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Accessing Super Early

By August 31, 2020 2 Comments

The Australian government is allowing some people to access superannuation (super) early to help get through the economic tough times due to COVID-19, but is it a good thing? Is it beneficial or should you steer clear?

For those of you that haven’t met me, my name is Angela, I am your Money Messenger. My background is in financial planning, I’ve been working in that industry for over 20 years here in Australia. I help financial planners to put together recommendations for their clients which detail strategies about how to repay debt, save money, invest for retirement, and protect with insurances. Together, we come up with strategies that show clients how to use their money in a smarter way to eliminate financial stress and have a better life.

Whether or not to access super early is a huge question for many people. Whilst COVID-19 is ravaging the country and the world as we know it from a health aspect, it’s also devastating from a money side of things. Health aside, here at the Money Messenger we talk about money, so we’re talking about the financial casualty of this virus.

The government has recognised that there will be some economic tough times like never seen before, so to help get through it, the government announced last financial year that certain people can access their super early and potentially withdraw $10,000 last June and also $10,000 in July. That’s now been extended through to September because the government has realised that there is going to be a prolonged economic downturn.

This initiative is not available for anybody and everybody. It depends on whether a person is still working and receiving JobKeeper or JobSeeker. There’s a list of eligibility requirements that you can find here:

Essentially, you need to be receiving some kind of government assistance.

So is accessing super early a good idea and what does it mean? Sounds too good to be true right? Well, when considering whether this is right or wrong for you, you need to consider both the short-term implications and the long-term implications.

You could get your hands on $10,000 – $20,000 and either put that towards bills, mortgage repayments, and other necessities that you must pay but perhaps you can’t right now because you’ve lost your job or found that your income has been dramatically reduced. That’s what the program is designed for and if you’re in that situation that’s why the government is offering this, however, some people are not in that situation, perhaps things are not that dire, but they are eligible to access their super and so are also are wondering they should or not, perhaps to buy a property and use it as a home loan deposit.

So let’s talk about the long-term ramifications first because this is the part that jumps out at financial planners and people that give retirement investment advice.

Loss of market returns

If you access $10,000 of your retirement savings now, by the time you retire, which, if you’re in your mid-20s for example, could be 40 years away, that $10,000 with interest and market returns compounded over 40 years could be worth more than six figures by the time you retire at age 67. $10,000 in today’s dollars assuming a 5% p.a. return over 40 years could be worth $70,000. That $70,000 could even be a lot more because you wouldn’t just have $10,000 in your super fund. Instead, contributions constantly go in from your employer and/or yourself and multiply and compound over time, so, that $70,000 loss be more like a $100,000 loss by the time you retire.

The main problem with taking out $10,000 now, a relatively small amount in the scheme of things compared to what it could be by the time you retire, is that you’ll miss out on the compound returns.

Unfortunately, if you are in your 20s, 30s, and 40s, you may not generally be too concerned about retirement. It’s not really at the forefront of your thoughts because it’s such a long time away so you’ll worry about it later, but you can see that with compound interest, which is a game-changer when it comes to making money and creating wealth, is that it can rattle your end retirement balance by the time you get to 67. If you have less super in your fund by retirement it can have dire effects on when you can retire and the type of lifestyle that you can expect to enjoy in retirement. That $100,000 you may miss out on could make a difference to the type of retirement you have. You might need to work longer, you might need to scale back the amount of travel you do, or the income you have. You could potentially even have to rely more on the Age Pension which is not a great retirement. It’s not a lot of money and not your first choice when it comes to retirement.

Selling when markets are down

Another big issue with accessing super early is that not only will you miss out on market returns and retirement savings in the future, but you will essentially sell something now when markets are down. You’d sell an investment at the bottom of the market. Essentially, markets have dropped by up to 30% in the recent few months. They’ve come back a bit of late but something worth $10,000 now, as an example, was worth $13,000 a few months ago. Up to 30% more. If you had $13,000 a few months ago and someone offered you $10,000 for it now, would you take it? Would you sell? Of course not! You wouldn’t sell any other asset when prices were low so why would you dip into your retirement savings?

We’ve talked about the long-term ramifications of accessing your super early, such as taking out $10,000 now and potentially missing out on $700,000 at retirement, probably more like $100,000, but, if you withdraw the full $20,000 allowed, you could miss out on $200,000 by the time you retire or more! You’ll also be selling when markets are down so taking out $20,000 now was essentially worth 20% – 30% more a few months ago.

