STOP: Here’s What You Should Know Before Accessing Any Super Early

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If you’re reading this, you’ll be aware of the early access to superannuation scheme designed to combat financial hardships induced by the COVID-19 Pandemic. To help relieve some of the financial strain, eligible persons can access up to $10,000 from their super until June 30th, 2020. You might also be eligible for a further $10,000 from July 1st to Septemeber 30th, 2020. 

Now, of course, accessing your super early can provide a hard and fast liquidity boost in the short term. And yes, for some of us there simply isn’t any other alternative. 

But, if you can avoid drawing down from your superannuation, you’ll be doing yourself a favour of huge financial proportions.  

Here’s what you need to know. 

What exactly is super?

In its purest form, superannuation is a beautiful concept. Basically, the folks in Canberra decided it wasn’t viable for them to keep making pension payments to retirees. Especially as our population ages. They needed a long term solution to ensure a comfortable retirement for all, and alas, Superannuation was born.

The idea is that employers contribute a small portion of their employee’s wages to a superannuation fund chosen by either the employer or employee. Currently, employers need to contribute a minimum of 9.5% of their employee’s gross wages to superannuation.

Your super fund then invests on your behalf into a diversified portfolio of assets like shares (local and international), bonds, property, and cash. That portfolio is designed to compound your retirement nest egg over the course of your working life. The caveat is that you’re not able to access your super prior to the retirement age (under normal circumstances). Which is genius because it allows compound interest to work its magic without any disturbances. But because of the huge financial burden imposed by coronavirus, the game has changed.

WARNING: Withdrawing $20,000 from your super now could cost you thousands more come retirement! Here’s how (and how to avoid it).

By withdrawing funds from your super prior to retirement age, you’re basically robbing yourself of decades of compounded returns. And that can have a big effect on the quality of your retirement. The impact is amplified if you’ve got the majority of your working life ahead of you to compound your super. And most alarmingly, it’s this cohort of people making up the majority of applicants requesting early access to their super. The ATO‘s latest figures state that 66% of applications for early release of super are for people 40 or under. 

Basically any money withdrawn from superannuation now is money that you won’t have available in retirement. The worst part is it will likely be worth much more than what you access now. This is because you won’t be partaking in the additional compounded returns you could have earned while you were invested with your super fund.

Our relationship with our super is symbiotic. For the relationship to prosper, we need to interact positively to co-exist. Fortunately, compound interest is a fantastic tailwind to have at your back when it’s working for you to build up your super. Unfortunately, it’s equally as damaging when it’s working against you. 

To see the damage first hand, MoneySmart.gov has created this free calculator. You can use the calculator to determine how much of an impact withdrawing super early can have on your retirement. 

What unpredictable and volatile investment markets mean for your retirement savings.

Since the onset of coronavirus, investment markets have experienced volatility not seen since the heights of the GFC in 2008/09. In March, we saw the Dow Jones Industrial Average fall into a technical bear market faster than any time in its history. And now, only 3 months later, it’s nearly rebounded back into positive territory for the year.

Given the uncertainty caused by COVID-19, it’s possible that volatility will return in global investment markets, potentially causing more losses. By withdrawing money from your super, you’re effectively locking in these losses because your super fund may need to sell the assets like shares that it holds on your behalf.

By converting paper losses to real losses, you’re basically stealing the potential for future growth from yourself. How counter-intuitive.

Here’s how you can avoid withdrawing money from your super and
maximise your retirement savings!

Every other alternative to withdrawing your super should be considered.  It’s worth seeking out whether you’re eligible for any Services Australia initiatives like Job Keeper or Job Seeker, which will help ease the financial stress. 

If you’re struggling to meet rent commitments, have a chat with your landlord or real estate agent. If you advise them of your situation, they may be happy to arrange flexible payment terms. The same principle applies when it comes to other miscellaneous financial commitments like phone or utility bills. You’ll be pleasantly surprised by how many organizations are willing to help out where possible.

If you’ve got a mortgage, personal loan, or any other debts, you may be able to get some relief on your repayment obligations from your lender due to the circumstances. Again, it’s worth asking the question and finding out for yourself. 

Don’t ever be afraid to ask. The worst outcome is that you end up exactly where you were before asking the question. 

How you can make easy money just by selling your unwanted possessions.

And what about those bits and bobs you’ve been meaning to sell on Marketplace but never got around to it? If you need the cash, now’s your time to shine. Ridding yourself of things you have no use for will give you a handy cash boost. Hopefully, it also prolongs your need to access your super early.

My Verdict 

If you’re considering accessing your super early, make sure all of your other options are exhausted before doing so. Unfortunately, there is no escaping the fact that accessing super early might be the only option for you. But make sure it’s your last one. Shadow Treasurer Jim Chalmers, summed it up quite nicely by saying “The expansion of early release superannuation risks is undermining retirement incomes and compromising financial system stability, and should only be a last resort.”

P.S. I’d love to meet you on Twitter: here.

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DisclaimerThis website (the “The Money Pal”) is published and provided for informational and entertainment purposes only.  The information in the Blog constitutes the Content Creator’s own opinions and it should not be regarded as financial advice.

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