Why dipping into your two-pot retirement savings is not a wise decision

Although fund managers have already paid out billions to pension fund members who chose to withdraw funds from their saving pots under the two-pot retirement system, experts are still warning consumers who have not yet applied to withdraw to think twice before dipping into their saving pots.

According to the latest report from the South African Revenue Service (Sars), more than R21.4 billion has already been withdrawn from members’ retirement savings, with an excess of one million withdrawal applications approved – and counting.

While consumers will use the majority of these funds to settle short-term debt according to Momentum’s financial advisers, there some who will use the money for non-essential purposes, such as travel.

However, Marianne Smith, financial adviser and franchise principal at Consult by Momentum, who specialises in retirement planning, says most people dipping into their retirement savings are struggling financially.

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Concerning that most withdrawals are from older people

“Statistics show that most people who withdrew from their saving pots are between the ages of 40 and 50. 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 past few years.

“They maxed out their affordability for their credit agreements and needed to tap into their retirement savings to bridge the shortfall.”

However, she warns, most clients, even if they belong to an employer-funded pension fund, do not have sufficient retirement savings to sustain themselves after retirement.

“Even a once-off withdrawal of R30 000 from your saving pot will mean a reduction of around R500 000 in retirement savings over a 25 year period. therefore, 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.”

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When to withdraw under the two-pot retirement system?

Is there any occasion when dipping into your retirement savings would be a wise decision? Smith says that if you experience extreme financial hardship, such as eviction, accessing your retirement funds might be necessary.

Withdrawing under the two-pot retirement system can also be justified when you find yourself facing an unexpected and uninsured medical emergency, she says.

Before lifting the lid on your saving pot, Smith says there are these four important things to do first:

• Assess the urgency: Determine if the need is urgent and cannot be met through any other means, such as another form of savings or adjusting 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. Once again weigh this up against the urgency of the situation.
• Consider alternatives: Before withdrawing, examine all other avenues and possible sources of funds and their implications, such as loans, side hustles, or selling assets, which might be better options.
• Seek advice: If you decide to withdraw funds from your saving 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.

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Two-pot retirement system withdrawals tapering off

However, Paul Menge, actuarial specialist at Momentum Investo, says it seems like the influx of requests for two-pot retirement system withdrawals is tapering off. During September, the financial industry was flooded with calls and emails to contact centres, indicating how desperate people were to access their retirement money.

According to industry experts and Sars statistics, many people battling financially earned themselves yellow cards for making withdrawals.

“We are a rather small product house within the larger Momentum group and most of our clients contribute an average amount of R1 200 per month to a retirement annuity. Some supplement their savings in retirement funds at work and some work for themselves.

“We were pleasantly surprised that only around 1% of our clients made withdrawals under the two-pot retirement system. However, we are worried about how many of those who did make withdrawals fell in the age group of 40 to 49 years. Almost 50% of those who withdrew, fell into this category.”

Menge says this means they do not have a lot of time left until they retire. “Most of us realise that it is time in the market that earns us the most growth and that the last couple of years are the ones where we build the most value because the more money you have, the more your growth can snowball.

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Retirement savings like a ball of dough

“It is like a ball of dough: the more dough you have, the better the yeast can do its magic while it is basking in a warm place to double in size. But if a naughty child keeps stealing little balls of dough, you are in trouble as these numbers illustrate.”

Two people invest in a retirement annuity of R3 000 per month over a period of 25 years. They increase their contributions by 10% per year during the savings term and we assume 12% growth (before fees). What will their retirement value be for the one who never withdraws compared to the one who withdraws the whole available amount every year at inflation of 6% and assuming that each million can buy R6 000 in income per month?

(*To put things in perspective, real value shows how much you would buy with your future savings amount today.)

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Withdrawing could wipe out third of your savings

Menge says this shows that the ‘stealer’ or ‘sinner’ is giving up a third of his income during retirement. “With inflation being the bully it is, eating away at savings, this is not a great idea.

“Fortunately, there is a plan. These are still the early days of access to retirement money. Hopefully, people who were in desperate need of financial relief have made the withdrawals they needed to.”

If you have withdrawn funds from your saving pot, you can ask your financial advisers for help to calculate how much you must save to catch up to where you would have been based on how much you withdrew, the tax you paid on the withdrawal and the growth you missed out on. 

Menge says while speaking to your financial adviser, you can just as well make sure that your retirement savings plan is still on track by asking two questions:

• Are the funds you invested in growing at the rate they promised to grow at?
• Are you prepared to make up for inflation’s eroding effect on your savings, especially medical inflation, which is usually 3% to 4% higher than the consumer price index (normal inflation?

“We all want to make sure that our retirement is as stress-free as can be one day. It will be great if we can slice a freshly baked bread every day. We do not want to cry because our yellow cards escalated to red cards. We want to play our hearts out on the field of investments to earn as much as we can, while we can,” Menge says.