Alternatives options to consider

Now, let’s consider the short-term implications and give you some suggestions on other things you could do in place of touching your long-term retirement savings.

  1. Consider what government assistance is out there, whether it be JobKeeper or JobSeeker. Go to my.gov.au or moneysmart.gov.au and check the other government initiatives that have also been released as part of the government stimulus package to get you through these tough times.
  2. You could apply for a hardship loan through your bank or another provider however I would strongly steer away from that because the last thing you would be taking on is more debt right now and I can only imagine the types of interest rates or the terms and conditions that are attached. It’s more so about buckling down and not taking on additional financial commitments in terms of bad debt, personal loans, hardship loans and even avoiding racking up the credit card if you can.
  3. If you have emergency savings, now’s the time to use it. This is what an emergency is. If you don’t have emergency savings and we’ve seen that a lot of people in Australia do not have emergency savings, then that’s something in the future for you to consider once this is all-over and our incomes go back to somewhat normal. Emergency savings is what you need to get on top of and establish. For those of you that do have some, this is exactly what it’s for using cash now will be the cheapest way for you to get through this instead of touching something as your super or racking up debt which has interest attached.
  4. Contact utility companies, any companies you pay bills to, and ask for a price reduction. Ask for a payment plan if you need so you can pay your bills over time instead of having to pay all at once.
  5. If you are considering accessing your super but you don’t need the full $10,000 or $20,000 available, then don’t take the full amount. Take only what you need. It doesn’t necessarily mean that you have to take the full amount. If you’re going to withdraw the full $10,000 and then spend half on your bills and mortgage and then blow the rest on ‘stuff’, then you’re going to shoot yourself in the financial foot you’ll go backward because what you’re going to spend your money on you’re going to take it out of an investment that was growing for you and then buy stuff that will potentially go down in value. Taking from something that goes up to replace with something goes down does not make financial sense.

Repaying what you withdraw

I’ve been asked, what’s wrong with accessing super early so long as it’s repaid? Well, in Australia there’s a growing debt crisis. Put coronavirus crisis aside, Australians have a problem with debt we see a lot of people spending more than they earn with growing debts majority times people say they will do something whereas they don’t. When it comes to money, people say they will repay, but chances, most won’t. Just going off history.

Accessing super early to buy property

So people are considering accessing super early as it may be a chance to buy a property. Particularly these days, with prices of houses as high as they are in Melbourne and Sydney, etc and people often living above their means and not actively saving towards a home loan deposit for as long as it takes, which is sometimes several years, some people feel that accessing super now could be a way of putting together a home loan deposit, or at least a big chunk of a deposit. If buying with a partner who can also access their super, then together, you may access up to $40,000 which could be a huge chunk of a property deposit.

Accessing your super early isn’t great, but if you then put it into another asset that will grow over time, does it make it better? Whether that’s a positive or negative thing will depend, will whether the property grows in value between now and retirement more than your superannuation would have. Problem is, no one has a crystal ball. We don’t know the answer to that as there are many different factors when it comes to property investing and superannuation that will affect that such as the suburb and the demographic of people, the type of house, the type of land, plus, what’s driving the economic factors. Leaving your super alone and saving for a home loan deposit the good old fashioned way (with savings and other government grants) will be financially better.

 

So at the end of the day, should you touch your super? The short answer is ‘no’. I believe that the long-term ramifications of accessing retirement savings now are too great to fix short-term problems. If you are in dire financial stress, which is why this initiative was released by the government, then I’ve mentioned some other things that you can do first before touching your super which is quite a final decision. Once you’ve withdrawn the funds it’s very hard to put it back and not ever lose some money, so I’m very much against doing anything financially that will leave you financially worse-off.

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Disclaimer: This information provided is general in nature. It is based on the knowledge and experiences of the author and not intended to be taken as financial advice. It does not take into account the objectives, financial situation or needs of you or any other particular person. You need to consider your financial situation and needs before making any decisions based on the information. You may have to modify the information and do further research, for it to suit your personal financial situation. Therefore, before acting on the information, it is recommended that you consider its appropriateness to your circumstances or consult a financial adviser, tax advisers or legal professional to assist you in doing this

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