Cliff and Elaine moved to Australia nine years ago. In the process, they gave up Cliff’s UK police pension that would have allowed them to retire early at age 52. Now they want to explore their retirement options in Australia. Should they go for FIRE and retire early or could (Early) Semi-Retirement using a Coast FI approach be a better alternative for them?
Exploring Pathways to Financial Independence
Meet Cliff and Elaine from Adelaide, South Australia. They are both 42 years old and emigrated to Australia in 2012. Cliff was recruited by SAPOL (South Australia Police) from the UK Police. Elaine is a dental nurse. They are currently in the process of building their first Australian home. This will likely be their “forever home”. Cliff and Elaine have two children aged 20 and 22 who live with them.
If Cliff and Elaine had stayed in the UK, Cliff could have retired on a full police pension at age 52. After their move to Australia, they had to get their heads around the Australian superannuation system and investing landscape. They paid all debt down after reading the Barefoot Investor. Now that they are going to stay in Australia long-term they need to plan for their Australian retirement.
Initially, Cliff was hoping to try and replicate what they could have achieved in the UK – retire on a comfortable income at 52. However, he realised that this might be an unachievable dream. Lately, Cliff has started to explore what a Semi-Retirement option might look like for him and Elaine.
Cliff and Elaine are aiming for a comfortable lifestyle, one where they can cover all expenditure and have several interstate breaks or a couple of international holidays per year. They want to be able to eat out often and enjoy what Australia has to offer.
Ideally, Cliff and Elaine would like to semi-retire soon and move to part-time work (3 days per week). They would like to fully retire at age 60 with a passive income of $60,000-$80,000 and hope they can pay off their home by then. Cliff and Elaine would also like to explore the option to keep working full-time until they reach Financial Independence and then retire even earlier.
Let’s have a look at Cliff and Elaine’s numbers.
Cliff’s income: about $126,000 (gross; including $11,000 overtime) = $90,000 (net)
Elaine’s salary: 62,000 (gross) = $50,000 (net)
Total after-tax income per year: $140,000
Annual employer Super contributions:
Cliff: $12,600 (gross) (police contributions are tax free, 15% payable on drawdown)
Elaine: $5,890 (gross) = $5,000 net (after Super tax – 15%)
Total after-tax income (incl. superannuation) per year: $157,600
Note for our international readers: Superannuation (or ‘super’) the the Australian equivalent of a 401k. It is money put aside by your employer over your working life for you to live on when you retire from work. You have control over how this money is invested, but you cannot access it until age 60. Superannuation contributions are taxed at 15%.
Savings and Investments:
Superannuation: $453,000 (combined – invested in high growth funds)
Cash: $36,000 (savings account – this is investable money)
In addition to the investments above, Cliff and Elaine have set aside a $15,000 emergency fund. Cliff’s job is very secure so he doesn’t believe that they need too much cash lying around doing nothing. They have also set aside another $17,000 for additions to the house that were not included in the mortgage (rainwater tank, carpets and blinds, etc.).
Cliff and Elaine currently add $2,150 per fortnight to their savings.
Home loan of $517,000 at 4.39% (PPOR value: $550,000)
Because they are building a new home they did not have a choice and had to accept the high standard variable mortgage rate of 4.39%. Cliff and Elaine won’t start making repayments until September 2021 when their house is complete. They will refinance as soon as possible to get a cheaper interest rate.
Cliff and Elaine’s expenses currently sit at around $62,000 per year ($5,167 per month). This includes $1,862 per month in rent. So their expenses minus rent are $3,305 per month / $39,660 per year. Once they move into their new house, they will make monthly mortgage repayments instead.
Unique Points About Cliff and Elaine’s Situation
- UK pension: While their move to Australia meant that Cliff had to forego his comfortable police pension, he and Elaine both still pay their UK National Insurance contributions. This means that they should both be entitled to full UK aged pensions at age 68. One big difference to the Australian aged pension is that the UK aged pension is not means-tested, so they should receive their pensions no matter how much wealth they accumulate over time (unless the system and conditions change, of course). They currently pay around £146.40 ($268.49) each per year. They will be entitled to a pension of £9,371.27 ($17,187.28) a year each (in 2021 dollars). Not a bad deal at all!
