Ilze van der Berg, Managing Director at Phoenix Financial Benefits

The idea of retiring early, at 55, is undeniably tempting, but it requires careful thought and planning. For most people, retiring early is simply not financially feasible. In this article, we will explore key factors that should be considered before making such a significant decision, and why we are cautious about promoting early retirement.

Early retirement can have significant financial implications, particularly when it comes to lost income and the potential for less retirement savings growth. The later years of your career often represent the peak of your earning potential, and by stepping away from work early, you may forgo several years of high income, as well as the employer contributions to retirement plans and the continued growth of your investments.

In addition, those extra years of earnings provide more opportunities to build wealth, both through savings and through increased contributions to retirement accounts, which can compound over time. Early retirement can also mean you may need to draw down retirement savings more quickly, potentially stretching those funds thinner and requiring adjustments to your lifestyle or spending habits in retirement.

It’s important to carefully weigh the benefits of early retirement against the financial realities and to plan accordingly, making sure that your retirement savings and investments are structured to support a longer retirement period.

Living longer means planning for a longer retirement

It’s widely known that people are living longer now than they did 50 years ago. This is an important consideration when contemplating early retirement. Before you submit your retirement notice, ask yourself if your savings at age 55 or 60 will be sufficient to support you throughout your entire retirement.

Upon retirement, whether from a pension or provident fund, you will typically need to either cash out your retirement savings or convert at least two-thirds of them into a monthly income. This income must sustain you throughout your retirement, which could span decades without the supplement of a work salary.

How much will you need to retire?

A common guideline for retirement planning suggests that, at age 65, you should have accumulated approximately 18 times your annual salary to maintain a meaningful standard of living. Early retirement requires an even larger sum: to retire at age 60, you will need around 23 times your annual salary, and for retirement at 55, you should aim for close to 30 times your annual salary. The earlier you retire, the more you need saved, as your retirement benefit must last for a longer period.

What is the state of your health?

This is a double edge sword!  The healthier you are, the more likely that you will live longer which will require a larger capital amount to sustain you.  On the other hand, if your health is deteriorating, you will most likely face higher medical expenses which in turn will also drain your retirement capital.

The importance of compounding

Compounding refers to the increasing value of your investment over time.  The effect is aggressive, as income is earned on the capital sum as well as the interest in preceding periods.

At the age of 55 you should have accrued a large sum of savings, which will continue to earn income and grow until you retire. The value of your retirement fund savings at age 55 could more than double in the 10 years to age 65.

If you cash in your savings to retire early at age 55 you will wipe away 10 years or more of accrued interest and regular contributions to your savings.  This  decision significantly impacts your retirement nest egg, which must now also support an additional 10 years of retirement living.

No matter how far you are from retirement, it is crucial to have a retirement plan. Once you have scrutinised your financial position you will have a better view of the financial risks of early retirement.

In the  few years prior to retirement, you may be able to improve your financial situation by taking the following actions:

• Increase your savings to the maximum you can afford, and try to push yourself even a little bit beyond that limit.  You can do so by making additional voluntary contribuitons to your retirement fund or increase the contributions to your existing retirement annuity plan or savings.

• Limit your  day to day expenses.  By limiting regular expenses, you will also decrease your standard of living and at the same time allocate more to your retirement fund. In doing so you will put yourself in a financial position which is more affordable during retirement.

• Pay off those debts that will potentially drain your retirement income.

• Consider your investment portfolio. While you don’t want to take unnecessary risks, you also want to be invested in a portfolio that will provide returns above inflation during the years preceding retirement.

• Consider a later retirement date, to give you time to benefit from compound interest, to be able to contribute for a longer period to your savings, and to reduce the number of years that you will be reliant on your retirement savings.

Early retirement may eliminate your greatest earning years. With all those years of experience and knowledge at the age of 55, you may be waving away five or ten years of large pay cheques,  together with the additional savings in that period preceding normal retirement.

ENDS