Black Friday and the destruction of my retirement (aka Don’t use your Two Pot savings to buy things you probably don’t need)

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of 10X Investments.

Once upon a time, there was a woman called Nicola (not me, obviously), who had her heart set on a very high end, deliciously curved, 50’s diner-looking red fridge.

And then, Nicola saw a huge Black Friday discount on that red fridge on the retailer’s website. But how? It wasn’t Black Friday, or even November yet (this spending frenzy is really out of control, isn’t it?). Actually, who cares. Nicola wants that fridge.

The website encapsulates every aspirational characteristic possible for kitchenware. The site is, of course, red. And features a red Porsche of some vintage. The brand started life as a metallurgical enamelling works in Italy. It’s famous for its designs, often retro, developed in collaboration with artists and architects.

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Now, what makes owning that fridge a problem for Nicola is that she’s an average middle-class person. Not one who lives on a wine estate and indulges her reading hobby by owning a publishing house.

Nicola really only needs to look after her current fridge – a reasonably reliable, plain white double storey job with enough space for a gammon at the top. When it does complain, she needs an awesome repair guy called Bobjan to come and do the necessary in a timeous fashion.

But let’s assume she caves in to the rabid lifestyle pressure applied by Instagram and goes for the deal on Red Beauty. She doesn’t have the cash to hand (obviously – she’s a writer like me), so she uses the new Two Pot legislation to pull R30k from the savings pot of her retirement annuity. And then, because she loves the fridge so much, does the same thing every other year until she retires, buying a whole bunch of things that make her more social media acceptable.

Let’s run the numbers here.

Assuming a 6% net return (so after fees and inflation) from age 40 to 65, a R30k withdrawal every other year, and a R5k monthly contribution to the Retirement Annuity escalating by 3% every year, this is how it shakes out:

Scenario 1 (A R30k withdrawal from the savings pot every two years)

Savings pot: R815k

Retirement pot: R5.41m

Final balance at age 65: R6.23m

Scenario 2 (No withdrawals)

Savings pot: R1.79m

Retirement pot: R5.41m

Total final balance: R7.20 million

In total, she has withdrawn R392,600. Her absolute loss is R974,435 (13.53% of final balance). That’s an opportunity cost of R582k (loss minus withdrawals). Put another way, for every R1 withdrawn early, she loses R2.48 at retirement due to forgone compound growth.

Wow.

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If that blows your mind, if she did the same thing from age 30 instead of 40, herabsolute loss is R1,962,182 with an opportunity cost of R1.42 million. For every R1 withdrawn early, she loses R3.61 at retirement.

So withdrawal pain scales exponentially. 30-year-old Nicola withdraws R151k more (18 vs 13 withdrawals), but loses R988k more in opportunity cost. Early withdrawals hurt way more when you have decades of compounding ahead.

So ja. When I look at it like that, I’m not prepared to spend what should be ‘only-access-in-the-event-of-an-emergency’ money on something that is really just an aspirational signal. Instead, I could (and should) be increasing the value of my overall pension pot by simply leaving my savings pot alone and letting compounding do its magic.

But I still want the fridge!!!

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It’s just too easy to access the savings proportion of my retirement annuities and splurge on something nice but unnecessary. Especially when that something goes on sale at a magical 50% off. It’s far easier to put in the forms and wait for the money to clear than worry about the net effect on my retirement.

But I should be worrying. And so should you (assuming you don’t have a life or death situation to deal with, or are carrying a bunch of bad debt – that’s another story).

(There’s a reason why psychologists and other people trumpet the 24-hour rule: give yourself 24 hours to cool off before spending this kind of money)

It’s been just more than a year since the two-pot retirement reform came into effect, which makes it possible for anyone to access one-third of the contributions they’ve made to their retirement annuity or corporate pension/provident fund since last September as well as the R30,000 seed fund ahead of retiring. Every year, I can take out as much money as I want (ok, as much money as I have available) from my savings pot as long as it’s at a minimum of R2,000.

Which, as discussed, can be a tempting thought. And then, whatever is left after the fee is paid and the tax man takes his cut – which could be much higher than my marginal tax rate if I owe him money – is mine to spend.

Here’s a 10X explainer on two-pot.

It’s intended for emergencies and to help with tough situations. Not to buy top-notch appliances on sale on Black Friday (or long before, as the case may be).

And that’s how I’m going to think of that money: for emergencies. If my cat does trip me up on the stairs and I require several thousands of rands of medical care that my medical aid won’t cover, I’ll be ok, because I stuck with the combination of my plain old fridge and Bobjan.