Preserving retirement savings vs. blowing it on a big purchase

To best illustrate the difference between preserving your retirement savings and spending the money on buying something like a new house, we would like to tell you a little story about two doctors.

The first doctor, whom we shall call Dr. Preserve, has a great advisor who holistically guides him to make the right decisions.

The second doctor, whom we shall call Dr. Bond, is less fortunate. His advisor is an old friend whom he trusts but who offers him limited product advice. Both of these doctors having completed their compulsory government service and have decided to start their own practices. Like most employees who work for government or corporate institutions, the doctors have been contributing money to a pension fund. Upon resignation, their HR representatives reminded them of these savings. They are given the following options:

Both Dr. Preserve and Dr. Bond have exactly the same amount of money in their pension funds. This amount is equal to R322,500.

Dr. Preserve decides to preserve his pension fund money for his retirement. His advisor assists him to transfer the money into a preservation fund. The entire amount of R322,500 is transferred into a preservation fund that allows Dr. Preserve and his advisor to customise a low cost portfolio.

Dr. Bond, however, decides to use the money for a deposit on a bond for his new home. He withdraws the whole amount, pays tax of R54,000 and is paid a net amount of R268,000, which he uses to fund the purchase. His advisor friend tells him that he’s still young so he has more than enough time to save for retirement.

If you work on a nominal growth rate of 10% per annum, the results below will illustrate the projected values at retirement:
Dr. Bond: R0
Dr. Preserve: R5,627,432
The difference: R5,627,432

Dr. Preserve’s R322,500 has grown to R5,627,342 over the 30 years to retirement, illustrating the benefit of compound growth. We have assumed a growth rate of inflation + 6%, with inflation assumed to be 6% per annum, and total ongoing fees assumed to be 2% per annum.

Dr. Bond has no money in a preservation fund at retirement, but he does have a property which he could sell in order to fund his day to day expenses. This option would mean he has to downsize or rent another property.

Author:
Written by Karen van Rooyen

Categorised in: Articles of Interest, Retirement

This post was written by thys