- Police superannuation: All of Cliff’s superannuation contributions are pre-tax. He will only pay 15% tax on the taxable part of his super when he retires. There is no limit to the amount he can salary sacrifice into super. Cliff currently salary sacrifices 12.3% of his salary into super.
Note for our international readers: Salary sacrifice is an arrangement between you and your employer that allows you to contribute part of your salary to your super account before you pay tax on it. You only pay the 15% superannuation tax rate instead of your marginal tax rate on these contributions. Superannuation contributions are capped at $25,000 per year for most people.
Notes on the Calculations
- Mortgage: I have assumed an average interest rate of 3% for the calculations below. This is a bit higher than what is currently available, but no doubt interest rates will increase again at some point in the next few years (although it has been predicted that they will stay low for quite a long time).
- Living expenses in retirement: Cliff and Elaine want to have a passive income of $60,000-$80,000 in retirement. I used the middle point – $70,000 – for the calculations below.
- Investment return: I assumed inflation-adjusted returns of 7%.
Cliff and Elaine’s Retirement Options
Let’s dive in and see what is possible for Cliff and Elaine. I use the Money Flamingo Semi-Retirement Calculator to calculate their potential Semi-Retirement and FIRE dates for the different scenarios discussed below.
Option 2: Work Full-Time Until Fire, Then Retire Early
Cliff and Elaine are only 42 and in a great financial position, so working until they hit FIRE is definitely a feasible option for them if that’s what they want to do. Had they stayed in the UK, Cliff would have retired on a full police pension at age 52. Well, I’ve got news for you! It looks very much like they can achieve a similar result here in Australia!
Let’s assume they want to pay off their mortgage in just 10 years so that they are debt-free at 52. This would mean monthly mortgage payments of $5,002.
So their living expenses including the mortgage would be $8,307 per month / $99,684 per year. This would still leave them with just over $40,000 per year to invest outside of superannuation plus the $17,600 in annual employer super contributions.
Based on these numbers, they could pay off their house AND reach FIRE in 10 years – at age 52! How awesome is that?
As Paul and Elaine only have a very small fraction of their net worth outside of super (which they won’t be able to access until they are 60 years old), they would have to invest as much as possible outside of super to get them from their FIRE age to age 60. If they invest the $40,000 they have available every year outside of super, they would have enough ($576,264 to be exact – assuming 7% inflation-adjusted returns) to get them to age 60.
One downside of this approach is obviously that they won’t be able to make use of the fact that there is no limit to the amount Paul is allowed to salary sacrifice into super each year. However, if he salary sacrifices into super instead of investing outside of super they will not be able to retire once they reach their FIRE number.
Option 2: Semi-Retire ASAP and Fully Retire at 60 (Coast FI)
Ideally, Cliff and Elaine would like to move to part-time work and semi-retire as soon as possible. They would like to fully retire at age 60 with a paid-off house. Let’s have a look at what that could look like:
In this scenario, they would pay off their mortgage over 17 years (taking into account that they won’t start making repayments until later this year). Their monthly payments would be $3,248.
Cliff and Elaine’s living expenses including the mortgage would be $6,553 per month / $78,636 per year.
Let’s have a look at the calculator results:
More good news! Cliff and Elaine are already at Coast FI for their target retirement age (60). They would get to FIRE by this age even if they didn’t save another cent.
This means that they can semi-retire NOW. From now on, they only have to earn enough to cover their monthly expenses (including the mortgage repayments). They currently earn $11,667 per month, so they could reduce their after-tax income by around 44%!
