BOITUMELO NTSOKO: Welcome to the Money Savvy podcast. I’m Boitumelo Ntsoko. October is retirement month and throughout this month the Money Savvy podcasts have covered topics such as how to recover when you have a retirement funding shortfall, where alternative investments should form part of your retirement plan, and we looked at where say-at-home parents can save for retirement. As we wrap up this four-part video series, in this episode we’re exploring how to retire early with Rick Briers-Danks, who is a certified financial planner at Veritas Wealth. Welcome to Money Savvy, Rick.
RICK BRIERS-DANKS: Thanks, Tumi, thanks for having me.
BOITUMELO NTSOKO: A lot of people dream about cutting their careers short and retiring early, but with life expectancy increasing is this still a viable goal to work towards?
RICK BRIERS-DANKS: Look, the idea of the retirement age of 65 is a bit of a misnomer. It’s like a completely arbitrary age. I think it actually dates back to about 1889 in Germany, when Otto von Bismarck decided when somebody would qualify for a pension. He picked an age of 65. Funnily enough, at that time the average life expectancy was about 40 or something like 40 or 45. So that age of 65 retirement is really a bit of a misnomer.
But to answer your question I think it comes down to personal choice. Many people have a goal of retiring early, but I think the bigger question here is: why do you want to retire early? What do you want to achieve? What are you aiming for? You know – are you going to pursue other interests when you retire Are you going to pursue other passions? Are you going to work for an NGO, or are you going to give back to society? Or are you planning to make a difference in the world? What are you actually doing it for? Or is it trying to become financially independent as quickly as possible and have choices? Or do you just want to stay at home and, say, play golf? Is that your game?
I don’t know if you’re aware, but there’s a movement called Fire, which is F, I, R, E. It basically stands for Financial Independence Retire Early. Those guys are taking things to the next level. They literally are trying to save so aggressively, they are trying to save between 50 and 75% of their income and, by doing that, it allows them to retire in their mid-thirties, forties – and it’s based on two main principles.
The first one is you need to have a very good income early on in your career to be able to save. The second one is obviously you need to be so aggressive on your living costs and your expenses that you need to live on the smell of an oil rag and save as much as you can. Then, they say, you can retire early and become financially independent.
Personally, I commend people who are focused, and so focused on retirement. I’d wish all my clients were so focused on retirement, but I just believe that life is kind of worth living. I don’t think having such a relentless focus on a goal of getting to a number is that healthy. I think life’s a bit of a journey; it’s not a destination. That’s probably a way of saying it.
The road is long, and I think there are lots of twists along the way, and lots of transitions in your life. You’re going to go through lots of things in your life and it’s not as a matter of just saving as aggressively as you can and then retiring.
So in this ‘Fire’ principle, while I like the first part of it being the financial independence side; but the retire early – you need to just really think about that. As a matter of fact there’s actually a youngster who hit his ‘Fire’ total, and made a comment the other day – I read this on a blog where he said: ‘I’ve saved so aggressively. I was [so] relentlessly focused on my savings and hitting my goal that I’d actually forgotten how to live.’ It was like he had no social life, no connections. He just was [at a loss]. He asked: “Can you help me learn to live my life?”
So, yeah, while it’s a great goal, I think you need to maybe explore the reasons why you want to retire early. What are you actually planning on?
BOITUMELO NTSOKO: Now for those who are determined to retire early, how do they calculate the amount of capital they need to be able to do so?
RICK BRIERS-DANKS: Tumi, when people ask me – and I get this a lot as a financial planner – ‘How much do I need to retire?’ At least my standard answer is ‘It really depends’ – because it really does depend.
It depends on how you want to live your life. But if I have to give you an answer, I would probably say the guide for somebody retiring at 65 is that they should have enough capital to support a drawdown of 5%. What that means is, if you take 5% of your capital annually, can you live off that number? You should work that out and then you can work backwards. But if you’re retiring early, I would think you’d need to build in a bit of protection there. So certainly not 5%; it would probably be like 3.5% to be safe, depending on how early you are looking to retire.
