Nosipho Nhleko
Some of us are familiar with the planned two-pot retirement system instituted by the government as a release from economic pressures, which will allow for limited withdrawals of up to a third of our retirement funds as at March 2024 to access retirement savings and to cope with challenging life events.
However, such financial decisions made in haste and without the proper financial advice could impact not just this month's worries – but the future financial health and the legacy you leave behind for your loved ones.
The cumulative effects of the rising cost of living, the recent ninth increase in the interest rate in just two years, and the continual impact of the load-shedding crisis are all taking their toll on South Africans, with additional financial impacts notable globally.
We're all just trying to survive from day to day. Unfortunately, when the average working life comes to an end, it doesn't mean the end of bills – which still need to be paid when you've retired and stopped earning an income. This is why – difficult as it may be – it’s important to cultivate the habit of small yet incremental savings and prepare adequately.
Shift the mindset, shift the outcome
Through the new two-pot system, your retirement funds are split into two – the ‘savings pot’ is where you will be able to make a withdrawal once in a 12-month period. While this is immensely helpful in a crunch, you should make sure you understand the long-term financial impact of withdrawing from these savings.
Consider this scenario: Thabo and Mandla, both 40 years old, have decided to save for retirement by using a retirement annuity (RA). They both contribute R1 000 per month to the same RA fund and underlying portfolio which grows at 10% a year.
Thabo decides to take advantage of the new two-pot legislation and withdraws 10% every 12 months to help with emergencies. Mandla doesn’t and allows his investment to grow at the growth rate of 10%. At the end of 20 years, Thabo has R230 175 saved in his RA and Mandla, R723 987 saved – which is more than three times the amount Thabo has. In addition, Thabo would have had to pay tax on withdrawals, further reducing the money that ends up in his pocket.
The truth is, withdrawing from your savings will have a compounding impact over time. It is definitely not something you want to continue to do or do often and should be viewed as a last-resort option for when you're in a significant financial crunch.
Until now, retirement has had different meanings for different cultures – for many, it has come with a burden on the younger generation to financially maintain their retired loved ones. However, now is the time that we should be thinking about ways of changing that. It’s also the time to find out about new avenues of creating generational wealth that could take care of you during your retirement years and take care of your children beyond that.
You can start by seeking help from a financial adviser to guide you in avoiding any potential financial pitfalls, and by changing the way you approach creating generational wealth.
Save, as a rule, use when needed
Creating a savings culture can seem daunting while contending with a tenuous economic environment, which isn’t unique to South Africa. It is global, and introducing options such as the two-pot system allows for flexibility when it comes to savings options. However, therein lies a double-edged sword.
Historically, people could not touch the money in their retirement savings until reaching the retirement age of 55, or when they resigned from their job. The latter often posed a further challenge to the retirement funding system in that fund members would often opt to cash out their funds upon resignation to alleviate their financial burdens.
While the two-pot system introduces flexibility in accessing money from the savings pot, I believe it is also innately positive in that it will encourage more interest in saving for retirement, the flexibility of financial planning and may bring awareness of options to up-weight savings within the investment space. It is crucial to remember that saving for retirement is a marathon, and if a client is not in a tight financial corner they should definitely not access their retirement funds, they should rather opt to remain consistent towards reaching their desired finish line.
• Nhleko is an investment product specialist at Liberty
* The views expressed are not necessarily the views of IOL or Independent Media.