An interview recently published on Moneyweb created quite a stir.
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.