RICK BRIERS-DANKS: And then, of course, probably the best way to do that work is to actually do a bit of a cash flow modelling exercise, like ‘What do I need to live on?’ and then build in things like I want to go travelling, I want to replace my car. I need to factor in looking after my mom when she’s older. I need to educate children. All of those sorts of things. And if you get down to the detail, you’ll build yourself a pretty robust plan, and that’s going to give you a fair idea of the capital you need. So a good lifestyle financial planner or CFP [certified financial planner] can help you do that.
BOITUMELO NTSOKO: Now, once you have the magic number, what should be your investment strategy going forward?
RICK BRIERS-DANKS: The investment strategy? In broad principles, the longer your time horizon the more aggressive you can be with your investments.
But I think the most important thing to be aware of is that inflation is your biggest enemy. It’s enemy number one in retirement.
So whatever your investment strategy is, it needs to be targeting an inflation-beating figure. Your mandate has to [be to] beat inflation over time. Factored into that is you need to know how much you’re spending. Whatever that spend number is, you need to factor in inflation over time. Of course you need to have a well-diversified portfolio, which we’ll probably get on to just now.
BOITUMELO NTSOKO: Just on that, what tax-saving tools should you employ to actually achieve that goal?
RICK BRIERS-DANKS: Traditionally you would use all your tax breaks in saving for retirement, using your retirement annuity. Or if you were at work with a pension, you’d use a pension fund or a provident fund, whatever your work offered. You’re doing that because you’re getting a tax break, you’re getting a tax incentive. It would be a no-brainer to use those things.
But now we are flipping this thing on its head and you are saying, well, you want to retire early.
A problem with retiring early is all the retirement products have a rule that you can retire from them only at age 55.
So you need to think of others – not to say you won’t use them because you are going to reach 55 at some point, and you can definitely use those products. But I think you would need to factor in other things like tax-free savings accounts. I think you can save R36 000 a year now into those, so that would be a definite no-brainer. You’d be wanting to maximise those. You’re going to be using discretionary savings, basically like a discretionary unit-trust-based saving share portfolio.
I suppose the other thing to consider is a property, a property getting a nice diversified rental income stream. So yeah, you should be diversified. That’s probably the key.
BOITUMELO NTSOKO: Now, when drafting your plan, how do you then factor in unpredictable events such as pandemics and market shocks?
RICK BRIERS-DANKS: Let’s say you’re retire at 50 and your life expectancy is 90, you’re going to have 40 years of investment horizon. That’s a long time. I can virtually guarantee that you’re going to go through a number of economic shocks along the way, corrections, market shocks. It’s inevitable. The key is you’re not going to know when they’re going to happen because that’s exactly what they are, they are unpredictable. It’s easy to sit here and say that, but don’t get too emotional about it. You need to remain invested through these ups and downs and to sort of stick to your mandate. You’ve got a long investment horizon – stick to it.
There’s a saying that ‘the only free lunch that you have in the investing world is diversification’.
That’s the key here. To just remain well-diversified across a number of asset classes is probably the key.
BOITUMELO NTSOKO: Now, obviously investing is just one part of the plan. What lifestyle choices should you make to achieve your goal?
RICK BRIERS-DANKS: Yeah. Putting yourself into a position to retire early is all about behaviour, really. You’re going to have to be absolutely ruthless on your costs, cutting your living costs down, probably really cutting down on luxuries. You’re going to have to be quite aggressive on that in the accumulation phase of your life. So it’s making lifestyle adjustments.
