“We’re on a road to nowhere, Come on inside
Taking that ride to nowhere, We’ll take that ride”
That’s how I felt for a long time, on a road to nowhere, enjoying the ride but not at all sure where it was going. When it comes to retirement it’s like that for most of us except for the few who have a clear view of where they are going. Nevermind financial freedom or financial independence which I had never heard about. Eventually, I found my way by understanding that if I took control I could have financial freedom and be more prepared to set myself on a path to financial independence and hopefully early retirement.
Retirement – Get Your Head Out of the Sand
All decent articles on retirement start with some scary statistics, right? Well they have to because the stats are true and really scary but no one seems to pay attention. That is probably because whenever you hear a statistic it always applies to someone else and never to you. The last 10x Retirement Reality report 2019 surveyed 15 million South Africans about their plans for retirement.
Only 6% of respondents said they have a thought through plan that they are executing. No surprises there as the often-quoted figure from National Treasury is that only 6% of South Africans will have saved enough to retire comfortably and independently. So what is everyone else doing? They are just going to depend on others, The Association for the Aged quotes the following, 16% will depend on state pensions, 31% will have to keep on working and 47% will depend on their family and friends.
The most interesting info out of the retirement survey are the reasons why people don’t have a retirement plan. There are really only two, first one, 55% say “I don’t earn enough” and second 36% say “Its not a priority for me at this stage of my life”. I too have had these and other reasons and they are all valid, but that wasn’t solving the problem or making it go away.
When I look back at my own experience, I can really identify with these reasons, I didn’t believe that I earned enough to save and I never imaged it being possible for an average earner to save enough to retire early. The underlying reasons for these beliefs were that I had no plan.
I had no idea how much I needed for retirement, nor did I understand why, and I was oblivious to what I needed to do. Yet every day we plan, be it for road trips, holidays or just going to the shop, first you decide where to go, then how to get there and lastly the route to follow. Retirement is no different, it is just like a road trip. I wanted to be on this journey, yet I did not know where to go or how to get there!
A Journey to Discover Financial Freedom
My path to financial freedom has been a long one with a few wrong turns, many stops and no idea of what shortcuts to take. Finishing school there were many decisions, it can be a time of great opportunity but also great confusion unless you have a strong calling or burning desire to pursue c career. I ended up following a really good if somewhat traditional route of university and then a job, met a lady and got married, bought a house.
The 20’s Jol
For that period of my 20s I just followed the path that life took me. This is not uncommon for 20-year olds, mostly good times and a lot of fun, not a bad thing, but obviously not the most productive time and a lot of lost opportunities there. At that time, I thought because I work and have a pension fund and save some money, that this was enough. Somehow I just had to wait until the retirement age and then magically I would retire.
During those initial working years, I started thinking about wanting to retire “early” by the age of 50. Don’t laugh that was back in the 90’s before the concept of FIRE (financial independence retire early) had become popular. When I look back now I realise that I had no idea of what financial freedom meant or even what having enough money to retire looked like and consequently I had no plan to get there.
The 30’s Growing Up
When I reached my 30s there were a few speedbumps as life started happening, a divorce, a marriage and a dive into entrepreneurship. For the first time I really started thinking proactively about what it was that I wanted in life. I realised that I had been following the “right thing to do” path. I started to understand and explore exactly how much in control of my life I was.
Quitting corporate life meant no more pension so suddenly I realised that I had to accept responsibility and plan for retirement myself. This reality check forced me to start understanding, learning and experimenting with investing. I didn’t do anything major just opened a trading account and made some investments, so it was a start, but I still didn’t have a plan.
The 40’s Learning
Into my 40s and I re-entered corporate life with many lessons learned, new parameters for work life balance, life priorities and some clear goals for success. Part of the reason for leaving own employment was that financially it was not working, family priorities changed and there were better opportunities elsewhere.
However, it wasn’t long before a new set of questions started to crop up. I was working harder and earning more but still not achieving my wealth and happiness objectives. Also getting older now I started to think more about what was needed for retirement. At this point I eventually sat down and put some numbers together, things just were not adding up.
Then by some random chance I came across an article on frugality that had mentioned Mr Money Mustache Blog (Money – must – stash). Reading his blog was a revelation and it made me realise that despite all my efforts I was still just part of and a product of a big consumer system.
