How much capital do I need to retire early?

I would like a monthly interest payout of R50 000 after tax.

I am 34 years old and would like to know how much I need in capital to peacefully retire (early) with a monthly interest payout of R50 000 after tax? Which investment vehicle will be best suited to pay out this amount?

Stephen Katzenellenbogen - NFB Private Wealth Management

*Please note that the information provided below does not constitute financial advice; in fact, we are precluded from giving specific advice. Generic information has been applied given the context of your question. We have limited details about you and your circumstances – such detail may impact any advice provided* 

Your question is very topical and has garnered a lot of media attention over the last decade via movements such as FIRE (financial independence, retire early).

The idea behind FIRE is that you find ways to maximise your savings (targeting 50% to 80% of your income) so that you can stop earning an income at a young age. Proponents of the movement suggest you should aim to save at least 25 times your estimated annual living expenses so that upon retirement you can withdraw 4% of your “retirement fund”. 

Let us start with the number-crunching part of your question. As with all calculations of this nature, there are assumptions that we will need to make. You didn’t specify what retiring early is (this is age 50 to some people and one day before passing away for others), so I’m going to have to pick a number; I’ll go with age 55. The other assumptions I have used are:

Inflation: 4.5% (important when working out the future value of the R50 000 you would like. Also, I have assumed your monthly contribution goes up each year with inflation).

Return: 10%

Life expectancy: age 100 (our calculation assumes you run out of money at this age).

Current assets/savings: R1

Average tax rate in retirement: 20% (R62 500 needed pre-tax to get R50 000 net).

Based on the details above you would need to save circa R26 000 per month and then increase this by 4.5% (inflation) every year until age 55.

You have also asked what investment vehicle is best suited to your objectives.

To save R26 000 a month you would need to earn say R70 000 a month pre-tax with the following assumptions:

  • Average tax rate of around 29%;
  • You contribute nothing to a retirement annuity; and
  • Both you and your employer contribute R2 000 each to medical aid.

If, for example, you contribute R5 000 a month to a retirement annuity, your average tax rate comes down to 26.5%.

I have gone through this high-level tax exercise as the type of investment product you choose determines, among other things, how your return and withdrawals will be taxed.

At this point, I just want to reiterate that I am not giving advice but rather giving you something to think about.

Back to investment vehicles. You will most likely find that a blend of products will work best. Here are a few thoughts on some of the main investment vehicles available at the moment.

Investment vehicle My thoughts
Tax-free savings account I would think that this is a slam dunk option, although your maximum contribution here is R3 000 per month; you still have R23 000 per month you will need to invest.
Endowment/sinking fund This is a 50/50. Based on current legislation tax is paid within the investment on the investor’s behalf at 30% income tax and 12% capital gains tax (CGT). Based on my assumptions, your average tax rate is around or below the product’s flat rate so you could land up paying too much tax.
Retirement annuity Likely to be beneficial as you will get a tax deduction on your contribution, and your growth will be tax-free. You do need to consider the lack of liquidity, Regulation 28 investment guidelines and the fact that when you retire the full income from the annuity will be subject to income tax.
Unit trust/shares/exchange-traded funds etc These types of investments could be suitable to your plan as they offer many investment options and liquidity. Equity-based investments will attract mainly CGT when you sell, where the maximum is 18%. The tax along the way should be low unless you chop and change often.

You have an ambitious objective. To see this come to fruition you would need a capital value of approximately R22 000 000. I wish you the best of luck in reaching your goals. My thoughts herein are not all-encompassing, but they should give you some pretty clear direction.

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OK so what is the amount of capital required at age 55 – that was the question I think !!

You’re right,Advisors always duck the answer to this question.
The answer is you will need at least capital of 20 X your required annual income. This capital must be invested in come producing assets. 25X is probably a safer amount.

Maybe I am wrong, but I am sure it says R22 million the columns…

Oh, I see they had forgot to put it into the original release.

Nice article thanks Stephen K

The number was 22 million..

If he wanted to retire today and have R50K after tax every month, he’d need R21.1 Million

Spot-on, the capital required is around R22-23m. It’s important to contextualize the workings and thinking

Hi Stephen….Why didn’t you just say so then….????

Unfortunately it slipped out in editing but it’s subsequently been fixed

And to remind readers that the R22 M is in today’s money, not future value

The simple answer of 25x your annual expenses is a first starting point.
This would result in you having 30 years of living expenses at 4% withdrawal with a 80-90% historical probability of succeeding. So R15m. This is the minimum target I would aim for, and to keep it simple at 80/20 between equities and fixed income. Generally that would be global index (VT) plus bonds (that’s become more complex due to low rates).

The actual answer to your question is more complex. Do you want to earn the R50k per month from 1. income distributions from your portfolio or 2. are you happy to draw from your capital by selling shares, ie drawdown?