Look, the one thing that intrigues me is you’re going to be in this phase of saving as aggressively as possible through your accumulation stage. You’re going to get to, say, 45 or whatever your early retirement date is. You’re going to have to have a change in mindset and that mindset is going to be well, now I’m not accumulating as aggressively. I’m now going to start living on my capital. I can tell you, as somebody who advises people going into retirement, it’s a change that somebody has to go through – like now they are actually drawing down on this capital amount of money, and it’s quite an adjustment. I think it’s going to be quite difficult to deal with. So you’ve got to be ready for that, but be coaching through all of that.
So I guess to answer your question, no, investing is one thing but there’s a lot more behind that. Really it’s about getting your mind around it all and being ready for what it all means. So it’s not just money, essentially.
BOITUMELO NTSOKO: Do you think it’s advisable for those who are aiming to retire early to be flexible with the retirement age that they were envisioning?
RICK BRIERS-DANKS: We have a planning tool that obviously has a bunch of assumptions, like return assumptions. But, as we know in life, returns don’t come in a straight line and you never know what’s around the corner. Yes, we can project and plan and make assumptions, but it’s never, ever going to happen like that on a straight line. All we’re doing is we’re trying to get ourselves as close to a [certain] picture as we can, and we are tweaking that all the time.
So to answer your question, absolutely be flexible. Life has a way of happening and the money just follows – and it’s part of it. So yes, you have to be absolutely flexible. It may come earlier, it may come later. Things change all the time. You may have some life events, life transitions that happen. So you really need to be flexible.
BOITUMELO NTSOKO: What other factors should you consider when drafting your early-retirement plan?
RICK BRIERS-DANKS: The most important thing is to ask yourself: What am I doing when I retire, what am I actually going to be doing? What is your purpose? Human beings need to have a purpose. I think you need to remain connected, you need stimulation – and a work environment gives you all of those things. It gives you a sense of worth, a meaning, so you really need to think through what you are actually going to be doing in retirement.
And then there are the obvious things, which are that you need to do your planning properly. You need to make sure – are my costs correct? I need to adjust by inflation all the time, and certain costs don’t behave like other costs. Medical aids escalate on average by 10%, so you need to have an inflation-plus on medical-aid costs.
There are a lot of factors to consider, but with some good planning and some help it’s not difficult to do. But be prepared to be flexible.
BOITUMELO NTSOKO: Now let’s say you do manage to retire early, what would be the ideal drawdown rate, let’s say, for a 40-year-old versus a 55-year-old?
RICK BRIERS-DANKS: There’s a book called The 100-year Life, written by two people [Lynda Gratton and Andrew Scott] who’ve done a lot of research. Basically, people are living longer and, going back to the retirement age of 65 even that is young. So when you talk about retiring at 40 and 55, there’s a long, long investment horizon there. Just talking about The 100-Year Life book, it really talks about going through almost three phases of work in your life. This is how we are going to evolve. People are living longer and it’s about almost re-skilling.
So you’re going to maybe study at university or wherever, and you’re going to do your first job, let’s say. And then later on you are going to re-skill, you’re going to take time out and you’re going to do a second job. It could be completely unrelated. And then later in life, you’re going to take some time off, you are going to re-skill, study again, and you’re going to do a third job. But in all of this time, taking time off, you are refocusing, you are recalibrating, and that’s because we’re living longer. We need to keep engaged. The authors look at it like that. They actually reckon we’re going to be working in our eighties and it’s good for us.
So when you talk about retiring at 40, 55, you need to have a plan of what you’re going to do in that time. To answer your question, you need to keep a drawdown which is going to be sustainable if you’ve got this pot of money, if you’re not going to be adding to it or doing anything in retirement to create income. Normally the guide is 5% at 65. So it needs to be 4% of that at 55, somewhere around there. And if it’s lower, like 3.5% drawdown would be a safe drawdown, to answer your question.
BOITUMELO NTSOKO: Thank you so much Rick, for joining us on this episode.
RICK BRIERS-DANKS: Cool. Thanks for having me to me, Tumi.
BOITUMELO NTSOKO: That was Rick Briers-Danks, a certified financial planner at Veritas Wealth.