My retirement annuity or my emergency fund?

Posted in Blog
25/05/2020 Mduduzi Luthuli

A client recently e-mailed me the below question…

Q: As the coronavirus spreads across the country, my life is slowly coming to a halt. My employer has indicated they are struggling financially and can only afford to pay me 70% of my salary this month. I fear I may be retrenched the longer this lockdown and pandemic continues. As such, I’m trying to proactively plan ahead financially and am considering partially suspending or reducing my investment contributions. Should it come to this, which of my accounts should I prioritise? My retirement annuity or my emergency fund?

Here’s my answer below. I hope it helps you too.

A: I’m sorry to hear about your predicament, truly I am. Unfortunately, you’re not alone and this concern is one I’m starting to receive more often. Some South Africans are already out of work and millions could end up losing their jobs in a potential global recession.

While I would typically encourage setting aside at least a small portion of your income for the future, ideally 10-15%, now may be the time to scale back or stop contributing to the retirement annuity if you don’t have sufficient savings (3-6 months’ worth of expenses saved in the emergency fund) to fall back on.

I’ve looked at your emergency fund and based on your current after-tax salary, should you become retrenched, you have approximately 2.5 months’ worth of expenses saved. I suggest you take the money you’d normally save for retirement and redirect it towards the emergency fund until we’ve achieved our target.

Pausing retirement contributions is certainly not ideal, but I’m hoping this will be a short-term change. One you should make with the commitment to start contributing to your retirement annuity again once the goal (3-6 months’ worth of expenses saved in the emergency fund) has been reached or you’re back on your feet if retrenched.

It’s crucial to have a suitable emergency fund right now.

In addition to redirecting retirement contributions towards your emergency fund, you can also build it up by backing off on non-essential expenses. Make a list of all non-essential expenditures, including recurring subscriptions and memberships. Rank them in order of importance, then cut out the items ranked near the bottom of your list for a few weeks or months. Send the savings to your emergency fund.

Remember, these budget cuts are temporary, are in response to your stated fears, and reflect the times. Most of us are being told to not be social, which is usually where we spend money. Use that to your advantage to help cut back your budget to the essentials. Having a fully funded emergency account not only provides some measure of financial security, but also provide you with much needed peace of mind amid a frightening news cycle.

Information provided on this website is general in nature and does not constitute financial advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.

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