How To Save Your Way Out Of The Rat Race

A very large majority of Australians would ideally like to exit the workforce during their early 60’s.

With demographic statistics confirming many of us will live into our early 90’s, that would mean having 30 years of freedom to wake up each morning and do as one chooses.

A ‘proper retirement’ is far more appealing than ‘basic existence’ in old age.

But the critical question is where will the cash come from during those 30 years?

In a society which has always failed to teach financial literacy, the aim of this short blog is to provide several examples of simple and effective strategies for creating a big enough nest egg to support ‘future you’.

How much does one need each year?

The generic answer to the above question from a variety of sources found via Google and AI garbage suggest that a couple retiring this year and wanting a ‘comfortable’ lifestyle will require a combined annual (post-tax) income stream of $75,000 and a lump sum nest egg of $780,000.

Good luck trying to be ‘comfortable’ with that modest resource.

Having completed a proper exercise multiple times myself, I am happy to share some fundamentals here.

Calculating a desired annual retirement income must first factor in essential costs such as accommodation, food, utilities, transport and medical exist every year.

Then there’s discretionary expenses such as dining out, streaming services, recreation, entertainment, the occasional weekend away somewhere and holidays.

A realistic (after tax) annual figure for a couple to enjoy a ‘comfortable’, but far from lavish, lifestyle in 2026 is no less than $140,000.

That figure assumes a debt-free home, no dependent children, a basic allowance of $20,000 for general leisure and entertainment and $7,500 for annual holidays.

Over a 30-year period (early 60’s to early 90’s), the $140,000 per year cumulative spend equates to $6.6 million (assuming 3 percent annual inflation).

Hopefully this information is sinking in and making one realise the importance of financial discipline and intelligent investing during the 45 years that one is typically in the workforce for.

Scenarios for creating a nest egg

A structured budget with sensible discretionary expenditure would enable most households to save $2,500 per month (or $30,000 per year).

Herein we imagine a stereotypical couple with a starting age of 40 years. We’ll say their combined annual income is $200,000 and their projected combined superannuation balance by age 60 is $1 million.

This couple has committed to allocating $2,500 per month for a 20-year Wealth Accumulation strategy.

The amount which they set aside increases by $100 at the beginning of each new year [$2,600 per month from the start of Year 2, and so on].

FUN FACT: 6.4 million Australians are currently aged 60 or more. That’s 1 in every 4 people.

Each of the scenarios below is a different use of their monthly investment.

Acknowledging that future interest rates and other financial things are as predictable as the weather, the statistical assumptions used for these scenarios are listed at the end of this blog.

Scenario #1
Cash management account

The most apathetic of all strategies is to forever live in rental accommodation and to just deposit cash into the bank every month and leave it there.

Putting $2,500 per month into a cash management account will result in a savings account balance of $1,140,000 in 20-years’ time.

This scenario is a good example of the adage ‘from small things, big things grow.’

But $1,140,000 will not go very far for the stereotypical couple who requires $140,000 per year.

And they (still) don’t own a home.

Let’s say the 40-year-old couple were paying $650 per week for a basic property (or $34,000 per year).

If rent continues to increase by an average of 5 percent per year and they are still renting something similar in 20 years’ time, the cost will be circa $1,730 per week (or $90,000 per year).

Aside from the relatively modest value of the nest egg from this scenario, shortcomings include the ready access to cash represents a temptation risk and there’s no growth on investment capital.

Scenario #2
Accelerated home loan reduction

A simplistic strategy adopted by many homeowners is to just direct as much as they can towards paying off their home loan quicker.

So, let’s imagine the 40-year-old homeowner couple with a current loan balance of $700,000 and a remaining loan term of 20-years.

The minimum monthly payment of $5,015 equates to a total amount paid of $1,203,000 over the next 20-years.

But if they increased the home loan payment by $2,500 to $7,515, the loan will be repaid in 10.5 years and the total amount paid reduces to $944,258 (thereby paying $259,075 less).

Once the loan was repaid, if they maintained the same discipline for the remaining 9.5 years and diverted all of what they were paying into a cash management account, they would have a nest egg of $1 million cash at the end of the 20-year period.

$1 million cash might seem like a big nest egg, but keep in mind the primary purpose of the strategy.

Assuming inflation averages 3 percent, the $140,000 annual figure that we calculated in 2026 will be circa $250,000 when the couple wants to exit the workforce in 20-years’ time.

