"Many drops make a bucket, many buckets make a pond, many ponds make a lake, and many lakes make an ocean.” (Percy Ross)
According to a recent survey by Just SA, only 11% of South Africans over the age of 50 feel “really confident” that their savings will last if they live to 100. For 57% of respondents, their retirement plan is to rely on their children or grandchildren.
These are not very encouraging numbers. They make it clear that most South Africans know that they are not saving enough to sustain them once they stop working.
At the same time, data from retirement funds shows that more than 80% of members cash out their retirement savings when they change jobs. In fact, there is evidence that many people leave their jobs just so that they can access their retirement pot.
And this is one of the main reasons why South Africans don’t have enough in retirement savings. If they keep taking their money out, they always have to start again at zero to build up that retirement pot.
This is why preservation of retirement savings has become such an important issue. Simply put, preservation refers to keeping your retirement savings invested until you actually stop working.
The government is even changing legislation so that nobody will be able to touch a part of their retirement savings until they reach the age of 55. This is called the two-bucket system.
What this means is that all of your retirement savings contributions will be split between two buckets. Most of it will go into the preservation bucket, where you will not be able to access it until you turn 55, even when you change jobs. A smaller portion will be put into a shorter-term bucket that you can take out in certain circumstances.
This is a critical change that will ultimately bring a lot of benefits. In the UK, for instance, preservation is already compulsory, and it has made a big difference to ensuring that people have enough money to retire on.
Preservation is critical not just because taking money out of retirement savings depletes what you have built up. The really significant issue is that it robs you of time.
Consider that if you put away R500 every month for 40 years, earning a 10% return, you will compound that to R3.2 million. But if you keep taking out your retirement money in your younger years and only give yourself 20 years to save, you would need to put away R4 200 per month just to get to the same final value.
So, while it might seem like the money someone puts away in their early years of working doesn’t amount to very much, it is actually the most important part of their investment journey. The money anyone invests in their 20s and 30s will have the longest time to compound and create the most value in the long run.
Even once the new legislation comes into force, money that was saved before its introduction will be accessible when people change jobs. However, our advice (except in a few exceptional circumstances) would always be to preserve that money in the retirement fund or in a preservation fund.
Not only does it keep your retirement money for the purpose it was intended, but you will also save a significant amount of tax. Your future self will be grateful that you did so.
To discuss your retirement savings plan, speak to a professional.
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