By: Lizl Budhram
With the introduction of South Africa’s Two-Pot Retirement System, retirement planning has become more flexible, but it also brings a new temptation: accessing your retirement savings prematurely.
Whether it’s a change in employment, a new baby, or an unexpected financial obligation—without compromising our financial wellness. Flexibility should be achieved through smarter investment strategies, lifestyle adjustments, and better-suited financial products, rather than dipping into retirement savings.
As life’s financial demands shift, it’s essential to have a dynamic plan that can adapt and grow with changing needs. Flexibility is key, and advisers are crucial in helping customers adjust their retirement plans as their needs change.
Here are some practical ways to help you stay on track:
Avoid lifestyle creep
Life events, like job promotions or pay increases, often lead to lifestyle inflation—buying bigger homes or more expensive cars. While this can feel like a reward for hard work, it increases the amount you’ll need to maintain the same standard of living in retirement. Avoiding lifestyle inflation is essential because overspending now may lead to financial strain later, tempting you to tap into your accessible retirement savings to maintain your lifestyle. By controlling lifestyle creep, you reduce the risk of relying on retirement funds for short-term needs.
Create an independent emergency fund
The two-pot retirement system provides access to a portion of your retirement savings before retirement for emergencies. However, it’s important to maintain a separate emergency fund that isn’t tied to the fluctuations of financial markets. This fund should be kept in a stable, easily accessible form, such as a savings account, which isn’t affected by market volatility.
Research from Old Mutual indicates that many withdrawals from the accessible two-pot retirement system’s ‘savings pot’ portion were likely used to pay off debt, cover medical emergencies, and manage unexpected expenses. It's essential to ensure that seeking short-term financial relief doesn't jeopardise your long-term financial security.
Establishing an independent emergency fund allows you to manage unforeseen costs while safeguarding your retirement savings, ensuring they remain dedicated to their intended purpose: your future retirement.
Use the right tool for the job
While an emergency fund is specifically designed to cover urgent needs, discretionary investments like a tax-free investment vehicle serve a different purpose. Tax-free investments can give you access to money when needed while growing faster than inflation if left invested for longer terms.
By using financial products like tax-free investments or other discretionary investments, you can manage non-emergency financial needs—such as saving for your children's university tuition—without losing the tax benefits you've accumulated by saving for retirement.
By incorporating these products alongside your emergency fund, you create more financial options and flexibility without risking your long-term retirement security.
Make your asset allocation work for you
Retirement planning is not just about saving—it’s about growing your money. During big life events like job loss or starting a family, immediate stability often takes priority. It’s tempting to switch to low-risk investments, but that can limit your growth in the long run.
When you’re in the accumulation phase, actively saving for retirement, being too conservative means that the value of your money won’t keep up with the rising cost of living over time, which is a problem when you’re trying to save for retirement.
A balanced mix of investments, combining both higher- and lower-risk options, is key to managing risk while growing your savings.
Leverage the advice offered by your financial adviser
It’s difficult to imagine your lifestyle at 60 or 70 when you’re only 30. However, key questions, like where you’ll live, whether you’ll downsize, and how you’ll cover rising healthcare costs, are crucial to consider. Financial advisers play an important role in helping customers address these unknowns. Advisers help adjust your strategy, offering tailored solutions to keep your retirement plan on track without the need to access your retirement funds prematurely. They provide alternatives and guidance to ensure your plan stays aligned with your long-term goals.
The key is finding a balance—using the flexibility the two-pot retirement system offers wisely while remaining proactive and planning for both expected and unexpected financial needs. Regularly reviewing your plan, leveraging sound investment strategies, and working with a financial adviser will help ensure your retirement remains secure and tailored to your long-term vision.
* Budhram is the a head of advice at Old Mutual Personal Finance.
PERSONAL FINANCE