How to retire early

Dear Dr Pesa,

I am a 27-year-old man earning a modest salary. I work very hard but I am unable to save as much as I’d like. This is particularly problematic because I’d like to retire in my mid-forties. What should I do?

Johnson

Dear Johnson,

The idea of working till old age, or till the grim reaper comes to collect, doesn’t appeal to many people nowadays. However, studies show that most millennials might not be able to retire till the age of 70 and upwards.

Millennials are building wealth at a much slower rate than previous generations. They entered the labour market during a tough economic time, and they have more difficulty finding quality jobs which offer stability and benefits such as retirement plans and health insurance.

Not having access to retirement plans at work is particularly disadvantageous as many people have trouble saving for retirement on their own. Many young adults also don’t own houses, a valuable asset in retirement, and they spent a significant portion of their income paying off student loans.

To a majority of young adults, retirement is a far away, outdated, and boring idea. With slogans such as YOLO (You Only Live Once), many have the attitude that you only have to worry about today.

However, as grim as it might seem, early retirement is still a possibility for millennial. In recent years, some young people have joined the FIRE movement- an acronym for “financial independence, retire early.”

If you want to retire early, here are some ideas to work with:

Do the math

First things first, you need to define what retirement means to you. If you ask five people what retirement means to them, you’ll get five different answers. In terms of age, some might desire to retire in their 40s while others are eyeing their 60s.

Some people might want to retire and not ever work again, while others want to retire so they can pursue their passions without worrying about money. Some want to retire to a quiet and modest life, while others want to travel the world and have a luxurious lifestyle.

Figure out exactly what you want and expect from retirement so you can plan accordingly.

Financial experts recommend that you think of how much you expect to spend per year, and accounting for about 30 years post-retirement. For example, if you plan to spend 500,000 shillings per year, you need to have at least 15 million shillings saved.

Remember to account for inflation- even modest inflation can significantly erode your purchasing power over time.

Having a number in mind will help you know how much you need to put away every month, and motivate you towards achieving your goal.

Live below your means

Being able to retire is highly dependent on savings. If you want to retire early, consider your savings the first bill you have to pay each month.

Even with a modest income, you can start saving towards retirement. While “save as much as you can” is the standard advice, financial experts recommend setting aside 10 to 15 per cent of your income for your retirement nest-egg - starting as early as your 20s.

If you’re aiming for early retirement, you should probably try to set aside even more than 20 per cent of your income. To increase your savings, adopt a frugal lifestyle- live further from the city centre, cut back on food spending, and avoid unnecessary luxury items.

Remember, being frugal doesn’t mean living a life of deprivation; it’s about being more intentional about how you spend your money.

Max out employment benefits

Unlike older generations, many of today’s young people don’t have pension plans from their jobs. But some jobs offer other saving plans via SACCOs, or even share options.

Changing jobs too often can negatively affect your pension - so unless you’re going for a significantly higher salary, it might be a good idea to find a job at a company you like and work your way up.

Always ask for a raise or promotion when you deserve it.

Increase your income

Instead of depending solely on your job, create multiple streams of income - either through a side hustle, a lucrative hobby, or a business.

Some modern ways of creating more income include becoming an Uber driver, renting out your house or spare room via AirBnB.

You can also consider buying and developing land for passive income.

If you’re a business person, think about related services and goods you can also offer your clients to boost your income. For instance, if you run a construction business, you can set up a hardware shop.

Consider setting aside whatever you make from your additional streams of income towards your nest-egg.

Invest in stocks

While saving is great, depending solely on savings to get you to your goal can be rather slow.

Make your money work for you by investing in stocks. Investing in your early years can be fun -- you have fewer responsibilities to worry about, you can invest in young companies and watch them grow, and you’re able to capitalise on emerging trends.

The key to investing for long term goals, such as retirement, is to find companies that have the potential to grow over the next 5 to 10 years.

Word of Caution

Planning for early retirement can be harder than it seems, so you should consider hiring a financial advisor to help steer you in the right direction.

Before you set off on this journey, know that early retirement isn’t for everyone. Some people can quickly find themselves bored without the purpose that comes with having a job, or isolated without the social connections that come with jobs.

Also bear in mind that without the benefit of a group plan, health insurance can become more expensive for retirees; therefore, plan accordingly.