For 1. you’ll need to construct a portfolio that pays enough yield to cover your withdrawal but still keep pace with inflation. It may be worth considering a combination of equities paying out 2-4% dividends plus bonds/fixed income. You move away from looking at purely from a net worth perspective, but from an income generation perspective. The early years post retirement matter the most, and probably a side income will help immensely. You’ll end up with way more capital than you could spend in this scenario since you’ll always be growing the capital and not spending it down.

For 2. You’ll need to be comfortable that the 4% rule spends some of your principal. Also, you’ll sell in years when due to volatility of the portfolio your equities are down in value, and your effective withdrawal rate will be above 4%. Remember this has worked through 90% of modelled historical scenarios including the great depression. However, it is for a 30 year time frame. So if you’re comfortable with drawdown, think the future won’t be worse than the worst periods of the last 100 years (great depression, WW1, WW2), and have a life expectancy of around 30 years at retirement, then 4% is fine, with some tax slippage.

The one consideration in all the probabilities of success, is not whether you run out of money, in fact the probability of death is multiples higher than the probability of running out of money under the 4% rule. The highest risk is actually a country collapse. See
To paraphrase from the article – in order to have a 50 year retirement, the country needs to survive for 50 years. Even a country seen to be successful such as Germany, collapsed twice in the space of 50 years.

Early retirement is possible, but we cannot see what the future holds.
All financial models are built on historical worse case scenarios, but no amount of capital is enough under certain scenarios. Hence there is no 100% peaceful guaranteed option, only higher probability ones.

Personally, I reached 4%, then left full-time corporate. It would also have been possible to just switch to part time work or another industry. You’ll know your own reasons for wanting to early retire.

Question is : What will RSA look in about 20 / 25 years. What will the ZAR do ?

A very stable government where bbbee is replaced by an investment friendly environment which leads to record low levels of unemployment. The economy is booming because of all the positive economic activity and extremely low interest levels due to the strength of the Rand. Property rights are given to every citizen where it previously did not exist. This further boost the economy and SA become the darling of the world again. Because everybody is satisfied there’s no need for politics and it retreats into the shadows and SA is truly heaven on earth.

That’s some strong stuff that you are smoking 🙂

I agree fully. A very stable government because they will not yield after losing elections, with an investment friendly environment as long as you have a specific skin pigmentation or am willing to pay the “appropriate” “fees” to the honest government officials. The economy will be booming, with record levels of 90% “self employed” people and the long fought for equality will be achieved with then having 95% of people equally “rich”. Our commercial farms will be so successful after the just and fair “property rights” programs that the farmers will be able to feed not only himself but his 5 wives, 4 girlfriends and 20 children from his mediocre 100k hectare farm. The bad political situation of today will also be long forgotten as we no longer have to think for ourselves, but rather we will have the one state party system that throughout history have created the most equal or prosperous societies.

The 4% rule, the 25X annual salary and 300X monthly expense are all variations on the same theme – same calculation, different metrics. They are good guides to determine the amount you need for retirement living expenses, generally calculating in today’s terms.

What I always find lacking in discussions covering this topic is the requirement for capital in addition to that needed for ‘monthly living expenses’. For example, buying new/replacement cars in retirement. These ‘capital/large expenses’ are generally ignored in the financial advice process.

This additional capital requirement needs to be added to that for living expenses. It obviously varies per individual/family; in my case, for what it is worth, I am catering for an additional 25% on top of my 300X figure.

I suspect you just spoilt February for a few hundred thousand 50y olds!

Don’t take this too seriously but it’s rather like the old one when, on asking the price of a new yacht, one is told: “If you have to ask, you can’t afford it.”

Assuming the country does not collapse one can buy an annuity at about R6000 per month per million( I guess at 55 that amount-its about R6300 for a 60 year old) from the large life companies which has an inflation escalation of 5% per annum but if you die the money goes to the life company.

You avoid mortality risk(so if you live to 110 its the life companies problem) but run inflation risk being above 5%. (Possible here in the ANC paradise). You also run life company insolvency risk.

So to get to R62500 per month you will need about R 10,5m.

My view-not advice-I am not a finance person-would be to :
1. Get to the R11m mark and buy an annuity as above,
2. Save as much as possible in a global flexible fund-another R 10m and you should be fine.

Good luck in building capital of R20m-not easy with our taxes, growth and low earnings

The age factor of 100 years old seems excessive. More realistic would be just above the actuarial averages.

What the FIRE movement does not seems to take into account is the human need for accomplishment every day, in whatever form. Lacking that you die early.

Work always, but on your own conditions.

We use age 100 as if we plan to say 75, what happens if you live until 90? I have come across so many older people who “Never thought i would live this long”. You cannot recreate money so always plan conservatively. For those who have access to decent food and medical care chances are you will live well beyond the average.

I wish I had the foresight of this person when I was 34y/o and with the knowledge of investments I have at the moment. I would have retired easily at 45 to 50.

End of comments.




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