Should I take that $10k out of my super?

I have lost count of how many times I have heard a similar story. As part of the government’s stimulus support package, individuals are were able to access $10,000 last financial year and can now access up to another $10,000 this financial year until the 31 December 2020, assuming they meet the eligibility criteria. The aim was to help people in situations just like this.

Now don’t get me wrong, having the offer of an instant $20,000 is very enticing especially if you have found yourself in unexpected hardship. But is it a good idea? And what are the short and long term impacts that you might not have considered?

Tell me more . . what is the impact?

So hopefully you have thought about your retirement and what that might look like – maybe a few overseas holidays each year, maybe a bit of renovations on your house, being able to eat out at restaurants each week if you want to, or possibly helping your grandchildren with their education. Well the fact is that the very enticing $20,000 is actually meant to be accumulating for your ideal retirement and will fund the lifestyle you want and have worked so hard for – so if you take out $20,000 then you might adversely impact on the quality of your retirement. Your retirement might look a bit different now – you might find yourself in the position of needing to monitor the gas bills, limiting the trips to the hairdressers and there may be no more elaborate holidays!

The extent of the negative impact is dependent on factors such as your current super balance, your age and your planned retirement age. I have crunched the numbers for you to give you an idea. . .

Current age	Estimated retirement age	Withdrawal amount	Estimated reduction to your super balance at retirement
20	67	$20,000	$52,872
30	67	$20,000	$43,032
40	67	$20,000	$35,024
50	67	$20,000	$28,506

Assumptions: 
The estimates provided use the assumptions and default values from the Superannuation Calculator based on an income of $50,000. The estimates provided are shown in today's dollars, which means they are adjusted for inflation by 4.0% p.a. (2.5% p.a. due to the rising cost of living [CPI inflation] and a further 1.5% p.a. for the cost of rising community living standards). Investment returns are defaulted to an assumed rate of investment return before tax and fees of 7.5% p.a. Investment fees are assumed to be 0.85% p.a. Assumed tax on earnings is 7.0%.
Source: https://moneysmart.gov.au/covid-19/accessing-your-super

Why is the impact so big?

For most Australians the default investment is a “balanced approach”, which has on average of 70% exposure to the stock market.

I am sure you have seen the news and the sea of red, as the Australian stock market came tumbling down in response to the global pandemic and the resulting down turn of global economies. So by pulling your money out of your super you will lock in these losses – the shares you bought for $41 per share (a year ago) are now selling at $27 per share and you will have made an immediate loss as well as losing out on the possible strong recovery in the future – when this might happen we don’t know – oh for a crystal ball!

Then to make it even worse you now have less money invested, as your super balance has reduced, which means both time and compound interest will magnify the gap you caused by the withdrawal, effectively robbing yourself of a comfortable retirement.

If I have not convinced you yet . . . here are some other things to consider

If your balance falls below a certain amount (currently $6,000), this may impact the insurance that you may have within your fund. Ultimately this puts you and your family at financial risk, if you were to suffer a health related event such as loss of use of your limbs, or even worse be diagnosed with a terminal illness you may not be covered.

Even with the best of intentions to ‘payback’ any amount which you have taken out over the last two financial years, you may never be able to catch up – there are provisions of how much we can contribute to our super and generally the last place surplus cash flow is allocated to is your superannuation.

But there are circumstances when this strategy might make sense

If you are not eligible for the other available grants provided by government and are facing financial hardship then you might consider using this pay your mortgage and keep on top of your monthly bills.

If you have outstanding debt that is attracting a high interest rate that you are struggling to service, you can utilise this to pay down this type of debt which will stop interest payments and improve cash flow.

If you decide to take an amount of your super make sure that you have a plan for what the funds will be utilised for and stick to it – don’t be encouraged to overspend and don’t use the money to build an emergency fund or provide you with a safety net.

Seek financial advice to ensure that you have a plan in place of how you can continue to meet your long term financial goals for your future retirement. This crisis provides us with an opportunity to review our expenses and financial goals, try to eliminate any unnecessary expenses.

Be aware of following

Scams – Cyber crooks are already trying to profit from the situation. Beware of people promoting early release of super schemes. These schemes are illegal.

Withdrawing your super early unless you meet a condition of release is illegal – so check the ATO website for the up to date eligibility criteria.

Further support

For further support on COVID-19, contact your local Bentleys advisor.

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Disclaimer: This information is general in nature and should not be relied on as 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 and seek professional advice before making any decisions based on this information.