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Think before you plunder your retirement fund

Feb 22, 2021

Think before you plunder your retirement fundRight 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.

3 Comments

  1. Thank you for your input, yes, most of what you said I do agree with.

    Settle credit card debt, let credit insurance pay off a portion of my personal loan and then pay the balance off in instalments (not a lump sum) and use the balance wisely.

    I do have an investment portfolio with EASY EQUITIES – thanks to you, remember, we have met and I thanked you for writing about them ages ago and as a result, I opened an account. I have an investment account and a TFSA account with them, the total value of the portfolio is sitting at about R108 000.00 which I have built up over four years since I opened that facility.

    I do however also have an RA with Sanlam and Momentum so while I am cashing in this Provident Fund I am not entirely without a retirement fund for down the line provided I keep up the payments.

    And I do have rental income coming in, so that along with 6 months of UIF will help.

    And yes, be cautious with investing in any new business. I hear you.

    I will also look into the RSA Retail Bond and see what might be best, this or a Money Market account to keep, to try keep, a portion of the money in.

    My thanks for getting back to me.

    You were the first financial journalist I ever started following, then after you came Simon Brown of Just one Lap and between the two of you, I am so much more informed than I was five years ago.

    Reply
  2. Hello.

    I was retrenched from Dis-Chem Pharmacies in December ( I was at their head office) after 10 years and two months with the company, which was a huge shock but I am over that now.

    I spoke to my financial advisor who said that if my Provident Fund is under R500 000.00 I should withdraw it to live on.

    I am a single White woman of 54 so chances of getting another position are slim, if we’re being honest, so all I can do is create something else for myself, either online or as a consult. So basically I need the money and that’s why I cashed it out.

    I will be getting my payout from Sanlam soon, just under R300K, what should I focus on?

    I have about R87 000.00 of credit card debt which I would like to get rid of and then about R200 000.00 in a personal loan, however, that will be, or should be paid by credit insurance for possibly the next six months. But thereafter I will still need to service that debt.

    I do have a rental property and get R13 300.00 from that, but that covers my rental and covers the bond on that property. I will also be getting about R8500.00 from UIF for about six months come the end of March.

    Can I ask for your input?

    My thinking was to set aside R100 000.00 in a money market account and not touch that portion and allow it to accrue interest, and somehow figure out how to live on the balance once I have settled the credit card debt while trying to figure out what endeavour I can create for myself.

    Thank you.

    Reply
    • It is a good idea to take the funds purely because you can get them out tax-free due to the retrenchment. It makes sense to pay off the credit card and definitely use the credit insurance to meet your debt repayments. Check, as it could even pay for 12 months if you have not found work.
      It may sound counter intuitive but don’t rush to use the lump sum to pay off the personal loan as you may need the money to live off if you have not found anything when your UIF runs out.
      Only pay that off when you have secured a livable income.
      At this stage you do need to keep your funds liquid so an interest bearing account may make the most sense. Also check out the RSA Retail Bond.
      You need to look for some way to earn an income well into your later years as you have no retirement fund. This may be a combination of a job plus a side business. But please be very careful of jumping in to start a small business using your capital. It is a very high risk endeavor – rather look at something to build up on the side.

      Reply

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Maya Fisher-French author of Money Questions Answered

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