Half a million reasons to think long and hard before withdrawing your superannuation during the coronavirus downturn
There’s an old saying that you shouldn’t make short-term decisions with long-term consequences.
But that’s exactly what the Government is inviting many of us to do by relaxing the hardship provisions of superannuation to try to help people struggling to make ends meet in this coronavirus-ravaged world.
Let me say at the outset, my intention in writing this is not to criticise the Government.
Even Scott Morrison’s harshest critics would have to concede the Government, so far, has done a wonderful job in stopping Australia’s coronavirus death toll becoming like Italy or Spain or the United States.
Monumental policy decisions have had to be made on the run though, and understandably, there’s been little time to think through all the consequences of all those policies.
In trying to help those who have found themselves out of work and destitute, thanks to the government-imposed virtual shutdown of the economy, the Government will allow us to withdraw up to $20,000 from our superannuation over the next six months.
For some, struggling to keep a roof over their heads and put food on the table, an extra $20,000 will be a lifeline in a sea of despair — especially as Mr Morrison is talking about the economic shutdown continuing for six months.
However, for those who take the lifeline, the brutal reality is that $20,000 of super will probably be the most expensive money they ever get their hands on.
The reason? Compound interest.
“$20,000 today could by hundreds of thousands in 35 years’ time”
Superannuation is meant to provide income for your retirement, and thanks to compounding, $20,000 today will be worth a lot more when you turn 65 (which for the purposes of this report I’ll use as retirement age).
Young people will pay the highest price for an early withdrawal from their super fund, because they have so many more years to retirement.
Let’s say you are 30 years old, for example, with 35 years left to work, and your super fund returns a very conservative 5 per cent a year.
That $20,000 today would equate to $110,320 in 2055.
No super fund would still be in business though if 5 per cent a year is all it could generate — and this is where it gets real and painful.
Most of us are invested in what’s known as ‘balanced’ super funds (which aren’t ‘balanced’ at all, but that’s a topic for another story).
According to Australian Super, which is Australia’s largest fund, its balanced option has returned an average of 9.76 per cent over the last 10 years.
If Australian Super maintains that rate of return over the next 35 years, $20,000 in 2020 will become $520,683.
That’s right — more than half a million dollars in lost retirement income, which will have a big impact on your standard of living in retirement.
It’s probably the difference between being able to live comfortably and do the things you like to do, or just scraping by and only being able to afford the basics, and you could be looking at 20 years of that.
But, I hear you say, any financial adviser worth his or her salt will tell you that past performance is no guarantee of future performance.
Let’s assume then that Australian Super’s fund managers have a tough time over the next 35 years, and can only deliver 8 per cent returns in their ‘balanced’ fund.
That $20,000 withdrawn today will still be $295,707 in lost retirement income.
If you’re 50, with 15 years left to work, you’ll lose $80,852, using Australian Super’s numbers, and if you’re 60, it’s $31,860.
So older people will not be hit as hard but it’s still not to be sneezed at.
“If you’re in dire straits though, all these big numbers way off into the future are little consolation.”
You’ve got to make ends meet now and you may have no choice but to draw on your super.
But armed with the consequences of that decision, try to make it your absolute last resort and if you do take money from super, develop a strategy to make it up when you are back in the workforce.
What you don’t want is 20 years in retirement wishing you’d done things differently all those years ago.
This is general advice only. Before acting on anything in this report, you need to consult a financial adviser who knows your personal circumstances.
Contact the team at ADR Wealth for advice specific to you.