Early Retirement On A Teacher’s Wage

In this article I am going to show you how to calculate an early retirement from a teacher’s wage, specifically on a teacher’s wage in Victoria, Australia.

You can, of course, extrapolate this method to teacher’s wages in other states or territories, or indeed other countries. You can also use this method using wage data from other occupations.

I will cover two scenarios.

Scenario one will be based on saving and investing 50% of your income by living a frugal life as a single person.

The other is based on saving and investing all of the teacher’s wage and living frugally off the spouse’s income. This is what we do.

In fact, I call my husband my super power because we are on the same page financially and work well together as a team. My husband is not a high income earner and earns slightly less than I do. Living from one wage doesn’t mean we miss out on fun. We budget for overseas family holidays, we have an emergency fund and each has a splurge account. This is done based on the Barefoot Investor method.

You’re probably wondering where we invest our savings.

There are three main ways to self-created financial wealth. They are real estate, self-employment/business and the stock market.

We’ve tried being landlords and did not enjoy the stress so we sold the rental property. I’ve also had a few goes at being an entrepreneur throughout my working life and none of the ventures resulted in a living wage (market gardener, writer, mobile bookshop, blogger/online shop). The strategy that has worked for us is surprisingly simple – buy index funds in the stock market. You do what suits you for wealth creation, do all three if that’s your thing.

Note to consider: if you invest your savings into superannuation you won’t be able to access that money until 60 years old – hardly an early retirement.

Compulsory money put into superannuation is not included in any of the calculations, and is viewed more as the cherry on the cake once traditional retirement is reached.

Calculations Required

The first thing you need to do is know your wage. You can get this from your payslip. Or if you haven’t started your career look online for salary rates. For the Victorian education rates go to this link: https://www.education.vic.gov.au/hrweb/employcond/Pages/salaries.aspx

If using your payslip, look for the net (after tax) amount. Keep in mind if you are currently paying compulsory HECS/HELP payments that your pay will go up once the debt is finalised.

Salary rates found online are gross salaries, meaning money that has not had any deductions taken out yet such as tax, the Medicare levy and HECS/HELP.

If you only know the gross amount, you’ll need to use an income tax calculator to figure out your net wage. The government MoneySmart website has many fantastic financial calculators for Australians.

To further refine your net pay, if you hold an education debt, go to the Australian government MyGov website to look up the balance of your HECS/HELP debt. Then head over to StudyAssist to find repayment rates.

The other calculator you will need is the compound interest calculator, again, MoneySmart has this covered.

Scenario One

Single person, living frugally, saving and investing 50% of wages, graduate 1st year teacher, no HECS/HELP debt. For example: living at home, or in a share house, or teaching in an area where subsidised housing is supplied, or as part of a couple but with separate finances.

The first step is to put the graduate wage of $72,058 through the MoneySmart income tax calculator.

As you can see from the chart, after tax and the Medicare levy, a person earning $72,058 takes home $56,731.

Now assuming this person is saving 50% of their income, they are saving $28,365 during their first year.

This savings is then invested into index funds in the stock market.

Time to use the compound interest calculator.

In this scenario, $1,090 is invested every two weeks and has a 10% return (the average return in the stock market over the past 100 years).

You might be thinking $1,336 isn’t much extra towards early retirement and that’s because the power of compound interest is only just beginning – the point where your interest earned starts earning its own interest.

From year two you have an extra $1,336 earning interest that you wouldn’t have had if you didn’t invest it.

Repeat The Calculations

Year two of a teacher’s wage is $74, 717 gross, or $58,474 net.

Half of $58,474 is $29,237, or $1,125 p/f.

Back to the compound interest calculator. This time the initial deposit is $29,676. That’s the money already invested.

At the end of year two, this teacher has $63,412 invested.

$4,486 is essentially free money gained as interest (plus the $1,136 in interest from year one).

Year Three Calculations

Third year wages are $77,474 gross, or $60,279 net. Half of that saved is $30,139, or $1,159 p/f)

Let’s put it through the compound interest rate calculator.

