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What it takes to ‘retire’ at 45: Part 2

There are some important takeaways from the FIRE movement, whether you think financial independence at a young age is a realistic goal or not.

An interview recently published on Moneyweb created quite a stir.

The article, What it takes to retire at 45, detailed financial blogger Stealthy Wealth’s journey towards financial independence.

While some readers felt that early retirement is only possible for a small minority, others noted that the majority of South Africans are not able to retire at 65. Surely retirement at 45 is a pipe dream? Some critics also highlighted that the future is uncertain, that tax laws could change, or that unexpected medical expenses could derail a carefully constructed plan.

In hindsight, the reference to ‘retire’ in the headline should probably have been in inverted commas. Most people still think of retirement as a period where you don’t work at all and sit at home. Fortunately, this is changing, and whether you are 45 or 65, in future ‘retirement’ will probably include some form of work, even if it is only a few hours every week, or a few months every year.

Longevity may necessitate retiring the concept of retirement altogether.

While the FIRE (Financial Independence, Retire Early) movement’s proponents save a substantial amount of their income and accumulate enough assets to generate a passive income that would allow them to ‘retire’ in their 30s or 40s, at its core, the movement is not about getting to a point where you could stop working and sit on the porch. Rather, it is about the optionality a debt-free lifestyle provides and reaching a phase where you have more freedom around how you spend your time, which may include doing other (lower paying) work or escaping the eight-to-five rat race. In that sense, the focus is rather about reaching financial independence than ‘retiring’ early.

Regardless of whether you think this is achievable, there are some principles underlying the FIRE movement that can be helpful in financial planning in general, even if you are not in a position to save 30% of your income.

1. The scarce commodity is time

When I was contemplating going back to university some years back, my boss told me: “Remember, we can still make more money tomorrow, but we can never get back the time we’ve used.”

Buying decisions are often made by considering the money you have ‘available’ – in other words, whether your cash and the credit you can access will be enough to buy something. If someone can relatively comfortably ‘afford’ a monthly car instalment of R5 000 based on their income and expenses, it may seem like a standard financial decision. The FIRE movement encourages people to think about such expenses by considering the time they would have to spend at work to pay for the purchase. Would the same person be willing to spend a year at work to settle R500 000 of debt for the car? Thinking about expenses in relation to time instead of money provides a different perspective.

2. Living below your means has an impact, even if it’s not early retirement

The most important determinant of people’s spending is arguably their income. We generally don’t buy what we need, but what we can ‘afford’.

Saving a significant amount of your income (FIRE followers sometimes save more than 50% of their income) forces you to live below your means. This not only creates a buffer for when something unexpected happens, but also allows compound interest to work its magic.

More importantly though, if you decide to save 25% or more of your income, you would have to scale down on your two largest purchases – your car and your house. Homes and cars are two great examples of ‘magnetic’ items; items that tend to attract more expenses. The more expensive the car, the higher the insurance payments, tyre expenses and so on. Buying a cheaper, second-hand car, also allows for savings in other areas.

3. Financial independence is not about doing nothing

Financial independence gives you a much greater degree of flexibility around how you spend your time. If you have large amounts of debt and expenses that need to be repaid, you need a regular income to meet the instalments.

If you are debt-free, don’t have significant expenses, and reach a point where your passive investment income can cover your basic needs, you have much more flexibility to decide how you spend your time. Maybe you love your work, and nothing changes, but maybe you have always wanted to take a year off to travel, or want to make a career change, or move to another city. Maybe you want time to write a book, or to teach or just want to spend more time with friends and family.

This doesn’t mean things can’t go wrong. Maybe you will need to return to work full time along the line, but in a world where people are living to 100, managing finances for the long run shouldn’t be about reaching a point where you can finally say goodbye to work. It should be about managing your finances in a way that will put you in the best possible position to reach the goals you set for yourself, live a meaningful life and weather the storms that may come.

It’s time to think about retirement in a completely new way. This holds true whether you are 65 or 45.

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Thanks Inge. I semi-retired at the age of 40. I currently work one day a week (in an office). The rest of my time is mine. Living proof that it can be done. I even wrote a book setting out how other people could do the same, but people just don’t believe it’s possible. Please keep reminding them that it is.

This applies to everyone not just the ‘FIRE’ movement.

Great article, Ingé. There are very few things a person HAS to do. Go count them. The rest are choices. Many years ago I saw two clients on the same day. They started working for the same company on the same day and was due to retire on the same day from positions at a very similar level, after thirty odd years service. The one did not have enough pension and savings for a comfortable retirement, and blamed the world for it. The other had a bag full of money in discretionary savings over and above his pension provision, as well as several paid off fixed properties, and was planning on buying another with the passive income from the others. The difference was clear – attitude towards debt and savings, and life in general.

The real challenge is not to retire at all. Find a passion which inspires you and covers your financial needs. Become a master in your passion, your income will grow and by investing wisely, you will find freedom fall in your lap.
Who wants to simply just retire at 45? then what? Been there, done that, back to work.

still can’t see on their spreadsheet where they factor in CGT deductions?

And the top CGT rate is an effective 17%? Much less than income tax.

debt has a way of disciplining people. Even companies without debt or with low gearing were found to be poor performers compared to those with gearing.

I’m in my mid 30s and doing this. Started a bit late, but I think I will get on track because I’m not married nor do I have kids (I just hope the markets will also turn!) . I do feel that the urge to buy stuff has gone away so I am happy that I no longer feel like I need to splurge. I’m currently using unit trusts as my investment vehicle, I’m contemplating using ETFs because they are cheaper. What are people’s thoughts on moving over to ETFs

I sold out of all my M.F. as they performed poorly – consider a selection of ETF – ones that will complement others that fall so at best you stay neutral in choppy times

Thanks for your thoughts. So a mixture of ETFs specialsing In REIts, bonds and Equities? Anything further I should diversify in?

