Last month, we gave you information about South Africa’s new Two-Pot Retirement System; this month, we want to share some thoughts on whether you should be accessing some of your savings, as the new rules allow. In short: Do NOT do it, unless you are facing a real personal crisis, such as potentially losing your home.
If you withdraw money from your retirement fund before you retire – just because you can – you will have made a severe and wasteful error.
There are a few cases where accessing your savings pre-retirement can be justified, such as being about to lose your home because you have lost your job and are in a cashflow crisis. In this situation, it is reasonable to consider drawing some of your savings to avert disaster.
However, if you are thinking about withdrawing from your retirement savings to put down a deposit on a house, to buy a car, to clear debt on a credit or store card – or worse, to buy household or consumable goods – you probably already know in your heart that this is a bad decision. Ultimately it will be you who will suffer the potentially tough consequences in your retirement. Besides, in most cases you do not really need to draw the money now – with a bit of patience and budgeting you will get your hands on the funds you need to buy the house or the car, or to pay off the credit card, but it will just be delayed.
‘Everyone else is doing it’ is certainly not an excuse for you to do it. The vast majority of people who make this mistake will not recover from it. Many will potentially be dependent on their children later in life or have to make real financial sacrifices in retirement. In short it means that your own financial future will be compromised.
Don’t make SARS rich at your expense
Accessing your retirement funds early means that SARS gets a bite of your retirement cherry, an option they did not have before the Two-Pot System came into force on September 1. You did not pay income tax on the funds you invested, and you are not paying any form of tax within the fund whilst it is growing. However, it is important to take note, that if you withdraw savings from your pretax savings, you will be paying tax at your marginal rate on those funds. This may push you into a higher tax bracket.
Apart from the immediate tax you would suffer, withdrawal denies your savings the miraculous effect of compound growth. The experts tell us that (potentially large) contributions made into your retirement annuity after the age of 40 have a far lesser effect on your actual retirement funding. It is the early, often smaller contributions made at the beginning of your career that have the greatest impact on building wealth over time. Leaving savings invested for as long a time as possible, is what gives the best results, meaning that you will be able to afford a good life in retirement. The converse is true: pulling these amounts out early is incredibly destructive.
In summary, do not draw from your savings fund just because you are now have access to it, or because others are doing so. This would be a costly mistake to make. Do not destroy your chance of a secure, well-funded retirement just because you have been given the option to access your savings portion.
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