Government is considering changing retirement laws so that you can withdraw some of your savings in an emergency. But this could have a very negative impact on your retirement fund. Even a R25,000 withdrawal could have a surprisingly serious impact on your future earnings.

The ‘two-pot’ savings system

Under South Africa’s current laws, you can’t draw from your retirement savings before the age of 55. There are a few exceptions, like if you become permanently disabled and if the fund value is less than R15,000.

Because of the financial losses many have suffered due to the Covid pandemic and the State of Disaster restrictions, government is proposing a new savings system with one savings pot that you can access at retirement only, and a second one that you can dip into earlier. Two thirds of your monthly contribution would go into the first pot and the remaining third into the second.

Ringfencing the bulk of your savings means they continue growing up to and beyond your retirement. In theory, you'll do less damage to your long-term savings if you dip only into this smaller pot.

Why you need to save as much as you can for retirement

It’s obvious that if you dip into your savings for an emergency, the eventual balance will be smaller. How much smaller? And is it really enough to upset your retirement plans?

Let’s say that you’re now 25, earn R20,000 and contribute R3,500 a month to your retirement savings. We’re assuming 10% returns per year on your investments, with inflation at an average of 4% a year and your salary growth averaging 5% a year.

Under the two-pot proposal, you would start off depositing R2,333 a month into your long-term pot and R1,167 into the pot you can dip into. You would increase these amounts when your salary increases. If you left that money untouched, you’d reach retirement age of 65 with almost R25 million in the first pot and just about R12 million in the second. You’d have a total of R37 million to last for about 30 or 40 years of retirement.

Bear in mind that if your monthly expenses are R15,000 when you’re 25, inflation will have pushed that figure to about R80,000 by the time you reach 65. By the time you’re 95, your monthly expenses are projected to be close to R200,000. That’s a very large number by anyone’s reckoning, and it means that a million rand won’t go nearly as far as it does today.

The impact of drawing savings early

Reaching your retirement target figure is much more difficult if you dip into your savings early, even if it’s the smaller pot currently proposed by government.

If you start putting a third of your savings into this pot when you're 25, in 10 years’ time your initial contribution of R1,167 would have increased to about R1,800 a month. You’d have saved about R300,000 by this point.

Let’s say that due to an emergency now you need money for an unplanned expense, so you decide to draw R25,000 from this fund. That doesn't seem like a lot, considering it’s less than 10% of your total savings in this pot. But what’s the effect 30 years down the road?

Would you believe that you could be nearly R500,000 poorer at 65 because of this decision at 35? And if another emergency forces you to dip into your retirement savings again over the next 30 years, the impact will just keep getting bigger.

Why you need an emergency savings account

Retirement savings need to be sacred. As you can see, the temptation to dip into your savings to satisfy a short-term need can be very costly, and your older self is the one who will pay the price.

A better money choice is to include emergency savings in a separate account alongside your retirement contributions every month. An emergency fund is exactly what it sounds like: money you have saved up for emergencies so you don’t need to dip into your investments when disaster strikes. If the 25-year-old earning R20,000 a month in our example began saving just R1,000 a month in an emergency fund, adjusted at the same rate as their salary increased, they’d have 3 months’ salary saved for emergencies in 5 years, and 6 months’ worth in 10 years.

If you have neglected your emergency fund and you need money urgently, affordable short-term credit can make more sense than damaging your retirement savings. We have a range of flexible credit solutions that could help you take care of an emergency. Your long-term financial well-being should not be put at stake because you believed you were out of options today.

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