Q&A: How to become financially independent and retire early

You assume the only alternative to slaving away at a 40-year career is to run off to a foreign country and live in eternal transit.

But what if there’s a way to both pursue a career and retire early so that you can enjoy the thrills life has to offer?

The traditional way of saving, and planning for retirement is being challenged by the FIRE movement – Financial Independence and Retiring Early.

With its roots in America, FIRE has gained momentum in recent years and South Africans have caught on to this trend.

In simple terms, it involves reducing your expenditure (i.e. selling your second car, living in a cheaper apartment, etc.) and saving as much as possible.

This week Justmoney found out from a South African blogger*, Stealthy Wealth, what this movement is all about and how he became involved in it.

How did you first become interested in pursuing FIRE?

While I really enjoy my day job as an electrical engineer, it’s not what I would choose to do for 40 hours every week until I’m 65.

There are only a certain number of hours in a day, in a week, in a year, and in a lifetime. And I want to spend as many of those hours on activities I find interesting and fulfilling.

Work constrains you in the amount of time and energy you have for other interests, hobbies and passions. Things like family, travel, and learning take a back seat while we go to work to cover our expenses.

A few years ago, I started asking myself why everyone accepts this. There is so much to see and do, and so little time – there must be a better way! And luckily there is.

How can someone get started preparing for FIRE?

I think the first thing you should do, no matter what your finances look like or what your goals are, is to start spending less than you earn.

A lot of people spend everything they earn, and some even spend more than they earn. But by doing this they are just spinning their wheels – or going backwards.

The only way to move forward is to free up some money every month. Once you get that right, you can use it to fast-track yourself out of debt, and ultimately start saving and investing.

Reducing your cost of living gives you a double advantage. Not only will you have more money available to put towards retirement or early retirement, but you will also need less money to retire on.

If someone were interested in FIRE, which expenses should they try to reduce?

The way a lot of people go about reducing their expenses is by phoning around for cheaper insurance, cancelling an unused magazine subscription, or reducing bank fees.

Now, make no mistake, all that helps, and freeing up a couple of hundred bucks can be very useful. But if you really want to make a dent, you should focus on the big things, like cars, houses, and commuting.

By reducing these big expenses, you can save thousands a month. This can turn into hundreds of thousands in a few years, and ultimately millions down the line.

A 10% saving on your rent or car repayment will become a lot more than a 50% saving on your bank account fee.

My suggestion is to list your expenses from highest to lowest. Start at the top and work your way down. For each expense ask yourself if there’s anything you can do to reduce it.

You may need to think out-the-box and ask yourself some uncomfortable questions. But if you are serious about FIRE, or even just a comfortable retirement, then you must to be willing to make some tough decisions.

How much money should someone earn before they start pursuing FIRE?

Society carries this illusion that you need to be filthy rich or have a really big salary to become financially independent or retire early.

The financial industry likes to tie your retirement number to income. But how much you need to retire has nothing to do with your income, and everything to do with your expenses.

A person who earns R100,000 a month and spends R100,000 a month will never have enough for retirement.

Whereas a person who earns R30,000 a month but only spends R20,000 could retire in less than 12 years (using some rough calculations and assumptions).

How much money would someone need to retire comfortably?

For this you should calculate your freedom number – the amount of money you would need if you wanted to stop working.

This may seem like some complicated mathematical equation that only experts can understand, but I think you would be shocked at how easy it is to work out.

There is an excellent rule of thumb known as the 4% rule, or the rule of 300.

In short, this rule says that you will need to have an investment that is worth 300 times your monthly expenses if you wanted to stop working and live off the investment.

Remember to use your expected monthly expenses in retirement for the calculation. You may not have a bond repayment or school fees, but you may have travel and hobby expenses.

Your freedom number may seem big and daunting, but don't overlook the power of compound interest and how it can crush even large numbers over time. 

What have you struggled with since you started pursuing FIRE?

A lot of retirement products and tax incentives are geared for more traditional retirement ages of 55 and up, and this has been a challenge for me.

Naturally, I want to save towards early retirement in the most tax-efficient way. Besides Tax Free Savings Accounts, there aren’t a lot of tax advantaged products for people aiming for early retirement and who need access to their investments sooner than the traditional retirement age.

Retirement Annuities lock your money away until you are 55 – and that's one of the main reasons I stay away from them. Traditional pension, provident, and preservation funds have higher tax rates for people wishing to access the money before age 55.

We have been contributing the maximum allowable amount to our TFSA's each year, but any investment over and above that gets a little tricky.

And what has been most encouraging to you?

I think a highlight for me is how we have managed to reduce our expenses through the lifestyle decisions we have taken.

A few years ago, we decided to move closer to where I work, and we bought a house that was less than what we could afford. We also decided to sell one of our cars since we really didn't need two, and when the remaining car was paid off, we resisted the temptation to upgrade.

Reducing our expenses in this way opened a world of options which we would otherwise not have even thought possible. Things like early retirement, and my wife being able to become a stay-at-home mom to our little boy for a few years.

*Since Stealthy Wealth publishes details of his personal finances on his blog, he needs to remain anonymous.