With living expenses ever-increasing in South Africa, people should avoid the temptation of cashing in their retirement funds when changing jobs or when facing financial difficulties.
Doing this could have long-term consequences and negatively impact their ability to retire comfortably with enough capital, said Hugh Hacking, GM of operations at Old Mutual Corporate.
Referring to the 2018 Old Mutual Savings & Investment Monitor, Hacking said that 53% of South Africans have no formal retirement savings at all, with 38% planning to rely on their children to take care of them in old age and 32% expecting the state to do so.
“When people face tough times they look for cash everywhere and the temptation to withdraw money that is meant for retirement can become almost irresistible,” he said.
“However, this should be avoided at all costs because the decision to stay invested or not has a huge impact on your retirement outcome.
“This is why it is so important to understand the benefits of `time in the market’ and the compounding effect of being invested over a long period of time.”
Power of compound interest
Hacking illustrates the benefit of ‘time in the market’ with this example: if you start saving at age 25, you can accumulate investment growth of R915,000 by age 65 by simply investing R178.74 per month, assuming a compound interest rate of 10% per annum.
However, if you only start saving at age 45 and you invest R1,381.24 per month, you will achieve investment growth of only R668,502 by the time you retire.
Hacking said that people too often believe they don’t have to think about retirement while they are young, and therefore only start saving later in their lives.
“However, saving for retirement should be a priority from the day that you receive your first salary,” he said.
“Even if you invest as little as R100 per month, that money will have 40 years to grow and accumulate returns. The best thing you can do for your ‘post-retirement self’ is to start saving for retirement as early in life as possible and remain invested.”
Hacking said that those who are fortunate enough to be invested in a retirement scheme as part of their employee benefits should remain invested in that scheme for as long as possible to ensure a favourable retirement outcome.
“Umbrella funds are a great way for employees to access retirement savings solutions as their employer will handle all the administration and pay the fees of the investment,” he said.