MONEY
EARLY RETIREMENT IS TEMPTING – BUT CAN YOU AFFORD IT? BY KERRY KING, ADVISORY PARTNER, CITADEL
T
he temptation to retire
GRAPH 1
seductive as you enter your fifties
THE EXPONENTIAL BENEFITS OF DELAYING RETIREMENT ON SAVINGS
and sixties, especially after many
If a 4% withdrawal rate will not
years spent with your nose to the
provide you with sufficient income,
grindstone. But can you afford it?
it may be worth giving serious
early and adopt a life of leisure can be particularly
There are two main drivers that determine if early retirement is even an option for you. They are:
consideration to delaying your GRAPH 2
• How much capital you have,
retirement. Remember, your salary and therefore retirement contributions
and
are usually at their peak in the
• How much you need to draw to
years just before your retirement,
sustain your standard of living.
and when combined with the added effect of delaying dipping
Clients often ask us, “How
into your capital, these last few
much capital will I need to retire?” The answer is directly related
years can make a huge difference To demonstrate the significance
to how much you require on a
of this, graph 1 shows how
monthly basis to sustain your
withdrawal rates affect how long
current standard of living.
your capital will last.
One of the very basic
The graph is based on the
to your portfolio through the power of compounding. To demonstrate the enormous impact of an extra few years on your savings, graph 2 compares
calculations I give my clients is
example of an individual who
three scenarios involving the same
to take their current monthly
retires at 55 years with capital of
investor who has accumulated a
expenditure, divide this number
R10m, and further assumes that
R10m capital lump sum at age 55
by four and multiply it by R1m.
inflation rises by 6.0% per annum
years.
This calculation works when you
and that their investment achieves
are still trying to accumulate
annual growth of 8.5%.
your capital and need to set a retirement savings target. If you are already at retirement
By keeping their withdrawal rate to 4%, their retirement capital
1
RETIRES AT 55 YEARS In the first scenario, the
individual retires at the age of 55
would sustain them until the age
years, and chooses to adopt a 5%
age, however, ensuring that
of 95. However, by increasing their
annual withdrawal rate. Assuming
your capital will last your entire
withdrawal rate to 4.5%, their
that inflation rises by 6% every
lifetime, which is generally
capital would be depleted by the
year and that their investment
unknown, becomes more
age of 87. A 6% withdrawal rate
achieves growth of 8.5% every year
important. To be conservative, I
would mean that their capital
(or 2.5% real growth), their capital
would suggest that you draw no
would run out at the age of 77 –
would be depleted at the age of 83.
more than 4% of your retirement
nearly twenty years earlier than
capital on an annual basis.
had they stuck to 4%.
36
SILVER DIGEST //SUMMER 2019
Continued …
