A recipe for your financial freedom
Saving for retirement can feel overwhelming, but it's not rocket science. This free website condenses the most tried and true essential financial advice for the typical working professional in South Africa.
Contine reading to see how you can manage your own finances and grow your wealth to achieve financial freedom and the retirement you deserve.
Last updated: 15 April 2024
1. Minimize your cost of living
- Avoid unnecessary debt (car loans, phone contracts, credit cards). Buy items with cash, preferably second-hand.
- Reduce monthly spending to essentials (rent, food, electricity). Savings can earn interest.
- Pay off existing debt quickly to save on interest.
- Maintain these habits for a quicker retirement.
2. Save and invest aggressively
- Increase your income (through upskilling, career growth, side jobs).
- Build an emergency fund (at least 2 months' living expenses) with easy access.
- Maximize a Tax-Free Investment yearly (R36k per year, R500k lifetime limit).
- Consider EasyEquities or Sygnia for low-fee Tax-Free Investments.
- If you don't know what to invest in, just buy the Satrix MSCI World ETF for well diversified offshore exposure.
- Dollar Cost Averaging can be used to help with budgeting and reduce risk (eg. R36k / 12 = R3k per month).
- No Capital Gains Tax on Tax-Free Investments makes these ideal for high-risk, aggressive, long-term investments.
- Invest for the long term (10+ years). Markets are volatile but offer strong returns.
- Limit your exposure to Retirement Annuities. They tie your money up, decide where to invest it, and expose your savings to possible government meddling, and they often come with ridiculously high fees.
- Invest mainly in equities and ETFs after maxing your Tax-Free Investment.
- You can use EasyEquities for this.
- Diversify (spread out) your investments to reduce overall volatility.
- Diversify across locations (eg. 50% of your net worth outside South Africa).
- Diversify across business sectors (eg. tech, retail, finance, mining, etc).
- Most people are terrible stock pickers and traders so just buy index funds (such as MSCI World, S&P 500, SA Top 40). These are excellent for diversification and they track the top performing equities.
- Consider allocating small amounts (up to 5% of your net worth) to other assets like cryptocurrencies and metals, and up to 20% in the property sector.
- Shift to low-risk investments (Bonds, Cash, Income Funds) as retirement nears for stability. Long-term returns will be lower but it will stabilize your wealth and protect you from market crashes.
3. Plan your retirement
- Keep costs low, save, and invest until reaching your retirement figure. It's hard to calculate, but the 4% rule can give you a ball-park figure.
- It's important to recognize that the 4% rule only gives you a rough target and you need to keep adjusting for your unique circumstance.
- The 4% rule says to multiply your monthly cost of living by 300 and that's your retirement figure (eg. R15k x 300 = R4.5m).
- If you had R4.5m invested today it should be enough to let you withdraw 4% (R180k) and pay yourself R15k per month, increasing with inflation each year, until you die.
- This formula already accounts for Inflation and Capital Gains Tax, but doesn't account for your unique needs and all of life's surprises.
- Keep in mind that inflation will increase your cost of living as well as your retirement figure, and your needs may change so it's a moving target that you need to recalculate periodically.
- Buying a home is big investment which can often be a very costly mistake. If you do buy property make sure it fits into your long term plans, and ensure you have a backup plan.
