The Fat Wallet Show from Just One Lap - #45: Is early retirement a pipe dream?

#45: Is early retirement a pipe dream?

Explicit content warning

04/23/17 • 51 min

The Fat Wallet Show from Just One Lap

Many have caught on to the idea that you don’t have to spend your life in servitude. Instead of lifestyle creep and keeping up with the Joneses, you can live modestly and put away the rest of your income. Once you have enough invested, you draw down just enough of your investments to maintain your already modest lifestyle and spend your free time doing what makes you happy. Early retirement: the Holy Grail of investment.

Mr Money Moustache in the US and South African Stealthy Wealth have embraced the idea of early retirement. In both excellent blogs, they explain the maths and share the types of financial maneuvering and lifestyle choices that would make early retirement possible.

Like most investment-related planning, though, both have had to make certain assumptions about what their investment returns would be over a period. No matter how much you save, cash won’t get you to early retirement. Enough money compounded over a decade or two, on the other hand, might just do the trick.

As aspiring retiree Ashleigh McLaren recently pointed out, however, the market doesn’t really care about our life plans. Over the past three years the local market has done very little, while Statistics SA recently reported a dependable and steady uptick in inflation. If I had to plan my retirement on my experience in the market, I’ll be better off buying survival packs so I can sustain myself on crackers and ammunition when I’m inevitably poor.

You might only be young once, but you'll be old for a long time and probably won't like cat food. https://t.co/71Mxdzm3w2 — Kristia van Heerden (@kristiavh) April 13, 2017

Are these calculations based on past market performance are realistic in the current market environment? We attempt to untangle that question in this episode.

P.S. We record the stinger at the beginning of the episode. I had every intention of talking about inflation-proof portfolios, but conversations tend to take on a life of their own if you let them.

Kris

You might only be young once, but you'll be old for a long time and probably won't like cat food. https://t.co/71Mxdzm3w2 — Kristia van Heerden (@kristiavh) April 13, 2017

Are these calculations based on past market performance are realistic in the current market environment? We attempt to untangle that question in this episode.

P.S. We record the stinger at the beginning of the episode. I had every intention of talking about inflation-proof portfolios, but conversations tend to take on a life of their own if you let them.

Kris

Previous Episode

#44: Choosing an RA provider

For most of us, a retirement annuity is the biggest investment we’ll ever make. More than any other investment decision, your RA should be scrutinised and prodded at every opportunity. This week Alexis Whitehead wanted to know how to choose a provider. We often mention 10X, although Sygnia claims to be cheaper. etfSA.co.za, home of our bestie Nerina Visser, also offers index-tracking RAs. Which is the right choice?

Equipping yourself with the right tools to make financial decisions, I believe, is the best way to healthy finances in the long run. I believe I should have the right financial building blocks in place if I hope to be successful financially. To recap, those are:

No debt
An emergency fund to cover my expenses for at least three months
Medical aid
Dread disease and disability insurance
Retirement savings

I also try to develop mental models that would make financial choices easier. Those include:

Calculating cost per use: In an ideal world, I want the cost per use for everything I own to be somewhere between R1 and R10. I like to think about it in terms of renting the same object. If something costs R2800 and I use it 280 times, would I be willing to pay R10 to use it every time? What price would I be willing to pay to rent something once?
Opportunity cost and future value: If I compound the price of an item, will the object of my desire be worth giving up that amount in the future? I lose the opportunity to invest that money when I spend the money on other things.
Cost compound: Fees compound in the same way earnings do. If the fees apply to assets under management, I also try to remember that the assets grow constantly. 1% of R10 000 is easier to stomach than 1% of R10m.

In the end, your money should make sense to you. Who you choose isn’t as important as why you choose them. Having a plan is half the battle won.

kris

Next Episode

#46: Five concepts that will make you rich

My biggest frustration in learning about the financial world is the expectation that I should understand concepts that nobody ever explained to me. A part of the reason why I got into so much debt is because I didn’t fully understand how interest applied to my financial situation. The other part of the reason is stupidity.

The Fat Wallet Show is my attempt to level the playing field. Not only am I declaring, out and proud, that I don’t know everything. I’m also taking back the most important weapon against ignorance - the humble question.

Because this show started out as my personal attempt to find answers, we started with concepts that I didn’t understand. In the process, we never covered things that I did understand. A lot of the questions I have about the financial world these days don’t have much to do with my personal finances. The interbank lending rate, for example, is not something that has an impact on my ability to make choices about my finances. Interest, on the other hand, is a core concept that informs almost all of my financial choices.

There are, in my opinion, only five concepts you need to fully understand to take control of your money. In this podcast, Simon and I discuss those concepts and how they affect your finances.

If we didn’t explain some of the concepts in a way that is easy for you to understand, find someone who can. These concepts might be the catalyst that launches a journey of financial curiosity. If not, they are enough to get you to retirement in one piece.

Kris