I can retire by 57?

I can retire by 57

Many people have a highly formalised goal in order to achieve retirement by a certain age. This is probably a good thing as target setting can be very powerful and influence the human psyche in a positive manner to promote execution. As a household we have always saved between 20% to 30% of our after-tax income by consistently living below our means. Therefore, I always thought retirement should be a breeze somewhere in my mid 40’s. As 33-year olds we have a paid off home and a decent amount in investments and retirement funds. But when I ran a basic spreadsheet (I know I like spreadsheets far too much for my own good) it kicked out 57. Damn…that is not what I expected.

The Dreaded Spreadsheet

So, what is the basis of these calculations? It is quite simple start by choosing a number, not just any number but how much you would like to earn (before tax) in retirement per annum. I would suggest you choose something close to your current living costs that you are comfortable with. This way you will be able to live at the same standard you are currently at in terms of your money’s present value. Now take that figure and divide it by 4% (0.04) and voila you have a target. This is using the 4% rule which is actually quite universal in its application globally.

Now that you have something to aim for you should measure how to get there. I only used 2 lines to see how we get there. The first one is our retirement funds’ current value which increases annually with contributions (inflated each year by inflation) and growth compounded over the period. The second is other savings that are currently growing. These are things like ETF’s, cash, index funds, tax free savings accounts, stocks etc. Again, the same logic applies by adding contributions depending on what you save after tax and making an assumption on growth.

Unfortunately, your target is not standing still either but it is moving. You have to increase your target by inflation every year. If you believe 3 million bucks is enough now, it will unfortunately not be in 20 years’ time, unless you live in Japan. If you do this by year your target might initially grow until your compounding investments catch up with it. Below is a snapshot of what an example looks like.

Always look at the bright side of life

Naturally when my spreadsheet kicked out this number I quite loudly uttered: WTF? I checked and double checked and it seems like that is the way it is. How did people like Sam do this at 33? But it is not all doom and gloom sometimes a different perspective can shine a lot of light on a situation. So, what are the pros when the cons are so obvious?

  • I can retire before the normal retirement age in South Africa which is around 60 to 65 (according to employers). And this is retiring at our current lifestyle with 0 debt while basically living on passive income if I structure it smartly. The fact is most South Africans (and most people in general) will never be in this position in their life, which makes me wonder what some of my less frugal friends will be doing.
  • Our current lifestyle includes bringing up our 2 amazing kids. The upside is; by that time, they will hopefully be fully independent (we can only hope). The downside is that as we are planning to pay for them up to a full university education meaning expenses will keep on rising over this period. But who knows universities might be obsolete by then.
  • The assumption is that we will keep on earning what we earn. Although any inflationary salary increases will largely be absorbed by expenses, both of our incomes have seen spikes during our careers which will hopefully continue. The key is to save that additional income from spikes such as promotions or performance bonusses. The inverse is however a risk if one of us are to lose our job.
  • The assumption is all active income will stop at retirement. Why should this be, there are many things I can think of which will be very fulfilling for me to do and most probably provide a small stream of income. Is that not the real bonus at retirement?
  • There are no windfalls built into this. Although I am very much a realist life does provide some windfalls where chunks of wealth can come your way. Normally you have to have some rods in the water to catch these fish like speculative investments or purely hard work which can pay off. My plan B is to have my son turn pro golfer which will take all these worries away once he gets his PGA tour card.

What to do?

Although this is by no means a 100% accurate calculation it does provide some insight. Sometimes that is all that is needed in order to enhance your mindset and form new habits. This encourages me to have an even better look at our finances, while knowing we will be ok.

I like to use the Earn, Save, Invest methodology to see how this can be boosted and for me personally it will look like this:

Earn: Be even better at my career (which I enjoy) and continue building it, while having a small side hustle.

Save: This can be achieved by cutting expenses, but not at the peril of not providing the best for my family in what we deem as important. Having a minimalist mindset is good but not at the detriment of laying the foundation for your kids’ future. What should be closely guarded is lifestyle inflation as we already have it very good as is.

Invest: We are not doing bad here, but it can improve. I probably have too many individual shares (although they have boomed) which can be converted to index funds for more consistent long-term gains. I think the cash which we have as an emergency fund and for potential large expenses can probably attract a bit more interest. My portfolio of investments need to be a bit more balanced especially when living in South Africa (more on that later).

So, when do you think you can retire?

Always grow your wealth for tomorrow while being content with your wealth today.

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