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Tuesday 8 November 2016

My Plan To Retire At 45

Complicated maths can prove
Since the start of this blog, I have been laying down the groundwork for an early retirement plan. I have discussed a range of boring totally interesting things like BudgetsInflation Rates and Investment Returns, How To Generate Wealth, and The 4% Rule for Retirement. So all the theory is in place, and now it is time I reveal to you how I plan to make use of all of this to retire early - my goal is to hang up the gloves my keyboard at the end of 2030 aged 45.

In short I have been following the steps I laid out in the 10 Steps To Financial Freedom post.

Starting at the beginning (some say it is a very good place to start) let me work through the steps.

Step 1 - Determine Current Expenses

Been running my budget for a while already. I have a good idea of where our money is going.


Step 2 - Reduce Expenses

Step 2 says I need to reduce our expenses - this is sort of an ongoing activity, but I am mostly there. Will still do my "annual reviews" to see if there is anything else we can shave off.


Step 3 - Attack Debt

We whacked our car payment at the start of 2016. We only have a bond, but I am not too concerned about this at the moment, because it is so called "good debt" and I believe over 15 years I will be better off investing that money. Check out the Pay Off Bond Or Invest and the Attacking Debt post for more info.


Step 4 - Retirement Cost of Living

I took a stab at estimating this - you can check the result in this post. In short I worked out we could live off around R22k/month in retirement.


Step 5 - My Retirement Number

And for my next trick, I will make my
boss disappear!
I finally get to use a calculator woohoo! :) Time to calculate the magic retirement number (it is magic because it can make your boss disappear!) Applying the 4% Rule to our retirement cost of living, I multiply the R22k by 300 to determine that we would have needed a cool R6.6 Million at the end of 2015 if we wanted to stop working in 2016.

Now I mustn't forget about that nasty I-word. Inflation....

So if we wanted to stop working this year we would have needed R6.6 million.

But if we wanted to stop working next year, our cost of living would have increased by inflation (and would now be R280 759). Therefore our retirement number needs to be adjusted accordingly.

Our retirement number is therefore a moving target that increases with inflation each year.

Let me put it into a nice little table.

Year Estimated Cost Of LivingRetirement Number
2015 R264 000 R6 600 000
2016 R280 579R7 014 480
2017 R298 200R7 454 989
2018 R316 927 R7 923 163
2019 R336 829 R8 420 737
2020 R357 982 R8 949 560
... ... ...
2025 R485 422 R12 135 548
... ... ...
2030 R658 229 R16 455 729
... ... ...
2040 R1 210 299 R30 257 468

Using this table I can check what amount we would need at the end of any given year in order for my wife and I stop working.


Step 6 - How Much Can I Invest?

Step 6 says I need to determine how much I can afford to invest each month. I calculated that we could afford to contribute around R13 500 a month. Of course if there happens to be some money left over at the end of each month (doesn't happen that often these days with us trying to throw some money at our investment for Stealthy Junior) I will chuck it into the pot as well.

Also important is that I can (and should) bump this R13 500 up every year by inflation. All things being equal and if I am a good boy at work, then I should get inflation related increases. Some years I may get an above inflation increase -  if that does happen, no prizes for guessing where the extra money will be going...


Step 7 - Time To Get Down To Business! The Stealthy Wealth Early Retirement Plan

Step 7 of this financial freedom plan requires requires another plan - a plan in a plan, I did not plan for that!

Ok so this is the "meat" of this post.

I basically need to take what I currently have invested, then factor in what I can afford to add each month, and then allow this to grow until it hits my magic retirement number. When this happens I give my boss the finger a wave goodbye.

Quick side tangent before I begin...

--{Start Side Tangent}--
It is worth mentioning that some of the money going into investments every month is unfortunately via our pension funds. This is ouch, firstly because of the fees, but also the Tax hit at the end is also going to suck quite a lot. You see we will be cashing out our pensions young (it's a relative term! :)) and as a result there will be a tax hit - SARS penalises you if you take your pension before 55 years of age.

Tax Ninja, sneaking up on you when you
least expect it!
You can join in my misery by checking out the latest Retirement Withdrawal Benefits on the SARS website. Currently there is some serious tax on larger amounts - R203 400 + 36% on amounts above R990 000.

