Right now you may be feeling overwhelmed by debt, but the impact of drawing on your retirement fund will leave you financially destitute at a very vulnerable time in your life when you may be too old to work. You may not have many options in terms of earning an income and rely on those years that you put money away.
Investment house 10X Investments illustrated the impact that cashing in your retirement savings has on your final retirement benefit.
In this example, they assumed that during a 40-year working lifetime, you saved R1 000 a month. If the average return over this period was 5% above inflation, on retirement that would be worth R1.7 million in today’s value. At current annuity rates this would buy you an income of around R10 000 a month.
If, however, you cashed in your retirement fund after 20 years, even if you continued to contribute R1 000 a month to your pension fund, you would only have R440 000 at retirement. This would only purchase an annuity income of around R2 200 a month.
Now consider that the value of the fund at 20 years was R440 000, if you add that to the R440 000 on retirement it only comes to R880 000. That means you have effectively lost out on the “free” money generated by compounding growth of R880 000.
Rather than using your retirement savings as a quick fix, commit yourself to a debt repayment plan. One that you incorporate into your budget and that you can pay from lifestyle adjustments. One day you will get old.
If you are being retrenched, you have the option of leaving your retirement fund in a preservation fund. You can make a single withdrawal from this fund before retirement.
This article first appeared in City Press.