Elke Brink, Wealth Adviser at R21 Wealth Management Stellenbosch Technopark.
I am changing jobs and am faced with the decision regarding my retirement fund. I have the choice to either transfer it into my name or opt for a cash payout to alleviate some of my existing debt. Due to the uncertain nature of finding another job in the immediate future, and considering the long-term implications, Im uncertain which route would serve me best. Can you advise?
When we change employment, the temptation is always there to access our retirement funds, as the documentation is often provided as a matter of course and future opportunities are still unclear. The power of preservation proves otherwise and just benefiting from time, and compound interest, can have a life-changing effect. The average person will change jobs around 12 times in their lifetime (according to a 2019 Bureau of Labor Statistics (BLS) survey of baby boomers in the USA) even more reason to reinvest your retirement funds every time you make a life change.
A preservation fund is an investment vehicle where you can reinvest your retirement funds without incurring any tax implication at the reinvestment stage. The fund provides the flexibility of enabling you one withdrawal prior to retirement of the full benefit, subject to income tax at the lump sum withdrawal tax tables.
If a partial withdrawal is made, the balance of the benefits remains in the fund until retirement age (55). No ongoing contributions may be made to the preservation fund.
The below example as provided in the Sanlam Benchmark Survey illustrates how reinvesting your funds when changing occupations, could lead to a 3x larger investment value at retirement, compared to making withdrawals on these employer changes every time you are essentially starting over, but with a shorter investment term to retirement. (The assumptions of the calculation are as follows: 9% p.a. interest earned on retirement savings; starting salary of R5 000 p.m; salary increases by 7.5% p.a. on average over career; contributes 8% of gross salary to retirement savings.)
Scenario 1: Thembi preserved her savings and retired comfortably. Her total capital contribution over 30 years amounted to R496 317. She earned R1 017 226 interest in her retirement fund. R0 withdrawals over 30 years and R1 513 543 in total retirement savings after 30 years which is almost 3x the investment value, simply by preserving.
Scenario 2: Thembi cashed in her savings at age 32 and 43 and retired short on cash. Her total capital contribution over 30 years amounted to R496 317. She earned R203 484 interest in her retirement fund. R261 972 withdrawals over 30 years and R527 079 in total retirement savings after 30 years.
Regarding your existing debt, I suggest creating a contingency plan to manage it without jeopardising your retirement savings. There are various options to consider such as refinancing or restructuring your debt, negotiating with creditors, or implementing a strict budget to manage expenses.
Leaving an employer is sometimes a much bigger life event than we give it credit for your portfolio will require holistic restructuring, and this is best done sooner rather than later.
Jacqui Kruger, Wealth Manager, Silver Lakes Wealth Management & Stockbroking.
For the past 18 years, I have been a stay-at-home mom. Following my recent divorce, I find myself in unfamiliar territory regarding investments. I want to use some of my settlement funds for income-generating investments. Im seeking guidance on how to begin this journey. Where should I start to explore my options and make informed decisions?
Im sure the world of investments may seem daunting, but the good news is, youre not alone. To provide a comprehensive answer, additional factors need to be taken into account, such as:
Your current age Have you since re-entered the workforce? Do you have an emergency fund and long-term insurance contracts in place? Do you have minor children for which there might be expenses of a capital nature in the future?The above factors are by no means exhaustive but are important to take into account during the financial planning process. I would err on the side of caution if you are 100% dependent upon the proceeds of your settlement to cover day to day expenses and recommend you seek professional advice which is beyond the scope of the limited response we are able to provide here.
A financial adviser can provide personalised guidance based on your financial goals and circumstances and help you develop an investment plan tailored to your risk tolerance and objectives.
As part of the advice process, your current financial situation will be evaluated and areas of risk identified. Holistic financial planning will enable you to understand your financial picture in terms of the present as well as the future.
It is only once we have a clear underst
