At 32, one of our clients is determined to achieve a debt-free future as soon as possible. The goal is to be completely free of debt by their early 40s. With a house valued at $675,000 and a remaining mortgage of $330,000 (the only debt they carry), this client is focused on creating accessible income to enable an early retirement, living off investments. Here’s how they will achieve this ambitious goal.
Financial Snapshot
The client’s current financial standing is impressive:
- House Value: $675,000
- Mortgage Balance: $330,000 (effectively $114,000 after considering the offset account)
- Cash in Mortgage Offset: $116,000
- Share Portfolio: $85,000 (with $1000 monthly deposits)
- Superannuation: $225,000
Step-by-Step Plan for Financial Freedom
1. Optimise Mortgage Payments
The client has strategically used an offset account to reduce their mortgage balance. By continuing to add $1000 a month to this account, they can significantly reduce the interest payable on the mortgage. In approximately 114 months (just under 10 years), the mortgage will be paid off.
2. Enhance Share Portfolio
With a solid foundation in their share portfolio, the client should continue their monthly contributions of $1000. Historically, investing in shares can yield substantial returns over a decade. By consistently investing, the portfolio can grow to approximately $270,000, assuming historical growth rates.
3. Consider Superannuation Contributions
While superannuation is a fantastic tax-effective way to save for retirement, it can’t be accessed until the preservation age is reached. It might be beneficial for the client to pause voluntary super contributions temporarily and focus on using those funds to reduce debt and increase the share portfolio, providing income in the short term.
4. Generate Passive Income
Once the mortgage is paid off, the client can consider generating income from their property by renting out rooms or the entire house. This rental income can supplement the passive income from shares. With an estimated $270,000 in shares, there is potential to generate around $10,000 annually from dividends.
Setting an Income Target for Financial Independence
To achieve financial independence, it’s essential to set a realistic income target. For example, if aiming to generate $50,000 annually, approximately $800,000 invested would be needed. This amount should grow with inflation and provide a sustainable income.
Long-Term Considerations
Age plays a critical role in financial planning. For someone at 69, with an expected lifespan of 15.7 years, about $400,000 might be needed. However, at 32, planning for more than 50 years of life expectancy is crucial. Ensuring investments keep pace with inflation is vital to maintaining lifestyle and financial security.
This financial journey to being debt-free and financially independent in 10 years is realistic and achievable. By focusing on reducing the mortgage, growing the share portfolio, and setting a sustainable income target, our client can look forward to a secure and prosperous future.
By following this structured plan, one can confidently work towards the goal of financial freedom, enabling early retirement and the enjoyment of investment returns.
This case study illustrates the importance of strategic financial planning and disciplined investing for achieving long-term financial goals.
Ready to take control of your financial future and achieve debt-free status? Contact the expert team at Inspired Money today to start your personalised financial journey. Let’s build a plan tailored to your goals and unlock the path to financial independence and early retirement. Don’t wait—begin your journey now, contact us on 086222 7909 or email us on admin@inspiredmoney.com.au.
