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Superannuation trap: The cash boost that could cost you $200k in retirement

Tapping into your super early doesn't just shrink what you have now, it also cuts down on what you could earn from your investments later on.

There's a short-term cash boost millions of Australians are considering that could cost them hundreds of thousands of dollars, and potentially push back your retirement age.

A staggering 56 per cent of Australians – more than an estimated 11.3 million people – admitted they would withdraw their superannuation early if given the chance, according to a recent Finder survey.

With costs going up, many said they’d use the extra funds to ease their immediate financial pressures, while others would purchase a home or even spend it on a holiday.

A jar with money collecting retirement cash and some Australian bank notes.
Retiring early and comfortably is the goal for many, and a short-term fix for financial woes could completely jeopardise it. (Credit: Yahoo Finance Australia)

But, while it may be tempting to dig into your nest egg, the potential consequences can be far scarier than many realise.

Hidden costs of early withdrawal

Tapping into your super early doesn't just shrink what you've got now, it also cuts down on what you could earn from your investments later on. Over time, the lost compounded interest and investment returns can amount to a significant sum, far exceeding what you initially withdrew.

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According to data from the Association of Superannuation Funds of Australia (ASFA), withdrawing $20,000 from your super at 30 years old could lead to a loss of around $60,000 by the time of retirement.

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For a clearer picture, you can work out how much you’d be projected to lose by entering details into a super calculator and comparing your current balance with the balance you’d be left with after withdrawing.

For example, let’s say you’re 35 years old with a super balance of $100,000 and an income of $90,000. Assuming your salary stayed the same and your fund returned 8 per cent p.a., your projected super balance at 65 would be $659,962, according to Finder’s super calculator.

According to the ASFA, this would give a single person enough to afford a comfortable retirement – estimated by the industry body to be a minimum of $595,000 for a single (or $690,000 for a couple).

Now, let’s assume you had an opportunity to withdraw the full balance at 35.

By starting your super savings from scratch, your balance at retirement would have shrunk to just $440,492 – a difference of $219,470 – which is now well below the sum needed to fund a comfortable retirement.

That means forgoing things like eating out at restaurants as well as other exercise or leisure activities, according to the AFSA.

 

It gets worse

You’re not just losing out on investment returns when you cash in your super early. It can also result in additional fees and charges, higher taxes and losing your insurance.

While all super funds charge annual fees, such as administration and investment fees, some providers will also charge additional fees if you choose to withdraw your funds early. These rates vary depending on the fund and your personal circumstances.

And you may find yourself hit with a higher tax bill. Superannuation is taxed at a lower rate than other forms of income. By accessing it early, you may be subject to higher tax rates that can significantly reduce the amount of money you receive.

Finally, by dipping into your super early, you might lose your insurance coverage. Many superfunds offer insurance coverage as part of their service. By accessing your superannuation early, you may lose this coverage and be left without protection in the event of an accident or illness.

When can you access super early?

There are currently just a few circumstances where you can withdraw your super early, although it’s a topic that’s regularly up for debate among policy makers.

In 2020, Australians were given the chance to access some of their super if they’d been financially impacted by COVID-19 – an opportunity taken up by millions of Australians.

That policy has now ended, but there are still several other reasons you may be eligible to access your super early.

For instance, you may get access on compassionate grounds, such as severe financial hardship or needing to pay for medical expenses.

Also included is being unable to work because of a temporary or terminal illness as well as the purchase of a first home – such as through the first home super saver scheme.

If you meet any of these criteria, you can apply for early access to your superannuation through the Australian Taxation Office (ATO).

However, it’s important to remember that accessing your super early should only be taken as a last resort. And, before you decide anything, it might be a good idea to chat with a financial counsellor or adviser. They can help you look at all your choices and figure out the best move for you.

While it may be tempting to access your superannuation early, it’s important to understand the lurking risks and consequences involved. By seeking professional advice and a number of other options to guide you, carve out an informed decision that will protect your financial future.

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Yahoo Australia