Cliff and Elaine’s would ideally like to move to a 3-day week. Cliff’s new salary for 3 days per week would be $69,000. I used his base salary of $115,000 for this calculation as I’m sure he wouldn’t want to work overtime as a semi-retiree. Elaine’s new salary would be $37,200. The beauty of working part-time is that with a lower income, you usually also move into a lower tax bracket. So by reducing your working hours by 40%, your income doesn’t drop by 40%. Here are Cliff and Elaine’s new after-tax incomes:
So together they would take home $7,297 per month, which is more than enough to cover their living expenses.
It looks like the semi-retired life might be a great option for Cliff and Elaine!
The Coast FI calculation for this scenario doesn’t even take into consideration the additional super contributions their employers will make for them over for their part-time work over the next 18 years. I see these extra contributions as a buffer in case the markets don’t return the expected return. They will also likely end up with a larger nest egg in super at age 60 than expected, allowing them to withdraw closer to $80,000 per year.
The Role of Superannuation
A lot of people find planning their early retirement around super a bit tricky. However, at the end of the day, your investments in super are just that – your investments. The only thing to consider is that they are invested through a structure that doesn’t allow you to touch the money until you turn 60 (if you fully retire) or 65 (if you are still working). If you’ve read some of my other articles you probably know that I don’t like to overcomplicate things by using a two-bucket strategy (one for investments inside of super and one for investments outside of super). I usually refer people to Mr. Money Mustache’s fantastic article on this topic.
Basically, as long as you have enough money outside of super, it simply doesn’t matter that some of your nest egg is locked up until you reach age 60. In Cliff and Elaine’s case, this is not the case. Almost all of their money is in superannuation, so they will have to invest heavily outside of super if they want to retire before age 60. Had they invested the money Cliff salary sacrifices into super every year outside of super, they would now have even more options.
The Role of the UK Pension
I almost forgot to mention Cliff and Elaine’s UK pension at age 68 again. They are in such a strong financial position that this pension will likely just be cream on top. This is great because we all know that in most Western countries the pension systems are under a lot of pressure. While it will be great if they end up receiving the pension it is definitely a good thing that they don’t have to rely on it. Their pension age is still 26 years away, so a lot of things could change, especially because they plan on receiving the pension in Australia).
If I were them I would wait until I get pretty close to the pension age (under 10 years away). If I was then 100% sure that I will definitely receive the pension, I would add the FIRE value of the pension (yearly amount x 25) to my net worth. This would then allow me to increase my annual budget even before I receive the pension.
Summary: FIRE or the Semi-Retired Life – What Is the Better Choice for Cliff and Elaine?
Cliff and Elaine are in a fantastic situation. They can choose between two great options:
- Pursuing FIRE and retiring early in 10 years or
- Semi-retiring immediately until they become financially independent and fully retire 18 years from now at age 60.
There is, of course, no right or wrong answer to the question of which option is better. It all comes down to their priorities and whether they would prefer to “sacrifice” another 10 years to gain 8 years of full retirement. It’s a question only they can answer.
It’s not a secret that I’m a big fan of the semi-retired life and the balance this lifestyle offers. However, in contrast to Cliff and Elaine, we have young kids. This was one of the major reasons we wanted more time and freedom now rather than later. Cliff and Elaine’s kids are adults (well done!), so this is not something they have to take into consideration. If they wanted to put in another 10 years in order to then retire “properly” to travel and enjoy life as retirees while they are still relatively young, that would be completely understandable.
There are of course many options that are somewhere in between the two scenarios we explored above. One example is Flamingo FI, which I left out of the case study so it wouldn’t get too long. With this option they would work full-time a few more years, then they could semi-retire until they hit FIRE in their mid-50s.
Cliff and Elaine have a great retirement ahead of them, no matter which option they go with. They are in the fortunate position to have lots of choices and the ability to design the life they want.
What would you do in Cliff and Elaine’s situation? Which retirement option would you opt for?
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Disclaimer: The views expressed on this website are personal opinions only and should not be construed as financial advice for your given situation. While all attempts are made to present accurate information, it may not be appropriate for your specific circumstances and information may become outdated over time.