Immediate Disposable Income Needs versus Long Term Retirement Savings Goals

I have always wondered if there is a tangible outcome to the term ‘balancing act’ or if it is just a frequently used phrase? So, I decided to look up the definition of ‘balancing act’, and while there are a few, Merriam Webster best defined it as: “an attempt to handle or deal with two or more things (such as obligations) at one time so as to satisfy often competing requirements.”

I guess this is top of mind for me because, over the past year, as a specialist in the Employee Benefits space and as a single mom to three boys, this phrase came up in almost every conversation, whether it be with employers, employees or even friends and family.

Families balancing which creditors to pay and which not, how to balance home schooling and working from home. Government trying to balance providing financial relief while managing corruption, employers on how to stay afloat while protecting business and employees ‒ the list is endless.

A sad reality is that, by now, almost all of us have a tragic story to tell of the devastation that the COVID-19 pandemic has wrought. The actions we have had to take to survive, and the decisions made as part of the ‘balancing act’ we have had to play; there have been no free passes on this one.

Let’s consider one such example.

The opportunity provided by government, to employers and employees in 2020, to take what was commonly termed a ‘Retirement Fund Contribution Holiday’. Employers who were in financial distress as a result of the COVID-19 pandemic and were unable to pay their full contributions to employee retirement funds, were given a temporary reprieve of up to a year.

The 2021 Sanlam Benchmark Survey revealed that 27% of stand-alone retirement funds and 41% of umbrella funds’ employers opted to either reduce employees’ pensionable salaries,

resulting in reduced contributions payable, or suspend all contributions ‒ paying only the risk premium and fund costs.

I have seen first-hand how this much needed reprieve provided the best outcome for all parties, at a point in time. Considering the thousands of retrenchments in South Africa since the start of 2020, this made sense. You can’t save for retirement when you have little to no funds to meet your basic expenses. What is of concern though, is the lack of potential solutions to remedy the impact of these lost contributions, post the fact. In fact, there is a proposed bill that seeks to provide even further access to existing savings, but that is a whole conversation for another day. Currently hundreds of thousands of South Africans will end 2021 with more than a year’s loss of retirement contributions and any subsequent interest these might have earned.

Which brings me to the resultant conversations I, and many advisers, are having over the long-term repercussions this will have on retirement savings. The economy has not, by any means returned to normal nor have our financial situations, but we need to start putting plans in place aimed at restoring lost savings and, at the very least, protect what we have. We cannot look to government, or employers, for solutions as they themselves are still under financial strain.

So, what are some possible solutions?

  • Supplementary income

    easier said than done but with the advent of working from home and access to online side hustles, this could be a viable option to explore.

  • Protecting your current retirement savings

    speak to your financial adviser, employers engage with your consultants to review your funds and ensure your current retirement savings are invested correctly, earning the best returns at the lowest fees.

  • Delaying your retirement

    if you are close to retirement, review your retirement plan with your financial adviser and consider the option of delaying your retirement by one or two years. A rough rule of thumb is that for every year you paused your savings, you can make up for it by retiring one year later.

  • Reducing your tax liabilities

    where possible, make use of tax efficient investment vehicles such as Tax-Free Savings accounts. These employ the eighth wonder of the world ‒ positive compound interest ‒ to complement your retirement plan.

I want to leave you with a sobering thought. According to a recent Brand Atlas survey of middle-income earners in South Africa, ‘41% believe their retirement plans are “a bit vague” and only 1% have a well-thought-through plan which is being carefully executed.’

When we are put in the unenviable position of having to play the balancing act, let us at least have a plan for when the crisis is over.

For advice on how to best deal with the financial implications of the pandemic – both during and beyond – please contact your Harbour Wealth Manager.

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