EMPLOYEE BENEFITS & RETIREMENT by SHEILA-ANN ROBEY

We are all familiar with the essence of the planned two-pot retirement system, in that it will allow for limited withdrawals of up to a third from retirement funds so savers can access money to cope with challenging life events.

The COVID pandemic showed us that completely unpredictable events are something we cannot ignore and that at those times any help we get is most welcome, even if it means taking money from our future savings to keep our present on track. But let’s think about this in terms of the life we would like our clients to live in the future. We like to think of saving for retirement as a marathon that lasts the duration of a person’s working life, as they head toward their finish line prize of being able to afford the life they would like to live after work. However, if they were to withdraw from their future retirement savings, they would actually be changing their future plans irrevocably.

Working with expectations:
Experience shows this marathon has an established distance in the minds of savers. Research by Liberty shows that over 60% of working South Africans only start to think about saving for retirement once they are over the age of 40. According to the research, only 31% of people between 30-35 have established a proper retirement savings plan. What this says is that most South Africans consider a 20-25-year timeline about right to build up a retirement nest egg, thus from the age of 40 to 65 more or less. These numbers are important for advisers, because they establish a ticking clock which can be used to motivate and remind clients of their inevitable commitments.

Change in pace:
With the new system allowing withdrawals, this steady race changes its pace at various points should the two-pot denominated withdrawals be used. This means suddenly they have less than they need during the timeline, so retirement savings plans will have to be re-thought. Therefore, new strategies will have to be put in place to cope with allowances from the two-pot arrangement.

With this in mind, it would be the adviser’s prerogative to change the sporting code altogether. Maybe the marathon now becomes a middle-distance sprint for a period of a couple of years to rebuild their clients’ savings, so that the finish line and prize remain attainable. In doing this, clients will have to increase their retirement contributions for a period to make up the deficit. And any other means of capital building should be added in here as well. For example, retirement planning may need to be diversified and clients may need to consider different sources of income to fund their retirement, with things like rental income, side-hustles and any other cash generating operations.

Keeping a sense of stability:
The point here is that the advantages of cash withdrawals via the two-pot system should never be allowed to change a person’s long-term savings finish line or goals. It’s no secret that most people are not saving enough for retirement, the two-pot system should not be adding to this burden.

So, the overall position an adviser should take with this new reality of retirement withdrawals is that the end result should not be affected. The advice process needs to focus on changing savings strategies so that the overall steady momentum is maintained. Instead of saving being viewed as a consistent marathon, different speeds of saving may be needed to be applied to maintain the arrival at the finish line prize of a comfortable retirement.

Source: https://www.iisa.co.za/images/downloads/fanews-april23.pdf (page 92)