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By Citizen Reporter

Journalist


How to know you can afford to retire early

The temptation to retire early and adopt a life of leisure can be particularly seductive as you enter your 50s and 60s, especially after many years spent with your nose to the grindstone.


But can you afford it? There are two main drivers which determine if early retirement is even an option you can consider.

These are:

How much capital you have;

How much you need to draw to sustain your standard of living.

Clients often ask: “How much capital will I need to retire?”

But the answer is directly related to how much you require on a monthly basis to sustain your current standard of living.

One of the very basic calculations I give my clients is to take their current monthly expenditure, divide this number by four and multiply it by R1,000.

This calculation works when you are still trying to accumulate your capital and need to set a retirement savings target.

If you are already at retirement age, however, ensuring your capital will last your entire lifetime, which is generally unknown, becomes more important.

To be conservative, I would suggest you draw no more than 4% of your retirement capital on an annual basis.

If a 4% withdrawal rate will not provide you with sufficient income, it may be worth giving serious consideration to delaying your retirement.

Remember, your salary and therefore retirement contributions are usually at their peak in the years just before your retirement, and when combined with the added effect of delaying dipping into your capital, these last few years can make a huge difference to your portfolio through the power of compounding.

It’s therefore vital to make sure that you’ve done all the proper planning and calculations before you take the big step.

And do not forget to add a buffer for any emergencies or unexpected expenses.

Inflation is a key risk that needs to be factored in when examining whether you have enough to retire.

With future inflation an unknown – and impacted by variables beyond our control, such as the rand exchange rate – having a buffer is absolutely key.

There are many companies that use life-staging analysis when performing retirement planning for employees and, as employees approach their retirement, an increasing portion of their pension or provident fund is moved into cash.

However, cash investments do not offer inflation-beating returns over the long term.

Another important point to consider is whether you have any outstanding debt that still needs to be paid.

Monthly vehicle repayments, for instance, could eat into your capital very quickly.

Concentrating your focus on repaying any debt before you retire could therefore make a huge difference to your monthly expenses and thus your draw from your pension fund.

While no one can predict how long they may live or how markets may change, a professional financial adviser should be able to identify whether you may be running out of money 10 or 15 years ahead of time.

This gives you time to adjust your lifestyle and spending.

Kerry King is Advisory Partner at Citadel

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