In just three years this teacher has saved $101,606!

The interest alone of $1,136 (year one), $4,486 (year two) and $8,060 (year three) has added an extra $13,682!

Coast FI

At this point, if you are in your early 20s, you can coast along to a standard retirement age and not invest another dollar yet still have $2.1M at 60 years old – such is the power of compound interest plus time.

For more details head over to If Only I Was In My 20s Again.

The beauty of Coast FI is that you know from early in your working life that you’ve got retirement sorted. This gives you options such as work part time, study, take time off to have children, whilst knowing that financially you’ll be okay.

Coast FI gives you options

Let’s head back to the early retirement calculations – the point where work becomes optional.

Now have a look at what happens over a ten year span of saving and investing 50% of income.

Gross payNet payP/F InvestedInterest EarnedTOTAL
Principle & Interest
Year 1$72,058$56,731$1,090$1,336$29,676
Year 2$74,717$58,474$1,125$4,486$63,412
Year 3$77,474$60,279$1,159$8,060$101,606
Year 4$80,337$62,154$1,195$12,104$144,780
Year 5$83,297$64,093$1,232$16,670$193,482
Year 6$86,370$66,106$1,271$21,818$248,346
Year 7$89,557$68,193$1,311$27,612$310,044
Year 8$92,862$70,358$1,353$34,124$379,346
Year 9$96,289$72,603$1,396$41,433$457,075
Year 10$99,842$74,930$1,440$49,626$544,141
TOTALS$217,269$544,141

That’s a massive $217,269 in free money as compounding interest, and a total of $544,141 in investments in just ten years.

Retirement Money

How much money do you need to retire?

Thankfully, there’s a simple calculation for that.

Figure out how much money you need to cover one year of living expenses during retirement, remembering most people report that they need less money in retirement than if they were working, particularly if they plan on doing geoarbitrage (moving to a lower cost of living area, or lower cost of living country).

Once you have calculated your yearly living expenses, times that amount by 25.

For example, if you would be happy with $40,000 per year in retirement, the calculation would be $40,000 x 25 = $1,000,000.

Based on this example, our single, frugal teacher would need $1M invested to have $40,000 per year, inflation adjusted passive income.

Flamingo FIRE

Looking at the chart above, the teacher is half way to early retirement.

Just like reaching $100,000 was a crossroad that leads to Coast FI, reaching half of your retirement investment is a crossroad to Flamingo FIRE.

(FIRE = financial independence retire early.)

Flamingo FIRE is the strategy of saving and investing half of your projected retirement amount, then stop saving, and have work options such as part-time employment etc.

Flamingo FIRE is another financial crossroad

Even if a person following the Flamingo FIRE strategy doesn’t save another dollar, the scenario example amount of $500,000 will continue to grow with compounding interest.

In just another 7 years, without another dollar added, the Flamingo FIRE teacher has reached their early retirement goal of $1M.

Early Retirement ASAP

Back to the teacher with $544,141 in investments after 10 years.

What if this teacher doesn’t want Coast FI or Flamingo FIRE and just wants to reach early retirement as soon as possible. For example, a teacher who didn’t start investing until later in life.

It may be a surprise, but it’s not another 10 years of saving and investing.

It’s only another four years to reach $1M. This is due to a continuation of saving and investing 50% of a teacher’s wage and compounding interest partnered with time.

Scenario Two

This scenario is a couple who save and invest all of the teacher’s wages, and lives off the wage of the other income earner.

Their goal is to have a retirement income of $60,000 per year. This means their retirement figure is $60,000 x 25 = $1,500,000.

Using the same financial details as scenario one, yet investing all of the teacher’s wages, let’s explore the figures.


