Your retirement preparation is a long-term effort, and those who don’t save up for the winter will be hardest hit.
The two-pot retirement system is a hot topic these days. I get the question almost every week: “How does the new system affect me?” The short answer and most important piece of advice I can give right now is that it shouldn’t.
The two-pot system is legislation that offers a unique balance between long-term security and short-term financial flexibility. In this system, your contributions are split into two parts: one-third goes into a “savings pot” that you can access every 12 months for emergencies, and the other two-thirds go into a “retirement pot” that remains untouched until you retire, ensuring a secure future for you.
This system was created to address a significant issue in South Africa. One in three South Africans withdraw their retirement savings in cash when changing employers before retirement. Additionally, more than a third (35%) of middle-class South Africans are not putting any of their salary towards retirement savings.
According to the Association for Savings and Investment South Africa (Asisa), it is estimated that 94% of South Africans are not on track to retire comfortably. The new system ensures that those who wish to withdraw part of their retirement savings early are limited to accessing only one-third of their funds.
Our instinct might be to withdraw from the savings pot simply because we can. However, this means having less money available at retirement and a smaller sum on which to earn compound interest. It’s important to remember that the government’s aim was to reduce withdrawals, not increase them. My concern is that the money will be too tempting for some, leading them to spend rather than save. This isn’t a criticism of the system but rather an observation of human behaviour.
So, what should you do in light of the new system? Keep working towards not needing to access your retirement savings before retirement. Consider using a high-return, tax-free savings account for emergencies and develop the discipline to pay off debt as soon as possible.
Much like the fabled grasshopper who played while the ants toiled, your retirement preparation is a long-term effort, and those who don’t save up for the winter will be hardest hit. Avoid withdrawing from your retirement savings as much as possible, and you’ll reap the rewards in due course.