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Ask Paul: We want to retire early on $140k a year

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Q. My husband, 47, and I, 40, have three investment properties: one in Sydney (worth $950,000), another in Melbourne ($600,000) and the third in Brisbane ($600,000). They provide 3.3%, 3.8% and 3.6% rental yield.

Our loans amount to $972,000 with an offset account of $972,000, therefore there is no interest payable.

Combined we have $340,000 in super, shares worth $5500 and savings of $400,000.

We move with work, therefore currently rent. Our annual expenditure is $140,000 and savings $100,000. Our goal is to have $140,000 passive income after tax.

We want to spend more time with our two school-aged kids. Our risk profile is low to medium.

Both parents are on pensions and do not have the knowledge to guide us financially, although they are beautiful people.

We feel we could retire sooner but are not sure how. What do you recommend and in what time frame?

The sooner the better! – Bindi

A. Good work, Bindi. A key to financial success is goal setting, and I love the idea of retirement “as soon as possible”.

Coincidentally my column in the April issue of Money is about exactly this situation.

But in your case I can be more specific, as you have given me a fair bit of detail.

You have total assets of about $2.9 million, which at your age is fantastic.

But as you need to plan for a lifespan of around 40 to 50 years, you really need to have an amount of money that gives you the $140,000 a year you need, plus inflation, for many decades.

History says that it is realistic to assume that you can earn about 4% to 5% above inflation on a well-diversified portfolio, so to have $140,000 a year plus inflation, while your capital keeps pace with inflation, you really would need about $3.7 million to $4 million and a home.

So you are very much on track. The next step is to decide on where you would live in the long run. This could be one of your current properties or one you buy as an investment now and move into it when you stop work.

I reckon you need about another $1 million in investment assets, plus a home, before you will have that “inflation-proof” $140,000 a year.

Written by Paul Clitheroe

Paul Clitheroe

Paul Clitheroe AM is a respected financial adviser and Money’s chairman and chief commentator. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Ask Paul your money question.

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  1. It’s great to see these kinds of ideas being discussed!

    However, I feel Paul’s response misses the biggest lever available to you Bindi: your desired spending.

    In simple terms, your retirement date depends on your current net worth, income, savings rate and how much you want to spend in retirement. If you’re really interested in retiring sooner (even now), then it’s worth challenging yourself on how much you really need post-retirement to make you happy. The average Australian family with two children spends around $100k per year according to the Australian Bureau of Statistics. Most Australian families I know seem pretty happy and I imagine they’d be even happier if they were earning that much without having to work! That $100k also includes a lot of work-related costs (e.g. daily commute, work clothes, work lunches, living in expensive location near work, etc.) that you’d no longer have to worry about once you’ve retired. Have you ever written down all your expenses and reflected on:
    (i) What items would reduce post-retirement?
    (ii) Which items bring you the most (and least) happiness per dollar?

    We’re pursuing early retirement and have designed a very comfortable post-retirement life that’ll cost around $80k/year.
    If you’re able to do the same, then you could retire NOW on the passive income from your $2.5m of non-super assets!
    Another way to look at it, would you prefer:
    a) Retiring now, living a comfortable life spending $80k/year and getting to spend quality time with your kids every day; or
    b) Missing out on spending another 5 years of quality time with your kids, so that you can grow your already healthy bank balance even further and have a slightly fancier lifestyle post-retirement?

    Whichever path you choose, I wish your family happiness.

    P.S. As background, we also move around with work as a family, rent and have a similar household income.

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