What you do with your existing retirement savings can make or break your financial future. To help you make the right choice, we’ll help you answer these questions:
Keep benefitting from compound growth
Cashing in your savings even once can derail your retirement plan because you miss out on compound growth.
What is compounding? Consider this example:
James invests R1,000. Every year he earns a 10% return.
In year 1 he earns 10% of R1,000, or R100.
In year 2 he has R1,100. He earns 10% of that, or R110.
In year 3 he has R1,210 and earns R121.
By year 10, he has R2,357 and earns R235.
Compounding has a snowball effect: the more James has, the more he earns and the bigger his savings grow. Because of compounding, your first 10 years of saving can fund 40% of your retirement. Cashing in your savings means you lose out on all the compound growth you’ve earned, and you’re forced to start over. That’s why it can be so devastating to your retirement.
Cashing in isn’t king
- Marcus retires with 41% less than Lerato.
- The R144,000 he cashed in ended up costing him R467,000.
- That's because he cashed in ten years of savings and missed out on compound growth.
Once you cash in, it’s difficult to catch up
It’s tempting to think you can make up the savings later on, but that’s probably unrealistic. To catch up, Marcus would have to save around 25% of his salary for the rest of his working life.
And saving doesn’t get easier as you get older. While your salary may increase, so do your living expenses, especially if you have children to support and educate, or if you move to a larger house.
There are tax benefits to preserving
When you preserve, your retirement savings aren't taxed. If you cash in, only R25,000 is tax free. Anything above that is taxed – and at a higher rate than any lump sum you take when you retire.
Read about more compelling reasons to preserve here.
Have you been retrenched? There are specific tax implications to consider - click here for more information.