Super: To access or not to access that is the question?
Firstly, we hope at the time of reading this blog you and your family are keeping safe and healthy.
As we are sure you are aware, the Federal Government have announced that people experiencing financial hardship during the COVID-19 Pandemic are able to access up to $20,000 from their superannuation account to take some financial pressure off their household during this crisis.
How does this work?
In short, this measure is very simple, if you are either unemployed, eligible for jobseeker (and various other payments), have been made redundant, had your working hours reduced by more than 20% or a sole trader and experienced a reduction of 20% or more in your business since January 1, 2020 you can gain early access to your super. Click here for full details. Specifically, If you meet one of these aspects, you can access your super in stages, $10,000 prior to June 30 and a further $10,000 from July 1 with the intent being to help meet financial commitments during this time of difficulty.
Access to super is due to commence on April 20. As it stands, approximately 600,000 Australian’s have reportedly registered on myGov to access their superannuation as part of the Federal Governments early access to superannuation policy to help people during the COVID-19 crisis. Now, before you seek to access your super or help a family member access their super, we would like to explore whether or not this is a good idea.
Should you access your super?
So far there has been a lot of content about how this policy works, and again summarized above however there has been little discussion about whether you should access your super and what considerations could be explored as alternatives. Importantly, for the Government’s part their responsibility is to create a legislative environment that provides us all with options to work through this crisis however it remains our individual responsibility to determine what measures are best suited to our individual circumstances. Before we work into some options to deal with this, we wanted to clearly and simply outline the long-term difference in your superannuation account, assuming an average rate of return of 7% per annum and retirement at age 65:
To explain, if you are currently 40 years old and withdrew $10,000 from your super we forecast that your balance would be $54,274 lower at age 65 or $108,549 if you withdrew the full $20,000. These numbers might sound outrageously high however the impact of compounding interest is so significant over the long-term, for further information on compound interest please click here for an earlier blog on this topic.
Therefore in light of the above, the question we intend to address is, should you access your super?
To answer this questions, we suggest that you follow these steps:
Step 1: Understand the cash flow shortfall
What we are reading and hearing is a thought process that because early access to super is possible for some that we should do so whilst we have the chance. Before, you fall into this thought process, we recommend that you understand your households cash flow shortfall. For example, we recommend that you calculate your household commitments, such as mortgage or rental payments, essential spending such as groceries, school fees, utility bills etc and other expenses that you expect to incur. Once you have calculated this, we would suggest that you break this down to a monthly amount as it is likely that some people will be able to return to work faster than others during this crisis so understanding this on a month by month basis will be very helpful.
Step 2: Understand your options to cover the cash flow shortfall
Accessing your superannuation is simply one option you have to meet your cash flow shortfall, however before you do access your super understanding all of your options is so very important. For example, some of the other options you have are as follows:
Job seeker payment;
Any expected redundancy or annual leave/long-service leave payout;
Freeze of your mortgage repayments which can be negotiated with your bank; or
Negotiate your rental payments with your landlord.
Once determined, again break this down to the amount of income you expect to receive on a month by month basis to help overlay with your forecast expenses/commitments.
Step 3: Calculate the gap
At the completion of steps 1 and 2 you should now have a clear understanding of what the cash flow shortfall looks like in your household. For some, utilising some of the options outlined in step 2 will overcome the cash flow shortfall, which is brilliant and therefore the need to access superannuation is not required however for others this will not be the case.
Step 4: Formulate a plan
If you still have a cash flow shortfall, now is the time to formulate a clear strategy to work through, which will most likely involve accessing your superannuation. Importantly, accessing your superannuation is not a bad thing, it is simply a reality of the world we are currently living in, however what we would encourage you to do is only access what you need and keep it aside only for use when and if the time comes. In doing so, your future self will definitely thank you for it.
In conclusion, accessing your superannuation is a great option to help work through this difficult time, however in understanding the long-term impact of doing so, we do hope this places some context around how much you should access if necessary. Naturally, the less you draw now the better and given the COVID-19 pandemic is evolving so rapidly we would encourage you to put these funds to the side and only use them when you need to because if the situation changes and you can get back to work faster, putting the money back into super remains a very real option so that your long-term financial health remains strong long after this crisis is gone.