The coronavirus has led to an unprecedented economic shutdown. Thousands of businesses have tragically closed their doors in response to this insidious disease and thousands of people have lost their jobs.
It's an incredibly sad time for both our country and the world.
In response, the government has announced an equally unprecedented raft of measures to assist Australians during this difficult time. These range from the JobSeeker and JobKeeper payments to assistance packages for the hardest-hit industries, like airlines and tourism.
But one of the more controversial measures has been the permission for some individuals who fit the eligibility criteria to withdraw up to $20,000 from their superannuation accounts. More specifically, those eligible will be allowed to withdraw $10,000 in the 2020 financial year and another $10,000 in FY21 (which starts in July).
For the FY20 tranche, the first redemptions went ahead this week, with a reported $3.8 billion already approved by the Australian Taxation Office.
The problem with a super withdrawal
Now, I'm not judging anyone's individual circumstances here. Those who have withdrawn their money might desperately need the extra cash.
But let's not downplay the significance these moves might have on the individuals who've applied for withdrawal and their prospects for a comfortable retirement.
See, superannuation was designed to harness the benefits of compound interest – the concept that Einstein described as the '8th wonder of the world'. But compound interest only works if you leave it to do 'it's thing'. Withdrawing funds from a compound vehicle like super cuts it off at the knees.
To put this in perspective, here are some numbers.
Let's assume your super fund can give you a 9% return each year by investing in growth assets like ASX shares over a long period of time.
Left alone, a $20,000 lump sum would compound to $112,088 over 20 years. That's what a withdrawal by someone who is 45 and intends to retire at 65 could be worth today.
What about if you're 25? Well, that $20,000 might have been worth $628,188 by the time you reach 65.
No, these numbers don't lie. It's a very expensive way to spend $20,000 to be sure.
Foolish takeaway
As I said earlier, I begrudge no one for withdrawing their super if it's the right thing to do financially. But if you have (or are planning to) go down this path, you might want to think about replacing the $20,000 as soon as possible – when you are able to of course.
