One of the advantages of a career as a CFO is the vast array of choices it gives you down the track. One of these may be to retire early to pursue other dreams. There are a number of steps you could follow to make this a reality.

Greg Einfeld is a Director of online financial advice firm Plenty Wealth. He explains that, while we all aspire to higher investment returns, the key to growing wealth and retiring early is controlling spending as early in life as possible.

“I see families that manage to live on less than $50,000 each year. I see others that spend half a million dollars every year and claim they don't have an extravagant lifestyle. What often happens is the more people earn, the more they spend. To build wealth and retire early, CFOs need to break this nexus,” he says.

According to Einfeld, the first step is to track your existing spending. “Most people either don't know what they spend or significantly underestimate it. The only source of truth is your bank accounts. There are simple tools that help you aggregate and classify your transactions so you know exactly what you are spending.”

The next step is to identify the areas you think you can cut back and set a budget. This requires prioritisation.

“It might feel hard to eat out less, or buy fewer shoes. Ultimately you have to make a choice: what is more important, retiring early or having more shoes? Then you need to continually monitor your spending against the budget. Every dollar you overspend is delaying that early retirement,” he adds.

Thinking long term

Pete Pennicott is a Director and Financial Adviser with financial advice firm Pekada. He agrees the first step in achieving an early retirement is controlling your expenses.

“Think long term with your money decisions. My personal framework is to think of two versions of myself: 'future me' and 'present me', who have competing priorities,” says Pennicott.

“One seeks instant gratification and the other aims for delayed gratification. Keeping both happy requires compromise: today's holiday involves a trade-off as future me is going to be a little worse off financially. The trick to making this work is to find the right balance,” he says.

Re-framing how you spend your money and focusing on what you really value and derive enjoyment from also helps when it comes to retiring early.

Says Pennicott: “Too often we waste our hard-earned money on things that don't really matter. I don't prescribe being completely frugal and saving every penny. Money is there to provide for lifestyle, but spend on things that make the biggest impact on your happiness.”

Spending less on unimportant things has a two-fold effect, as you end up saving more. You also learn to live on less and you don't have to save as much for retirement to replace that income.

“For younger CFOs, as they get a pay rise they need to resist the temptation of 'lifestyle creep', which is when you make more money and then spend more money. When you get a raise, you should try to invest half and live on the other half,” says Pennicott.

“Most pay rises happen early in our working lives so it is important to develop this habit early. For older people this is trickier as your habits and financial commitments may have already been set,” he says.

One opportunity, which is sometimes missed, happens later in life after raising children when CFOs have surplus cash flow. Pennicott says people have spare money at this stage and it's important to resist the temptation to spend this on lifestyle. “Instead think about how much you can add to your investments and super.”

How to boost your savings

If you want to grow your wealth, the first step is to live within your means. This allows CFOs to invest more and lets the magic of compounding returns do the heavy lifting in building your assets.

“The end game is to build an asset base that can deliver a passive income stream in the future. This is what makes an early retirement possible. Instead of having to work, your investments are working for you and providing an income in lieu of your salary,” explains Pennicott.

Einfeld says there are four ways to boost savings.

“You can spend less, earn more, invest more wisely and optimise for tax. Earning a higher salary could mean changing jobs, asking the boss for a pay rise, working overtime or even getting a second job. The gig economy now provides lots of ways to earn a second income,” he says.

For CFOs who are working towards retirement, superannuation is likely to be the most tax-effective savings vehicle, he adds.

Novel approaches to investing

If you're going to retire early, for instance at 50, you won't be able to rely on your super to fund your lifestyle as you won't be able to access it until your preservation age, which is at least 56.

“Have a pool of assets to fund your lifestyle in the gap between your early retirement age and your preservation age,” advises Pennicott.

“The focus needs to be on having the right amount of money available at the right time. Consider different tax structures to build your wealth to complement super. Explore options such as family trusts and investment bonds, which may reduce tax impacts,” he adds.

According to Einfeld, CFOs who are investing to retire early must have a long-term view.

“Suppose you are 55 today and are planning to retire at 60. You may think you have a five-year investment horizon,” he says.

“But you actually have a 30-plus year horizon because you are investing not only for your remaining years in the workforce, but also for your years in retirement. This may require consideration about how much to allocate to growth assets, which will enhance your ability to improve your savings.”

He says it is important to combine all the elements – when to retire, how much to earn, how much to spend, how to invest and how to use superannuation – into a single, integrated plan. “Only then will you really know if you are on track.”

This balanced approach will ensure your wealth creation and management plan is not so tough and restrictive that you can't stick to it.

Pennicott says that wealth creation takes time, so it's important to develop strategies that you can stick to long term.

“The diet you do for a month only to lapse and follow up with a binge has little impact on your long-term health. The same applies to a short-term financial strategy. If you take a long-term view to wealth creation you are much more likely to be able to build enough wealth to achieve your early retirement dream.”

Key Takeaways

• Work out what you actually spend – and how you can reduce this.
• As your income grows, don't increase your lifestyle commensurately.
• Four ways to boost savings: spend less, earn more, invest more wisely and optimise tax.