Normal retirement vs Financial independence

June 17, 2024

Only 6% of South Africans retire financial independent. Take control to not become a statistic.


Only 6% of South Africans can retire comfortably, without financial assistance. This has been a topic hounding me for many years. I started Finsesh with a passion to improve this terrible statistic by making people aware of financial independence and teaching the topic. 

I will share my opinion on the topic and delve into the history of the SA pension industry, defining each, sharing characteristics of each and finally how you can create a better outcome for yourself. This statistic is an enormous problem we as South Africans face, so understanding what we can do to improve this statistic is beneficial to us and our country.


Brief history of SA pension industry

The S.A pension fund industry was started in 1956 with the pension fund act. Initially all pension funds were defined benefit pension plans. A dramatic shift took place during the 1980 and 1990 toward the defined contribution pension plans. There were some benefits to this change, but the biggest influence was the risk transfer from employer to employees. This risk was the investment risk, ensuring you have sufficient funds in your pension fund to fund yourself at retirement, where previously a set pension is paid to you via a formula for life under defined benefit scheme as some public sector funds still enjoy today.


Defining each

Normal retirement: Relying on formal employment or self-administered and self-funded pension funds with the hope of having enough to retire. This could be self-calculated or with the aid of a financial advisor.

Normal retirement has created a multi-billion Rand industry, predominantly being serviced by big life companies and their tied agents. These agents are only being remunerated via products and services that the life companies can offer. The advisor industry does not advise on multiple sources of income, and hence they are not remunerated for this. It is one of the leading causes for one sided financial advice.

Financial Independence: Creating multiple sources of income during your working years with the aim of achieving your FI number as set out for yourself.

Financial Independence is a concept I was only introduced to after finishing my honors degree in finance and doing a lot of extra reading in the field of finance. How was it so difficult to come by this information? Firstly, it's not being taught in schools, and not in tertiary education either. It's a mindset and a way of thinking that was gained by being naturally inquisitive. The financial independence lifestyle is all about converting your money into assets that generate income to fund your lifestyle. Over the course of a few years, you should reach a point where your expenses are funded by your sources of income, reaching your financial independence number.


What is it based on and how is it calculated

Normal retirement planning has many variables when calculated. It's no wonder only 6% of people can retire comfortably. Financial independence gives you more control over your finances, being more mindful of your daily choices and how they will impact you. Let's delve into the differences between these two.

Normal retirement is usually based on 75% of your current income as a goal at retirement. This rule of thumb considers that you dont have any home loans or outstanding debt when you decide to retire. A good estimation for this guideline is to multiply your current salary by 200.

Lets start an example: Family X, age 35, has a household after-tax income of R37 000(R37 000 x 75% = R27 750) Their expenses per month is R32 000. Based on the normal retirement calculations they require R37 000 x 200 = R7,4m (as per the above guideline)

Where normal retirement is based on your current income, financial independence is calculated by focusing on your expenses. The 4% rule takes your current annual expenses and multiplies by 25 to reach an amount of savings that you are required to live from. Based on the previous example this family would need R32 000 x 12 = R384 000 (annual expenses) x 25 = R9,6m.



-        Income generally follows different growth patterns for different ages. A 2030-year-old will still be in a growth phase, where 40-50 will be matured. Calculations for age and growth in salary are unknown or guessed and cant be considered with accuracy making one growth assumption useless for future income expectations.

-        Your frugality is not considered at all as the calculation only focuses on income. Do you need 75% of our income?

-        Under normal retirement your retirement is set to a date where no future income is to be expected after formal employment ends, with financial independence you will still be earning an income if you used multiple sources as recommended.

-        Your salary is less controllable than your expenses.

-        75% of Family X salary is not enough to cover their expenses. Did they save enough?

-        At retirement, Family X, will withdraw at 4% from their financial independence fund compared to where they will withdraw at 5.2% from their normal retirement fund to cover their expenses, putting capital at risk and less buffer room for annual income increases.

-        More capital will last longer as can be seen in the picture below.


Sources of investing

Normal retirement only uses stock market investing via investment products from service providers. Financial independence uses three main sources of passive income namely, stock market investing, property investing and business investing.

Continuing with our example: If Family X invested in two properties that are paid off with minimal investment over 20 years, which generates R16 000pm income, they now only need R4,8m in their stock market investment to fund their expense deficits. If they started a sideline income, then the amount will reduce even further.


Control of the process

As your investment is managed by investment professionals you have no control over your investment outcomes with the normal retirement process. You can simply choose your risk level and trust the investment professionals to achieve these goals over your lifetime. Worst yet, you can't even negotiate on their fees.

With financial independence you have more control over outcomes. You can start a side business, invest in property, and create certainty of your monthly income. These income streams can mostly be handed over to the next generation which makes your results an everlasting legacy.

At Finsesh we want you to take control of your finances, become aware of financial independence, grow your knowledge, and let us be your financial independence partner. 

Onward to Financial Independence 

If you found this blog post helpful please follow us on Facebook and Twitter @finsesh for more tips on Financial independence. 


Related Tags:
5 min read
Share this article:

Related Articles

All articles