Personal finance: How to dip into your retirement savings sensibly

First published in the Daily Maverick 168 weekly newspaper.

A survey by the Financial Sector Conduct Authority in June last year revealed that in nearly 47% of active retirement funds in South Africa, the employer was in some form of financial distress because either the employer or employee, or both, had approached the fund to ask for a temporary suspension or reduction of retirement contributions.

In the US about 26% of respondents in the Edelman Financial Engines 2020 Financial Insights Study withdrew money from their retirement or savings accounts during the Covid-19 pandemic. Of those, 39% gave money to help a family member or friend, and 51% paid their own bills. On average, those who withdrew money say it will take almost six years to replenish their savings.

Separate research by Edelman Financial Engines shows actions detrimental to long-term financial security have increased 50% since April 2020. Nearly half of those actions (45%) directly harmed retirement accounts. These actions included changing portfolio allocations, reducing savings rates or borrowing from retirement savings, while 30% increased outstanding debt and 21% reduced or depleted their emergency savings.

Coming back to South Africa, André Wentzel, head of client solutions savings at Sanlam, notes that most people will not be able to retire comfortably at 60 based on their retirement savings.

“As we prepare for the third wave just over a year later, many South Africans are still recovering from the devastating financial impact of the pandemic, after dipping into their retirement savings and investments prematurely to make ends meet. This is likely to have a significant detrimental impact on the income you can expect to receive in retirement,” he says. Wentzel believes the solution is to delay retirement so that you have a longer timeline to offset the Covid-19 financial impact on your retirement savings.

He uses the example of Simon, who started saving 20% of his income from the age of 25 with the intention of retiring at age 60 and being able to maintain his standard of living. “Retiring a year earlier or a year later can have a 7% to 8% impact on Simon’s income. He could expect to receive 20% less income if he retires three years early but nearly 24% more income if he retires three years later. If Simon were to retire at age 55 he would receive 30% less and retiring 10 years later at 65 would equate to 42% more savings. So, retiring at 65 instead of 55 (which is the earliest you could access your savings) means your income in retirement is more than doubled,” Wentzel explains.

He notes that choosing to push out your retirement to a later date can improve your circumstances if you fall behind, whether it’s because you started saving later or because you had to pause your contributions or tap into your savings. “The rough rule of thumb is that for every year you paused your savings or delayed starting, you can make up for it by retiring one year later,” he says.

However, in the current environment, many are opting for “semi-retirement” or the option to continue working part-time after their official retirement to supplement their income. And this trend emerged before Covid-19. According to the 2019 Old Mutual Savings & Investment Monitor, nine out of every 10 retirees included in the survey were working to supplement their retirement income. At the time, Lynette Nicholson, research manager at Old Mutual, said the types of jobs varied between industries and depended on skill sets.

Here’s how to secure your retirement savings if you are still working:

Pay your future self

Instead of waiting to see how much money you have left at the end of each month, set up a regular debit order to go towards your investments, such as a retirement annuity fund or a tax-free savings account.

Retire the high life now for a better life later

Resist the temptation to keep up with the Joneses and try to live within your means. “It’s important to set realistic finance goals, but they can always be upgraded when life is going well. You can experience your own wealth, but you need to have a positive, realistic relationship with your money that isn’t influenced by other people,” says Nosipho Nhleko, investment product specialist at Liberty.

Check your statements

Your investment statement helps you understand where your savings are going and shows whether you are on track to meet your savings goals.

“Remember that investment projections are not a guarantee, as there are a lot of variable factors at play. Growth rates vary, so it’s important to make sure you’re always aware of your risk,” says Nhleko.

Stay the course

Nicholas Riemer, investment education head at FNB Wealth and Investments, says a major concern for most investors saving for retirement is market volatility and the market moving against them.

“Volatility measures the degree to which asset prices move up and down over time. The larger and more frequent these moves, the more volatile the investment is. More volatile investments are regarded as carrying higher risk,” he says.

Riemer cautions that short-term volatility does not alter the long-term trend of an asset price.

“An asset can be highly volatile and may still provide strong growth over the long term. This is particularly true of the equity market. For example, the JSE All Share Index broke its long-term trend and fell from 57,900 to 37,900 points in March 2020. Had an investor panicked and exited the market at that time, they would have realised substantial losses in the process. Those who remained invested saw the index recover from April and build its way back to pre-pandemic levels by July. The index breached 67,000 points in February 2021,” he says.

“Staying invested in the market for the long term has historically yielded good results. Long-term goals need to be aligned to the strategy of staying invested, as this allows your investments and savings to ride out short-term market volatility,” Riemer concludes. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.