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.
Please contact us on 1300 79 80 38 if you seek further discussion on this topic.
Conclusion
Following these steps can allow you to head into retirement with confidence and the necessary information to design the post-work life you desire.
If this article interested you and you would like to speak to Pat Casey on the phone, select a time to speak Pat – Financial Planner Sydney.
At Assure Wealth we specialise in helping busy, successful families structure their finances to achieve greater wealth and financial peace of mind.
Author: Pat Casey – Managing Director & Financial Planner Sydney – Assure Wealth
Download the Assure Wealth Corporate Brochure
Disclaimer: The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your Walker Lane Pty Ltd Adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Walker Lane nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.
Assure Wealth Pty Ltd ABN 31 965 466 780 Corporate Authorised Representative no. 1244817, Patrick Casey Sub-Authorised Representative no. 1244748 of Walker Lane Pty Ltd ABN 70 626 199 826, an AFSL holder No 509305.
