The government is planning a two-pot retirement system which is meant to assist people to help cope with challenging financial situations. This will allow for limited withdrawals of up to a third of one's retirement funds.
In 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 very helpful when one is tight for money, 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 an 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 various emergencies. Mandla doesn't and simply 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 3 times the amount Thabo has. Additionally, Thabo would have had to pay tax on his 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.
Up 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 also the time that we should be thinking about ways of changing that burden on our children. 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.
And this can start by seeking out help through a Financial Adviser to guide you in avoiding any potential financial pitfalls, and by making a concerted effort to change the way we approach creating generational wealth.
Save as a rule, use when needed.
Introducing options such as the two-pot system allows for flexibility when it comes to savings options. However, it is also a double-edged sword.
Historically, people could not touch the money in their retirement savings until reaching the retirement age of 55years old or when they resigned from their employment. 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, it is also innately positive in that it will encourage more interest in saving for retirement, flexibility of financial planning and may bring awareness of options to upweight 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 keep saving. Speak to a Liberty Adviser about growing and protecting your wealth.
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