FIRE: Financial Independence Retire Early is the end goal of many. Some will say FI is in everyone’s future, whether by choice or whether by force. Financial Independence is a misnomer though. You will never be Independent of Finance since money is the lubricant that makes all of life happen.
No, the goal more appropriately is all about expanding your ability to decouple money and time, which means Financial Flexibility. And to do that you will require a F-U-Fund, a plan and a whole lot of perseverance.
Following the dream to semi-retire to the beach and the yacht by 55. These are some financial ‘rules-of-thumb’ discovered on the way.
Remember though, most [if not all] of these ‘rules’ are based on assumptions and market research assuming standard 20 to 30 year retirement spans. No one size fits all. study their underlying assumptions and data and act with caution !
- Maintain your capital lump-sum indefinitely by withdrawing no more than 4% per annum.
- This is mathematically equal to “the rule of 25” – you need 25x your first year’s spending in savings
- CY => R1M gives you approx R4k p.m. [This is 5%, a little high for sustainability]
- For every R1000 pm you save/don’t spend [R12000 pa] => R300000 less savings needed.
- Market Valuation at the start of your retirement appears to be crucial to the longevity of your stash.
- An under-valued market historically generates better returns and allows a larger draw down [and vice versa].
- i.e. Sequence of returns is crucial.
The big questions & assumptions:
- You need to be very clear on your annual spend requirement
- How relevant are US-Based studies in the South African context?
- As soon as the woolly masses are all doing the same thing that’s a very good indicator that maybe you should run hard in another direction!
If you want to be certain of not running short -> Decent article by Todd Tressider here:
1. You can only spend the income thrown off by the assets, but the assets themselves can never be touched. At this point, your life expectancy is irrelevant because you can never outlive your income, making the expected lifetime assumption irrelevant.
2. The second rule is you must manage your assets so that growth (total return-income) is greater than the inflation rate. As long as the difference between your total return and the income from your assets exceeds the rate of inflation, you can remove any need to estimate future inflation from your calculations. It becomes a non-issue.
3. your residual income must come from multiple, non-correlated sources. A reasonable mixture of dividend paying stocks and income producing real estate would satisfy that requirement What you don’t want to do is retire based on one source of income.
4. A fourth bonus rule also exists, but it isn’t necessary. Don’t begin early retirement until your passive investment cash flow exceeds what you spend. This will ensure you have money left over to reinvest.This provides the last added measure of insurance to cover against unexpected surprises, lost income due to default, catastrophes, excess inflation, etc