There’s more guesswork involved in retirement planning than we’d like to admit. If you’ve ever gone through the retirement planning process with a financial advisor, you know what I mean. To calculate how much money you’ll need for retirement, you need to factor in the expected inflation rate as well as the expected growth rate of your investments. If you had the ability to know those things with any degree of certainty, you wouldn’t need to do any retirement planning because you’d be psychic.
One of the most crucial guesses you have to make is how much money you’ll need in retirement. It’s hard for us to imagine our lives a week from now, much less decades into the future. How do we tackle this dilemma?
The Financial Independence, Retire Early (FIRE) movement offers a useful rule of thumb to help here. To ensure you have enough money to retire and never run out of money, you need 300 times your monthly expenses. This is an excellent shorthand, because it forces you to put as much effort as possible towards controlling what leaves your account every month.
However, using your current expenses would be to over-prepare. Some of your current expenses go towards preparing for your retirement. Your long-term savings and your long-term insurance products exist solely for this purpose. Once you reach financial independence, you go from having to look to others for an income to paying yourself.
That means your cost of living will automatically reduce by the amount of money you put towards retirement the minute you reach financial independence. Once you’ve accumulated enough assets, self-insurance becomes a reality. Stealthy Wealth does an excellent job of explaining how that works in this post. That’s another expense you can take off the list.
But what about the hobbies you plan to take up once you have more time? How should you plan on paying for those? What if you wanted to take a holiday?
In this week’s episode, we talk through how you can think about your expenses in retirement when you’re working out your financial independence number.
We are once again so grateful to OUTvest for funding this week’s episode. If you’re looking for a place to save towards your retirement goals, have a look at their excellent product here.
Win of the week: Joy
I think another example of upside risk is in studying. It is possible to work so hard at school and university to get top grades which give you a suite of distinctions and awards, but at what cost to friendships, hobbies, physical and mental health?
I know many adults who because of the sacrifices they made to achieve those things have always had that as a huge part of their identity. I’m sure you know, for example, middle aged men who are still called by their nickname from school or are part of the old boys club. Really?
Your qualifications are only important so far as you can actually make practical use of them. Who cares if you qualified as a doctor cum laude from Cambridge university if you are unprofessional, unkind and thoughtless? Or if you can’t even balance your personal finances 😂
My dad's idol was to retire early. He achieved that well. He never thought much about what he would do after that and as a result has really had (to my thinking) a pretty poor quality of life wandering aimlessly through this supposedly amazing thing called “early retirement”. When the idol shows itself as gold plated outside but hollow and empty on the inside 😢
Rafi
The number you get when you multiply your expenses by 300 does it include your Pension/RA, paid off house?
Lyzelle
I have Old Mutual Unit trusts. I would like to get out of there.
I suppose I already know the reply for this one, since you have said numerous times that you cannot time the market, but here goes... do you think now is an exceptionally bad time to move money from the Unit trusts elsewhere?
Melanie
I don't understand half these fees. Are these fees normal or should i run for the hills and move my RA.
1.Yearly marketing and administration charge % of fund value
First R500 000 4.20%
Next R500 000 3.75%
Excess above R1 000 000 3.50%
Sanlam Escalating - Coronation Balanced Plus Fund P (TIC 1.15%)
SATRIX Dynamic Balanced Fund B Fixed (TIC 0.30%).
Herman
I moved to Belgium recently (for how long I don't know). I thought I'd share some interesting personal finance observations from here. Not really applicable to SA, although it did help me to rethink some assumptions about "the way things just are" in SA:
First I have to say that I pay a hell of a lot of tax on everything else - like 50% on any income above €37000, plus a lot of VAT, plus municipal taxes. So this is not to say that SA is bad and Belgium is good, but:
- My bank account is free. I also get a Mastercard debit card with it. All transactions, withdrawals (internationally as well) are free. Also 0% interest, so in that sense you pay for it. But still cheaper than in SA (perhaps the newer banks are better).
- Savings accounts: interest rates of 0.1% p.a. are standard. That is lower than inflation here, just as interest rates on savings accounts in SA. You can do better in special accounts, but you really want to go for ETFs for saving.
- The only capital gains tax here is attracted if you flip a house within 5 years of buying it. No CGT on sales of shares...
- No dividends withholding tax if you reinvest the dividends.
- DeGiro is a Dutch broker where you can open a free account and make 1 free purchase per month of an ETF. Like, zero deposit and withdrawal fees, zero monthly fees. etc.
- ETFs domiciled in Ireland attract no taxes in Ireland. Many ETFs are domiciled there for that reason.
- Hence, investing through DeGiro in some ETFs in Ireland attracts zero taxes - CGT or DWT, and zero fees. It is like a TFSA in SA, but with no cap!
- They also have things like RAs here. They suck as much here (if not more) and for the same reasons as in SA. High fees, prescribed asset percentages leading to low growth, exit taxes (only 8%), etc. Also smaller tax breaks initially.
I think the SA financial services sector is more advanced and competitive in their offerings than the Belgian sector, although Europe is much more focussed on ethics etc, which I really appreciate. Nevertheless, I find it amazing that in SA a TFSA is this special thing, but here it assumed in the FIRE etc. communities.
Neville wanted us to look at this ETF holdings. Catch Nerina Visser's presentation on how to think through your holdings.
Mary
I received my IRP5 as a non-provisional taxpayer. Currently I contribute 23.5% of my base salary to two annuities.
I realized that this percentage is calculated on my basic salary, but on the IRP5 there's an income code portraying gross income received and this amount is much higher than the base salary.
Could this higher amount be used to calculate higher contributions without it rolling over to the next year so long as it's still under R350k as capped by the government? Or is it better to stick to base salary limits?
Molekoa
I've been working for 26 years and decided to resign as a civil servant. What is the best option for investment.