Funny species: people. Since I have retired at fifty after I (gladly) accepted a severance package from a company where I spent 22 years and 11 months and 18 days in their salaried employ, I had to field quite a few questions on quantum.
How much do you need to retire at fifty? How much did you save? How much…so far, be it because of good breeding, emotional intelligence or just social standing, no one yet asked explicitly how much money I have.
The answer to the last question is “enough, but not all that much, thank you.” It in a sense also answers the aforementioned questions: how much is needed?
Money, like work, expands or contracts to fill the space allowed for it. If you have 10 days to do a 10-hour job, chances are that it will take you most, if not all of the 10 days. Similarly, if you have an open budget, you will use most of the available money.
Therefore the question of “how much?” is superfluous. How long is a piece of string? How many tomorrows in your future? How do you love your wife? All questions with answers that can at best only be applicable to you and even then the final answer may be somewhat vague.
I am not a financial adviser and this blog is not about financial advice.
But based on years of experience in the financial service industry and what I hope is a good amount of common sense, I would like to offer some pointers. But remember: my answers, may not be your answers.
How do you see spending (most of) your time after (early) retirement? Obviously you will need more money if you go on annual all expenses paid pilgrimages around the world. Will you live in splendour, spending your days on your private yacht, or will you continue your normal life? Will you downscale, move to a rural area and grow your own veggies and open a small coffee shop to keep you busy?
What is your current financial situation? How much money do you spend on necessities: tax (you may not need it, but the government does), medical aid, housing (bond or rental), other debt, food, services and actual spending? How much of that spending will remain when you retire? Most middle class people spend around 30% on their bond, but the companies that employ them pay parts of their pension or provident plans and medical aids. If you retire you may have to fork our more for the latter although your house may be fully paid.
How much do you actually save of your monthly after tax income? Compounded interest is often called the eighth wonder of the world: and it is, if you save enough and allow it to get compounded for long enough. I often marvel how people complain about the small, meaningless amount their retirement annuities (I think the Americans call it 410k’s) pay out, but they never seem to think that the minute amount of money they saved monthly played any role in the small final amount. If you save 2% of your monthly income the wonder of compounded interest won’t help, you’ll need a major miracle to assist!
How and where do you save? It is often said that the 2 most important drivers of saving behaviour is fear and greed. Often fear means that you save in only the safest possible instruments, not realizing that you are not getting any real, inflation beating, returns. Greed kicks in when you are trying to get maximum growth without realizing the concomitant, underlying risks. EVERY investment, irrespective of the investment vehicle you choose, has some element of risk. High risk often means the possibility of higher returns (most people forget the possibility part), but it can also mean loss of capital. A good savings plan has elements spread over the risk spectrum and it also means NOT having all your eggs in one basket. A final question: do you have the time to actively manage your savings and investments or are you willing to pay professionals (realizing that any type of guarantee will cost you additional money). And a final piece of common sense advice: if it sounds too good to be true: it usually is.
How long should your money last? If you have saved for 10 years and expect the resultant savings to last for 30, how much have you saved in that 10? Do you want to leave your dependants a sizeable estate on death? WHY? I find it amazing that people will do themselves short, just to leave some money behind for their children, especially if the parents are in their seventies and their children in their late middle years. Use the relevant investment vehicles for what they were intended: very few things beat life insurance for value if you want to build an inheritable estate.
If you plan to retire, you need to understand your answers to the above questions. USE your common sense AND involve a professional. But don’t believe everything that you are told (not because advisers and brokers are dishonest, but because it is YOUR life and future, with your expectations and wishes). Do your own homework, speak to other people and listen to your gut-feel.
My own responses in short to the above (if you need some idea of how and what I did):
I wanted to scale down and live on a (previously bought – as part of my plan) smallholding, but I still had to build a bigger house, as the existing one was too small. I still need money for a few “bucket-list” items and like to invite people over for dinners and braais. I like to go on road-trips and want to travel internationally every now and again.
Get to your potential monthly expenses and add at least 25%. I sold my house, but had a second property, so no additional housing costs. I had no other debts on retirement and moved to a cash only environment, no overdraft and a very small credit card limit. I had to buy medical aid, but could reduce my life and occupational disability insurance. Make sure that you have enough money to cover your monthly expenses based on a (in my case) 7.5% annual return. If you need 750 000 per year, it means an investable amount of 10 million. (Don’t forget that you will need to pay tax on your income and that the 750k is the gross amount). Also be wary of inflation.
If you are serious about saving for (early) retirement you have to save at least around 20% – 25% of your after tax income. AND your savings have to be largely in instruments were your money can’t be accessed to buy a new TV, a new car or anything else to keep up with the neigbours. Remember: your current house can be part of this saving, but don’t be fooled by counting your monthly bond repayment as part of your monthly saving percentage.
I used various savings and investment vehicles: additional contributions to the company pension and provident funds (often the best from a cost perspective), personal retirement annuities, some buy-to-let property, unit trusts and direct shares. The biggest investments were left for professionals: if you really want to run your own investments you have to treat it as a full time job and even then you are not guaranteed to succeed. But, just as an aside, some of my best investments were still to send my son to a good school and to go on great holidays.
How long will my money last? I hope it will be long enough. Currently I am achieving in excess of the 7.5% return, so the capital is actually growing. I have largely built the second dwelling I planned and have done a few road-trips (I haven’t travelled offshore yet, but my wife has). I physically work my butt (and other fat deposits) off (because I want to and enjoy it). I have read some of the books that I have promised myself to do “one day” and go for regular hikes in the mountains and forests where I stay. Emotionally I am in a brilliant space and grateful that I took the leap in 2010. And I have some life insurance to ensure that my spouse will be even better off when I die (remember she will also get the capital and property). There may even be some left for my son….
The house we built
Life is good. Life is a song. If you live it with common sense and stay awake, even during the dreary parts.
(And if the question still burns you, but you are too decent to ask: No. I don’t need 750k per annum and I don’t have 10 million invested, but I have enough, thank you!)
Musings from a village in Africa 