It’s so tempting to dip into your retirement savings when you change jobs. But here’s why it’s not a great money choice: you could end up with a whole lot less at retirement if you don’t preserve your savings.

Let’s look at the impact of withdrawing some of your savings when you change jobs rather than reinvesting that money into another long-term retirement fund.

When can you withdraw from your retirement savings?

If you contribute to your company’s pension or provident fund, you’re allowed to withdraw a part or all of your savings from that fund when you move to another company.

The wise thing to do is to shift your savings into a preservation fund that’s designed to preserve your savings until you retire. When you leave your money untouched in this way, you also avoid any penalties or taxes.

If you’re saving towards your retirement through a retirement annuity (RA), you won’t be allowed to withdraw your money without penalties before you’re at least 55. Some RA contracts stipulate a withdrawal age higher than 55, so check yours if you want to avoid paying early-withdrawal penalties.

On the topic of penalties, always bear in mind that you will be taxed on the amount that you withdraw according to specific tax tables.

What’s the impact of early withdrawal on your savings?

Although it seems obvious that you’ll have less retirement savings if you don’t reinvest this money when you change jobs, it’s the long-term impact of this decision that is most damaging.

Picture the following scenario: It is 2022 and you’re 25 years old. You've started your first job and expect to retire in 2062, when you’re 65. You’re earning R15,000 a month, saving R2,550 a month (17% of your salary) and your salary, plus contributions, will be growing by 5% each year.

For the sake of simplicity, we’re assuming that the average inflation over this period is 4% and your annual investment returns are 10%.

Given this scenario, you should end up with around R36 million by the time you retire, to last you, say, 30 years in retirement.

But what if you withdrew some money when you changed jobs, after 10, 20 or 30 years of saving?

Withdrawing a third of your retirement savings when you’re 35 is the least damaging, because you still have another 30 years for your money to grow and one third of the nearly R1 million you’ve saved by now is only around R300,000. But if you draw one third of your savings 10 years later, you’ll be taking R1.2 million out of the nearly R4 million that you’ve saved. If you change jobs when you’re 55 and take a third of your savings, you’ll pocket R3.8 million.

These look like welcome windfalls only until you see the impact on your savings by the time you reach 65. The following table makes it clear, using the same numbers quoted in our original example:

Don’t be lulled into a false sense of security by these seemingly large numbers. By the time you’re 65, the monthly expenses in our example will be in the region of R75,000, growing to more than R250,000 by the time you’re 95. So, you might be a millionaire when you retire, but you’re going to need every cent to maintain your lifestyle through retirement.

What we learn from these scenarios is that your decisions today have real long-term consequences. You may feel that you deserve to spoil yourself after 20 years of hard work by dipping into your retirement savings – but rather think twice and speak to an accredited financial advisor for independent expert advice before deciding what to do. Your future self deserves it. 

We have a wide range of savings products to help you build a strong investment portfolio through every stage of life. You can also set up savings and investment accounts on the Nedbank Money app. 

Want to know more?

Contact your financial planner. If you’re not a client yet, we can help you prepare for retirement. Complete our online contact form for a consultant to call you, or learn more about your retirement planning options.

This information is for general information purposes only and is not legal advice.