The old way of thinking about retirement is becoming less and less attractive to the younger generation. It used to be that you work for one or two companies, have a career spanning +/- 40 years and only retire at age 65.
There is a generation of growing voices who want to retire early. Retirement has always been looked at from an age perspective and this way of thinking assumes that if you work for long enough and save money over 40 years, then you can retire comfortably.
The new school of thought argues that retirement is not just about age, it is about financial freedom. So, whether you reach financial freedom at 40 or 50, that can be your retirement age.
I think what is most misunderstood about the FIRE (Financial Independence, Retire Early) movement is that it’s really about owning and reclaiming ones time; being able to do the things you really want to do while still young, have vitality and not so much about never working again.
Most people who have achieved this type of financial freedom continue to work, but do work they love and are passionate about and they still contribute to society.
When I think of the FIRE movement, a quote by Dave Ramsey comes to mind: “Live like no one else, so later you can live like no one else.”
The quote puts emphasis on what you have to do now, so you can live a financially free life later (but much sooner than what has been the norm) when everyone else is still chasing his or her ‘golden age’.
Since government still looks at retirement the same way they did decades ago, the ‘legal retirement age’ is still from the age of 55. Meaning that that, you cannot exit a retirement annuity before then.Other retirement vehicles like Pension/Provident funds have great tax protection benefits, which you will forfeit should you retire earlier than the prescribed retirement age.
But early retirement is still appealing nonetheless; so what can you do to retire early?
- Calculate how much you will need to retire
At retirement, it is assumed that you would have paid off your house and car, which make up the biggest expenditure in your budget. You then look at your living expenses on a month-to-month basis; this gives you an idea as to how much you will need in retirement. Studies show that most people cannot maintain the same or similar lifestyle they were used to before they retired.
To maintain a similar lifestyle, you will want to replace at least 70% of your pre-retirement income. This means that if you earn R500 000 a year, your goal should be to create enough retirement income that you are able to live on at least R350 000 per year.
Don’t forget costs like medical aid can get expensive the older you grow, so take that into consideration as well when calculating costs of living.
- Spend less than you earn
To retire early, you need to be frugal. You need to spend much less than you earn and invest the rest. You need to decrease your expenses so you can boost your savings.
This boils down to ‘its not about how much you make, but how much of your money goes to work for you’! If you earn a good income and spend it all, you will never reach financial freedom.
Therefore, you need to aggressively review your budget and see what you can live without.
- Increase your income and save more
Whether it is an increase in your salary, a bonus or you start a ‘side-hustle’ to bring in extra income, be sure to put it towards your retirement funding.
To retire early, you need to acquire more investments or assets than you acquire lifestyle assets i.e. expensive cars and houses. You need to be conscious of your financial decisions and how they impact your plans of early retirement.
Because retiring early means that your savings have to support you for much longer than, say 20 years, you have to focus your energies on saving more.
- Invest in low-cost investments
We all know the detriment high fees/costs have on investments: the higher the costs, the less you will get when you need your retirement funds the most.
Look for investments that carry a lower cost.
According to 10X Investments, paying a more expensive fee compounds over time, and could mean you end up with 40% less money when you retire!
- Track your net worth
I find that when most people think about their finances, they think along the lines of their salary. As I mentioned earlier, it is not so much about how much you earn but more about putting your money to work for you.
Tracking and increasing your net worth ensures that your assets can pay for your living expenses and other luxuries.
The net worth calculation is really simple: Assets less Liabilities.
The FIRE concept is definitely not for the faint-hearted, it requires discipline and demands an individual to be resolute in their decision. Although it is the road less travelled, the financial freedom is certainly is worth it!
This article first appeared in City Press
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