There is a well-known piece of wisdom that implores people to live in the moment as the future doesn’t yet exist and the past is no more. This is fantastic advice when it comes to experiencing priceless moments, such as your child’s first step, the happiness of feeling the ocean breeze against your skin and hearing the words “I love you”. But this is terrible advice when it relates to retirement planning.
Being able to retire well means that you have spent the preceding years building up a nest egg that will unlock the glory of your golden years. In South Africa, 33% of retirees will still be paying off debt once they have retired. And most South Africans will spend their later years scraping pennies, unable to make ends meet. The temptation of cashing in a pension fund to pay for luxuries or a holiday has to be avoided at all costs. Still, sometimes people rationalise cashing in their pension fund to settle debt.
“Planning for your retirement is one of the most important things you will ever do. By withdrawing your retirement funds prematurely, you are stealing from your retirement. The fleeting pleasure in the present is one of the worst things you can do to your future self,” says Floris Slabbert, Director at Ecsponent Financial Services. “Don’t steal from your future.”
There are massive savings drives in South Africa, aiming to instil a culture of saving, but the lure of cash is ever-strong. “People change jobs an average of five to seven times in a lifetime, depending on which statistics you use. This means, there are multiple opportunities to withdraw their retirement savings over the span of a career. Despite the penalties one must pay, many South Africans choose the cash option,” says Slabbert.
Slabbert explains that settling current debt, even if it comes with astronomical interest rates of 25% or more, robs you of the compound interest you would accrue over the years leading up to your retirement. Settling debt of R100,000 now, may save you spending close to R180,000 in financing the debt over its full term. But people underestimate the power of compound interest, says Slabbert. If you are 30-years-old now, that R100,000 could be worth more than R800,000 in your fifties if it grows at 10% per year.
“Settling current debt with future money, cannot be rationally justified,” says Slabbert.
In addition to the large amount of money lost that you would rue later in life, settling debt now has a nasty side-effect that very few people acknowledge. “In essence, you have taught yourself that you can get away with racking up debt. You have not learnt to tighten the belt, to budget and to live within your means. I’d bet that most people will be back in the same debt position within a few years’ time. Draw up a budget and plan to settle your debt while controlling your lifestyle, and keep your pension nest egg growing,” says Slabbert.
Preserving your pension fund, or switching to your new company’s fund is easy enough to do. Most HR managers are ready to assist with the forms and requirements. “If your new company is not with a fund, or you prefer an alternative route, speak to your financial advisor about a preservation fund. There are several tax benefits to these options and your retirement funds are safe. At the end of the day, you need to make long-term decisions that will benefit your future and not harm it. At Ecsponent we always advise in a way that guards and accelerates wealth accumulation.
“In my years of professional financial management, I have heard every reason in the book to justify stealing from retirement, but none of them ever trumps the pressing need to protect future wealth. Regret is a painful emotion and it’s avoidable,” concludes Slabbert.