Early retirement – is it really feasible?

The popular TikTok hashtag #retiredearly highlights various strategies young people use to achieve financial independence and retire early from regular employment. But how viable is it really?

Two financial experts explain what it takes to exit work early, and outline the pitfalls.

Tip: Debt can stop you from retiring early - or at all. Find out how debt consolidation can help you free up cash.

Will you have enough funds to retire early?

Only 6% to 8% of South Africans can retire at age 65 with enough capital for the rest of their lives. Needless to say, most people will not be able to retire early, says Ettienne Bezuidenhout, a wealth manager at Alexforbes. 

“Before considering early retirement, assess your savings, investments, and income sources,” he advises. “Will you have enough funds to sustain your desired lifestyle without receiving a regular salary?”

Selma Kruger, an investment consultant at Fairtree, provides an example.

“If you’re 25 years old, with no retirement savings, and you wish to retire at age 55, you must save R11,189.20 a month (escalating at 5% per year) to receive a monthly post-retirement income of R40,000 before tax (which will increase by 6% per year) until the age of 90,” she says.

Kruger bases her projection on an inflation rate of 6%, and average annual investment growth rates of 12% before retirement, and 10% during retirement.

She notes that most 25-year-olds can’t afford to allocate R11,000 a month toward retirement. 

“In addition, if you hope to retire early, you need a strategy to take factors such as inflation, prolonged life expectancy, tough economic conditions, investment growth assumptions, and income withdrawal expectations into account,” Kruger cautions.

What if you outlive your retirement savings?

If you plan to retire at age 40, and you live to 100, you’ll spend less than half of your life accumulating capital, which makes early retirement unrealistic for the average wage earner, Bezuidenhout notes. 

“If you retire at age 65 and draw an annual income of 4% to 5% of your capital, your income should last up to the age of 98,” he says. “However, if you retire at 55, it will only last until you’re 88.”

This assumes that the funds grow at a real rate of 4% – but if your investment return decreases, or inflation increases, your income will drop at a much younger age, he warns.

How can you beat inflation?

Inflation poses a major risk, especially if the cost of living increases above your investment returns.

“If you assume inflation of 6% during retirement, with an investment return of 10% a year, you get a real yield of 4% – that is, the difference between your investment return and inflation,” explains Bezuidenhout. “If inflation increases, the real yield will decrease.”

If the real yield is 4%, and you take 5% of your capital as an income from age 65, your capital should provide an income for around 33 years. However, if inflation rises to 7%, your income reduces after about 26 years; and if it rises to 8%, after about 20.

If your personal inflation rate is higher than 6%, you’ll need to make extra provision to compensate, and draw less than 5% of your capital on early retirement, reducing your income, Bezuidenhout adds.

Tips to make early retirement a reality

If you still hope to retire early, Bezuidenhout offers the following tips.

• Save diligently and allocate more of your earnings to savings than the average person.
• Consider whether your budget can handle the extra savings.
• Invest in more growth assets, such as local and offshore equities, to achieve the necessary growth for early retirement. Make sure that you can afford the increased risk associated with these investments.
• Carefully select the drawdown rate – the level of income you can live on – from your retirement savings. For early retirees, it may need to be reduced to the minimum legal rate of 2.5%.
• Consult a qualified financial adviser to help you make decisions. Retirement involves complex financial planning.

Tip: A budget calculator can help you keep your retirement planning on track.