Decisions that could result in Regret

When thinking about our retirement, I am sure we see ourselves as possibly travelling the world, lounging on the beach, or taking up that one hobby we never had time for. I doubt there are many of us that envision still having to work or struggling to make ends meet.

Working during our earning years may provide a decent lifestyle, but often will not secure a decent retirement. This is generally due to a lack of discipline and proper financial planning. Whilst there are many ways to save for retirement, e.g. starting a business to sell or building a rental property portfolio to generate annuity income, pension funds make up a large portion of retirement savings.

Sadly many of us make decisions during our income producing years that have devastating effects on our ability to retire comfortably. One such decision is cashing out early of our retirement fund when we change jobs or are retrenched. In our normal work lifespan, statistics show that most of us will change jobs between 5 and 7 times.

Cashing out is very popular in South Africa, leaving more than 34% of retirees with debt to repay once they’ve stopped working and in fact, many can’t afford to retire.

While there are many compelling reasons and excuses we give ourselves including, “I have large debt that I want to pay off,” I need the money now” to “I still have enough time to save”, when reaching retirement age, it is often the case that we simply do not have enough money to retire.

When you withdraw early, you are not just losing the amount you take out, but you are also losing all of the earnings it would have brought you over time through compound interest.
To better understand the actual ‘cost’ of cashing in early consider the following example:

You contribute R1 000 per month into your fund, and earn a net 4% real return (after costs and inflation). If you grow this continually over 40 years, your investment could equal to R1.14m on retirement. However if you decided after ten years to change jobs and, cash out your retirement, the consequences when you retire is that you would only have saved R673 000 – 41% less to retire on.

The Government is also trying to encourage preservation of your funds and its current tax laws are aimed at exactly that. Without going into too much technical detail, if I was to withdraw R500 000 as a pre-retirement withdrawal today and using all the applicable tax implications, I would pay SARS an amount of R85 500. While that does not seem like a large amount in comparison to the withdrawal amount, it effectively means that if I plan to retire in 25 years, this tax payment [sacrifice] will reduce the future value of my retirement savings by nearly R1,161,557.
A very sobering thought!
So how do we make the right decisions, ones we won’t regret? Consulting with a Certified Financial Planner and getting specialist advice is certainly a great starting point. Secondly, having the legislative environment explained to you and understanding the ramifications of each decision you take, will empower you to make informed, financially sound decisions.

A further example of how legislation impacts on our retirement planning is that on 1 September 2017, National Treasury gazetted new retirement fund regulations that ensure retirement funds have a default in-fund preservation arrangement to members who leave the services of their employers before retirement. For retiring members, a fund should have an annuity strategy with annuity options, either in-fund or out-of-fund, and can only “default” retiring members into a particular annuity product after a member has made a choice. Sounds complicated right?

Basically what this means is that you no longer have to withdraw your funds from your Pension/Provident Fund when you leave the company, you now have the option to leave your accumulated retirement savings in the fund, which not only lessens the opportunity of cashing out early but also allows your money to stay in the same fund and earns preferential fees that the fund offers. It also means that should the market be underperforming at the time you leave the company you no longer have to withdraw your funds and suffer the financial loss, you are able to wait until the time is right to move your money.

While there might be times when you have no option but to cash out early, you need to be mindful that cashing out reduces your eventual retirement benefit value substantially, has punitive tax implications and could result in you having to work long past your chosen retirement age.

Having professional financial advice will assist in navigating the minefield you might find yourself in. Contact one of our qualified independent Financial Advisers to guide and assist you: http://www.harbourwealth.co.za/contact-us/

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