Whilst the family home is debt free in this scenario, the $1 million investment nest egg will be insufficient.

Related article: Best and worst performed property markets

Scenario #3
Investment property

Taking great confidence from knowing that housing never (ever) goes out of fashion, the 40-year-old couple could leverage some equity in the current family home to buy an investment property asset.

Assuming the expertise of Propertyology was engaged, a skilful acquisition of a detached house in a strategically chosen city/town would typically cost circa $800,000.

After allowing for rental income and associated expenses, the current $30,000 net annual cost to hold a fully leveraged investment property would be covered by the couple’s $2,500 monthly Wealth Accumulation budget.

If we adopt the historical average annual capital growth rate over several generations of 6 percent, the investment property asset will have increased from $800,000 to $2,565,000 over the next 20-years.

That’s a net equity position of $1,765,000.

It is also assumed that the family home will then be debt free, and that the investment property will become cash flow positive at some stage prior to Year 20 (the exact year will largely be determined by future interest rates).

When ready to exit the workforce, the couple could convert the equity to cash via selling the investment property (capital gains tax would then be payable), or benefit from further capital growth and some cash flow by holding the property for a longer period.

It is worth noting that, if the property was held for an additional 10-years, the projected value will be circa $4.6 million (or net equity of $3,800,000).

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Depending on one’s age when they exit the workforce, options for accessing cash to fund a retirement lifestyle could come from:

• downsizing the family home,
• progressively drawing down on superannuation,
• a Reverse Mortgage, or
• selling the investment property.

Other scenarios
Share portfolio

Advantages: requires very little capital to enter, it is liquid and holding costs are nominal.

Disadvantages: leveraging is less powerful than standalone houses and share values are much more volatile.

For a general comparison of the 20-years ending August 2026, the value of the ASX200 index increased by 70 percent (from 5,100 to 8,700), while Australia’s combined capital city house value increased by 220 percent (from $370,000 to $1,180,000).

Among companies on the share market and assorted property markets, the very best performed options are almost always lower profile opportunities which are typically only uncovered by those with the best skill, expertise and a touch of luck [refer here: Case Study].

Superannuation

The professional fees for retail and industry superannuation funds can be exorbitant, and the money is predominantly invested in share markets (refer above).

No wonder 1.24 million adult Australians now have a SMSF.

My biggest gripe with superannuation is the loss of control over access.

It is fast approaching 70 years of age, which is completely useless for those who want (or must) put the cue in the rack before then.

Limitations on contributions, significantly diluted leverage potential for growth, governments forever changing legislation and the desire of those greedy grubs to get their hands on our superannuation also are unappealing to me.

Commercial property

As with other asset classes, plenty of people have been handsomely rewarded from investing in different types of commercial property (warehouses, industrial premises, retail shops, offices, medical centres, etc).

Compared to residential property, the biggest attractions to commercial property are typically the higher rental yields and lower outgoings.

On the flip side, interest rates are typically 2 percent higher, loan structures are tighter, capital growth rates are often significantly less due to there being a much smaller pool of buyers, and the cash flow risks associated with tenant quality can be serious.

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Consequences of apathy

Those who choose to spend everything that they earn, thereby neglecting to create a proper nest egg, will be entirely reliant on superannuation and a taxpayer-funded aged pension.

For those who don’t already know, the maximum pension for an Australian couple is just $47,000 per year.

Last year alone, that back-ended unemployment scheme cost taxpayers a whopping $65 billion.

To be ‘eligible’ for that handout, one needs to be at least 67-years of age.

I doubt that meets anyone’s definition of ‘fun’.

Assumptions used for aforementioned scenarios

1. $30,000 annual commitment to Wealth Accumulation (or $2,500 per month)
2. Increasing the Wealth Accumulation amount by $1,200 each year
3. Home loan interest rate (charges) of 6 percent
4. Cash management interest rate (earnings) of 2.75 percent, paid monthly
5. Tax on interest earnings each financial year at 37 percent tax rate
6. Rental income increasing by an average of 5 percent per year
7. Rental vacancy period of 4 out of 52 weeks per year
8. Rental expenses include interest charges, $3,500 council rates, $3,500 insurance, $3,000 general maintenance and property management fees
9. Investment property average annual capital growth rate of 6 percent
10. Investment cash flow losses carried forward annually and eventually deducted from future capital gains.

[disclaimer: this information is general in nature and does not constitute personal financial advice].

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