#1 How Much Do You Need to Retire Early?

You are listening to Wealth Bytes, the best show on the planet for tech professionals who wants to take tax-smart decisions, make money, and retire early with clarity and confidence. You are about to get the real deal from building your emergency funds to investing like a pro. I am the founder of MyWealthChoice, with 20 years of experience helping tech professionals take tax-smart decisions. Now, here is today's episode. One of the most common questions I get asked is, how much do I actually need to retire on early or to start working optional? You see, some of my clients want to start working optional. And in that sense, they want to work part-time or at their own terms, doing consultancy, or not full-year work, etc. So they want to understand why they want to retire early. How can they reach this point? And how fast can they reach to this point? They have actually different motivations to ask this question. And the truth is, there's no one-size-fits-all answer. There are multiple ways to look at it, depending on your lifestyle goals, investment strategy, and risk tolerance. So today, I will be breaking it all down for you as a tech professional. I'll be breaking down the numbers, the lifestyle costs, and the investment strategy. I will help you calculate your early retirement number, what kind of lifestyle you can afford at different levels, and the investment strategies that can get you there faster. So stick around. This could change how you think about your work optional or financial independence forever. So the first key question is, how much do you really need? And to be honest, there's no magic number that fits everyone. But there is a formula, and it starts with one key concept, your annual expenses. And the only way for you to know that is to have a budget. In my experience, I have never worked with anyone who was able to achieve their goals without having a solid budget in place, understanding the inflow of their money and the outflow. What are the sources of income? How stable the sources of income are? What sort of expenses do they spend? What is the fixed expense and what is the variable expense? So on and so forth. Understanding these annual expenses gives you a benchmark of roughly how much you need. Once you get to this number, we'll get you to the benchmark, which is widely known as the 4% rule. And this is a widely used benchmark that basically says you can safely withdraw 4% of your portfolio per year in retirement without running out of money. That means, if you need $100,000 per year, which you figured out from your budget, you need $2.5 million invested. And if you need $150,000 per year, you need $3.75 million invested. You get the idea, right? But the thing is, the 4% rule may be right, and maybe not. So let's go deeper to understand more about this. Let's go deeper to understand more about this. The 4% rule really comes down to your lifestyle. So what kind of lifestyle do you aspire to? So retiring early doesn't really mean quitting your job, like meaning having the freedom to live on your own terms, or something else. So you have to ask yourself, where do you want to live? Is it a big city? Is it the suburbs? Is it a low cost of living country? Because every answer will determine a different number. Living in Sydney or Melbourne is different than living in Perth. Living in the suburbs is completely different than living in the CBD. So on and so forth. I'll give you a real life example. I worked with a client called Sarah. She was a software engineer in one of the big tech companies. She wanted to retire at age 45. And we worked with her to analyze her expenses, and annual expenses really, and then realized how she could live comfortably on $120,000 per year. And using the 4% rule, she aimed for $3 million in investments and a paid off home loan before quitting her job. The investments that we're speaking about can come from different avenues, which I will discuss later in this podcast. But now let's talk about how can you actually reach this number? So how do you build your early retirement portfolio? I have multiple answers. The foundation to find these answers is that you need a mix of cash flowing assets, and growth investments to sustain you for decades. Because if you think about your retirement, you're looking at at least 25 years, at which you have an annual expense that you already determined, and you have no income. So you're not really working anymore. No wages, no superannuation contribution, no bonuses, no RSUs, nothing. So you need to be very careful about the work optional that you do. You have to build up your portfolio in a way that can survive the long term market cycles, economic downturns, different political tensions everywhere that can impact your income. And look, I'm not a big fan of focusing on the news, US elections, liberal winning, all this sort of stuff. I always tell my clients, focus on your own economy. Yes, these kind of things have an impact, but you can easily navigate the impact on your own economy, and your own lifestyle, and your own finances, when you really understand it. So back to the fundamentals of your early retirement portfolio. So one of the pillars of this foundation is having investments in the stock market. As scary as it sounds, some people have, you know, different horror stories about stock markets. But let me tell you the truth, it works. For the long term, it works. History tells us it works. And the reason being simply, companies that form the stock market are trying to succeed. They're trying to make money. Same like the company you work for. You guys have strategic plans, long term plans, short term plans, milestones, saving on costs, finding efficiencies, trying to find profitability, new clients, so on and so forth. You know what I'm talking about in