How early super withdrawals add up

The coronavirus pandemic is having profound effects on Australian families, communities, businesses, the financial markets and the global economy.

       
Many people have lost their jobs and there is much uncertainty around the depth and duration of the current crisis. Governments and policymakers across the globe have announced unprecedented fiscal and monetary packages to provide some offset to the downturn.
 
The Australian Federal Parliament has approved the JobKeeper payments ($1500 per fortnight), boosted JobSeeker payments up to $1100 per fortnight, and allowed the unemployed and people whose hours have been cut by 20 per cent to dip into their retirement savings to help them weather the coronavirus crisis.
 
People will be able to apply online through the myGov web site to access up to $10,000 of their super, tax free, before 1 July 2020, and then another $10,000 after the new financial year begins, also tax free.
 
While some will have to access these funds to make ends meet, others may have a choice. Should they or should they not use the early access to superannuation?
 
How early withdrawals add up
 
Withdrawing superannuation funds now means an investor selling part of their portfolio in a depressed market, crystallising current losses and giving up the benefits of eventual recovery in investment markets. It will also erode the investor's retirement wealth by forgoing future compound interest.
 
Consider the impact that an early withdrawal could have on an investor's superannuation balance. The calculations below are for a balanced multi-asset managed fund containing a mix of equities and fixed income, with an average net return of 6 per cent per annum.
 
For an investor who has 20 years until retirement, the value of a $10,000 withdrawal is estimated to be worth $32,100 at retirement. Over the course of 40 years, the impact of the $10,000 withdrawal on the retirement savings climbs to $102,900, while a $20,000 withdrawal means an investor would have $205,700 less at their disposal. For this investor who chose to withdraw funds right now, it could mean delaying retirement for a number of years.
 
Comparing potential withdrawal impacts at different ages
 
Investor's current age Years to retirement Value of $10,000 at retirement Value of $20,000 at retirement
67 0 $10,000 $20,000
57 10 $17,908 $35,817
47 20 $32,071 $64,143
37 30 $57,435 $114,870
27 40 $102,857 $205,714
 
Source: Vanguard calculations
Notes: This is a hypothetical scenario for illustrative purposes only. All values are nominal.
 
A disciplined approach
 
Global evidence supports the importance of disciplined saving for retirement outcomes.
 
In 2018, the World Economic Forum named low levels of savings by individuals amongst the six key challenges facing the retirement system worldwide. Many people delay retirement savings until they are in their 40s or 50s. This is not unusual as at each life stage, more immediate financial priorities come first – for instance, saving a deposit to buy a home, paying down a mortgage or investing in kids' education. In addition, more often than not, savings intended for retirement do not last until retirement; sometimes they are drawn for medical emergencies or critical housing repairs, or during periods of unemployment.
 
As Australians live longer and spend more time in retirement, we require higher levels of savings to sustain our longer lifetimes and adequate lifestyles. The World Economic Forum estimates that combining auto-enrolment to superannuation, increasing savings over time and avoiding dipping into the superannuation savings prior to retirement is expected to increase wealth at retirement by 70 per cent.
 
Many people are currently doing it tough and will need to rely on the early access to superannuation as they do not have other means to support their families. For investors who have a choice, taking a long term perspective may prove to be beneficial. We recommend investors seek financial advice and explore other ways of obtaining financial assistance first.
 
Stay the course
 
Vanguard founder Jack Bogle famously said: “The courage to press on – regardless of whether we face calm seas or rough seas, and especially when the market storms howl around us – is the quintessential attribute of the successful investor.”
 
Historically bull markets last substantially longer than bear markets, and this downturn will eventually be over.
 
The best thing investors can do is to stick to their investment principles and philosophy, and “stay the course” to have the best chance for investment success.
 
 
Inna Zorina
Senior Investment Strategist 
Investment Strategy Group
15 April 2020
vanguardinvestments.com.au
 

GENERAL ADVICE WARNING

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients' circumstances into account when preparing our website content so it may not be applicable to the particular situation you are considering. You should consider yours and your clients' circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This website was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
 

Latest Financial Planning News

New laws prompt review of SMSF estate plans

  In light of recent laws passed this month, many clients will need to review their estate planning to...

Read More

SMSF sector grows, new fund numbers drop

  Overall growth of SMSF sector has continued despite a drop in the number of new funds in the December...

Read More

Ways to outsmart your cognitive biases

  As markets continue to be wax and wane due to ongoing coronavirus fears and subdued employment and...

Read More

COVID-19 cuts risk pension pain

  The Federal Government recently announced the mandatory minimum drawdown rates for retirees with...

Read More

SMSFs urged to review leases before granting rent relief

  SMSF clients planning to provide rent reductions to tenants should review the lease agreement to ensure...

Read More

New financial year to bring new rules for super

  As the 2019–20 financial year draws to a close, a technical expert has highlighted some of the new...

Read More

‘But how will we pay for this?’

  It's a natural question about global policymakers' multitrillion-dollar efforts to prop up...

Read More

Related-party property development concerns — Part 1

In the first article of a four-part series on SMSFs and property development, I focus on related-party...

Read More

Do your investment goals stack up?

There's an old saying, to only focus on the things in life that you can control.       ...

Read More

SMSF liquidity lessons learnt from the pandemic

Sometimes it is true that you don't know what you've got.  ​Till it's gone.  Music...

Read More

Court decides on taxable capital gains distributions

The Federal Court has determined whether trusts that distribute capital gains to non-resident beneficiaries...

Read More

A super catch-up plan

It's a number that can only be described as mindboggling: $400 million a day.       ...

Read More