THE SECRET: SAVE HARD AND INVEST WISELY
Tom*, 32
AIM: retire at 42 to 48
INCOME NEEDED: $45,000 a year INVESTMENT STRATEGY: buy a commercial property for work; half a dozen small-cap shares; listed investment companies such as Barrack St Investments and Cadence Capital.
Benchmarking your own spending with the average in your age category can be telling. This is what Tom has done and recorded on his blog on wealthfromthirty.com.
Tom found out that a 35-year-old (or younger) living on their own spends an average of $42,640 a year, from numbers compiled by the Australian Bureau of Statistics. “In terms of income, the median disposable income for under-35-year-olds living alone is $50,388.
“Australia is a wonderful country but, damn, is it expensive at the moment! According to consumer surveys it is 20% more expensive than Vienna, 13% more expensive than Nagoya and 10% more expensive than Toronto.”
How did Tom compare with the average? His total expenses for the year were a bit higher at $46,125.
Currently working on his PhD, Tom admits years of study means he only started saving seriously for financial independence in 2012.
One of the reasons that Tom blogs about his journey towards financial independence is to keep himself accountable and think things through. It is easy to get dispirited but Tom says there is a great online community and he chats with people in different parts of the world.
Tom has taken a close look at where his money goes. His top 10 expenses in 2017 made up around 96% of his spending. He worked out that he spent $9748 on food and groceries in 2017, excluding alcohol.
“I live in what I’d define as an expensive suburb but this still seems a lot. It works out at $6.67 per meal per day, assuming four meals per day.”
Tom says it is important for early retirees to:
• Aim for a savings rate after tax as high as comfortable and invest the proceeds wisely (ETFs or index funds, super, direct shares, real estate, etc).
• Invest for passive income, both inside and outside super.
• Try to save enough so that you can cover your annual expenses comfortably, from early retirement onwards. The formula used in the FIRE community is annual expenses multiplied by 25 as the amount of capital required.
• Know your income and expenses and create a positive cash flow each pay day.
• Reduce your expenses – there’s a lower limit on what’s possible.
• It’s important to try to increase sources of income, preferably recurring/passive (investment properties, shares, Airbnb).
• Start today – it’s not the first year of investment returns you miss out on but the last, and with compounding in play that’s a lot.
There’s a common calculation, known as the “4% rule”, in the FIRE community assuming that if you can earn an average 7%pa from a relatively conservative investment, after inflation of 3%, you have the remaining 4% to spend without reduction of capital.
The maths are based on a 30-year retirement but the assumptions are so modest (for example, not relying on a government pension, earning an income intermittently during early retirement or being able to reduce your expenses as you grow older) that it works for a 60-year retirement too, with just a little tweaking.
TIPS
• Books: A Random Walk Down Wall Street by Burton Malkiel (excellent for those starting out); The Millionaire Next Door by Thomas Stanley and William Danko; The Barefoot Investor by Scott Pape; The Intelligent Investor by Benjamin Graham; The Defensive Value Investor by John Kingham; Value.Able by Roger Montgomery, Irrational Exuberance by Robert Shiller; Reminiscences of a Stock Operator by Edwin Lefevre.
• Podcasts: Value Investing series by John Mihaljevic.
*Not his real name.