The recently announced extended deadline for implementing National Treasury’s two-pot retirement system from 1 March 2024 to 1 March 2025 could give financial advisers more time to prepare their clients for managing their savings pot, which offers the option of annual withdrawals to help with unforeseen financial challenges. This is the view of Old Mutual Personal Finance Certified Financial Planner® Henri le Grange, who says financial advisers face the challenge of understanding the new system and effectively communicating its intricacies in the run up to its launch. Le Grange shares his views on how advisers can help their clients to navigate the two-pot retirement system wisely.
In the ever-evolving financial ecosystem, systems and strategies are perpetually refined to meet the needs of the modern retiree. Enter the new two-pot retirement system – a ground-breaking approach designed to give consumers greater flexibility in their retirement planning. At first glance, it seems to promise increased control over financial futures. But as with any innovation, it ushers in new opportunities and novel complexities.
Financial advisers now stand at the crossroads of this transition. As stewards of their customers’ financial futures, they face the challenge of understanding this new system and effectively communicating its intricacies. With every customer’s dream of a secure retirement at stake, it is paramount to ensure they can navigate the two-pot retirement system wisely.
This new structure introduces a particular tension. On one hand, the freedom to make strategic withdrawals can be empowering. Conversely, these withdrawals can jeopardise long-term retirement outcomes without meticulous planning and foresight. This delicate balance underscores the vital role of advisers in guiding customers towards informed and sustainable decisions.
Therefore, financial advisers must equip themselves with a deep understanding of the two-pot system and the intricacies of early withdrawals from retirement funds. By mastering these six critical aspects, advisers can empower customers to make informed and sustainable decisions, ensuring a more secure and prosperous retirement.
1. Leveraging the power of compounding: a vital insight for financial advisers
In the world of financial advice, one’s worth is often measured by the wisdom imparted to customers. Among the pearls of financial wisdom, there’s none as profound as understanding the silent power of compounding. Financial advisers must grasp this concept and articulate it to customers as an essential value-add in retirement investing.
In its essence, compounding is the heartbeat of wealth creation. It’s the art of money making more money. Compound interest takes the interest earned on the balance in an investment account and reinvests it, causing a snowball effect of exponential growth. Customers who comprehend this phenomenon are more likely to resist impulsive withdrawals from their principal balance, recognising the dire consequences such actions may have on their retirement outcomes.
2. Co-creating financial strategies aligned with lifestyle goals
Financial planning is a collaborative venture to align financial strategies with individual lifestyle goals. Unlike mere investment management, financial planning begins with a profound understanding of the customer’s values and aspirations.
Financial planners co-create a tailored plan with each customer, exploring various trade-offs to form a solid financial strategy. This involves not only selecting a mix of assets but also understanding the required return to make the desired lifestyle attainable. The objective is to build trust and ensure customers are well versed in the decisions made, enabling them to face market volatility with confidence. Through sound financial planning, customers are equipped with a resilient plan, capable of weathering market fluctuations, while steadily advancing towards their long-term financial and lifestyle goals.
In the financial markets, uncertainty is the only certainty. Customers, less informed and more prone to emotional reactions, may seek to cash in on investments during turbulent times. Advisers must be the steady rudder guiding them through market cycles.
We should clarify that market downturns are part of a natural cycle, not necessarily a loss but a period of slowed growth. Proposing diversification strategies and reminding customers of their long-term investment horizon helps them to remain steadfast in their pursuit of retirement goals.
3. Defining emergencies: an adviser’s role in emotional intelligence
In retirement funds, emergencies are often the unseen dragons lurking in the shadows. Under the new two-pot system, members may seek to access a part of their retirement savings pot prematurely because of unforeseen events, such as loss of household income, medical bills, or unexpected repairs. Financial advisers must exercise emotional intelligence when guiding customers through these tumultuous waters.
Advisers are responsible for assisting customers in discerning whether an event is indeed an emergency warranting a withdrawal from their savings pot. Balancing empathy with pragmatism is the key. Through thoughtful dialogue, we can help customers to explore alternative solutions to address financial adversity without depleting their retirement nest egg.
Even the most prudent customers may face financial calamities for which their savings buffer falls short. It’s during these critical junctures that customers turn to us for guidance. Advisers must be well versed in the myriad of financial alternatives available, from soft loans to asset disposition and short-term financing options.
They must be capable of providing customers with precise calculations that illuminate the actual costs of resorting to short-term debt versus tapping into their retirement funds, particularly considering the tax implications. In all scenarios, retirement savings should be regarded as the last resort, and this conviction should be communicated clearly.
4. Consistency: the bedrock of retirement planning
The saying “consistent contributions lead to financial resilience” is crucial in retirement planning. Without a well-crafted plan, individuals may need to work beyond their desired retirement age or rely on family or government pensions. As advisers, we emphasise the importance of regular contributions to retirement accounts aligned with planning goals.
Additionally, we highlight the necessity of an emergency fund, serving as a financial buffer, ideally covering six months’ expenses. By advocating for regular contributions to this fund, aligned with their broader financial objectives, we ensure our customers have a robust financial plan ready to weather economic uncertainties.
5. Evaluating savings strategies: tailoring plans to individual needs
Financial advice is not a one-size-fits-all profession. To serve our customers optimally, we must regularly evaluate their financial plans. This entails examining their financial health, analysing investment performance, and suggesting amendments to ensure alignment with their retirement objectives.
A holistic approach is indispensable, considering income level, age, risk tolerance, overall financial portfolio, and current market conditions. If a customer’s financial situation improves, we should encourage them to save more. Conversely, if financial pressures loom, we must help customers to create a budget, identifying areas where expenses can be trimmed. We aim to enable customers to monitor their investments’ performance, remain steady during economic downturns, and manage risks effectively for a secure retirement.
In addition, holistic planning must include provision for risk events, such as death and disability, as well as short-term risk cover.
6. Clear and effective communication: navigating through financial reforms
In an ever-evolving financial landscape, communication is of paramount importance. Many customers may be unaware of forthcoming retirement fund industry changes. The adviser’s role is to decode complex concepts using straightforward language, employing calculators and modelling tools to help customers visualise the potential impacts of their financial decisions.
Facilitating open and honest discussions about the merits of avoiding premature access to retirement funds empowers customers to make informed choices that align with their long-term goals.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning advice that is appropriate to every individual’s needs and circumstances.
