As Australia continues to grapple with the impact of COVID-19, many of us are facing decisions that we may not have needed to make on a regular basis. Should our kids still attend school? How do we stay relevant in the current job market? Can we pay our bills? Should we withdraw some of our super early?
Off the back of the Government’s announcement to allow eligible Australians to have early access to their super from mid-April 2020, the last question is something that people may be pondering.
If you are living on a tight budget, the announcement can be a welcome relief to help meet your expenses.
If you are not, the decision to withdraw your money prior to retiring is one that shouldn’t be taken lightly as superannuation is a long-term investment to finance your golden years. Here are three factors to consider.
1) Withdrawing your super = Selling your investment
Most of Australian Catholic Super’s investment options including LifetimeOne have an exposure to shares. Withdrawing your money in the coming weeks is likely to result in selling these shares at a low value and locking in any losses. You will also be left with less units of the option, which can put you at a disadvantage in any market recovery.
If you must withdraw your money come mid-April and have some of your super allocated to defensive assets such as cash or bonds, typically drawing down on these asset classes will save you having to sell your shares in the current depressed market.
2) The snowball effect of compounding
You would be familiar with the power of compounding, that is with time, your savings and investment can grow at a more rapid rate because your returns are reinvested with the initial amount.
Conversely if you withdraw your investment, you may lose out on larger returns due to the reduced capital.
For example, let’s assume 25-year-old John has $50,000 in super. The following scenarios illustrate the differences in his capital upon reaching 65 years of age if he:
- withdraws $10,000; or
- withdraws $20,000.
|Action||Capital balance at 65 years of age in today’s dollars* ($)|
- John earns $80,000 per annum.
- The only contributions to his super are made by his employer.
- The rate of investment return is 4.5%.
- The inflation rate is 2 per cent.
- The amounts are net of taxes, fees and costs.
- Figures are rounded to the nearest thousand dollars.
If you take a longer term view and leave your super untouched for now, history has shown that the market will recover at some point and the value of your investments are likely to rise again.
3) Insurance cover
If you have death, total and permanent disablement and/or income protection cover with your super, you may like to check your insurance arrangements to make sure they are suitable for you. You may also like to ensure that there are sufficient funds in your super to pay future premiums.
If your insurance cover ceases due to an insufficient balance to pay the premiums and you decide you’d like to have insurance in future, you will need to re-apply to obtain cover.
Any advice contained in this document is of a general nature only, and does not take into account your personal objectives, financial situation or needs. Prior to acting on any information in this document, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek independent financial advice if you are unsure of what action to take.
Past performance is not a reliable indicator of future performance.