The $54,000 cost of early super drawdown

13 July 2020

People who access the full $20,000 available from the Federal Government’s hardship early release superannuation scheme will be over $54,000 worse off in terms of their retirement balance in 20 years’ time.

That is the assessment of Wealth Within chief analyst, Dale Gilham who has added his voice to those questioning the long-run fall-out from the early release scheme.

His comments have come following superannuation fund executive confirmation of a spike in people seeking to access the 1 July second tranche of the scheme.

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Gilham has questioned whether the early release scheme has achieved what it set out to do, noting that he had spoken to several people who had accessed the money but did not needed and “wanted it simply because they do not like superannuation”.

“While others have used the money to pay bills or reduce debt to give themselves some breathing space during the lockdown, you have to ask is this robbing Peter to pay Paul,” Gilham said.

“If you take $10,000 out of superannuation, then according to ASIC’s compound interest calculator, your superannuation would be worse off by around $27,000, assuming a compounded growth rate of 5% over 20 years. If you take the full $20,000, then you will be over $54,000 worse off in 20 years based on the same compounded growth rate.”

“So, did the scheme do what it was supposed to do?” Gilham asked. “We don’t really know the impact of that just yet, but what we know is that those who took the money will be worse off in retirement, which is not good.”

The Australian Prudential Regulation Authority (APRA) is expected to give an insight into the scale of the second tranche draw-down spike when it releases new data this week.

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Such a simplistic view of this scheme is unnecessary and adds little to the conversation. Using the same compound interest argument I could say that all clients with more than 7 years investment horizon should invest in high growth assets, because to stay in cash and defensives will cost them valuable retirement savings. It ignores a myriad of other factors such as the financial situation of the client, their goals and indeed what they plan to do with the money.

I’d argue that two young people who access their super to put $40k toward a house deposit in a growth suburb will do just as well with their funds as HostPlus Balanced will.

Felix perhaps it is your simplistic view that may be the problem......the purpose of Superannuation is to provide an income and lifestyle after ceasing work. The house they live in is NOT going to help with this aim as they will need it to live in! I am no fan of industry funds but I would also not put a cent on a wager that would suggest the new return on residential housing would be better than a well run superannuation fund. This was bad policy from the government from which we will not see the ramifications for a few years. When we then have the comments about retirees being underfunded please remember this exchange

Right. So I’m tipping you’ve never made a downsizer contribution then? And what of the client that pays their house off sooner who then frees up significant discretionary spend to create wealth? Or perhaps borrow a portion against it to invest further? Super is one part of a client’s retirement portfolio, but not the only one - a tax free, unencumbered PPR is a very valuable asset indeed..

Don't forget the government run Pension Loans Scheme which allows up to 150% of age pension value to be drawn down annually against home equity, with interest capitalised at below market rates.

If clients are unable to discipline themselves to build up a sufficient house deposit by cutting back on spending such as eating out, going on holidays etc then this creates really bad habits for them.

Super is there for your retirement savings its not an extra savings account you dip into to help out with your current expenditure, people accessing this super are only meant to be using it to meet extreme financial distress not to be putting it towards a house deposit.

So what happens when those clients have kids and they have to pay for their expensive schooling should they dip into the super again what happens if some unexpected expense comes up just dip into super again.

My wife and I were able to save up to buy a house in Melbourne which is a very expensive market but we did that by making sacrifices and disciplining ourselves that has built some good habits and allowed us to build up a savings buffer in an offset account.

You should be trying to change the bad habits of clients not pander to them because in the long run clients will be worse off, property grows at a long term annual rate of around 3-4%, your super if invested in a growth portfolio would be growing at around 8-9% so yes over the long term it will have huge implications because of the compounding affect of returns.

