|
NEWS - PLANNING
How to retire at 50
6/21/2005
Got $140,000? Then you can retire at 50 and live happily off an ordinary bank account until you can get your superannuation at 55. Early retirement is not a pipedream if you plan it carefully and make the most of every concession the government has to offer.
Just save enough outside superannuation to survive from the day you quit work to the day you get your super. Then use super and perhaps other investments such as property to fund the remainder of your life. The numbers are not astronomical. Just under $140,000 invested at age 50 will provide enough money to survive until 55 even if it returns just 3 per cent after tax in those five years, according to numbers from KPMG Private Wealth.
This is less than the annual interest rate on popular cash accounts such as ING Direct.
You have to be happy to live on annual after-tax income of $30,000 but that is not insignificant if the mortgage is paid off and the kids have left home. Just remember that a sensible lifestyle is key to early retirement as much as investment is. If you want a bigger income, you'll need to save a lot more. Anyone who wants an annual after-tax income of $50,000 needs at least $200,000 to invest at 50. The figure is closer to $300,000 for anyone dreaming of a more opulent early retirement - or after-tax income of $70,000. The capital will be exhausted when you get to 55.
Part-time work is another option for anyone with insufficient assets to retire early, especially since new rules from July 1 will let people who've reached retirement age draw on their super but keep working. It might not be a fairytale sea change but it could provide an alternative to working full-time beyond 70, a prospect facing many Australians.
The extra income could at the very least help pay off a mortgage or other debts, speeding up eventual retirement. But there are other strategies that take advantage of the new rules to increase regular retirement income.
Again, budgeting is crucial to stretch capital to the average life expectancy of 77.8 years for men and 82.8 years for women.
"Many people on high incomes come in for a big shock in early retirement," says KPMG Private Wealth head Bill Raffle. "The budgeting skills of some wealthy individuals are almost non-existent. They put enormous amounts of time into earning and accumulating wealth but have very little control over spending it.
"A moral is: don't wait until you retire to get your costs under control. Do it now and you may be able to retire even earlier or at least have the option to retire earlier. Before you start creeping up the expenditure ladder, remember that it's a lot less painful going up than it is to come down."
And never neglect superannuation. It will provide a significant amount of income for the rest of your life from 55 onward. Work out how much you need to contribute to get the income you want in retirement and take advantage of all possible tax concessions. Lower tax means that super savings can grow faster than other investments, giving investors leeway to save the cash needed to fund the first years of an early retirement.
But director of ipac Financial Planning Sally Manion says it is amazing how many people avoid simple opportunities to maximise super savings, including salary sacrifice. Anyone who salary sacrifices into super makes voluntary contributions from their pre-tax salary, rather than from net income. Manion says the abolition of the super surcharge - an extra tax paid by high-income earners - is a huge bonus that makes salary sacrifice even more attractive.
She uses the example of a hypothetical investor who earns $110,000 a year, paying the top personal tax rate of 48.5 per cent. If the investor salary sacrifices $10,000 a year into super from July 1, it will attract only a 15 per cent contributions tax on the money, rather than 48.5 per cent paid on ordinary income. It means an extra $3350 is working for the investor - rather than going to the tax office.
Tax-effective investment strategies should also apply to the $140,000 portfolio required to fund the first five years of an early retirement. Prominent Sydney financial adviser Jim Clegg says it is possible to create a highly tax-effective portfolio outside super if you buy the right assets.
Clegg, from Berkley Group, says the tax benefits of a portfolio skewed towards fully-franked shares or securities that pay tax-deferred distributions do not necessarily fall too short of the concessions offered by super. He often advises clients to invest only 50 per cent to 60 per cent of their savings in super regardless of whether they want to retire early or not. His logic is that super is inaccessible until retirement and has a so-called legislative risk - there is always a chance that future governments will change super rules and stymie any plan an investor had in place.
It is not rocket science to work out the big-name stocks that might underpin an early retirement portfolio. Retail stockbrokers nominate the major banks, listed property trusts and Telstra as companies which deliver impressive fully-franked yields. Toll road operator Transurban is an example of a company that has a 100 per cent tax-deferred distribution.
"You want secure stocks - no surprises - as well as income. This means larger, low-risk stocks with little volatility when it comes to dividends. You don't want to find that you have no income in the second year of your retirement," Scott Marshall from Shaw Stockbroking says.
Perhaps the bigger question is how to get the minimum $140,000 required to fund an early retirement. It would take about 17 years to save that money if you put $100 a week into a cash account paying 5 per cent, so more aggressive investing strategies are likely to be required.
"The earlier you retire, the longer you need to support yourself and the more attuned you need to be to the whole investment process. You may find it difficult to recover from a big loss of capital but if you are too conservative you might not generate enough income to live on," Raffle says.
That may mean investing in assets that tend to produce higher returns than cash, like shares and property. Manion says gearing into the sharemarket - borrowing money to buy shares - is one alternative because it can multiply capital gains. But to retire at 50, an investor would need to start gearing at 40.
Gearing is a strategy that multiplies loss as much as gain - investors need to commit to it for about a decade to ride out inevitable dips in portfolio value as the sharemarket rises and falls.
The upshot is that there is no magic formula for early retirement, unless you're lucky enough to win the lottery, inherit some cash or stumble upon a great idea. It takes planning, discipline and a willingness to sacrifice luxuries - the same rules that apply to any investment strategy.
Reproduced from the Australian Financial Review - 18 Jun 2005
|
|
|