Over the long term those lower costs on ETFs will make a considerable difference. Do the calculations on the compound interest of this difference and you will see.

don’t think, just do it. Rather buy the S&P500 etf each month no matter what the markets are doing. If you want to go fully offshore in USD then do it, otherwise the local ETF’s in Rands is not a terrible way to go, as long as they are foreign based ETF’s.

Unless you want you are going to be living and spending offshore in dollars, you are best buying a rand-denominated S&P 500 or World ETF. Why? Because the bank likely makes at least 2% on currency conversion when you take your money offshore and will do the same when you bring it back to fund your spending here. This currency conversion is an unncessary waste of your money (unless you want to receive your income in dollars and spend it offshore). The buy and sell spreads for Absa can be seen here…they are even bigger in other circumstances
https://www.absa.co.za/indices/exchange-rates/?cmpid=PSC_BT10976_1_2_2_2_3_3_2

It is therefore much more efficient to buy a rand-based ETF if you want your dividends and money here.

In terms of performance, yet again the passives funds predictably outperform the actives. This is very notewrothy, because, in principle, a global fund manager has his/her greatest opportunity at outperformance when he has the whole world as his investment oyster. He/she has the opportunity of exploiting every last bit of mispricing by that mispricing fool called Mr. Market may present. It is worth wondering why the smartest minds in the investment world fail so dismally do so in these global (and other) funds. If you like active fund managers and want to lose more money, please feel free to be involved in a large wager on the outcome of your 2 selected SA active global fund mangers against the above 2 passives over the next 10 years 🙂

The Sygnia S&P 500 is the cheapest and best performing S&P ETF (Total Investment Cost 0.21%)
https://www.moneyweb.co.za/investing/how-should-investors-evaluate-sas-sp-500-

The Sygnia World (9th out of 47 rand denominated global funds and ETFS over 5 years) and Satrix World (11/47 over 5 years) predictably outperform the vast majority of the 47 active global funds with 5 year track records (there may be others that have already folded in the past 5 years, thereby underestimating the outperformance of the passives), including the highly publicized and illustrious Allan Gray Orbis Global Equity Feeder Fund (28/47), as well as Prudential Global Equity Feeder Fund (20/47), Discovery Global Equity Feeder Fund (33/47), PSG Global Equity Feeder Fund (36/47), Investec Worldwide Equity Feeder Fund (37/47), Sanlam Global Equity Feeder Fund 46/47. Makes you think, doesn’t it?
http://www.fundsdata.co.za/scripts/home/QuickRank.aspx?c=Global–Equity–General&period=5yr

The Sygnia S&P 500 and Sygnia World are dividend distributing ETFS (jolly nice for an income), while the Satrix World is a roll-up fund, forcing you to sell ETFs (with potential CGT implications) when you want some money to live on.

Thanks for your input guys. Is easy Equities the best platform for ETFs.
Also curious what happens if you hold bonds and the inevitable junk status is handed to us? Will their value crash if foreign investors have to withdraw. I couldn’t find this answer in Google?

Yes!
1. you can invest as little as R10 (hence your kids can invest pocket money, and you can immediately reinvest any dividends you receive. By contrast, most stockbrokers charge minimum brokerages in the range of R70-120, with brokerage at 0.4%-0.7%: this minimum brokerage requires you to invest something like R30 000 at a time to keep your brokerage down to about 0.3%.
2. your brokerage remains 0.25% with no minimum amounts (imagine that: you only pay brokerage of 0.25% when you buy an ETF or share for R10: this gives you all sorts of options in respect of diversification)
3. there are no custodian fees

If you want to retire at an early age you have to plan it from early age and focus on your plan , save your money and do not buy the best cars you can afford and do not try to keep up with your friends. Cheaper products is not the main issue….plan it ,get a focus and save is the main issues. I retired at 57 as I planned since early age

I read the comments on cheaper products , they will not help you to retire earlier . You might get some extra bucks from it , the real issue is to decide early in life that you want to retire earlier , start to focus on a plan , save regularly , do not buy the best car you can afford and do not try to keep up with your friends. I retired at age 57 as planned fro early age….

Another issue – Life gives you a snotklap in terms of an unexpected retrenchment. Believe me, you would be very glad that you aspired to live according to the FIRE principles in such a case.

Me and my buddies call it F* you money, cause that’s the sound you make when you realize your boss is crazy and you have enough to just go.

Well, it seems part 2 is bit more well received than part 1. There are a few living examples of us who have done and accomplished this, and the freedom is simply mind blowing. Despite my financial situation, I still save 80% of my salary, all investment returns simply gets reinvested. High savings rate is one thing I preach continuously

I was fairly critical of part one but can buy into the re-positioning of part two. I think a big challenge is mental stimulation when opting for this arrangement, if you have managed to position your finances to be able to change your life. Secondly ensuring that your skills remain relevant if you want to go back to working on a full or part-time basis at a later stage. Pharmacists and Doctors are fortunate because of the locum opportunities. Be careful of starting businesses, which require lots of capital, as a significant number of people have blown their nest-egg in this way. My final comment is about the mindset one needs to accept. If you have been out of a high paying job for a few years you may have to accept that you will earn less than you earned before and possibly significantly less then your former peers who continued working.

I was hoping to become part of Zuma’s inner circle but they even took that away from me!

Read about the famous Marshmellow test for children regarding delayed gratification.

Maybe early retirement is all about delayed gratification?

Delay buying liabilities but don’t delay buying assets.

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