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  • Writer's pictureKyle Meadows

The two-pot system: Creating generational wealth


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Most people are familiar with the planned two-pot retirement system in that it will allow for limited withdrawals of up to a third of their retirement funds as of March 2024, so savers can access money to cope with challenging life events.


However, decisions particularly financial, made in haste and without the proper financial advice could impact not just the current month you may be worried over – but the future financial health and the legacy you leave behind for your loved ones.


And while consumers continue to feel the economic pinch, perhaps now is the best time to make a mindset shift from worrying about the magnitude of what saving for the future looks like on an already constrained financial budget – to cultivating the habit of small yet incremental saving.


Shift the mindset, shift the outcome.

Through the new system, a client's retirement annuity is split into two – the 'savings pot' is where clients will be able to make a withdrawal once in a 12-month period.


Consider this scenario: Thabo and Mandla, both 40 years old, have decided to save for retirement by using an RA. They both contribute R1 000 per month to the same RA fund and underlying portfolio which grows at 10% a year.


Thabo decides to take advantage of the new two-pot legislation and withdraws 10% every 12 months to help with various emergencies. Mandla doesn't and simply allows it to grow at the marginal interest rate. At the end of 20 years, Thabo has R230 175 saved in his RA, and Mandla, R723, 987 saved – which is more than 3 times the amount Thabo has.


The truth is, withdrawing from your RA savings, depending on how often you do it, will have a compounding impact over time. It is definitely not something you want to do often and should be viewed as a 'last resort option' for when in a real financial crunch.


Additionally, to consider, the recent 2022 UCT Liberty Institute of Strategic Marketing's report on The Black Middle Class in particular, revealed that in the next 20 years the country's first major wave of Black middle class retirees.


Up until now, retirement has had different meanings for different cultures – for many, it has come with a burden on the younger generation to financially maintain their retired loved ones. However, many people are now thinking about ways of changing that burden on their children in 20 years' time; and importantly, about creating generational wealth that could take care of them during their retirement years and for their children beyond.


Save as a rule, use when needed.


Flexibility. That is what this new two-pot system will allow for – but therein also lies a double-edged sword.


Historically, people could not touch the money in their RA until reaching the retirement age of 55 years old when they could apply for early retirement. However, that also presented a limiting factor in many clients' general interest in investing and diversifying investments as well.


While the two-pot introduces flexibility in accessing money from the savings pot, I believe it is also innately positive in that it will encourage more interest in saving for retirement once it brings in a more accessible and flexible investment space.


If a client is not however in a tight financial corner and does qualify to access the funds, they should definitely not be using it. The big reasoning around this is having the benefit of essentially tax-free savings through your RA. One thing people should never underestimate is how much power there is in being consistent with the event, the smallest amount they have – from as little as R500 a month – could change their financial circumstances, for themselves and their families for generations to come.

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