Don’t touch that two-pot, says Daily Maverick’s financial coach

Question: I want to withdraw R30,000 from my pension in order to settle some debt. What are the pros and cons of doing this?

Answer: I have had several similar questions over the past week. When it comes to your finances, you need to look at the short term as well as the long term.

Your retirement fund is a long-term investment. The key to a long-term investment is compound interest – this is the growth upon growth that your investment makes over time.

For example, if you invested R100,000 and it grew by 10% each year, the year-on-year growth would be as follows:



By year 30, your year-on-year growth would be R158,000.

Each year’s growth upon the previous year’s growth builds real wealth.

This is why it makes sense to start investing early and to leave the money invested for as long as possible.

I often come across people approaching retirement whose retirement funds are growing by much more than their monthly salaries. This is because they did not make any withdrawals from their retirement funds when they changed jobs. The R100,000 that they invested when they were 30 years old will be growing by more than R150,000 a year when they are 60 years old.

So, to come to your question – if you take out R30,000 from your retirement fund now, the long-term implications are bigger than you think.

If we assume that the retirement fund grows by 10% a year, the difference in the value of your retirement fund if you take R30,000 is given in the table below.



After 10 years, your retirement fund would be about R77,000 smaller than it would have been had you left the R30,000 in the fund. After 30 years, the R30,000 withdrawal will result in your fund being more than half a million rand less than it would have been had you left the money in the fund.

If you want to make a withdrawal from a long-term investment like a retirement fund to sort out a short-term solution like debt, just be aware of the long-term implications.

There are a few other factors that you need to consider when making a withdrawal from your retirement fund:

Delays

Costs

Tax