Quit work early

If you want to retire early, make sure you plan ahead and consider the following tips:

Step 1 - Control your spending

This is the most important step of all.  Nearly everyone overspends and this is usually not intentional - because money often just slips between the cracks.

Here is another way of looking at it:  Let's say you have $100,000 invested returning 6% or $6,000 a year and you manage to reduce your spending by $96 a week.  The result is the same as increasing your investment return to 11% or $11,000 a year!

Step 2 - Save more

Save more money in superannuation and start saving aggressively outside of super. Use non-super investments to fund your lifestyle before you are allowed to draw on superannuation savings.

If your super can be paid out at age 60 but you want to retire at 50, aim to save enough in non-super investments to support your lifestyle for 10 years. After that, use your superannuation.

Why? Because you pay less tax on superannuation investments and this means your capital will grow more quickly within super.

Step 3 - Invest sensibly

Invest sensibly. An sensible super strategy will free up cash for non-super investments. Many super funds now offer growth investment options that tend to produce better long-term returns than conservative investments, albeit with a higher degree of volatility.

Outside of super, invest in growth assets like property and shares that historically have produced higher returns than cash or fixed interest. Remember that you need to hold growth assets for around 10 years or more to benefit from the long-term returns these assets can generate.

Be prepared to accept the risks associated with your investment strategies. The balance of these investments is likely to fluctuate - both up and down.

Step 4 - Plan income streams

Work out how you want to receive income in retirement. Account-based pensions are a good option and are essentially tax-free from age 60. Early retirees may not be able to commence an account-based pension which requires access to unrestricted non-preserved monies. An investment in a portfolio that includes fully franked shares and property trusts would help to minimise tax in the accumulation phase.

Step 5 - Calculate income needs

Calculate how much annual income you will need in retirement to set a final savings target. Be realistic - you may not need to match your pre-retirement income once you quit work. This is most likely to apply if you have paid off all your debts and have no dependants. If you have no mortgage repayments and any children have left home, your income requirements are likely to shrink.

Step 6 - Talk to a financial coach

Use a financial coach to design a savings strategy that suits your individual circumstances and risk profile.

Partly sourced from Strategy Steps