8 Steps To Financial Freedom
If the Great Australian Dream was a movie, the final few scenes would show a couple reaching the age of 67, saying goodbye to the offices they worked at for 40 years, downsizing to a unit and then packing up a campervan to road trip around the coast of Australia. Their beachside lattes and campsite fees are proudly paid for by their hard-earned super pensions. While this does sound like a beautiful way to wrap up a life story, I like to think about retirement slightly differently.
Personally, I don’t want to wait until my late 60s (and let’s be honest – by government standards, my generation will probably have to be in their 70s) to be able to retire. I want the option a lot sooner than that, which is why I think of retirement as achieving financial freedom. Let’s break down what you realistically need to have in place before you’re able to choose whether to work or not.
According to research done in 2018 by the Association of Superannuation Funds of Australia (ASFA), a debt-free single retiree who would like to maintain a modest lifestyle needs roughly $524 per week, or $27,248 per year. For a debt-free retired couple also looking to live modestly, they need $754 per week, or $39,208 per year. For a debt-free single retiree looking to live a more comfortable lifestyle – that includes things like owning a car, having private health insurance and the ability to go on holiday – they need closer to $820 per week, or $42,640 per year. A debt-free couple would need $1154 per week –$60,008 per year. While these examples are great, I recommend you aim closer to $100,000 per year as a base to ensure you’re more comfortable.
Knowing how much money you’ll need comes down to what type of lifestyle you want to maintain and how much debt you have at the time of retirement. To help you get on and stay on the path to financial freedom, I’ve listed some helpful steps for you to take. Depending on your age, health and goals, you may need to revisit these steps and adjust them as your values change.
Step 1: Identify your values
Of course, we are going to start by talking about your values. While you may be saving for a trip, house or education now, you also need to think about what “future you” will want to spend money on. Will you need money to take the grandkids on holiday? Do you want to be able to donate to causes close to your heart? Is it a trip around the world? Is it daily yoga classes? Bi-weekly golf trips? By figuring out what you might want retirement to look like, you’ll be much closer to accurately estimating just how much money you’ll need to live that lifestyle.
Step 2: Account audit and budget
I hate to break it to you, but budgeting is something you’ll need to do throughout your life – especially when it comes to managing the wealth you’ve created for yourself at the time of retirement. As you grow closer to scaling back work, have another look at where your money is going. Break down what you earn, spend, owe and own. This is the best way to calculate how much money you’ll need to maintain your lifestyle. Some potential costs include: car costs; insurance costs; utilities and bills; food fund; holiday fund; leisure activities; gifts for the family.
Step 3: Say goodbye to debt
This will probably come as no surprise, but in order to be in the best possible financial position at retirement, you’re going to want to be debt free. This means your mortgage is paid off, and you don’t have any credit card debt or personal loans. For some, this means delaying retirement by three to five years. While you may have one or more investment properties, make sure they are well and truly positively geared.
Step 4: Minimise risk
As you begin to near the age you’d like to retire, it’s important to adjust your risk profiles across your investment portfolio and superannuation. This could mean scaling back to a low-risk fund, moving money to government bonds, and adjusting the risk profile of your superannuation fund. You used to have time to mitigate any risk and correct markets, but now you need to focus on presentation and stability.
Step 5: Identify your income streams
When planning your financial freedom, it’s important to know where your income will be coming from. It could be your superannuation, a government pension, interest earned from an investment or cash you have in a high-interest bank account. While ideally you will have put assets in place from a young age to create wealth, there are government pensions and incentives to supplement your income. I also want to point out that many people think retirement means you never work again – this is not always the case. Many people who “retire” continue to work part time or begin a side hustle.
Step 6: Explore what government entitlements you qualify for
The government offers concession cards that provide seniors, retirees and pensioners with discounts on banking, health care, transport, some goods/services and utilities. These incentives vary by state and territory, and are usually income and asset tested. It’s best to visit your local Centrelink office to see if you qualify for a pensioner concession card; senior card; Commonwealth Seniors Health Card.
Another thing worth looking into is your eligibility for tax offsets, which can be done through the ATO.
Step 7: Do an insurance check
Things change all the time, so you’re going to check in on your insurances and ensure that you’re covered for everything we’ve spoken about. One of the best ways is to write all your insurances down and what you’re covered for on one page, and then work out how much income you’d need in the event of illness or injury. This will vary depending on your current life stage.
Step 8: Revisit your estate plan
Check that your will is up to date and that you’re still happy with your chosen power of attorney and enduring guardian. It’s also good to double-check who the beneficiary is on your superannuation fund.
Victoria Devine is the host of She’s on the Money, an award-winning podcast designed to help women manage their money. Edited extract from She’s on the Money by Victoria Devine, published by Penguin Random House Australia, RRP $32.99.