Why you should think twice before dipping into your retirement fund savings pot

Feel free to reach out to PSG Wealth Adviser  Bernice Barnard  directly.

Your retirement fund savings pot is not an emergency fund

One of the main reasons people turn to their retirement savings is because they haven’t built up an emergency fund. Without a financial safety net, any unexpected expense feels like a crisis, leading people to justify early withdrawals. However, your retirement fund is designed to secure your future, not to cover short-term financial hiccups.

The best approach is to have a separate emergency fund, worth at least three to six months’ worth of living expenses, set aside in a savings account. This way, when unexpected costs arise, you can handle them without touching your long-term savings.

Pooling expenses together is a dangerous habit

Another common mistake is grouping multiple non-urgent expenses together just because a lump sum is available. Would you have replaced your furniture, upgraded your car, and taken a holiday all at once if you didn’t have access to your savings? Probably not.

When you don’t have easy access to extra money, you tend to prioritise expenses over time, handling them as they arise. But when people see a large amount available in their retirement savings pot, they suddenly justify spending on things they wouldn’t have otherwise or that they could have spread out over several months. This impulsive behaviour leads to unnecessary withdrawals and ultimately weakens their financial future.

The devastating long-term impact on retirement savings

Withdrawing from your retirement savings today doesn’t just take away the money you remove—it also takes away years of growth and compound interest. The money you withdraw now could have grown significantly by the time you retire.

For example, let’s say you withdraw R30 000 from your retirement savings pot at age 40. If that money had stayed invested with an average annual growth rate of 8% (before fees and costs), it could have grown to R205 455 by the time you turn 65. In other words, withdrawing from your savings pot at age 40 won't only cost you the original R30 000, you also forego over R175 000 in potential future value, which highlights the opportunity cost of early withdrawals.

Additionally, it’s important to consider the tax implications of these withdrawals. Even though you may withdraw R30 000, the amount you actually receive, will be after tax, based on your marginal tax rate (including the withdrawal amount). This means that you could end up with significantly less in hand than expected.

Now, imagine doing this multiple times throughout your life. You could be reducing your retirement savings by hundreds of thousands of rands without even realising it.

Retirement should be a time of comfort, not stress

 The biggest risk of depleting your savings pot regularly is that you may run out of money during retirement. Many South Africans already struggle to retire comfortably due to inadequate savings. By withdrawing funds early, you’re making it even harder for yourself to enjoy a stress-free retirement.

The last thing anyone wants is to depend on family members, rely on the measly Older Persons Grant (SASSA), or be forced to work long after they should have retired just to cover basic expenses. The decisions you make today will determine your financial freedom in the future.

What should you do instead?

 Rather than tapping into your retirement savings, consider these alternatives:

• Establish and maintain an emergency fund: Even if you start small, a dedicated emergency fund will prevent you from touching your long-term savings.
• Cut unnecessary expenses: If you feel the urge to withdraw from your savings pot, first review your budget and eliminate or postpone non-essential costs.
• Look for additional income sources: Consider a side hustle or selling unused items instead of withdrawing from your retirement fund's savings pot.
• Be cautious of additional debt: Instead of taking out a loan as a quick fix for financial shortfalls, focus on disciplined spending and proactive planning. Borrowing, especially through short-term loans, can trap you in a cycle of high interest rates and fees, undermining your financial stability even further.

Protect your future

Your retirement savings are there for a crucial purpose – to support you when you no longer have a steady income. While there may be emergencies or exceptional circumstances where withdrawing from your savings pot is justified, it should be a last resort. Every rand you take out now is at least one less rand that you will have when you retire.

Before withdrawing from your savings pot, ask yourself: Is this expense truly unavoidable, or am I compromising my future for a short-term need? Your future self depends on the choices you make today. Prioritise long-term financial security and protect your retirement savings.