terms of a business cycle, right? These companies operate in the same way. They want to succeed. And these companies, for as long as we know in this history, has been making money. They have survived, obviously quality companies. So when you have part of the investments in this stock market, it means you're a partner in this success. Without doing anything, just being a shareholder in these companies, you are part of their success. The selection of these companies is a different story. That's episodes, hours I can talk. But how about a simple solution that can get you on board with these companies to be a partner of this success without really doing a lot of work? I am talking about the low cost index funds. These funds come in different forms, be it managed funds or ETFs, et cetera. But the point is, they are representative of the market. You want to be part of the market. You want to be part of the market movement. That being said, different indices reflect different markets, different sectors, different industries, et cetera. So you'll find that index that is reflective of the mining sector or the property sector, Australian shares or US shares or Japan shares, et cetera. This kind of indices can be part of your portfolio. You need to structure them in a way that is strategic on the long term. So if you think about Australian shares and index, for example, so one of the indices, the ASX 200, and it really captures the top 200 companies in Australia, according to a specific criteria, obviously quality criteria. When you buy in an index fund, you are part of these 200 companies. You are investing in the best and most successful companies in Australia. That is not advice to say that this is the best investment ever, but this is to give you a picture of how the investment would be allocated. You are investing in the best 200 companies in Australia. These companies have the best minds, the best board members, the best employees, because they want to succeed. So having access to low cost index funds can be a good success partner in the future. You also need to think about the structures of your investments. So there are multiple structures that can help you in your retirement. Superannuation, it is the most tax effective environment in Australia. You can't beat it. No matter how complex your investment strategy or structure strategy would be, you cannot beat it. And that is why the government is cracking down on it because a lot of people are taking advantage of it. So make sure you utilize your superannuation environment in the early days when you're still accumulating money inside the super and also have the relevant strategies when you're retiring. It is literally a goldmine. The second thing is, you need to think about real estate. You need to think about real estate. You need to think about real estate for passive income. Real estate is a very important pillar of any investment strategy. The reason being is not that it's risk-free, because there is no investment risk-free. I know that there are a lot of people think about property as low risk or risk-free, et cetera, et cetera, but that is not the case. Property come with a lot of risks. You may not like them, but it doesn't mean that they don't exist. They do exist and they are big. And we can talk about this later. But for now, you need to have some real estate investments in your portfolio. Whether you have this through a direct ownership or you have rental properties, which can provide a steady cashflow, a cashflow that is having a different market cycles than other market cycles in the market. Or you can have investment in managed funds and real estate investment trusts or REITs that invest in property in a hands-off approach. These kinds of investments can provide you with different exposures. REITs can give you different exposures to commercial property, residential property, infrastructure, you name it. And the way it works is they go acquire the property, they rent it out and you get part of the return. Put it that way. The third pillar of your investment is alternative investments. So these are the things that needs to be in your portfolio, not in a very big portion, but you need to be part of it as a growth strategy. Things like tech startups, things like private equity, et cetera. These are all investment vehicles that needs to be part of your investment strategy. So my pro tip for you today, a combination of dividends, rental income, and stock market growth gives you the flexibility and the financial security that you reach your work option stage having peace of mind. If what you're hearing resonates with you and you are ready for real clarity in your financial journey, I have over 20 years of experience helping tech professional unlock smarter money moves. I invite you to a free 30 minutes meeting. We will dive into your current situation, identify opportunities and design a plan that works for you. If this sounds relevant, visit my website, www.mywealthchoice.com.au and book your session today. Now let's talk about your expenses when you retire early or in retirement in general. So there are some hidden factors that people sometimes, especially if they retire early. So the first thing is healthcare costs. So if you retire early, you may need private health insurance until your Medicare kicks in, or you need a budget really, because some of the items are not covered by Medicare. So you're looking at 10 to $20,000 per annum of medical and healthcare. That could range from covering off things like physiotherapy, medicines, massage, anything like that. And also the other thing that is very commonly missed is taxes. You retire, there are taxes, especially if you retire early. If you have an investment property, it could attract some taxes. If you have an investment portfolio in shares or managed funds or ETFs, it