Securing a Golden Retirement: Practical Steps, Early Retirement, and Financial Planning Insights

I'm not here to tell you what to do , but I am here to share my experience and the best ideas that I've learnt , and I hope these ideas help you on your journey to financial freedom .

And when I look at my requirements to meet the above , I have my own living expenses , I have no children and I also have my mother's living expenses , whose costs I share with my brother , and my mom is 85 years old . I've always lived well with him . I have no debt . I've invested as much as I can over the years .

I've maxed out my tax free savings accounts since inception 2015, . I'm currently maxing out my pension at work at 27.5% and my aim has always been to try and retire as early as possible .

I'm now 55 and when I do the calculations that are on offer on all the retirement calculations that you find on internet with all the asset management companies , I'm still well short to achieving a 4% drawdown on my capital amount and I'm telling me I need to work for another five , six years .

But if I look at the calculations and if I split the same capital amount between a guaranteed life annuity to cover my living expenses and then to take a separate living annuity invested in a 10-year long bond to cover my mom's expenses , I'm exceeding what I actually need . In fact , I'm netting more than what I actually weigh ahead of what I actually need .

So I don't know if I'm missing something . I'm just really nervous to do this big step to take early retirement at 55 . But if I look at what he's on offer at the moment , will I be stupid not to take this window opportunity of the great rates that have been offered through life annuities ? Thank you , warren .

I'd appreciate if you could give my question some consideration and thank you for the great show . I've downloaded all of your podcasts and I'm systematically working my way through all of them . Thank you for taking the time to always answer our questions .

So let's just reset quickly for a second to go back and look at the principles and then let's get into your question . Firstly , I think , just understanding financial freedom for everybody . Financial freedom is three steps . Number one , it's going to be debt free .

Then , number two , have an emergency fund which covers three to six months worth of your normal monthly expenses . And then , number three , step three in the final step , is get enough income from your investments that they cover your lifestyle expenses over your lifetime .

And so , listening to Jill's question , it sounds to me , jill , like if you're not there right now , you're very , very close and that's an amazing achievement to do that at age 55 , especially where you've got kind of joint financial dependent between you and your brother with looking after your mom . So well done , and I think it's a heck of achievement .

And so just taking the next step now , looking at what to do . So just explaining the difference between a living annuity and a life annuity very quickly . A living annuity says you take all your money from RA , a retirement annuity , a preservation fund or a provident fund and you put it in an investment called a living annuity .

The law allows you to draw anywhere between 2.5% from that money to 17.5% per year as an income and you decide how much you're going to draw , but in that range , and you can change it once a year on the anniversary of that investment .

In other words , if you retire on the 1st of December , then on the 1st of December every year you'll be able to decide how much to draw in that range of 2.5% to 17.5% .

The money that you then have in that living in UTI is invested , usually in a life assurance or unit trust platform , and you have a lot more say in how that money is invested than when it was sitting in an RA or a pension fund or provident fund .

So you can decide , for example , to invest 100% in a money market account , which I think is a really bad idea , but you can do that up to 100% in shares , which I also think is a really bad idea . So it's a good idea to have a diversified portfolio inside a living in UTI .

So that's kind of the living in UTI and I know I'm brushing over it , but we have covered them before and then a life in UTI is very different .

So what happens is you take the money from your RA or your pension or provident fund and you basically do a contract with a life assurance company where you say to the life assurance company here's my RA , it's worth two million rand , I'm going to sell you that two million rand .

In exchange , you're going to give me a guaranteed income for the rest of my life . So the life assurance company , before the time , will give you a quote and they will say to you for your two million rand , we will pay you whatever it is . I'm just choosing an arbitrary number . Let's say it's 7,000 rand a month for the rest of your life .

In addition to that 7,000 rand a month , what they will say is that there will be choices . You can choose to take an increase which is related to inflation . So they might say to you you get a CPI increase . Or they might say to you you can get a guaranteed percentage increase .

In other words , it's not linked to inflation but you can get 5% a year , as an example , an increase on that income . Whatever the terms are that you agree with the life assurance company on day one of buying that life annuity . Those terms are set for the rest of your life . That's an important point . You can't change the deal once you've signed that deal .

That is now a cost in stone . I've tried many times in the past to renegotiate terms with life assurance companies on behalf of people that I've met who have these life annuities , and they've never been able to change the terms .

It's a contract that you sign for the rest of your life and the thing to understand about a life annuity is after , I think , an initial five-year period . In most instances , if you die let's say you retired 55 and you died at age 61 , the money is gone . To be clear , the money is gone .

That's part of the deal with the life assurance company , so they're going to honor the contract to you for the remainder of your life .

If you have a very long life and you live to age 109 , then the likelihood is that you will be winning in a contract like that , whereas if you die at age 61 , then you probably would have lost out and you would have been better off elsewhere . So , understanding that life annuities , they are a calculated gamble , and so people who retire early .

So if you are going to retire at 55 , and you've got some longevity in your family , if your mom's 85 now and she's reasonably healthy , then there's a good chance maybe that she's going to live to age 90 or 95 .

And , Joel , if you're in that kind of a position where you're as healthy as your mom was at the same age , then there's a very good chance that you're going to live that long .

Then you really need to think about a life annuity , because longevity is a big risk for all of us and especially if you're taking early retirement , then longevity is something you've got to worry about almost more than anything else . And then having a contract with the life assurance company where they take on the risk of your longevity is important .

But we need to know that life insurance companies are not stupid , so they're gonna ask you a whole lot of questions before you sign a contract with them and they'll also try and figure out how long you're gonna live , and so what they'll be doing is paying you a bit less , for example , than , let's say , your friend , who might retire at 55 as well , but has

been a heavy smoker , never exercised a day in her life , and drinks a bottle of wine every day . Then the life insurance companies likely to pay them out a bit more every month than they'll pay you because they expect your friend to die before you will .

So , just understanding that there is always a calculation going on and the life insurance company employs many actuaries , does a lot of big data collection to try and understand how they can make money out of a deal like this . So this is not just kind of a gift from life insurance companies to you because they're nice people .

They're doing this because they think they're gonna make more money than you will . Having said all of that , at the moment when interest rates are very high , it is the most attractive time to buy life annuities because they use those interest rates as a way of locking in the debt . So sorry , not locking in the debt , but locking in the monthly payments .

And so if interest rates are high , they will buy bonds that have a long term at these high rates of interest and therefore they'll be able to pay you a bit more than they would pay you when interest rates are low . So it is worth considering .

I think I just wanna say to you taking early retirement to 55 because rates are high , I mean , it's something you really need to consider very , very carefully .

You need to know that you need kind of a big cash lump sum sitting elsewhere as well that's invested in unit trusts or exchange traded funds , because you need lump sums to buy new cars every five or 10 years . You need money to kind of maintain your property .

Even if you live in an apartment , you need to fix that apartment from time to time , pay special levies or whatever it is . Or if you get an unplanned medical expense that's not covered by medical aids , all of those things are going to be part of the deal .

So I think if you're considering early retirement and your retirement funds are kind of your main asset and you don't have another lump sum , then I would really consider kind of just delaying for a year or two to build up a bit more cash that you can use to find yourself with the unplanned expenses at retirement .

And maybe my last comment is this is a podcast , it's done within nine minutes of talking you might want to pay an advisor a random amount to kind of give you a retirement plan to do a sanity check for you . That's no bad thing to spend a few thousand Rand to get independent advice and make sure that you're doing the best thing for yourself .

So I hope the podcast helps , but I'm going to really urge you to pay someone to give you a good , independent view . Thanks , jill , and good luck with your decisions .