Millennials can achieve comfortable retirement with proper planning.

A lot has been said about millennials’ financial habits. Just last month Australian real estate mogul Tim Gurner advised millennials to stop buying avocado toast so that they can afford buying property. But Stanleur many people appreciate that things aren’t that simple. “Sanlam’s research shows that, on average, millennials are better educated than any previous generation. Yet they have lower real earnings, higher levels of debt, experience more unemployment and have less disposable income.”

Stanleur says of all challenges millennials face, special attention has to be paid to their retirement planning. Stanleur cautions that millennials are the generation most at risk of achieving poor retirement outcomes, because of the frequency at which they change jobs.

“Younger workers in particular are more exposed to the temptation of withdrawing their savings than any other generation before them. Recent research by recruitment agency Kelly found that the longest tenure with any one employer was two years or shorter for 36% of SA employees surveyed. We therefore need to address the importance of preservation.”

When you leave your current employment, money which you and/or your company contributed towards your pension and/or provident fund, becomes available to you. You then have the choice of either taking the proceeds in cash, or reinvesting the money. Cashing out your retirement proceeds can be a detrimental decision in the long run.

“Early withdrawals have harsh tax implications, as only the first R25 000 is tax free. So you pay tax on every rand you withdraw after that. But, most importantly, even if you start to save more towards retirement as you get older, you lose out on the compounding effect of leaving your savings invested when you change jobs.”

Here are three options for reinvesting your retirement proceeds:

1. Reinvesting in the retirement fund of your new employer

Stanleur it is important to compare apples to apples when you choose this option: “Firstly, compare the benefits of the fund of your previous employer with those of the new employer, to make sure you will still be receiving the same benefits. This is particularly important considering the amount of cover offered by the pension fund in question.”

2. Reinvesting in a retirement annuity (RA)

A retirement annuity is a secure and disciplined long-term savings solution which offers a wide range of investment choices. However, your investment in an RA can only be accessed at the age of 55. An RA has a tax benefit since you can deduct your contributions from your taxable income. Furthermore, funds in an RA cannot be attached by creditors. An RA will instill discipline on your part since you will not have access to your retirement savings until you are 55 years old or older.

3. Reinvesting in a preservation fund

The new retirement legislation allows money to be deposited in a default preservation fund until you decide which retirement product to reinvest your savings in. Preservation funds can be a great vehicle to preserve your retirement savings since they offer the flexibility to make one withdrawal prior to retirement, which could be useful in the event of a major financial problem.