By Neil Vorster
Retire early and easily, can this be too good to be true?
Early retirement is a dream we all want to come true.
And yes, your dream can come true, and I'll show you how.
Studies show that more than 50% of the people interviewed between the ages of 30 and 50 express a desire to retire before they turn 60. Incidentally, if you have read this far you fall within that 50%, good thinking!
A quick Google search will return an endless supply of advisers who produce very complicated algorithms and calculators designed to boggle your mind and convince you to buy their products. All this in an effort to stave off the inevitable 40 odd years of hard salaried work followed by the penny pinching twilight years.
In almost every case, these financial calculators are marketing tools designed to sell you a retirement annuity or convince you to build up a share portfolio. Their algorithms generally follow an approach that is dependent on a whole array of assumptions and predictions, such as;
- the average inflation rate over the next 20-50 years
- the interest rate for the same period
- your projected salary increases
- your planned annual savings
- stock market performance
- and of course if the calculator is American, a reference to 401(k) pension fund
If you search really hard you will come across a philosophy called Early Retirement Extreme (ERE). ERE is a lifestyle philosophy that combines an integration of many ideals, which sounds like a life sentence of effort in planning, ascetic living under the disguise of “simple living, self sufficiency, and not to be forgotten, prudence. It speaks of aiming to save between 50 and 80% of your monthly income!
I am sorry to say, if my cross section of friends and acquaintances are anything to go by, ERE will have to remain a book title, an unreachable goal for most of us.
When I was in my twenties, a wise friend, Paul Fairhurst, gave me a pearl of wisdom that I have never forgotten. It took me 15 years to act on his wisdom, and my only regret was to have waited so long.
So what is this great pearl of wisdom?
He said, the average person in South Africa spends 25% of the family’s combined income on rental or their bond repayment. A simple extrapolation brings you to a formula for retirement. If you therefore own 4 paid up properties in Fourways, Sandton, you can retire on the average Fourways household salary. Robert Kiyosaki calls this financial freedom: the point at which, by the application of financial wisdom, your job becomes optional.
The beauty of this simple formula is that it is so easily attainable, and is such a safe bet. It makes no requirement of you to guess future interest rates, stock market performance or inflation rates. It relies on the simple rule that people spend a quarter of their income on rent or bond repayments. If you feel insecure with the formula (like I did), why not aim to own 6 or 8 buy to let investment properties. That way if the 25% rule remains, you will end up well-off. If the South African lifestyle becomes more conservative and people only spend as little as 15% on rental, you remain safe.
The only discipline that will be required of you is that you educate yourself in an effort to maximise your investment decisions. Once your portfolio has reached your target 6 or 8 buy to let properties, plough all your surplus rental income into repaying the bonds. By using the escalating rentals to reduce your bonds quickly, financial freedom becomes a very real option within 10 to 15 years.
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If you want to know how to invest, have a look at our Property Investment 101
Have you ever heard this simple retirement plan before?
Does it make sense, or simply raise additional questions?
Please feel free to leave your comments or questions below.