Of course the Tax laws will most certainly change (hopefully for the better) as my 15 year plan unwinds. But there definitely will still be a tax bill (how cool was that rhyme!).

So I'll try compensate for this by building in a little fat into my plan (more on this a little further down...)

I could also try be smart about it towards the end, by for example living off our other investments until we are 55 if that's possible. I guess we will cross the tax bridge when we get there.
--{End Side Tangent}--

So first up, I luckily have some money already invested. At the end of 2015 I did a quick check and it turned out I had around R717k (you can see the details of each of my investments in this post). So that's the point where I kick off from.

Ok and what sort of return am I expecting from my investments?

The regular readers will know I use an inflation number of 6.28% and an equity return value of 15.28% when running my calculations (you can check how I got these numbers in this post).

For my TFSA account, I am buying ETF's and I expect the vanilla 15.28% return. If I happen to max out the TFSA I will buy ETF's/shares in my normal share trading account. This should also give 15.28%. Straightforward.

But now for some of the exotics...

My company's share matching plan means I get a 100% return at the matching date even if the share price does nothing (because they match my shares 1 for 1. You can read more about my company's cool share matching plan in this post). But then of course there will be Tax on this.

(I have said the word Tax way too many times in this post!)

But at the end of the day I am expecting a return much greater than the 15.28% of equities. I am guessing maybe around 30% per year.

This lekker return is nicely (or rather horribly) countered by the inferior returns I am expecting from my wife and my pension funds. The thoughtful people at our respective employers pay "highly skilled" people to take our money (fee) and then allocate that money to some more highly skilled peopled (fee) to pick a Unit Trust (fee) which aims to outperform the market - and I already know that they in all likelihood will not be able to do that. So basically our (and your) pension funds are a horrible concoction of multiple high fees and under-performance.

I recently attended a presentation hosted by the leeches my pension fund and I see they have a target of CPI + 6%. So using my inflation number of 6.28% that means they are hoping for around a 12% return. Strangely enough they are actually meeting their objective (credit where credit is due.) But I have serious doubts that they will continue to do so over the longer term. I am guessing that they will maybe do around 11% or so.

So putting this all together - the poor pension fund returns, with the superior share matching returns, and the vanilla TFSA and ETF returns, I am expecting growth of around 15% p.a. (which is the equivalent of around 1.171% per month compounded).

With this assumption I am now all set to put this all together and see what happens.

I start with R717k, add the investment amount each month, and "grow" the account by 1.717% each month to represent the expected equity returns. The summarised results looks something like this:

Month Investment Value
0 R717 000
1 R739 058
2 R761 374
3 R783 951
4 R806 794
... ...
12 R999 432
... ...
24 R1 335 210
... ...
60 R2 756 489
... ...
120 R7 326 528
... ...
180 R17 152 978
... ...
240 R34 500 766 

So now the question becomes:

At what point does my investment value exceed my retirement number?

This is probably the most important question anyone can ever ask themselves!
Possibly life's most important question - At what point does your investment value exceed your retirement number?
It is the question which holds all the answers!

Man I love Excel! I drew up a spreadsheet to help me with this very important answer. In short the spreadsheet is my blueprint (or maybe it should be called a greenprint, since it involves money) for my financial independence and early retirement.

Below I will present to you the short version of a rather complex calculation. I have however sent the full spreadsheet including all the awesome Maths to everyone on the mailing list (you can subscribe to the mailing list by clicking here ..... go on do it, I will wait...) If you are not on the mailing list but want the spreadsheet, get in touch and I will forward it to you if you say pretty please :)

*2018/01 Update - I have made the spreadsheet available for download on the Spreadsheets page.

Armed with this spreadsheet you can enter your own current investment, savings amount, estimated cost of living and start date, and it will spit out your estimated early retirement date (just don't spit back at it or your keyboard will get wet). Pretty sweet!

So what was the outcome?

In my case my investments should exceed my retirement number after around 180 months, or 15 years, or at the end of 2030. Let me put it into a pretty picture showing what happens at the end of each year....

