In this third part of our two-stage FIRE series, Just One Lapper Kris Naidoo shares three considerations to keep in mind if you want to become part of the FIRE cohort. Next week we’ll wrap up the series by sharing a do-it-yourself worksheet to run your own numbers.
As a quick recap – the first post in this series looked at the concept behind two-stage FIRE and the problem it solves for South African FIRE followers. The second post focussed on the numbers you need to run to calculate how much you would need to reach financial independence.
When doing your planning, remember to account for the following:
Remember the tax
Look at your various income streams and consider the tax implications of each of them. Remember, your after-tax income must be able to cover your expenses upon retirement.
Kris shared the table below as an example of how to keep tabs on the moving parts of your income streams:
|Rental income||Rental received from investment property||After deducting allowable expenses the rental profit will be subject to income tax|
|Interest from cash holdings||Keep a number of years of living expenses in cash. This will serve as a buffer in case of a poor sequence of returns.||Interest income exceeding R23,800 subject to income tax.|
|Dividend income||Assume dividend yield and 20% dividend withholding tax.||Dividend withholding tax already paid indirectly, thus “tax-free” dividend income.|
|Sale proceeds of equity portfolio||Sell stocks to cover the balance of living expenses.||Subject to Capital Gains Tax (CGT) assume a conservative base cost.|
This Tax Tuesday blog is another great resource regarding tax implications upon retirement.
The importance of a cash buffer
Yes – this is the same as having an emergency fund. “It is advisable to keep a certain number of years of expenses in cash. It’s worth it to sacrifice some equity outperformance in order to have a multi-year cash buffer to avoid drawing down from an equity portfolio in times of a market crash,” says Kris. “Think sequence-of-returns risk. You can choose whether this is one, three or five years of living expenses in cash at the time of financial independence – your strategy, your choice. One can gradually transition to this amount of cash holding in the years before financial independence.”
Don’t jump into FIRE once you’ve ticked all the boxes
Kris believes that a small delay to FIRE (by continuing to work) will make you less less vulnerable to risk.
“For example, by simply waiting one more year to FIRE, the initial drawdown rate can be reduced markedly. You can also wait until the initial drawdown rate is less than 4% (the widely accepted safe withdrawal rate), which means that the discretionary investment capital will not be depleted, and, in theory, you would not need to tap into your retirement savings portfolio.”
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, we try to answer some of the retirement questions we hear most often, ranging from which products are best suited to different circumstances to efficient tax treatments. Words by Carina Jooste.