Money often gets treated better than people. A company can rebrand, pivot, acquire, or spin off new divisions. Its capital is fluid. We, by contrast, are much more constrained. To earn, we must pass narrow filters: someone must demand what we do, be willing to pay for it, and others must not be able to do it better or more cheaply.
And one day, our salary will stop. Whether through retirement, illness,
job loss, or age, we can no longer rely on being the “active” earner
indefinitely. Most of us build our lives around that expectation. Yet the more
interesting question is whether we can build capital instead. Capital that pays
us rather than the other way around.
The Dividend Analogy
This is where the salary and dividend comparison becomes powerful. A
company's dividend is a flow of cash, intended to be smooth, predictable, and
ideally growing. It is a commitment management makes to shareholders. Share
prices themselves are volatile, but dividends tend to be steadier.
Warren Buffett once noted that, on average, a stock’s 52-week high and
low differ by around 80 percent. He referenced historical data from Value Line,
which tracked about 1,700 companies, to illustrate how wildly prices can swing.
These swings often happen without much connection to the underlying cash flows.
He intentionally frames volatility as opportunity rather than fear.
Robert Shiller’s work reinforces this point with rigor. He showed that
stock prices move far more than the discounted value of their underlying
dividends would warrant. In other words, market noise, sentiment, and narrative
drive swings beyond fundamentals. This is called the excess volatility puzzle.
Shiller’s CAPE ratio, which averages inflation-adjusted earnings over 10 years,
helps smooth out that noise and show a more grounded valuation metric.
The lesson for individuals is similar. Smoothing matters. Dividends are
smoother, salaries (until they stop) are steady, and capital that pays
dividends can bridge from one to the other.
Retirement as a Dividend Machine
Once you stop earning, your capital must transform into your income. In
South Africa, many retirees use living annuities, which legally allow you to
draw between 2.5 percent and 17.5 percent of your capital each year.
- At 2.5 percent you
may preserve or even grow the capital over time.
- At 17.5 percent you
run a high risk of depletion unless your life is short or returns are
stellar.
- The risk of
outliving your money, called longevity risk, becomes very real.
In the United States, the often-cited 4 percent rule suggests that a 4
percent initial withdrawal, adjusted for inflation, gives you a better than
even chance of lasting 30 years. That implies having around 25 times your
intended annual withdrawal as capital. But many retirees, constrained by their
actual savings, end up needing to draw more.
So a practical sustainable drawdown zone for many is roughly 2.5 to 4
percent. Above that line, you begin entering the decumulation phase and
accepting trade-offs. Below it, you might preserve capital, but balancing
lifestyle and security becomes a delicate art.
First, Second, Third Generation Wealth
There are three stages of wealth. Capital can transition from active
earning to quiet income.
- First generation:
building from scratch, working for every rand.
- Second generation:
capital begins to earn alongside you, and you balance salary and capital
income.
- Third generation:
money earns enough that you may draw without exhausting principal, while
still allowing growth.
In that third stage, drawing capital feels more like a dividend, a small
fraction of a large, compounding base. You can live, grow the base, and detach
more fully from the necessity of employment.
That is the destiny many financial plans aim toward: your capital
supporting your life, not the other way around.
Compulsory and Discretionary Savings
Another piece of this puzzle is how you save.
- Compulsory money,
for example retirement funds and pension contributions, is often pre-tax,
sheltered growth, and restricted access. It is the “forced engine” the
system incentivises you to build.
- Discretionary money
is after-tax, flexible, and liquid, but taxed on growth and exposed to
volatility.
Compulsory savings encourage a long-term mentality because you cannot
touch it too early. They act as guardrails against short-termism. Discretionary
money gives you optionality but also temptation.
Part of aligning your money to be salary-like is balancing these two.
Use the system’s incentives where possible, but make sure your discretionary
capital also works hard, fills gaps, and gives breathing room.
The Emotional Landscape: Identity, Fear, and Over-Frugality
One of the trickiest parts of the decumulation phase is the emotional
shift. Most of our identity is tied to doing, producing, being paid. When
salary stops, that scaffolding dissolves.
Thinking of money as a dividend machine helps detach identity from
income. The Norway sovereign wealth fund offers a metaphor. Originally built on
oil revenue, its identity is no longer just oil. It diversified globally and
broke free from its original source of wealth. People, in their financial
lives, can similarly detach: from “my job is who I am” to “my capital supports
my purpose.”
Another emotional risk is under-consumption. People become so scared of
running out that they live too tightly. They never enjoy retirement, even
though the money is there. The fear that capital will be eaten away becomes a
prison.
Thus, planning is not only about avoiding ruin. It is about calibrating
ambition, security, and enjoyment. It is about allowing your money to feel like
salary, predictable and generative, while still giving you permission to live.
What You Can Do (Rule of Thumb)
- Aim for 2.5 to 4
percent drawdowns in your planning horizon.
- Use capital
multiplied by 25 to 40 as a working target, recognising it is not a
guarantee but a frame.
- Treat every bit of
cash you do not need as a worker: get your money a job.
- Balance compulsory
savings, which provide guardrail capital, with discretionary investments,
which provide flexibility, growth, and optionality.
- Think of your
identity beyond income. Allow the possibility that your life can outgrow
the filters of paid work.
- Accept noise. Let
the market fluctuate. Use smoothing, through dividends and stable
allocations, to moderate how much of that noise hits your daily life.
Provocative Question
How salary-like do you need your money to be?
That question is not just for the ultra-wealthy or future retirees. It
is for anyone with capital or ambition. It shapes what type of assets you lean
into, how much risk you accept, and how you define purpose beyond your
paycheck.
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