Simple money habits to help you enjoy an early retirement

Pay off high-interest debt, start saving early, create a diversified portfolio and avoid withdrawing from your retirement account early, experts say

Those who adopt the Financial Independence, Retire Early movement save up to 70 per cent of their annual. Alamy
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Millions of people around the world aspire to retire early, perhaps even in their 30s or 40s. Some follow the saving and investment principles of the Financial Independence, Retire Early (Fire) movement to shave years off the traditional retirement age.

The Fire movement involves a programme of extreme saving and investment that helps people to retire far earlier than traditional budgets and other financial plans would permit. The movement was born out of the 1992 best-selling book, Your Money or Your Life by Vicki Robin and Joe Dominguez, according to Investopedia.

Proponents of the extreme money-saving lifestyle remain in the workforce for several years, saving up to 70 per cent of their annual income. When their savings reach approximately 30 times their annual expenses, or about $1 million, they quit their day jobs or retire from work altogether, Investopedia says.

When asked at what age they’d like to retire, 21 per cent and 15 per cent of 1,000 US-based respondents to a survey last year by personal finance website FinanceBuzz said they were most likely to select age 50 or age 55, respectively. Only 2 per cent said they would not mind continuing to toil away until age 70, the survey found.

About 36 per cent of respondents were willing to choose austerity and spend two years without buying anything new, with the exception of essentials such as groceries, to retire early. Meanwhile, 32 per cent were willing to work harder now by taking on a second or third job if it meant they could retire early.

Twelve per cent of respondents said they would forgo having children to be able to retire a decade earlier, while 11 per cent said they’d give up their pets and 6 per cent would give up their car, according to the survey findings.

“Many people fantasise about having more leisure time in their later years. They might desire to travel extensively. Or they might feel led to do volunteer work,” says Vijay Valecha, chief investment officer at Century Financial in Dubai.

“Whatever the reason, the question is the same: what would it take to be able to retire early?”

If the frugal methods of the Fire movement are too extreme for some people to adopt, financial experts recommend following some basic tips to help you to retire early.

Start saving early

After paying fixed expenses, this should leave some disposable and discretionary income. With this, consider automatically directing a portion of your money to an investment account to use for savings and retirement, says Rupert Connor, partner at Abacus Financial Consultants.

“Use the power of compounding to your benefit. This is the primary way people create wealth,” he says.

Pay off high-interest debt

Before you consider how to best prepare for your retirement by building up a portfolio and income, you should pay off any outstanding debts, according to Christopher Davies, chartered financial planner at The Fry Group.

“Are these debts carrying a high interest that will derail your plan to reach financial freedom as soon as possible? If so, it is best to repay these as soon as possible before investing,” he says.

Use the debt avalanche method, which first calls for paying off loans with the highest interest rates, Mr Valecha says.

During this repayment plan, individuals should keep making the minimum payments on less expensive debts, while directing excess funds towards the costliest debt, he says.

“Each long-term loan one takes on jeopardises assets that could be used for retirement purposes,” Mr Valecha says.

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Create a financial plan

Once you are confident that your debts are under control and those that remain are working for you rather than against you, such as a mortgage, begin to consider how to plan to create a suitable portfolio to fund your retirement years, Mr Davies says.

“In general, you need an investment portfolio of about 25 times your initial income requirement,” he says.

For instance, this could be a $1m portfolio that produces a sustainable $40,000 income per annum in retirement that increases annually for inflation and covers a standard 30-year retirement.

“How much you save, the growth rate achieved and the desired retirement income will determine when you can reach financial freedom,” Mr Davies says.

One factor in retirement planning is selecting a country in which you can afford to retire, according to Mr Connor. This is a personal, but important, decision in your retirement plan.

Set retirement goals, find out about your finances, analyse the information, construct a financial plan, implement the strategies and then monitor and review regularly to ensure progress is maintained, Mr Connor says.

In general, you need an investment portfolio of about 25 times your initial income requirement
Christopher Davies, chartered financial planner, The Fry Group

Consider a diversified portfolio

You should invest in different assets and geographic regions to reduce any specific risk from affecting your portfolio too greatly at the cost of a comfortable retirement, Mr Davies says.

“You may also have other income-producing assets such as rental property and/or pensions from a home country, for example, that could add to your ability to retire earlier,” he says.

Spreading money across a wide range of companies in collective funds reduces risk and offers the best chance of successful stock market investment, according to Mr Connor.

Apply the same philosophy to your personal investment portfolio by spreading investments across a wide range of assets, he says.

Avoid withdrawing from your retirement accounts early

When you reach a substantial balance in your retirement fund, it may be tempting to withdraw it all at once for a major purchase. But the longer the funds stay invested, the greater the potential for growth, Mr Valecha says.

“Some retirement plans may assess a penalty fee if withdrawals are made before actual retirement, which is another incentive not to take money out of the retirement account,” he says.

Have several sources of income

This could include investing in income-generating assets such as a rental property, a small business or, more traditionally, taking on a part-time job or side-hustle, Mr Connor says.

“Alternate income streams help to cover the cost of living, leaving more towards the end goal of early retirement,” he says.

Secure the right insurance

When making retirement plans, it’s easy to overlook what is needed to tackle any future monetary emergencies. Because of this, it’s crucial to have appropriate insurance in place, Mr Valecha says.

“People must pay attention to health and disability insurance. By the time one turns 50, he/she should either have a strategy in place for long-term care using retirement savings or long-term care insurance,” he says.

Review your retirement plan and stick to it

Over time, you will face challenges to your retirement plan. Family changes, job changes and even economic and stock market changes have the potential to knock your retirement planning off course, Mr Davies says.

“The aim here is to stick to the long-term plan where possible,” he says.

“Building a buffer to your plans by overstating your goals could ensure that even if you hit some turbulence, you still make it to your goals.”

Updated: July 08, 2022, 6:02 PM