Strategy matters when it comes to achieving financial freedom and semi-retirement, as it can make these goals a reality for many individuals. Helen Nan, an adviser, explains that semi-retirement allows people to work less while still progressing towards their financial objectives, which may take less time than expected. This phase serves as a transition between full-time work and full retirement, giving individuals the opportunity to reduce their workload and pursue other interests such as travel, hobbies, spending time with family, or starting a side business.
During semi-retirement, it becomes crucial for individuals to determine how they want to live their life in retirement and assess whether they have accumulated enough savings to sustain their desired lifestyle. Those who wish to transition to retirement at their own pace require appropriate financial strategies, which can vary based on their age.
Younger generations, for instance, often aspire to achieve financial freedom and retire early. Retirement in this context does not imply the end of work but rather having more options and a better work-life balance, or spending more time with family. To achieve financial freedom, it is necessary to build an investment portfolio that generates passive income exceeding one’s expenses. The key is to refrain from touching the principal investment and only withdraw an amount equal to the investment growth.
The amount needed to achieve financial freedom is typically around 25 times one’s annual expenses. For example, someone with annual expenses of $80,000 would need $2 million in savings to retire comfortably. Assuming their investments grow by 7% (adjusted for inflation), their investment would reach approximately $2,140,000 after a year. If the investor withdraws $80,000 annually, which is 4% of $2 million, the value of the investment after withdrawal would be $2,060,000.
The good news is that individuals do not have to wait until they accumulate the full $2 million before slowing down. They can stop saving once they reach half that amount, or $1 million, allowing the investment to grow on its own. This enables them to semi-retire long before the traditional retirement age. Assuming a 7% annual growth rate, individuals could achieve their financial freedom goals of $2 million after approximately 10 years of semi-retirement.
Semi-retirement has become increasingly popular among younger people seeking a life of abundance and freedom from financial constraints. By implementing the right strategies, they can enjoy their desired lifestyle much earlier than others.
For older individuals considering semi-retirement, the financial strategies may differ as they may rely on the age pension during retirement. According to the Association of Superannuation Funds of Australia, a couple needs about $68,000 per year to live comfortably in retirement. This would require retirement savings of approximately $640,000, assuming a 6% investment return.
Even if a retired couple wishes to spend $80,000 per year, they do not necessarily need $2 million due to the potential receipt of a full or partial age pension. Self-funded retirees may be eligible for an age pension if their nest egg falls below the asset and income test limit, provided they live long enough and spend their money accordingly.
Working with a financial adviser can help investors maximize their age pension entitlements through the right strategies and gain a better understanding of the investment risks required to achieve desired returns.
In conclusion, the key to a successful semi-retirement lies in understanding the numbers, creating a solid financial plan, and mapping out strategies based on age and individual needs. By taking a proactive approach to finances, individuals can maximize the benefits of their money and ultimately live life on their own terms.