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Some people have their sights set on the goal of reaching financial independence so that paid work becomes optional, way before retirement age. Sounds idyllic but it is possible? writes Abdallah Moosa.
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Lockdown, work from home, and work from anywhere have changed the way many of us view work, and now may be the perfect time to plan for an adventure of a lifetime.
More and more young people are unsubscribing from the "golden watch career", where you work until retirement age, and instead are subscribing to the FIRE movement. The acronym describes a lifestyle called "financial independence, retire early" and is for people who have their sights set on the goal of reaching financial independence so that paid work becomes optional, way before retirement age. Sounds idyllic but it is possible?
To reach the stage where paid work is optional means maximising your savings. You can achieve this by either aggressively cutting your expenses or increasing your income. Mostly it is a combination of both.
It is a steadfast commitment to a frugal lifestyle where you prioritise what is most important to you, and this often leads to a less materialistic way of living.
A shift in focus
This lifestyle involves shifting your focus from accumulating possessions and instead ploughing any spare cash into aggressively paying off any debt and then saving.
It also includes choosing the right assets in which to invest. This is where people really need the guidance of an advisor who holds the Certified Financial Planner accreditation, so that they can benefit from advice in the all the right areas. Read more: How can I find a good financial adviser?
The idea behind accumulating assets is that these assets will provide you with sufficient passive income to live a modest lifestyle, thereby allowing you to be time "rich". This may sound like normal retirement, but the idea is to get there way before age 60. Exactly when you get there will depend on quite a few parameters.
READ | How much do I need to save for retirement?
Get help strategising
With the help of a seasoned advisor, you can strategise the best way to achieve financial freedom or even a hybrid scenario where you can have sufficient assets to take multiple career breaks to pursue many of life’s adventures. We should all be planning for our financial goals. And what better time to start than in spring, the season of new beginnings?
Live for today, plan for tomorrow
Here are four easy steps to help you make plans for the future you want.
Step 1: Scrutinise your debt.
Have a strategy when it comes to paying it off. Paying off a loan on your primary place of residence sooner will leave you paying a lot less interest than you otherwise would have, therefore saving you money.
READ | What can I do if I have a debt problem?
Your home loan can be seen as an investment that offers guaranteed returns with practically zero risk. If you have an "open-access" home loan, where you can pay in funds and still have access to it, your home loan will likely offer you the best return on your cash while still giving you full access.
This makes it the ideal vehicle to park surplus cash, which can still be used in an emergency.
READ | How do I set up an emergency fund?
Step2: Analyse your spending habits.
This is key as it often helps identify what trade-offs you are willing to make in order to invest that money elsewhere.
Step 3: Consider the tax efficiency of your investments
When you are aiming for "retirement" before the age of 55, remember that access to your retirement funds is generally restricted until you reach the age of 55.
Step 4: Examine your options.
Choosing the savings vehicle that is right for you is imperative. For example, a tax-free savings account is considered a good investment vehicle, but it comes with its own lifetime contribution limit.
READ | What do I need to know about investing in a tax-free savings account?
If you need assistance to run the numbers and work out which savings option is best for you, your needs and your personal aspirations, speak to a qualified financial advisor. Do it today, so that tomorrow the adventure can begin.
This article was first published on SmartAboutMoney.co.za, an initiative by the Association for Savings and Investment South Africa (ASISA).
