By: Marianne Smith
Like the folkloric fairytale of the magic porridge pot that wouldn’t stop cooking, the two-pot lid is off and the proverbial floodgates are open.
According to the latest report from the South African Revenue Service (Sars), more than R21.4bn has already been withdrawn from members’ retirement savings, with an excess of one million withdrawal applications approved – and counting.
While the majority of these funds are being used to settle short-term debt according to Momentum’s financial advisers, there are those using the funds for non-essential purposes such as travel.
Most of those dipping into their retirement savings are struggling financially.
Statistics show us that most of those who have withdrawn from their savings pot are between the ages of 40 - 50 years old. Typically, these clients have home loans and vehicle financing agreements in place and were caught off-guard by the increase in interest rates over the last few years. They maxed out their affordability for their credit agreements and needed to tap into their retirement savings to bridge the shortfall.
However, most clients, even if they belong to an employer-funded pension fund, do not have sufficient retirement savings to sustain themselves post-retirement.
Even a once-off withdrawal of R30,000 from your savings pot will mean a reduction of around R500,000 in retirement savings over a 25-year period. So, you can imagine what annual withdrawals will do to your retirement nest egg.
Accessing your retirement savings should be a last resort because it can compromise your future financial security.
But is there any occasion when dipping into your retirement savings would be a wise decision? If you're experiencing extreme financial hardship, such as eviction, accessing your retirement funds might be necessary. For those who find themselves facing an unexpected and uninsured medical emergency, this is another instance where tapping into retirement savings might justified.
Before lifting the lid on your savings pot, there are four important things to do first:
Assess the urgency
Determine if the need is urgent and can't be met through any other means, such as another form of savings or through making adjustments to your budget.
Weigh the impact
Once you have an accurate idea of how desperate the situation is, consider how withdrawing funds now will affect your retirement plans later, including potential penalties and lost growth, and once again weigh this against the urgency of the situation.
Consider alternatives
Before withdrawing, examine all other avenues and possible sources of funds and their implications. Loans, side gigs, or selling assets might be better options.
Finally, seek advice
If you decide to withdraw from your savings pot, consulting with your financial adviser can provide a clear picture of the impact on your long-term financial health, and help you mitigate the blow.
* Smith is a financial adviser and franchise principal at Consult by Momentum.
PERSONAL FINANCE