Retirement planning or ‘financial independence’?

Financial independence as a concept is perhaps easier to consider than formal retirement for the younger folk living in the modern world today.

Much is written in the financial press about investing and that one should invest. There are even surveys compiled around the world that measures the savings/investment rate of different countries to determine whether that country’s population is saving “enough”.

We as humans know that fundamentally putting money away to use at a later stage is a good idea, this is the initial principle to investing. The second is that whatever money we save needs to earn in some way for the capital value of the savings to grow. Basically, the money needs to sweat!

Is it a good idea to invest?

So why is it “a good idea” to put money aside to use at a later stage?

Let’s explore this concept of “putting money aside” to be used at another time. My understanding of this concept is based on a realisation I had many years ago.

I come from a working family, there were four of us children, mom and dad worked and looked to use whatever we had sparingly. Polony sandwiches were the staple everyday school lunch. This transferred to the concept of saving money and it became the reason why I had to make do with certain things.

Hence, the concept of putting money aside in the safety of bank accounts was ingrained in my psyche from a young age. I never really thought of why this was necessary until I was much older (Truth be told, the concept of saving and investing is maybe one of the reasons that I entered the investment industry).

When I was 26, I entered the investment industry as a young man, eager to learn. I was full of ideas and newly married, with a small child and I had no idea of how I was going to be able to put money away. Through hard work and sacrifice we did put money away, I never really strayed far from the lessons imposed on me by my parental family.

One day, I was talking to a colleague who introduced me to a concept of what he termed as “financial independence”. He continued to say that “financial independence” is a concept where you have enough capital not to have to finance anything, you live without debt, to be able to move out of your parent’s house and live on your own.

Did I listen to this colleague’s advice? Yes, in some ways. It was only much later in my career when consulting with much younger investors that this concept of “financial independence” started taking shape in my mind.

I believe that when young people begin their working career, there is too much emphasis on the concept of “retirement” saving.

Imagine trying to explain the concept of retirement to young people today. Considering that this demographic are people who are used to having pretty much anything at their fingertips, at the click of a mouse, instantly!

Imagine a 25-year-old in his first job, these days deals with the immediacy of a digital age, now he must try and focus his mind on a concept that could be 40 years away and this in a world which is fluid, where people move countries very easily.

There are Youtubers who genuinely make a very good living by posting videos on Youtube. Imagine even 16 years ago (2005, not so long ago) if somebody told you that you earn a good income by simply setting up a computer in your spare room with a camera, microphone and a good internet connection and post videos about things you are passionate about, and if you have enough hits on your Youtube Channel, you have a viable business.

Even if this 25-year-old looks up to his father, who in all probability does not understand “retirement” in the same way his grandfather did. Imagine trying to tell this 25-year-old that he has to be a part of a company pension fund, that he will contribute to and that he cannot have access to until he retires…or leaves the company.

Realistically a 25-year-old today will not only change companies but also countries of residence and careers a number of times before his “retirement” date comes around.

The current generation is completely different to the ones that came before, so why do we as society, investment advisors and wealth managers not change the way we explain the reasons to invest to our children?

Perhaps “retirement” as a formal concept needs a change. Does “retirement” or even “retirement planning” mean having capital in formal retirement funds? Can “retirement” simply mean that you have built up enough capital, so as to not need to work to generate more income? Even post-retirement as an idea has changed in the last years, in that many folks who formally retire from their company pension fund end up working long after they have “gone on pension”. They often see this as an opportunity to consult or start a second career or business.

Why not move away from trying to convince our children to “save for retirement” and focus on “financial independence”?

The concept of “financial independence” in my opinion could be expanded to the objective of:

“Having enough capital put aside, that with good capital growth you could leave your job and live off the capital for the rest of your life, being able to afford whatever you heart desires (with a little “discipline”) and not have to rely on being required to generate income from a job or a business enterprise, unless you wanted to. This is real financial freedom”

In this way, if an investor achieves financial independence, retirement planning and saving for retirement is taken care of as a result of achieving financial independence.

So how do we achieve financial independence?

This is easier said and done, especially for young people in their first foray into the world of work. As many of these people are having to pay back study loans, getting married, having children, moving out of their parent’s homes or buying their first home all in the first years of their careers.

The first step is the same in achieving anything in life. Devise a strategy and then start.

Let’s use the example of Bob. Bob is 23 and has just qualified as an engineer and he has been appointed as a junior engineer at a mechanical engineering firm. He is single (he has a steady girlfriend, and they are considering making this relationship more permanent). Bob has been offered a monthly salary of R25 000 per month which includes group benefits of medical aid, group life cover and provident fund. He has a car that dad bought for him second hand and his current expenses are R15 000 per month (he lives at home) and this includes his entertainment costs. His take-home income is approximately R19 000 per month.

Let’s for the moment ignore his forced saving into the company’s provident fund.

Bob has R4000 per month “free float”.

In my mind, for Bob to achieve financial independence his aim is to be able to earn R19 000 per month (replace his current net salary) from his investments.

He can start by investing R3 000 per month in a flexible discretionary investment (like a linked unit trust portfolio as an example) and avoid the temptation of buying a new car/motorbike/ etc for now.

In this way, he not only starts building towards that financial independence but also should he at any point find that he has been retrenched or has a period that he cannot work, or his income has been reduced, he has capital to fall back on.

What we need to keep in mind is that for Bob to achieve financial independence when he is earning R19 000 per month after tax he would require to have capital and or income-producing assets of about R4.6 million.

The point is to invest every month, learn to “pay yourself first” from the monthly income. Take the time to chart the progress towards this goal and never stop investing.

If the objective of “financial independence” is kept in mind from a young age, this forms a habit that reduces the silly extravagances such as fancy motor vehicles, big houses in expensive areas, overusing credit cards etc throughout one’s working career.

The objective further reduces the need to encash retirement funds when one is changing jobs as the mind is kept focussed on the ultimate objective. The ultimate objective can be achieved. It may reduce the frivolous expenditure of bonuses earned or inheritances received, simply because there is an ultimate objective to be achieved.

In addition to this, investment advisors should be aware of how the modern world operates and understand that people and their money must be more fluid and flexible than ever before and therefore provide investment products to their clients that match these needs in the modern world.

This concept of financial independence is not an easy goal to achieve, it’s a moving target. As soon as income increases the capital required to be able to stop working increases. Every time Bob takes on financial responsibilities such as getting married, or buying a home or having children the capital sum required changes. We also need to take into account the inflation rate which also adds to that target as it moves.

Financial independence might take a whole working career to achieve, but perhaps as a concept, it is easier to consider than formal retirement for the younger folk living in the modern world today to understand. As opposed to the idea that one day when it is time to move away from working, when you are now “too old” to contribute you can “go on pension”.

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Michael Haldane

Global & Local The Investment Experts


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Good article, and is add one additional thing here (touched on but not stressed).

I know so many people who really would have better off without their credit card (esp as they use them for junk like expensive groceries etc)

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