Gen Zs and Millennials: Why retirement savings preservation when changing jobs is vital

It’s not fun thinking about growing old, but having a financial plan that factors in retirement is an essential aspect of life. For Gen Zs and Millennials in particular, saving for retirement has become even more critical. The rising cost of living and longer lifespans make it imperative to start investing early and consistently.

These days, it’s far more common (and acceptable) for people to have several jobs over the course of their careers.  With this comes the opportunity to cash out of accumulated retirement savings with each job change, and it can be tempting to spend that cash-- perhaps on a luxury item, or to temporarily increase your standard of living. However, this decision could have a significantly negative impact on your financial future. Before deciding to cash out retirement savings, we encourage you to carefully consider the following factors.  

Longer life expectancy

Gen Zs and Millennials are expected to live longer than previous generations. Currently, men and women around the world have a global life expectancy of over 70 years for men and over 75 years for women. For Gen Zs and Millennials these figures are likely to increase given the better health care and nutrition these generations enjoy. Additionally, it’s anticipated that the number of people who live to 100 years or older will increase to almost 3.7 million by 2050, compared to just 95,000 in 1990.

A study revealed that the maximum lifespan humans can reach is believed to be as high as 150 years.

While life expectancy can vary depending on various factors such as socioeconomic status, lifestyle choices, advancements in technology and medicine, and better education on nutrition, are some of the reasons why Gen Zs and Millennials are expected to live longer.

This means that having a plan for a longer retirement period is crucial, and highlights why it matters to start as early as possible and preserve your retirement savings until you retire.

How time fits into investing

Retirement savings need compounding returns to thrive. Over time, returns earned on an initial investment are reinvested and earn additional returns. If you’re regularly contributing money (such as the recommended 15% of pre-tax income per month) to a company retirement fund, this will add to your investment capital, creating a larger base on which to earn returns.

Over the years, compounded returns can lead to significant growth in retirement savings, provided you keep your money invested until you retire.

If you’re cashing out your retirement savings early, there will be lost returns that could’ve been earned if you’d stayed invested, which will have an impact on your capital at retirement. 

Cashing out means starting over

If you withdraw and needlessly spend your retirement savings when changing jobs, it becomes decidedly more difficult to save enough to sustain your current standard of living in retirement. The historical returns that you earned will have been lost, never to be recouped.

This can be particularly detrimental if there isn’t much time left until your retirement. However, if you transfer your accumulated retirement savings to your new employer’s retirement fund or put it in a preservation fund instead, your retirement plan keeps its momentum and you’re able to defer any taxes until your actual retirement.

Source: Morningstar

The graph represents two investor scenarios. Investor A and B set out to invest R1,000 as a starting monthly contribution with a 5% annual escalation into the M&G Balanced Fund over 15 years. Investor A remains the course and the total value at the end of the term is R522,937. Investor B makes a full withdrawal in the seventh year and continues with the regular contributions for the rest of the term. At this point, both investors’ contributions are R1,407 (due to the 5% annual increase) but Investor B has 53% less than Investor A at the end of the term due to the impact of the withdrawal. This highlights the importance or remaining invested and preserving retirement capital rather than withdrawing it.

Building up and preserving retirement savings from your first job onwards will help you to reach a comfortable retirement. Gen Zs and Millennials should always resist the temptation to cash out retirement savings early. Changing jobs may feel like a fresh start, but draining your savings intended for the future means impeding your progress.  

Why not make every chapter of your professional journey count by keeping your retirement provision in place and adding to it, so that it gets you closer to the golden years you are hoping for? It’s a personal choice to choose a comfortable retirement as your goal. You can try our Retirement Calculator to see what it will take to get there.

It's never too late to start investing, and the best part is that the sooner you start, the better your end result is likely to be, provided you focus on consistent investing and keeping your savings intact.

To invest with M&G Investments, contact your financial adviser or our Client Services Team on 0860 105 775 or email us at info@mandg.co.za.