Effect of withdrawing $10K from super on your savings

Hi everyone, it’s Rob from Wealth Factory and I just wanted to run through the disadvantages of withdrawing $10000 from super, some figures I have calculated and, if you have to do it, as some of you are doing it tough at the moment, how to get back to the position you were before.

Look, there are a lot of figures being touted about and some are saying that taking out $10000 from super will cost you $300,000 and all those sorts of things. I’m sure they have done their calculations in more detail than me, but my figures are more conservative, and a lower figure is probably more accurate anyway.

My figures are based on figures from Vanguard showing average returns from 1989 to 2019 for different asset classes: Australian Shares, International Shares, Property, Bonds, and Cash.

What this works out to be for a 70% growth asset allocation is a 7.97% investment return after 30 years. This is just an estimation, not accurate enough to rely on and make changes to what you are doing. Seek personal advice.

Now we need to take tax out of this as well, which is 10-15%, so we round it off to a nice round 7% investment return. Markets never deliver consistent investment returns. If you have followed the markets for the last few months, I am sure you agree.

We will introduce Einstein’s Rule of 72, which says if you divide 72 by the investment return, you will get the number of years it takes to double your investment. People often find this a useful calculation, as it is easy to apply it in the real world.

$10,000 taken out of super compounds the loss over a period of time. If you are 25, the impact might be $150,000, if you are 35, around $76,000, and if you are 45, about half again. If you are 60, the difference isn’t as significant. The younger you are, the larger the impact on your retirement balance and this is the reason you don’t want to take it out of super if you can help it.

This doesn’t take into account super fund fees and insurance, so the difference is probably slightly less. The other calculations are probably using more complex modeling, but the difference is still significant.

How do you get back square with your super if you are in a situation where you need to feed your family and accessing super is your only choice to make sure you survive? Take $10,000 out. How do you repay this? $2000 a year for five years? No, not even close. You will need to know the investment returns you are missing out on before you can accurately calculate what you are down.

We are just going to pick an arbitrary figure that I think will put you in the same position or better. Any money you put back in will have tax taken out of it (assuming salary sacrificing or claiming a tax deduction). Investment returns are likely to be higher in a recovery period, so if we doubled those above average, this would work out to more than $20,000 needing to be put in.

I figure if you put $100 per week for five years, which is $26,000 less tax, still being more than $20,000, you will likely be in the same position or better as you were before you took the money out of super, plus you’d save a bit of income tax over this time as well.

This should only be done as a last resort, and this repayment is probably going to put you in an even stronger position, but saving tax and having a great retirement is a good thing, right?

Just like borrowing from friends, family, and the bank, any money borrowed from yourself needs to be paid back.