just in case the stock market crashes at the precise time I retire.
That cash reserve will also need to cater for home maintenance costs. I need to ensure my house is in good shape, to reap its benefits for Phase 3 – The end.
So my current strategy is to invest every spare cent in my share portfolio, taking into consideration living expenses and sinking funds. Sorry, I have to live, you know. That travel fund is not going to fund itself and I am not not travelling the next 7 years.
I will not be using the 4% rule in this phase. I don’t have time to build my savings and investments up to 7 figures, in order to withdraw 4% from it. This amount need not last forever either – just 5 years.
Phase 2 - Post super
I am most excited about this Post super phase.
Unbeknownst to me, I have been tracking well on this front. I cannot stress the importance of automating retirement savings enough. Even though I did not do it right 100% of the time, 70% to 80% was enough to set me up to be in a good position.
So what I did right with superannuation was that I contributed extra on and off throughout my whole working life.
When I first started working in 1992, a family friend convinced me to open a superannuation account with AMP. This was an additional account, a separate account outside of my employer’s contribution. All I had to do was deposit $2000 (after tax) each year – this increased every year to cater for inflation.
Some years when I felt I didn’t have extra money, I did not contribute or I contributed less than what I was invoiced for. Eventually I stopped contributing altogether. I never budgeted for it and found it hard to come up with an annual lump sum, what with paying a mortgage and travelling.
I have no idea what sort of fund it was invested in, no idea on its asset allocation or the fees charged. All I know is that some years, the return was in double digits and some years it was negative. Yes, negative.
All up, I contributed $41000 over the years. And when I finally looked at it in 2018, my balance was $83000! However, they charged me around $4000 in exit fees so my ‘roll over’ amount was only $79000 when I transferred it to my main account.
I am sure if I had paid attention over the years, especially to the fees and the type of fund it was invested in, the returns would have been much better. But I consider it a good result in light of my neglect and failure to contribute every year.
In the meantime, my main superannuation account where my employer contributions were deposited, was also steadily growing. Before I bought my house, I salary sacrificed a small amount every week – on the advice of my accountant who sees his main job as saving me taxes. The amount I salary sacrificed reduced my taxable income, hence I paid less tax.
Even though I stopped salary sacrificing while I had my mortgage, the balance was still growing. Once again, I had no idea what my balance was or how it was invested. Or the fees charged. Or the insurance premiums deducted. Until last year.
I started salary sacrificing again in 2018 and aimed to deposit the maximum of $25000 pre tax including my employer’s contribution. Once I stop working, contributions from my employer will stop. I am conscious I have 7 more years to optimise this phase.
The 4% rule will apply for this Post super phase. And the amount will need to last forever.
Phase 3 - The end
With any luck, I do not need to activate this phase until I am in my 80s, when I can no longer look after myself in my own home. Most likely this means I have to move into an aged care facility. Who knows what aged care options will be available then? I sincerely hope there are other alternatives available.
My paid up house will be sold to generate extra funds to pay for aged care. There is no guarantee what house values will be then. But I can rest easy knowing I have an asset that will contribute towards the cost of aged care. And in the meantime, it will have provided stable and comfortable shelter for many years.
There should also be some money left over from Phase 2, in case house prices are really bad at the time when I need to sell. And in the worse case scenario, there may be the aged pension from the Commonwealth government if it still exists. The pension, that is, not the government.
Where am I at now?
I aim to have a mix of 30% cash and 70% shares for the Pre super phase 1. Right now, I am at 17% of cash target and 50% of shares target. Amazingly, I am also at 50% of my target for the Post super phase 2. Of course, this is all due to the strong share market at the moment.
The Rule of 72 is a simple calculation to estimate when an investment could double. Divide 72 by the rate of return to calculate when an initial investment will double. So assuming a rate of return of 8%, I could double my investment in 9 years.
This is very reassuring as it means even if I never contribute another cent, my shares and super (majority invested in shares) should double in 9 years, provided we can maintain a rate of return of 8% or better.
And this is where the uncertainty lies. Are we heading into a recession? Will the strong performance of our share market continue? Past performance does not predict future performance, blah blah blah.
The only thing I can control is how much I contribute to savings and investments. I decide how much to allocate to cash and shares outside of super and assess if I need to continue salary sacrificing the maximum amount into super.
So I will continue to automate savings and track my net worth. I will adjust and pivot as necessary; and celebrate each milestone.
Fingers crossed, if nothing drastic happens to my life circumstances, I should be able to reach my goal in the next 7 years.
There, you have it – my 3 Phase plan to retire at 55.
I am trying very hard not to second guess myself.
It is not the end of the world if I can’t achieve my targets by 55. I can always work part time from 55 until 60, when I can access super.
Looking at the cold hard figures and barring any unexpected life altering events, I am confident I will reach my target within the 7 year timeframe.
And retire early at 55.