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Moving jobs – The best way to rob yourself?

Household Finance

Moving jobs – The best way to rob yourself?

Reading Time: 2 minutes

Many people, when shifting jobs, are tempted to withdraw their Retirement Fund. They do this because they believe they are young and have enough time to continue saving for retirement. Allow me to suggest that you may be actually robbing yourself.

I will explain my point by using the following example:

Example:

  • Say you are 25 years old when you start working and saving for retirement
  • You intend on retiring at 65 years of age
  • R500 is deducted from your salary at the start of every month for your retirement savings. This deduction increases over your working life as your salary grows – at 6% per year.
  • The interest your fund earns over the term is 12% per year and fees you pay are 1.5% per year

Question:

How much should you expect to have saved up at retirement?

The good news is that you should expect to have a retirement fund worth around R6 million when you’re 65! 😀

Now here’s the twist:  

At 35 years’, you decide to shift jobs. You also decide to withdraw your retirement fund; which at that time should be around R130 000. You need the money, or you’re paying off your bond, starting a business, or feel like spoiling yourself etc. You’re only 35 years right? You still have a WHOLE 30 more years until retirement.

By withdrawing your Fund, you would have to start saving completely from scratch. If we assume the same salary, salary growth and salary deduction % you had from 35 years’ onwards; you should now expect to have R3.5 million at retirement.

Yes! You would have forsaken 2.5 million Rands compared to your original R6 million! That is a reduction of 41% of your fund at retirement; near half of your money.

But how is that possible?”; you ask. “I only took 10 years’ worth of money; I still had 30 more years!

No. You didn’t just take 10 years’ worth of saving, you also took 30 years’ worth of the future interest your R130 000 would have earned you. This is very important to realise.

Can’t I just catch up by increasing my savings when I withdraw the money?

Well, Yes.  Sure you can, and you should! But to catch up to your original retirement fund at 65, you would have to increase your retirement savings per month by 1.7 times. This is almost double the amount, had you not withdrawn your retirement fund.

So before you withdraw that fund, remember your future retired self, and consider that you may very well be robbing him/her.

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Benjamin is a corporate actuary, currently working at a major financial services firm. He has experience in wealth and investment products. Benjamin is very passionate about teaching and empowering minds.

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