Don't rob the elderly

When changing jobs, it can be really tempting to cash in your retirement fund to help settle some debt or buy that expensive something special you really need. When looking at the kind of numbers your forward-planning says you need to retire, even a healthy sum in your retirement fund can look rather puny and you may think it won’t hurt to redirect the funds to a “clear and present” need. But as with all decisions, one needs to weigh up the pro’s and cons before blundering ahead.

Take a thirty year old person, who has resigned a job and has R100 000 accumulated in the company retirement fund. If that amount was “preserved” (kept in a retirement-funding investment) it would grow to around R2 041 396 by the time our investor reached sixty-five years of age. (using a set of assumptions kept consistent throughout this example). You say, “But inflation means that amount is not as big as it looks”. You’d be right, so if I strip out the effect of inflation, the “today’s money” value of the R100 000 at age sixty-five is R265 496 – way more than double the value it is now.

Of course, if you cash the fund in now, you’ll be taxed about R13 950, So you only get R86 050 out. That means that to get R86 050 you have exchanged R265 596 – not good business at all.

So what about saving a little extra each month to make up the shortfall. You’d need to add R752 to whatever you normally would have to save – if you add that up over the years it comes to R315 840 extra. Ouch.

The moral of the story is that it is of paramount importance to keep a long term view when it comes to retirement funding. It’s enough of a challenge accumulating the capital you need, without raiding that fund along the way –essentially, robbing an “older you” of a much needed income.

A carefully crafted retirement plan is essential to set up, follow and monitor if a financially secure old age is to be achieved – the trick is to get started and keep going.

Will you have enough to invest in their passion?

Opportunity costs money. Great opportunity often costs a lot of money.

A commitment to investing smartly now means you can see your child's potential fulfilled. Now that's what parents are for.

How much to invest?

That will depend on the kind of plans you are preparing for. For example, if you are planning to fund a four year degree that costs R40 000 per year now and your child is new born, an investment of around R1100 escalating at 6% per year should cover the cost of the degree when the time comes.

Having the cash available in advance when it is needed is far better than needing to borrow the money or to cut back on lifestyle expenses to squeeze through the university years. And it's a huge advantage to your child to start his or her career without the burden of a student loan.

What investment vehicle should you use?

You need something that can adapt to changing plans. Avoid the "Education Plans" in the retail market - these are nothing more than endowment policies with a new label. They are generally expensive and not very flexible.

Get a qualified financial advisor to put an investment together for you using unit trusts. This will allow you to tailor the risk/return profile, cut costs and have an investment that can allow changes in contribution, additional lump sums, full or partial withdrawals and temporary stoppage of payment - all without penalty costs or other drama.

Investing for your child's future is not expensive...it's priceless.

You should never tell a child their dreams are unlikely or outlandish. Few things are more humiliating, and what a tragedy it would be if they believed it.

Rita Ghatourey