This one mistake can cost you big at retirement.
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People are still cashing out their retirement savings, facing massive losses in the long term, says financial services firm 10X Investments.
The group recently released the most recent version of its South African Retirement Reality Report 2023, which demonstrates that even when individuals are exposed to the structured nature of retirement savings through a formal employment-based retirement scheme, 60% of those who have left a corporate scheme cashed out their savings.
There is no denying that many people who cash out their funds, particularly those who have lost their jobs, have no other viable option in the current economic context, according to 10X.
“Even if they are aware of how much they’ll lose over the longer term, pressing concerns such as hungry children or being handed over to debt collectors will override worries about their long-term financial well-being,” added the group. (This one mistake can cost)
According to 10X Investments, despite not having an immediate need for the money, a significant number of customers continue to cash out their savings based on preceding results from reports and broader industry information.
According to 10X Investments, it would have been much wiser for those individuals to transfer their savings to the fund of their new company or to ringfence them (together with the related tax benefits) in a preservation fund. Almost typically, the loss of the growth of those savings, which compound over time, outweighs the loss of the actual amount saved. (This one mistake can cost)
The long-term profits from compounding contributions would also be lost if, for instance, two 25-year-olds started contributing R1,000 per month to their retirement fund and then, 10 years later, one of them cashed out. In this case, they would also be subject to a tax penalty levied by SARS.
The following image, which was provided by the organisation, illustrates the significant impact early withdrawal has on a person’s retirement savings:
The following graph calculates the actual cost of an early withdrawal during a 50-year investment life using a 5% annual net real growth rate (after fees and inflation) (40 years of work and half the retirement period).
According to 10X Investments, withdrawing R10,000 at age 25 will result in R115,000 less in retirement funds.
Or, in a more real-world scenario, a person who withdraws R300,000 at age 35 will have R2,1 million less in retirement savings than they would have otherwise.
Nedbank advises against messing with your retirement. You are not permitted to withdraw from retirement funds before the age of 55 in South Africa. (This one mistake can cost)
There might be a few exceptions, such if you become handicapped or if the fund value is under R15,000.
Two-thirds of your monthly payment would go into the first pot and the remaining third into the second under the recently proposed two-pot retirement scheme, which will allow you to access one pot at retirement and another earlier.
“By ringfencing the majority of your savings, you ensure that they continue to grow until and after retirement. If you simply draw from this smaller amount, you should theoretically cause less harm to your long-term savings, according to that bank. (This one mistake can cost)
According to the Treasury, the new system will go into effect on March 1, 2024 instead of 2023.
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