As we would all be aware of by now, the effects of the coronavirus on all aspects of life are extraordinary. The economic damage from our response to the outbreak is likely to be significant and long-lasting.
It's for this reason the Federal Government is rolling out some of the biggest stimulus packages in history to deal with the problem. One of the options the government is making available is early withdrawal from superannuation retirement accounts – up to a $10,000 limit in this financial year (FY20) and a further $10,000 in FY21.
There are conditions on this release – you must be either unemployed, receiving a welfare payment or be under hardship as a result of the pandemic.
Many Australians might be relieved at this thought – it is 'your money' after all and it might go a long way to helping to make ends meet during this tough time.
Now I am not advising anyone to do anything here. If you really need this cash right now, by all means, withdraw it. The government has done this for a reason, and if it will give you and your family a lifeline, then I fully accept that it can be the right thing to do.
But it's not a decision that will come without consequence.
The whole point of the superannuation system is harnessing the benefits of compound interest over your working life – earning interest on interest on interest. Adding periodically to your super over 45 years (give or take) without withdrawing a cent of capital is what makes it such a powerful tool.
If everyone had to follow these rules with their ASX share portfolios, I frankly think most investors would be better off.
If you're 20 years from retiring, a $20,000 lump sum withdrawal could equate to $112,088 (based on a 9% annual return) that you end up missing out on when you do hang up your boots.
And if you're 30 years out, that jumps to $265,354.
35 years from retirement? It's a $408,279 sum you'd be giving up.
So, while withdrawing a $20,000 lump sum might help you in the short-term, it will also kneecap your retirement fund.
Foolish takeaway
Now, as I said earlier, if you really need the money right now, don't hesitate to withdraw your super. You and your family's financial wellbeing is of paramount importance at this trying time. But I think everyone should at least understand what withdrawing your super early really costs you down the road!