Gross payNet payP/F InvestedInterest earnedTOTAL
Principle & Interest
Year 1$72,058$56,731$2,181$2,673$59,379
Year 2$74,717$58,474$2,249$8,974$126,827
Year 3$77,474$60,279$2,318$16,121$203,216
Year 4$80,337$62,154$2,390$24,208$289,564
Year 5$83,297$64,093$2,465$33,342$386,996
Year 6$86,370$66,106$2,542$43,638$496,726
Year 7$89,557$68,193$2,622$55,227$620,125
Year 8$92,862$70,358$2,706$68,251$758,732
Year 9$96,289$72,603$2,792$82,870$914,194
Year 10$99,842$74,930$2,881$99,258$1,088,358
Year 11$108,003$80,003$3,077$117,736$1,286,096
Year 12$108,003$80,003$3,077$138,442$1,504,540
TOTALS$690,740$1,504,540

As you can see from the chart, the couple in scenario two have reached early retirement in just 12 years! And they have a whooping $690,740 in free money from compounding interest!

Perpetual Income

By now you must be wondering how this money invested can be a perpetual source of passive income.

It’s all to do with the Trinity Study.

A group of very smart people got together and ran through calculations based on the history of the stock market and came up with safe withdrawal rate recommendations.

According to their calculations if you only withdrawal 4% from your invested nest egg, your money has 99% chance of lasting 30 years if you own 75% in stocks and 15% in bonds. Check out the chart below for different withdrawal rates, time spans and investment allocations.

Early Retirement Now

Using the previous teacher example, $1,500,000 would return on average $150,000 for the year. If you only withdrawal 4% rather than the full 10%, you would have $60,000 to cover your living expenses, with the remaining $90,000 remaining invested.

The following year the nest egg would be $1,590,000. With a withdrawal of 4% at $63,600 and the remaining $95,400 left invested, theoretically the money invested grows each year to account for inflation.

Conclusion

Early retirement is achievable on a teacher’s wage if you are prepared to live frugally and avoid hyper-consumerism.

Once a person or a couple have money behind them, they have more lifestyle choices, particularly in regards to work.

Some of the crossroads of choices mentioned in this article are Coast FI (age dependent) on reaching $100,000 in investments, the other is Flamingo FIRE at reaching 50% of retirement income saved and invested.

The other example was of a couple with one wage invested and the other wage used to cover living expenses, they were able to reach early retirement in just 12 years. This is also the strategy my husband and myself follow.

It’s important to note that the calculations mentioned are not teacher specific, but can be applied to other occupations and scenarios.

Please scroll on down to the comments box and share your thoughts about early retirement.

Have you heard of the online broker SelfWealth – it’s who we use and I can highly recommend them. Each buy or sell trade only costs $9.50 – no matter how much you are investing. Here’s a link if you’d like to try them out. The link entitles you to 5 free trades (and we get 5 free trades as well). https://secure.selfwealth.com.au/Registration/Plan/5/K2qDn

Disclaimer: I am not a personal finance advisor and this is not financial advice. Do your own research and contact a professional as needed.

2 thoughts on “Early Retirement On A Teacher’s Wage

  • 21 September 2021 at 3:29 pm
    Permalink

    Great way to outline the impact of compound interest!

    (I may have missed this)
    I have a question about the 10% annual return, is this inflation adjusted? If not, then I think the nest egg/portfolio needs to account for the future yearly expenses or income. The concept would be similar but it would take a few more years to achieve the desired figure.

    Assuming 2.5%pa inflation, the $60K yearly income in today’s dollars will need to be $80.7K income in 12 years, thus the $1.5M nest egg for the couple at year 12 won’t be enough to retire on as they’d need $2.017M due to inflation.

    Reply
    • 22 September 2021 at 9:48 am
      Permalink

      Thanks for your question.
      The inflation adjustment depends on your withdrawal strategy. For example, at year one of retirement $1.5M would return on average 10% = $150,000. However, if you use the safe withdrawal guide of 4% you are only taking out $60,000. The remaining $90,000 stays in the investment and the $1,500,000 is now $1,590,000.
      During year two the investment $1,590,000 now returns $159,000 and 4% is now $63,600. In theory, each year the investment grows and therefore each year it will produce more income than the previous year.
      Hope this helps.

      Reply

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