Early access to super: what does it really mean?
Recently, the Government introduced a new compassionate early release measure that allows individuals to access up to $10,000 from their super during the 2019-20 financial year, and a further $10,000 during the 2020-21 financial year.
When withdrawing any amount of money from your super, it's important to understand the effect it may have on your retirement prospects. This is because you are potentially missing out on the benefits of compound earnings - particularly when this money is release many years before you retire.
Compound earnings are the earnings you get on the money you initially deposit and the earnings you've already made, For example, if you have an accumulation balance, you'll earn returns on this initial balance AND on the returns you have already made up until that point.
What does this mean?
Case study 1
Callum is aged 32 and elects to withdraw $20,000 under the new compassionate early release measure. Fast forward 35 years and Callum, aged 67 retires from the workforce. Assuming an earnings rate of 5%, Callum would have $126,708 less in his accumulation account.
Case study 2^
Bob and Susie are both aged 30 and each have $35,000 in their super nest egg. They have both experienced financial hardship as a result of the financial impact of COVID-19, and are now eligible to access their super under the new compassionate early release measures.
Bob decides to take $10,000 out of his super. Reducing his super balance to $25,000. As a result his balance at retirement (age 67) is $327,616.
Susie decides to leave her $35,000 in super invested, Her balance at retirement (age 67) is $350,019.
By leaving her super invested, Susie will have $22,403 more in retirement than Bob.
What impact will this have on your compound earnings?
The figures below provide an estimate of the earnings you could miss out on by withdrawing $10,000 from your super at different ages. For example, if a member aged 40 decides to withdraw $10,000 from their super, they may miss out on $28,466 in compound earnings when they retire at age 67.
|Age at withdrawal of $10,000
||Total compound earnings lost at retirement (age 67)
Locking in losses in falling markets
It's important to remember that accessing your super now will lock in recent investment losses, and might mean that your super misses out on the gains. Particularly for younger members whose super may have decades to recover.
Our message at this time is to stay focused on the long-term.
Super is a long-term investment, so while investment markets can be unpredictable over the shorter term, they typically recover over the longer term. If you're approaching retirement, or are retired, it's still important to stay focused on your long-term investment strategy and consider all your options before making any significant changes.
"Our members' retirement prospects remain our priority. While we understand that during these difficult times members may need to access their super, we advise that doing so in times of market volatility, be seen as a last resort" Mark Puli, CEO, ESSSuper.
What are your other options?
The Australian Government is providing a range of financial assistance to impacted Australians. This assistance includes income support payments and payments to support households. For more information please visit the Treasury's web page.
The Department of Social Services is also supporting the individuals and families affected by Corona virus through a range of measures. Visit the Minister for Families and Social Services' web page for further information.
We're here to help
We will continue to monitor the situation as it unfolds and will provide regular updates on our website. For the latest news and more information on our investment response to COVID-19, please click here.