Posted in Blog
12/07/2018 Mduduzi Luthuli

I recently had a consultation with a client in their mid-20’s and they asked me a question. “How do I retire before I’m 45?” My answer was simple.

“If you can save 50% of your take-home pay, you can retire in 16.6 years. If you save 75%, you can retire in just 7.1 years.”

He looked at me as if I was absurd and asked, “how am I expected to live on only half my salary?” to which I answered, “Make the decision to do so.”

The point I was trying to make to my client is that they had a choice to make. Live what is deemed the conventional life, increase your debt, not make investing a priority, or walk a path less taken. I wanted my client to realise there’s a way to arrange your life, so you don’t have to sit in a cubicle for 40 years. Pursuing that path is a decision he must make. It is possible to become financially independent should you choose to do so. I know…what a crazy idea. This idea doesn’t mean you must stop working for money. It simply means you can stop working for money

Define Retirement

Retirement means something a little different to everyone, so the first stop on the early retirement journey is to figure out what you’re after. If your goal really is to lounge for 50 or 60 years, no judgment here — but you’re going to need more money. If your goal is to travel work-free, you’ll probably need even more.

On the other hand, you might be looking for something a little less drastic. Maybe you still plan to work but on your own terms, or you want to travel but plan to pick up work at each stop. In that case, you may be able to retire on less because you’ll have a continued source of income.

Destroy Debt

Lower debt obligations in retirement help free up income for basic needs and lifestyle expenses. Most early retirees share a common bond of becoming debt-free prior to their retirement transition. A 20% or lower debt-to-income ratio is a suggested guideline if you are planning on retiring early

Minimise Expenses

If you’re approaching your expenses with commitment and a compelling reason to become financially independent, you may not find it hard to live with a roommate, not buy a car, move to a lower cost of living area or sock away bonuses and raises as if you never received them. Those are some of the hard choices people refuse to make. Retiring at a young age takes a commitment; how you make that commitment can vary.

Invest Early

Young retirees don’t have access to any investing secrets. Instead of trying to beat the market, they keep it simple. Many combine compound interest, indexing and asset allocation as a steady, long-term investing game-plan that happens over a decade or two, rather than months or years.

Pay Attention to Tax

Taxes can erode your savings, so it’s important to invest in a tax-efficient way. This means that you want to save into investments that can help your money grow tax-free, such as tax-free saving accounts. For high income earners, endowments are a great vehicle to reduce the tax burden on future income.

Understand the Market

The original 4% withdrawal rule assumed of a 30-year retirement. But that math must be reworked for anyone adding 25 – 30 years of retirement to support. Rocky returns, especially early in a lengthy retirement plan, can be devastating. If you don’t account for poor returns early in retirement, you could find a bad run could leave you way short of what you’ll need to get to age 95.

Some investment professionals expect future returns to be lower than what they’ve been in the past since interest rates and economic growth rates are also below what they have been historically. Instead of 4%, if there’s a new normal, the withdrawal rate is less than that. The risk is more significant the earlier you retire since investment returns become that much more important.

Just Decide

Saving the bulk of your income each month will require major sacrifices, and it’s even more difficult the older you are or if you have a family depending on you. But that doesn’t mean it’s impossible.