could attract taxes. And the smart way to think about this ahead is to account for taxes in your annual target income. Which is back again to the 4% rule. So you need to think about this 4% rule as net of taxes. I lost count of clients thinking that they need a specific amount of money, thinking that they need a specific size of a portfolio, without really realizing they will be paying tax. And most of the time, they are short anything between 30 to 40% of their target, because they just missed this thing, taxes. So it's very important to think about the taxes in your retirement income, and to think about any other expenses that you would incur being retired. Also, the other thing is the sequence of returns risk. And that is a very big risk, highly unrecognizable by most of the people because they just don't anticipate it. So you know how there are market cycles up and down? Yes, you are focusing on your investment portfolio, and you're building an investment portfolio for the long term. But you need to think about what are the impacts of a market downturn on your retirement income, especially if this market downturn is in the early years of your retirement. It can actually derail your plan. If you think about COVID, or the financial property crisis in 2008, it can actually derail your retirement plan. If you think about COVID, or the financial property crisis in 2008. If you would have been retired in 2007, and then you have an investment portfolio consisting of managed funds and investment properties, you'd be likely losing anything between 25 to 50% of your annual income and your capital value. That is actually on paper without saying anything. But if you think about how this impacts your income that you plan for, that is a significant drop. So if you're planning for $100,000 per year, and this is dropping by $20,000 or $30,000 per year, you'll find yourself forced to go back to the workforce or having a different lifestyle that you have planned for. So having two to three years of cash reserve in a high interest saving account or term deposit or anything like that can prevent forced selling that actually consolidate your losses. So now that we've went through the investment strategies, the lifestyle, the unexpected expenses, it's now time to have your action plan, to think about your next steps. So your first step is you calculate your retirement early number. How much do you really need using your desired annual expenses? The second step is to audit your current savings and investments against your plan. Are you on track? Are you likely to achieve your goal? And in that step, I highly suggest that you get in touch with me. I can help you identify your magic number, your sweet spot. How can you get to this number? How close are you to this number? And how can we plan for your work optional milestone? The third step for you is to optimize your saving rate. Can you push your saving rate to invest in a better way? Can you spend less? So in that sense, you need to review your budget. You need to find out your expenses. What is your big ticket items? What are you spending money on? And I always say, show me your budget. I'll tell you what's important to you. If you spend a lot of money on travel, I'll tell you you'll be a big travel spender. If you spend a lot of money on eatouts, I will tell you you'll spend a lot of money in retirement on eatouts. Once you review your budget and optimize your saving rate, you need to start investing smartly. You need to start prioritizing tax advantage accounts, things like superannuation or investment bonds or trusts, depending on your circumstances. You need to think about structures. The most common mistake I see with high income earners in the tech industry is that they are making a lot of money. They are crushing it at work. But the problem is they are buying everything under one or two structures. If you look at wealthy people, you will find that they have multiple companies, multiple trusts, multiple names to own their investments. And the reason being, it reduces the overall taxes. And you need to also invest smartly in a diversified way. Diversification is your insurance policy against market downturn. When you diversify your investments across different countries, different sectors, different industries, and different companies, this means you are having a lot bigger cushion or buffer against market downturns. If the property is in a good condition, if the property market slows down, you're invested in the tech industry. If the tech industry takes a hit, you invest in the real estate. If you think about diversification, if you're investing in real estate, real estate takes a hit, you're invested in the share market. If the share market takes a hit, you're invested in sectors that didn't take the hit. So sometimes the share market does not take a full hit, like some industries would be impacted and some not, so you need to be diversified across different sectors. And the last thing is to plan for the unexpected. Things like healthcare costs, taxes, downturns, and sequence risk, all these things need to be planned for. You need to make sure that you have a bag of tricks for everything that comes your way. Now, if you're a high-earning tech professional looking to optimize your finances, reduce your taxes, and fast-track your path to early retirement, let's talk. Connect with me on LinkedIn or drop me a line on my email. [email protected]. I've helped hundreds of professionals like you build a customized financial plan to work optionally in the future. And guess what? It is working. 110% it's working. Not because I'm the smartest guy in the room. It's just because it's a process and it works every time. Thank you for listening. Thank you so much for listening and giving me your time to know what I want to talk about. Speak soon. you