One by one I started to unravel these ideas and question many of my long-held beliefs about how we live our lives. Suddenly looking back I could see where I had gone wrong, and what I had missed, but most importantly I finally had clear sight of where I had to go and how to get there.
5 Steps to Early Retirement & Financial Independence
So what does the road map to financial freedom look like? Here are 5 key steps that I have followed to get me on the path to financial independence and hopefully early retirement.
Step 1: Identify the destination – how much do I need?
In my opinion, this is the most important, but it is also the most difficult and daunting. How do you know what things will be like in 10, 20, 30- or 40-years’ time? Besides it is so far ahead why even bother?
My recommendation is that you choose the shortest possible time to achieve retirement. This will make the task more tangible, if not downright scary, but it will be more understandable and it buys you time. Ideally you can achieve even greater success or worst case it gives you more time to achieve financial independence.
Once you actually pin down how much you need for retirement and how long it will take you, it will automatically force you to think about your salary, expenses, debt, investment etc. in a completely different way. There are many different methods to do these calculations , the simplest rule is the 4% rule, but more about these in later posts.
Step 2: Plan a route – How can I save so much?
Now you know where to go, the second most important step is how do you to get there? To start you need to take stock of where you are currently. What are your current retirement plans and projections, how much are you earning, what are your expenses like, how much debt do you have and how much are you saving? When you do that and look at where you should be you will see the problem.
So now you can work out some scenarios of how to achieve your retirement target. The 3 big variables to manage are how much you can earn; how little you can spend and how long you are prepared to take. Remember, any plan is better than no plan so just start and decide what you need to achieve each year and then what that would look like by month.
Step 3: Learn how to drive – Learn and understand investing
Learning about personal finance and investing is a critical life skill that all of us need and usually at best find out too late. You need to understand inflation impact, investment returns, tax implications, investment options etc. Many people delegate this entire process to a financial advisor without knowing or understanding it themselves.
My experience is that those achieving financial success, have done so by educating and upskilling themselves. The information and access to investing is out there, tons of great books, some great blogs on the internet, engaging with other likeminded people via social media like twitter and newer more accessible investment platforms like easy equities. It’s a journey and investment is long term, you have time so the sooner you start learning the better.
Step 4: Look out for the shortcuts – Save more and earn more
If you follow the traditional planning path to retirement, then you can expect to spend all your working life towards this goal. However, if you want shortcuts then you need to be more frugal and investigate the FIRE concept.
This philosophy says that if you have a cleaver retirement plan, a decent household income, a frugal lifestyle and an aggressive savings strategy. You can achieve financial independence and retire early in as little as 10 years. Consumerism is driving our lives. When you look deeper you will realise how much money we are spending and wasting by the way that we have designed our modern lives. Cutting out these unnecessary expenses releases more money to be directed to investments to get to financial independence quicker. Then of course there are also ways of increasing your earnings and developing additional income streams.
Step 5: Check the dashboard to stay on track
So now you know where to go, you have planned your route and you are driving, and you have even found a few shortcuts, but this is still going to be a long journey. If you don’t constantly check the dashboard you are going to fall behind, take a wrong turn or even worse run out of fuel.
So, you need to track this on at least a yearly basis and ideally on a monthly basis. You can use your plan to do that. Your plan should be made up of annual targets which would have been broken down into what to do every month. Your annual tracking will tell you how your investments are doing and hopefully growing. Your monthly tracking will be there to manage budget, expenses and your savings ratios.
When I did my plan 5 years ago it said that it would take me about 12 years to reach retirement. I have called it #FIRE2028. After the first 5 years I am still on track and every year I am understanding more, refining and improving the plan.
If you do this in your 20s or 30s then you can be guaranteed of achieving early retirement and financial independence. If you are older and waking up too late like the rest of us than you need to do this just to make sure that you can actually retire comfortably. The sooner you start the better off you will be and it’s never too late to start either, but start you must, otherwise, you are going nowhere.
You shouldn’t take any of this as advice, consult a professional financial advisor for that. This is merely what has worked for me and my experience, so what has your experience been? Do you still have your head in the sand? Leave a comment and tell your story or ask a question.