Words on wealth: how you can retire early

This column is not for everyone. The majority of South Africans exist hand to mouth, with far too many households living below the breadline. “All this talk of saving,” they will say, “when we don’t even earn enough to feed our families.” Let’s consider their situation for a moment.

The Pietermaritzburg Economic Justice & Dignity Group publishes a monthly Household Affordability Index, which calculates the cost of a basic basket of groceries in different parts of the country and compares it with wages.

For October, the average basket of essential foods for a household of four costs R5 441. A worker earning the minimum wage, working 23 days in the month at just R28.79 per hour, brings in R5 297. Add two Child Support Grants of R560 each and a Social Relief of Distress Grant of R370, and the total income for a household with a single minimum-wage earner comes to R6 787. Spending R5 441 on food would leave R1 490 for everything else, including accommodation, clothing, non-food groceries, and transportation. They therefore spend less on food, with the result that they don’t get the nutrition they need. Saving is out of the question.

If you are in the position of earning a decent salary that covers your basic living expenses with some to spare, you belong to a privileged minority of South Africans. And if you are young with most of your working life still ahead of you, the saving ideas outlined below might appeal to you..

The Fire movement

There is an international movement among young people called Fire, which stands for Financial Independence, Retire Early. Their goal is to save as much as they can when they are young, so that they can achieve financial freedom by their early 40s.

The Fire folk are fanatical: they recommend putting away between at least half of one’s salary each month. However, there are very few people, in the face of rising living costs, who would be able to do that. But the idea is a worthwhile one. And if you make the right investment decisions and remain committed to saving a certain percentage of your salary each month (over and above what might be coming off your salary for your pension savings and what you might be paying on a mortgage bond, which in itself is an investment), your savings will grow remarkably quickly so that, by your early 50s, you'll have enough to enjoy the financial freedom that most people only dream of.

Let's do some sums

Say you're 25 and, after tax and retirement fund deductions, you take home R25 000 a month. For the purposes of this example, I will assume zero inflation, so you can get an idea of what your money will be worth at today's rand value. Let's say your salary, taking into account bonuses and promotions, rises by an average of 3% above inflation each year. And your investment in a suitable vehicle provides a return of 7% above inflation, on average, annually. (This is a realistic after-inflation return that, over periods of 10 years or more, you could expect from an equity fund). Any savings you make towards financial freedom are in addition to other forms of asset accumulation..

If you put away 10% of your take-home pay monthly, investing R2 500 a month initially but increasing this in line with your salary increases, after 16 years, you will have saved R1 million. Six years later, after 22 years of saving, you will have doubled your money to R2m. Just over four years later, you will have R3m. By the age of 55, after 30 years of saving, you will have R4.2m. (Don’t forget, this is at today’s money values – if you factor in inflation, the actual values will look very different.)

On top of this, you will have your savings in an occupational retirement fund. If 15% of your salary has been going towards this, and you haven’t touched these savings, at the same rate of return, you will have an additional R6.8m at age 55, giving a total lump sum of R11m at today’s money values. Your annual take-home pay will have grown from R300 000 to about R735 000 (at today’s values), and your lump sum will be about 15 times this amount – enough to retire on.

What happens if you double your savings on the side to 20% of your take-home pay? Beginning at R5 000 a month, you will have saved R1m after 10 years, R2m after 16 years, and R3m after 19 years. At age 50, you will have R5.4m and another R4.3m in your retirement fund. With close to R10m, you will have achieved financial freedom.

The biggest impediments to getting there are debt and lifestyle creep. On the latter, I’ll devote next week’s column.

* Martin is the former editor of Personal Finance.

PERSONAL FINANCE