3 steps to reaching your early-retirement goal

*This content is brought to you by Brenthurst Wealth

By Aidan Freswick*

Early retirement is a goal that a number of people set for themselves and manage to achieve. Who wouldn’t want to give up the daily grind to live a life free from the daily commute and workplace stresses? Sounds idyllic, doesn’t it?

It sure does, but the reality is that this is a goal that only a small fraction of us manage to achieve.

Not surprisingly, the main factor to consider is your finances and whether you have enough money to see you through 40, 50 or more years of retirement. As it is, South Africans who retire at 65 could expect to live well into their 90s, which means they need enough savings to survive for close on 30 years.

This could well increase if South Africa’s average life expectancy at birth continues to grow as it did between 2000 and 2019, which the World Health Organisation says improve by an astonishing 9.5 years.

Two parts to the retirement equation

Saving enough during your briefer-then-usual working years is obviously easier if your income is considerably higher than your expenses. For some, that means excelling in a well-paid career or building wealth quickly through entrepreneurship.

However, you don’t need massive riches if you lower your expenses so that you save a much larger proportion of your income. Probably the most important question that you need to answer is: what standard of living do I want to maintain in my retirement?

If you’re able to build enough wealth rapidly, then your chances are good that you can maintain a more lavish lifestyle in retirement.

You could, of course, also realise your dream of retiring early by being frugal during your working years to concentrate on maximising your savings. However, that thrifty mindset will have to be maintained for your savings to support you in retirement.

What these two contrasting approaches illustrate is that there’s more than one way to think about work-life balance if retiring early is important to you.

Ultimately, these decisions will be informed by your life goals, so I’m not going to try make an argument for or against this ideal. However, it’s important to understand the consequences of your decisions.

As a financial advisor, I wish only that my clients fulfil their life dreams by making informed decisions. To that end, here are three things to bear in mind if you plan to step off the hamster wheel and still enjoy your golden years.

Set a target

Using rough industry standards and norms, it is estimated that a retiree needs 200 times their last salary to maintain their current lifestyle in retirement. 

If you plan to retire at 65, you’ll need around R6 million saved if your salary at retirement is R30,000. Planning to retire earlier means you’ll need significantly more to account for the years that you’re not earning a salary.

The one shortcoming of this rule of thumb is that it doesn’t account for the impact of inflation.

The inflation monster

I’m sure we can all attest to the impact that rising inflation over the past few years has had on our pockets. Not only are goods and services more expensive, but so is the cost of debt because interest rates have risen in the wake of the COVID pandemic.

This threat takes on even greater meaning when you’re retired because your monthly income might not be able to keep pace with ever-rising costs.

Inflation erodes the purchasing power of money over time, making it more expensive to maintain your standard of living. And, if you’ve retired early, these rising costs could mean you need to increase your capital drawdowns, which could deplete your savings faster than anticipated.

What this means is that you need to pay special attention to your asset allocation to ensure that your capital grows at a faster pace than inflation is eating away at it.

The power of compound interest

While many retirees retreat to safer asset classes once they hit retirement, this approach will in all likelihood be less appropriate for early retirees. Traditionally, the shift to less volatile investments shields your savings from the vagaries of listed equites that can rise or fall quite quickly, and dramatically.

However, given your longer retirement horizon if you retire early, you could benefit from the power of compound interest offered by listed equities.

The reality is that more defensive investments might not offer the above-inflation growth you need for your savings to last. In my mind, this asset allocation decision is probably the most important you need to make to enjoy your early retirement.

Which brings us finally, to the role that a qualified financial advisor can play in helping you to achieve your retirement goals – irrespective of the age you decide to retire at. 

Whether you choose the path of frugality or the route of wealth accumulation, each step should be taken with a clear vision of your retirement horizon. Embrace this challenge not just with a calculator in hand, but with a heart full of ambition and a mind open to the possibilities that lie ahead. 

In this pursuit, the wisdom of a financial advisor isn’t just a luxury; it’s an essential compass guiding you through the complex terrain of early retirement planning. With each decision, you’re not just saving money; you’re building a legacy of choice, freedom, and personal fulfilment.

* Aidan Freswick, Registered Financial Practitioner™, is based at Brenthurst Wealth Tyger Valley. [email protected] 

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