Hunting down a target using the compound interest missile launcher

Also worth mentioning that at the end of 2030 the R17 152 978 I have invested is a little more than the R16 455 729 I need in order to stop working - I will have around R700k over what I need.... So what to do with this extra moola?

Remember that pesky little Tax problem I had? 

Well hopefully this will go some of the way to offset that...


Step 8 - Execute

I've planned the work now time to work the plan.

For me this is a 15 year step, but the exciting thing is I am already almost 1 year down!

Let me throw in my 3 P's of successful investing here:

The three P's of successful investing:
  • Patience
  • Persistence
  • Power of Compound Interest

Patience - I confess I have signed up for an unsolicited get rich slow scheme - you see investing is not for anyone in a rush. I've realised this is not going to happen overnight, and to benefit from the full potential of equity returns I need to wait a long long time.

Persistence - Month in and month out I need to just keep allocating funds to my investments, regardless of South African downgrades, Brexits, Trump winning elections, or other ridiculous and extremely unlikely events such as Arsenal winning the premier league.

Power of Compound Interest - Check out the graph in Step 7 showing my expected investment value versus my target. Notice how the blue line is relatively flat for the first couple of years, but then from around 2022 it really starts to lift off. There is enough stuff written about the power of compound interest on the internet, so to avoid boredom I will just leave it at that...

And then to finish up, let me ramble off some of the other usual cliches:
- It's not the timing of the market, it's the time in the market.
- Don't put all your eggs in one basket, and don't put all your baskets under one roof.


Step 9 - Adjust and Adapt

Step 7 is only a plan, and nothing in life is certain (I am not a fan of Death and Taxes). So circumstances can and will change.

I already mentioned Tax laws more than likely changing and the optimist in me says it will be for the better. Either way I will need to look at how I can optimise and reduce my Tax burden when I get closer to my retirement date.

I have assumed a market return of 15.28%. The market could have a bad 15 years, in which case my retirement date may get pushed out further (hey what's one or two extra years right? I will still be way ahead of most people...) On the flip side maybe the market has a massive bull run and does better than I expect - then I can retire even earlier!

I also need to try stay up to date of any new products and changes to existing products. Maybe TFSA limits get increased (holding thumbs) or maybe there are new investment vehicles cooked up by various investment companies and Government. I need to know about these if I want to benefit from them.

I guess the important thing is that I need to keep up to date and track how I am doing. I should always go back to my plan and check where I am relative to where I should be. 

The numbers demon in me can already envision all kinds of cool graphs I can draw up to track my progress, the blogger in me can already see an annual/semi annual post where I show my progress relative to where I should be, and the engineer in me predicts a full page on the Stealthy Wealth website solely dedicated to tracking my progress which will be automatically updated on a monthly basis to reflect almost in real time where I am at - so look out for that one!

When the numbers demon, blogger and engineer collide, I hope the result (a numdemblogineer?) is a highly flexible guy dedicated to meeting his goal and ready to adjust and adapt through any means necessary to make it happen!


Step 10 - Retire Early!

Not quite there yet....not even close! But hey I got 15 14.years, so no pressure. This is the end goal, and I I am extremely excited by the prospect of reaching financial independence! Seeing the numbers in front of me makes me believe that it is definitely achievable.



Shew, that was quite a lengthy post, well done for making it to the end!

So that is how I plan to do this early retirement thing - I guess I will see how it goes. Will definitely be checking in every now and then to see how the actual numbers are stacking up relative to the plan (year end approaching soon - that would be a good place for me to get out the yard stick).

Of course there are quite a number of assumptions that are used in the plan, and these could turn out to be wrong. But you know, if for example, returns are a little lower, or inflation is a little higher, maybe it means I end up working 2 extra years or something like that - and that definitely won't be the end of the world - there are plenty worse things than retiring at 47!

After all that I just want to say one more thing...

What would be totally awesome is if this post inspires even just one of you to take the plunge and join me on this early retirement journey - it is definitely one worth taking and probably the most rewarding thing you could do with your life.... Think about that for a moment....

No, stop reading and really think about it....

I said stop reading!

Till next time, Stay Stealthy!
 - ~ - ~