The cost of dipping into your retirement savings during a crisis

18 August 2020

If you should lose your job or have your income reduced considerably, how do you plan on making up the shortfall? You may think of using your retirement savings (preservation fund) to close the gap. There are serious pitfalls to raiding your preservation fund prematurely.

Think about the tax

An immediate consequence of an early withdrawal from your preservation fund is the tax you’ll have to pay. It will be taxed at the following withdrawal benefit tax rates:

Taxable income Rate of tax
R1 – R25 000 0%
R25 001 – R660 000 18% of taxable income above R25 000
R660 001 – R990 000 R114 300 + 27% of taxable income above R660 000
R990 001 and above R203 400 + 36% of taxable income above R990 000

The long-term impact on your retirement could be severe.

Withdrawing from your preservation fund can make a big dent in your provision for retirement. You’ll have to work longer, contribute more, or be content with much less income when you retire.

Rather plan and save smartly.

How to avoid a reduced retirement income

Take the time to set out your financial goals and work out a plan to reach them. The earlier you start, the better. However, it is never too late to start.

Make sure you have short-, medium- and long-term savings that form part of different savings pools, and which allow different levels of access.

If you need to make use of your short-term emergency savings funds, remember to top up your savings pool again. A Financial Advisor can help you work out which product is best, and which is most appropriate for you.

By structuring your savings and investments, and planning for short-term uncertainty – you can work to prevent one crisis creating another – a crisis which is a bigger one you need to face when you decide to retire one day.

Acknowledgment: Gerhardt Meyer CFP®

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