Why does a financial planner ask so many questions, and what should I be asking a potential financial planner? Um... good question.
The problem with the future is that it seems so far away – especially your retirement. The convo in your head typically goes like this: “I will start saving next month, next year…” Who’s with us? But blink, you’re at retirement age… and things aren’t looking too rosy. Financial Adviser and Investment Specialist Adele Barnard weighs in on exactly why you should never cash in that retirement fund, tempting as it may be. Trust us, we know.
Currently, only 6% of South Africans can retire comfortably…
Read that again. Yup, we have a bit of a retirement ticking time bomb on our hands. There are a couple of reasons for this…
1/ Lack of financial education.
2/ Unemployment figures are at an all-time high.
3/ You think your employer is doing more than your and their actual contribution to a retirement fund.
4/ You think you have enough time to save, and sometimes you just can’t afford to save for your retirement as you need to support your family.
5/ We also tend to live much longer today, so we need to save much more for our retirement.
6/ Finally, women tend to live longer than men. (This is still cool though – right?!)
Then there’s also the temptation to dip into that retirement fund…
We’ve all thought about it: financing that up-coming holiday or birthday, getting rid of debt, no employment prospects on the horizon, big expenses looming – it can be tempting to dip into your retirement fund for that extra cash.
“If you’re tempted to make a withdrawal, you are not alone,” says Adele. “The truth is that dipping into your retirement fund early – or worse, cashing it out altogether – might cost you more than you can imagine. You will get hit with tax at withdrawal if you are younger than 55 (only the first R25 000 is tax-free).”
More importantly, you’ll miss out on the long-term benefits – the effect of the compound interest over time.
Withdrawing from your fund now could unwind years of progress…
Let’s look at a practical example: Friend A invests R300 per month over 55 years, giving a total contribution of R198 000. Let’s assume a growth rate of 10%. Friend A will receive R7 131 505 after 55 years. So, for 55 years of investing, Friend A will receive compound interest of R6 933
505 (R7 131 505 – R198 000).
Friend B invests R10 000 per month for 10 years, which gives a total
contribution of R1 200 000. After 10 years, Friend B will only receive R2 014 576. For 10 years Friend B will receive compound interest of R814 576 (R2 014 576 – R1 200 000).
Hopefully, this will convince you to let compound interest and time work its magic on your money. Still kinda unsure where you stand? A retirement savings calculator can help you to see if you’re on track to maintain your lifestyle in retirement based on your current saving habits and investment strategy.
Never stop saving!
“Planning for retirement doesn’t have to be complicated,” say Adele. “You should either cut expenses or look for additional income streams and ways to save… Always educate yourself.”
Don’t prioritise your current ‘living your best life’ at the great expense of your future self. “At the end of the day, I always live by this quote: Do something today – your future self will thank you for,” says Adele.
And keep going back to these pearls of financial wisdom:
1/ Never stop saving.
2/ Increase your saving as your income increases.
3/ Don’t fall into the lifestyle trap (upgrading your lifestyle as your income increases).
4/ Never cash out any retirement fund money.