“Is it really possible to live off my investments?” This is a question we field often. We recently did a podcast about early retirement that deals with a variation on this theme. The question concerns me, because the answer lies at the heart of all financial planning.
Firstly, if living off your investments isn’t the end goal of investing, what is? How else do you differentiate between long-term investments and short-term savings? Intentionality is a theme that keeps cropping up on the Just One Lap platform. Good financial decisions aren’t possible without understanding the purpose of investing.
Secondly, the answer affects your judgement around whether your retirement annuity or pension fund is any good. How do you decide how much to contribute to these funds? All too often companies set the retirement savings rate on behalf of employees. If you can’t answer this question, how will you know whether the company-mandated savings rate or the oft-cited 15% is enough to see you through retirement?
When I started dreaming of an early retirement, I calculated I would need around R7m to be financially free. At a 4% draw-down rate, this would earn me a monthly income of just over R23 000. At 4%, so says the theory, my capital would keep on growing if my returns beat inflation.
Imagine I never ran this calculation and decided instead to contribute 15% of my monthly salary to an RA. If I started this month and continued my 15% contributions for the next 20 years, providing I earned an annual yield of 12%, I’m still almost R700 000 shy of my early retirement goal.
In this podcast, we talk about the numbers you have to run and the assumptions you have to make to know whether you have enough money invested. I highly recommend you visit the Stealthy Wealth website for a lot more information about this. While his goal is early retirement, the principles are the same.