Millennials need to preserve their retirement savings when they change jobs, to accumulate enough money by the time they retire.

Millennials have low levels of long-term savings, on average, because they change jobs often and tend not to preserve their savings with each job change, according to a recent Sanlam survey to supplement its annual Benchmark Survey of employee benefits.

Thandi Ngwane, the head of strategic markets at Allan Gray, says people don’t appreciate the power of preservation, and how devastating non-preservation is to their long-term goals and their retirement.

She describes a common scenario: “You resign from your job. Finance sends you a form to choose what you would like to do with your retirement savings, but offers no further advice and doesn’t put you in touch with a financial adviser.

“Your options are to make a full cash withdrawal, transfer the savings to a preservation fund or your new employer’s retirement fund, or a combination of those options. You think of your debt, or if you have been dismissed, the anxiety of being without an income weighs heavily on your mind. You start thinking that a cash lump sum could come in handy, without really understanding the effect on your future income in retirement. Before you know it, you’ve filled out the form with an instruction to withdraw your full benefit in cash.”

Many people have made this decision, Ngwane says. A 2015 survey by Sanlam found that 77% of people who left their jobs took their retirement savings as a cash lump sum. About 63% of them used the money to pay off debt, and 57% used it to cover living expenses while looking for a new job.

Ngwane gives the following example: Phakama, 33, withdrew her retirement savings when she resigned from her job of eight years to fund a study break. She thought she had a good plan in place: pay off her credit card and revolving loan, pay her fees for two years and draw a small income for living expenses. But it didn’t work out that way. After paying off debt and her fees, the money Phakama had left ran out after eight months. In no time, she found herself back in debt to cover her living expenses while studying.

Phakama is determined to get her retirement savings back on track when she starts working again after completing her studies in two years. She will be 35. After using an online retirement calculator, Phakama realises she will have a 44% shortfall in her retirement income, or put simply, she may not have enough saved for a comfortable retirement if she lives beyond the age of 80.

The table shows that Phakama will have to put away 29% of her income towards her retirement, as opposed to only 16% (assuming she started contributing at the age of 25) if she had not taken the withdrawal. 

Putting away almost 30% of her income may be unrealistic, so Phakama may have to look at what else she can do to achieve her goal.

The implications of withdrawing your retirement savings – including the tax implications – when leaving an employer are often not fully explained, Ngwane says.

“If, for example, you lose your job and have no choice but to tap into your savings, take only what you will need until you start working again,” she says. “However, if you have already lined up a new job, or have other sources of income when you leave your company, avoid taking a cash lump sum for ad hoc spending. Rather transfer your savings to your new employer’s retirement fund, or into a retirement annuity or a preservation fund. By doing this, you keep the tax benefits of your original fund and your investment returns are not taxed.”