Posted 8 months ago
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We get it. Times are tough. Ok, perhaps that’s the understatement of the millennium.
While Australia may be emerging as a model for how to deal with the crisis on a medical and social level, there’s no escaping the profound economic and financial impact of the COVID-19 pandemic. On the national scale, the numbers are mind-boggling. However, it’s at the individual family level that the financial pain is really starting to kick in.
Politics is not our thing, but it’s fair to say that the majority of Australians approve of the way our government has handled the challenge. The economic measures in place have indeed offered a lifeline to countless households.
That said, there’s one aspect of the COVID 19 stimulus package that we reckon struggling families and individuals think long and hard before taking advantage of: Early release of superannuation:
What is the COVID-19 Early Release of Super Scheme?
Put simply, the government is allowing people to access up to $20,000 from their super accounts with no tax or withdrawal fees and penalties.
To date, Aussies under the pump have withdrawn over 3.8 Billion (that’s right, with a “B”) from their retirement nest eggs. With no discernible end in sight, the mind boggles at the magnitude of booty that will be plundered before Corona is once again just a refreshing Mexican beer.
Now, I’ll be the first to admit that even in the best of times I’ve sometimes looked at the balance in my super account and indulged in daydreams about what I could do with that kind of coin, and I'd put down a crisp pineapple that says you probably have too. With financial screws now turning tightly on so many of us, this policy looks like a life ring to a drowning man or woman.
Looks can be very deceiving. In this case, we reckon they are. Yes, our Honourable Treasurer is a smart man. Yes, he was my sister’s mixed doubles tennis partner in high school (true story). Yes, we believe that he and the government have the best of intentions. However, we think that cashing out any part of your super to help you through this time is a really bad idea.
Here’s why:
Compounding the Problem
While the lure of quick money to relieve the stress today is tempting, you could be setting yourself up for a world of pain down the track. In rescuing your present, you’re really selling off your future.
The beauty of super is that it grows with compound interest. To put that into simple terms; you earn interest on your interest, not just your contributions. What you might feel is a workable amount today is going to cost you big time when it comes to retirement. Let’s see how that works:
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Returns on super can vary by year and by the fund. However, the average rate of return for median growth (moderate risk) super funds over the past 27 years is 8.32% per annum.
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If you’re 30 years old in the Age of Corona, then in the 35 years until you hit retirement age, that $20,000 would have grown to over $364,000.
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Some of Australia’s better super funds have delivered returns of around 10% over that period. At that rate, your 20Gs will be worth just a tick shy of $550K in 35 years.
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This means that to get through this short-term hump, you’re potentially sacrificing as much as $340,000 - $530,000 of money that you would have had to see you through your golden years.
Pause for a minute to consider what that kind of money could mean to the future you.
Now ask yourself: is it worth it?
The $3.8B that well-meaning folks have raided thus far? Using the same formula, by 2055 that would have grown to an aggregate $105,000,000,000 that Australian’s could have utilised for a better life in retirement. That’s a lot of zeroes. There’s just no way to sugarcoat this. It’s an unmitigated disaster.
Tough Answers to Tough Questions
That’s all well and good, but what are you supposed to do if you can’t make ends meet right now? While we are a small loan lender, we’re not in the habit of recommending people take on additional debt as a solution to their fiscal woes. However, in this case, that may be a far better option for many. A quick look at some of the alternatives tells a pretty compelling story:
Speckle Loan
A small cash loan from Speckle of $2000 paid back monthly over 3 months will amount to a total repayment of $2320. That’s a mere $320 in fees and charges. Obviously, it’s not $20K. However, before we sell off our future, it’s probably worth seriously assessing whether that amount of cash is truly necessary, or could we get through with less.
Let’s say you renewed that loan every 3 months for the next 2 years to ease the pressure. That’s still a total of $2,560 of fees over that period for access to $16,000 in cash. Isn’t it worth having a deep think about whether that’s not a better option?
Credit Card
Before you think that we’re merely plugging our loan, let’s see how it looks if you whacked $20K in a credit card. Even at 18% interest, if you pay the minimum every month, you’re still only looking at less than $55K in interest. Admittedly that’ll take you 54 years to pay back. But throw in as little as $50-$100 more than the minimum each month and both the payoff period and accumulated interest drop off sharply.
Personal Loan
Personal loan rates are sitting at around 7.5-10% at the moment. Even at the higher end of that spectrum, a loan of $20,000 paid back over 5 years will only accrue about $6100 in interest and charges.
Payday Loan
Excuse us while we hold our noses. This may be the first and last time that we say anything that could be remotely construed as positive about payday loans. The dangers of predatory payday lenders are well documented. However, when compared with what you’re sacrificing when you plunder your super, even these bloodthirsty sharks look like choir boys. Borrow $10K from one of these guys, with fees equivalent to a comparative interest rate of 48% per annum, and you’re looking at a total repayment of around $15,500 over the maximum period of 24 months.
Before you dash off to grab that cash, beware! Payday loans usually come with a ton of fine print that means you may be paying significantly more than that. Miss or run late with a payment and you may find yourself in a world of hurt.
Compare & Contrast
Compare the above numbers with the magnitude of what we’ve described above, and the conclusion is pretty clear. Virtually any option is preferable to withdrawing from your superannuation. Let’s put it this way, when Speckle tells you that you’re probably better with a payday loan (think Batman recommending you go to The Joker for careers guidance), you KNOW it’s an appalling idea.
People all over Australia and the world are doing it really tough right now. As tempting as it might be, trading in the comfort and peace of mind of a secure retirement is arguably the worst thing you can do in these circumstances. Whenever your fingers start getting itchy and the urge to crab that moolah starts to build, have a think about the numbers we’ve presented and that should hopefully set you straight.
Last Resort
So, what happens if you can’t easily access credit? If you’ve lost your job, you may not qualify for a loan. There’s no question that in some cases, sacrificing future financial security may be a necessary evil to help folks survive today. After all, a tidy nest egg is not going to help you much if you’re evicted from your home?
Every person’s situation is different and it’s certainly not for us to judge. However, if you truly feel that you have no other option, please heed this piece of advice: Once you’re back on your feet, increase your monthly superannuation payments and/or make additional contributions where and when you can until you’ve replaced the funds that you accessed. Of course, it’s your money. However, your best bet is to treat it as a loan and be scrupulous about repaying yourself every cent. After all, you know the lender pretty well, and don’t want to short-change them!
You’re Not Alone
Sure, it feels like retirement is a long way off right now. You’re positive that everything will sort itself out one way or another by then, right? Unfortunately, life has a way of throwing all kinds of spanners in the works. We’ve seen it all, and we know that life rarely pans out the way we plan. Make the wrong move today, and you run the genuine risk of condemning yourself to a long and challenging old age.
You might be in for a tough couple of years, but your future self will look back and thank you.
It’s crucial to know that you’re not alone. Speckle is here to help you through these difficult times. Whether it’s with a safe and fair loan of up to $2,000 to help you through a pinch or advice on how to manage your predicament, get in touch with us today. We’ll do what we can to put you on the path to stability.