James asks: My wife and I are debt free except for a bond of R600 000 on a property worth about R1,7-million. My wife and I both work but she is planning to stop work for a year or two to spend more time with our two children. This will be a challenge financially, so we are considering withdrawing part of her pension fund towards settling the bond.
We are disciplined enough to start rebuilding retirement savings, and also have existing RAs and unit trust investments that we intend maintaining. Would this be a very unwise move, or is there merit in taking the above route?
Maya replies: This is a difficult one because your wife’s retirement fund will allow her to stay at home with the children. However, the long-term financial impact is very serious.
It is very important that your wife looks after her own retirement and does not incorporate it into the family finances. Women are severely underfunded in retirement for two reasons:
Firstly they take time off to raise families. At this stage they usually cash in their retirement funds to allow them to do so and at the same time they stop contributing to their retirement. Most South Africans are underfunded in retirement and it is most likely that your retirement savings will not be enough to support your wife in retirement.
Secondly, your wife will outlive you, most likely by seven years, so in fact she requires more money on retirement than you do. The rule of thumb is that a person who starts saving for retirement at age 25 should save 15% of their salary — that figure for women is 18%.
Although you say you are disciplined at saving, because of the power of compounding, your wife will never be able to save enough to put her back in her current financial position.
Every seven years that R350&nsp;000 lump would most likely double in value, so it would be virtually impossible for her to catch up just by saving every month from now until retirement
The tax consequences are also severe. She will pay about R50 000 in tax (see related article) which would be worth around R1-million on retirement. She will also forfeit all of her tax-free lump sum on retirement.
As a couple you need to look seriously at how you can find a way for your wife to be with the children without cashing in her retirement fund. Is there an option for her to work part-time, for example?
If she does cash in her retirement fund now, there is a high chance that the children will be supporting her in her old age — maybe that is worth the trade-off?
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