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What to do if you’ve cashed in your pension fund

Mar 5, 2015

piggy bank with time bombThe continued mass resignations and cashing-in of pension funds by employees belonging to the Government Employees Pension Fund is a concern that has been highlighted widely. The biggest risk in withdrawing your pension fund is the issue of financial stability at retirement; the 2014 Sanlam Benchmark Survey found that only 29% of working South Africans, who are invested in pension funds, are going to have enough money to retire comfortably.

Based on these stats, the odds are stacked even higher against those who have cashed in their pension funds – well before retirement – as most often the money is not reinvested and rather used for their daily living expenses.

So what if you have cashed-in your retirement savings impulsively and have come to realise that you made a poor decision?  Here are five top tips by Donovan Adams, CFP® and FPI Financial Planner of the Year 2014 runner-up, on how to mitigate the risks and get back on track financially.

1. Get serious about your retirement planning

The best way to do this would be to engage the services of a Certified Financial Planner® professional. Having this person come alongside and assist you on the journey to a successful retirement is crucial to financial peace of mind. It’s no surprise that the biggest obstacle preventing you from achieving your financial goals is you. Your CFP® professional is there to help you invest wisely, to hold you accountable and to make sure you avoid any further financial mistakes (such as cashing-in your retirement savings prematurely).

2. Use the after-tax retirement lump sum encashment wisely

You have two options:

  • Settle costly debt: this locks in a guaranteed return; it, however, requires the discipline to then channel the monthly cash flow that was servicing the debt into a savings vehicle. Depending on your situation, this could be additional contributions to your retirement funds or discretionary investments.
  • Reinvest immediately into a suitable discretionary investment vehicle. Make sure you are maximising your retirement savings going forward.

3. Don’t be too conservative

Ensure that you are not too conservative when it comes to the fund selection (and asset allocation) in your retirement funds. It is vital that you have sufficient exposure to the riskier asset classes (ie, equity and property) which is the only way to target inflation-beating returns over the long term (seven years or more). However, you need to be comfortable with the associated investment risk. Remember that retirement planning is a “test match”, not a “one-day game”, so don’t be put off by any short-term market fluctuations.

4. Be innovative

Look for innovative ways to earn more income and reduce your cost of living to maximise your savings potential. Too many of us are living beyond our means, striving to “keep up with the Joneses and Khumalos”, impressing no-one on our way to the poorhouse. Warren Buffet is a great example. He may be one of the richest men in the world, but he still lives in the same modest home he bought in his youth and drives a humble pick-up truck (bakkie). Live frugally and enjoy the satisfaction of saving effectively.

5. Re-assess your plan every year

Set goals and revise your financial plan annually with your CFP® professional. This keeps you motivated and allows you to chart your progress and remain on course. For most of us, financial success does not happen suddenly. Rather, it is the culmination of slow, often boring, marginal and consistent gains that – when added together – compound to form something far greater than the sum of its parts. Time is your biggest ally in retirement planning and the earlier you can start saving, the better your chances of achieving your goals.

To find a CFP® professional who will help you on your journey of financial wellness, visit The Financial Planning Institute of Southern Africa’s website or call 086 1000 374 or 011 470 6000.

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Maya Fisher-French author of Money Questions Answered

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