What if your clients don't want to downsize? I don't want to move out of my home just so I have to contribute to super, lots of elderly clients dont want to downsize because of the emotional attachment to a home and because they are comfortable where they are, they know the neighbours area is safe etc

That's good ur so good with ur finances. Do u, like the Super Trustee and Board forget whose money it is? My first wish was always to have a roof over my head first. Don't forget over the next 20 years we could have a war, another (and worse) poo pandemic, starvation, floods etc so I don't know how you soothsayers can talk about $54,000 or 5% unless of course you have a phone line direct to the future. I hope you and yours live long enough to retire and don't have to deal with a Trustee as we have had to do with REST when our son died at the age of 32. I used to be happy about Super when I only had lovely experiences with it but I now have learnt so much about the Insurance side of it that I now am an advocate for voluntary superannuation. It's not yours, Death Benefits are not talked about, no in depth info from funds and I have spent the last 2 yrs since he died so angry when I see people in the industry with their hands cupped and singing that hideous "we're all in this together". They certainly are. Labor, unions and funds. Disgusting! Did you know you can get insurance with e.g. Real Insurance and you won't have to pay tax. I rec'd half my son's Super $213k, spent $109k on his Estate while the Trustee of REST took 12 months to come to a decision, and now today tax of $51k as non dependent beneficaries. The financial dependent of about 18 months got $213k and no tax and paid nothing to his funeral or Estate. If Super Funds think Australians will accept this they are dreaming! If Super funds want to save themselves they will have to do better than this! I have let REST know I want the other half which REST gave away contrary to his nomination and his Will. I have now taken this to AFCA and if that doesn't bring common sense then it is the Court of public opinion. This does not meet public expectations.

Sorry to hear about your horrible experiences with REST, I use to be with them and changed because their corporate governance is horrible, their are a lot of big issues with industry funds being buddy buddy with trade unions and labour, I don’t use them anymore now I have an account with a retail fund for insurance purposes and have ensured to put in place binding death benefit nominations to bind the trustee to pay out my and my wife death benefits so that they can’t muck us around like they have done with you. I am also have a SMSF so that I have full control of my super money. Hope everything goes alright with your dealings with the AFCA

hey what the? equity mate....... property always goes up. Australia got sucked in the big time. now it gonna blow

Felix is correct. A house can be used for future rental retirement income. Plus the rate of growth of Sydney & Melbourne housing has easily kept pace with the average earning rate of most Industry Super Funds

How can you use your own house for future retirement rental income, are you going to rent out rooms to other people in your 60s, who the hell would want to do that. Yea I live in Melbourne and the trajectory of house price growth is not sustainable we are talking about long term 30 year growth over that time it will fall back to the standard 3-4%, have you seen what happened to the property prices this year and even last year before Corona they came back down to reality, Stocks have always outperformed any asset class in the long term including property, that’s why super is beneficial it has a mix of stocks bonds alternative investments and even property

Of course the Govt calculator doesn't take into consideration freeing up $20k for get a home deposit together (ie for a low income a Minister of Religion who has been in Diocesan housing of his his life) or the opportunity cost of clearing $20k off the mortgage/credit cards faster. Finally, If you end up with $600,000 super vs $450,000 super at 67, are you really better off financially at 97, with the reduced Centrelink Aged Pension asset test impact? Probably not.

If the Liberals take the low income home buyer-super strategy to the next election, as a voluntary option, the past 3 months proves it will cement them into office.

And if the Union based super funds hadn't spent the past 20 yrs screwing over their competitor advisers to help cement their growing monopoly, they might have a bit more industry support. That support is fast evaporating.

Pulled 20k and put into the safest asset class ever .crypto ...I refuse to support superannuation.self education always wins out .the whole world will run on digital assets .

Hahaha yea because cryptos have been around since 2008 and they make up less than 1% of global payments thats a real disruptor, it only took a couple of years for iphone to disrupt the mobile phone industry and for uber to disrupt the taxi industry, Yet cryptos have been around for 12 years and haven't made a dent because who would want to receive their income, keep their savings or pay for a house with something as volatile as cryptos.

Good luck to you mate in 20 years people will be looking at people who bought cryptos the same way they looked at people who bought Tulips(Yes the flower) for millions of dollars in the Tulipmania bubble as morons

and just like all those people who bought into the biggest housing bubble on earth.

ha ha sucked in waterfront, mate, equity mate. now it gonna blow the big one.

Gentlemen, in 20 years time we'll be lucky if where even speaking English.

"retirement balance in 20 years’ time."
please reveal the magical formula that assures all beneficiaries of superannuation that they will live those years and a few more to spend it.

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