One of the biggest questions facing those contemplating early retirement is, "what happens if I run out of money in my old age?"
The rise of the movement to be financially independent and retired early or "FIRE" has meant more and more Australians are turning their back on the 9–5 work life to achieve more work-life balance in their younger years.
While there is an inevitable trade-off with long-term wealth creation, the idea of buying back family time and getting out of the Monday to Friday commute makes the lifestyle choice appealing for some.
I've looked at a few things below that can help you work out if you're already financially independent and ready to retire right now.
Is lifestyle inflation an issue for you?
One of the biggest reasons that many Aussies struggle to build up long-term wealth is that their expenses rise with their income, for no good reason.
Clearly, if you started on your FIRE journey as a single 20- or 30-something and then met your partner and are now a family of 5, your expenses will have changed.
The key here is to keep your expenses per person low even while your income climbs and resist the temptation to buy the newest, shiniest iPhone or TV as you have more discretionary income.
If you have good control of your spending then this is a big tick for your ability to retire early and start enjoying life on your own terms.
Have you considered your future expenses?
While you may well be 35 and looking at early retirement, long-term budget forecasting is notoriously difficult for anyone and your FIRE calculation is no different.
The reality is that you won't always be in perfect health, so you need to factor in the cost of healthcare in your older years, along with a variety of potential insurances as well as any costs for kids, if applicable.
If you have all of these worked out already, with a fair bit of budget slack allowing for any forecasting errors, then you're well on your way to being able to FIRE today.
What's the state of your ASX portfolio?
You may be one of the lucky Fools to have invested in Afterpay Touch Group Ltd (ASX: APT) shares at $6 per share or got in on the Nearmap Ltd (ASX: NEA) IPO and collected a tidy 5,200% return.
However, you have to be realistic when planning for the future and realise that your returns will not always be so lucky, and the ASX will not always be in a bull market.
Mean reversion – whereby things return to their long-term average over a sufficient period – is real and very applicable to our investments, meaning a conservative and inflation-adjusted average return could be used in your calculations.
It's wise to conduct some scenario analysis to account for a GFC-style recession or the removal of franking credits in the future, particularly if you're staring down at a 50-year retirement period living off your investments.
