A friend recently asked the question while we talked about retirement: “But when do I get to enjoy my money?”
I realised then that I’d forgotten that not everyone is familiar with how money in retirement actually works. People think that they will, one day, stop having to save and can let it all hang out, financially speaking.
The truth is that saving is a big habit and mindset change. It’s not about ‘being good’ about saving for several decades. It’s about becoming convinced that money is meant for better things.
Here’s what happens with retirement savings. You’ve been saving diligently for years. Decades. You’ve saved a big percentage of that money into a retirement annuity or a pension fund. These are special pre-retirement products with strict regulations and rules around it to protect us from plundering them. It’s air-tight. You cannot get at it until your retirement age of about 55 – 65. You’ve also been using savings to buy assets like stocks and index funds on the stock exchange. Maybe you prefer to buy property, or by start a business. Anything that puts money in your pocket is an asset.
After many years, your investments and assets have grown to a nice chunk. Hopefully, they’re returning significant enough gains to dwarf even your own savings efforts. Then, one day, you reach your retirement number, your annual expenses times 25. You are able to live off your savings for the rest of your life.
Now I get to enjoy my money and blow it all on boats and world-tours and cars, yes?
Nope. I mean you could… if you were planning to die falling off the boat exactly a year later. Only sensible thing to do in that case.
As we talked about in the FIRE post, retirement is now a number, not a date. We’ve talked about determining a rough retirement goal number using the 4% rule or 25 x your annual salary. It’s called the 4% rule because, in theory, you can withdraw 4% of your invested cash per year as an annual salary and the principle should remain untouched and even continue to grow.
So that’s you enjoying your money, by being free from having to work for it ever again. That’s a pretty sweet way to enjoy money, in my view, but then I don’t see the point of boats.
‘Withdrawing’ means selling off some of the assets you bought years ago, which have grown over time and are worth more now. When the assets are sold off, the money becomes available as cash to withdraw into your bank account. When you cash out your assets you incur a Capital Gains Tax after the first R40 000.
In the case of a retirement annuity, this works a little differently. You can cash out a certain amount of it, tax-free. The bulk of it buys you an annuity that will pay you throughout your remaining lifetime. It’s meted out as a salary, rather than letting you have it all at once and jeopardising your retirement by buying boats.
When it comes to saving for retirement, I’m favouring a mixed approach of
Tax-free investment accounts are a no-brainer and are my first priority as an investor. Investing in index ETFs are the cheapest and safest way to participate in the stock market over the long term. Their fees are low and they’re diversified by nature…