Anticipated impact of the Two Pot Retirement System on the markets.
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GUEST: Izak Odendaal - Old Mutual Wealth Investment Strategist
It cannot be stressed enough that early withdrawals from retirement funds should be avoided unless absolutely necessary. The biggest friend any investor has is time, since time facilitates compound growth. Early withdrawals from a retirement fund robs that money of the time to grow. Even at a relatively modest growth rate of 4% per year, R30,000 will more than double to R65,733 over 20 years. At a 6% annual growth rate, it will more than triple to R96,214, and at 10%, will grow to R201,825.
Therefore, taking R30,000 out of your retirement savings today does not mean that your future self will be R30,000 poorer. It means in future you will be poorer by R65,000 or R96,000 or R200,000 two decades from now. It gets worse, since early withdrawals will be taxed at your marginal rate, whereas growth inside a retirement fund is tax-free.
Nonetheless, estimates from the government and various financial institutions suggest that somewhere between R50 billion and R100 billion will be withdrawn in the first month or two after the two-pot system takes effect. This will largely be a one-off event, as future withdrawals will be based on one third of new contributions from September onwards and will therefore be spread out over time.
It cannot be stressed enough that early withdrawals from retirement funds should be avoided unless absolutely necessary. The biggest friend any investor has is time, since time facilitates compound growth. Early withdrawals from a retirement fund robs that money of the time to grow. Even at a relatively modest growth rate of 4% per year, R30,000 will more than double to R65,733 over 20 years. At a 6% annual growth rate, it will more than triple to R96,214, and at 10%, will grow to R201,825.
Therefore, taking R30,000 out of your retirement savings today does not mean that your future self will be R30,000 poorer. It means in future you will be poorer by R65,000 or R96,000 or R200,000 two decades from now. It gets worse, since early withdrawals will be taxed at your marginal rate, whereas growth inside a retirement fund is tax-free.
Nonetheless, estimates from the government and various financial institutions suggest that somewhere between R50 billion and R100 billion will be withdrawn in the first month or two after the two-pot system takes effect. This will largely be a one-off event, as future withdrawals will be based on one third of new contributions from September onwards and will therefore be spread out over time.