Get out of the Two-pot Sin Bin

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It seems like the influx of requests for two-pot withdrawals is tapering off. During September, the financial industry was reeling from the number of calls and emails to contact centres – some people were desperate to access the retirement money they’re allowed to withdraw. According to industry experts and South African Revenue Service statistics, many people battling financially earned themselves yellow cards for making withdrawals.

We are a rather small product house within the larger Momentum, and most of our clients contribute an average amount of R 1 200 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 retirement savings withdrawals.

But we’re 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. This means they don’t 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.

This is because the more money you have, the more your growth can snowball. Think of it as a ball of dough: The more dough you have, the better the yeast to do its magic while it’s basking in a warm place to double in size.  

But, if a naughty child keeps stealing little balls of dough, you’re in trouble. Let’s put some numbers to it to illustrate:

Two people invest in a retirement annuity of R3 000 per month over 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 below scenarios?

  • Person one never withdraws.
  • Person two withdraws all they can every year.

All values are in rands, maturities are rounded to the nearest 10 000, and income to the nearest 100. We assume inflation of 6% and that each million can buy R6 000 in income per month:

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

This means the ‘stealer’ or ‘sinner’ is giving up a third of their 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, those people who were in desperate need of financial relief have made the withdrawals they needed to.

People who have been withdrawing can ask their financial advisers for help. They can calculate how much they must save to catch up to where they would have been:

  • How much they withdrew.
  • What tax do they pay on the withdrawal (the tax rate they usually pay on their income)?
  • What growth they have missed out on? 
While they are speaking to a financial adviser, they can just as well make sure that their retirement savings plan is still on track:
  • Are the funds they are invested in growing at the rate they promised to?
  • Are they prepared to make up for inflation’s eroding effect on their 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 freshly baked bread every day. We don’t 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.  

Article by: Paul Menge, Actuarial Specialist at Momentum Investor