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Coronavirus: Why superannuation withdrawals can hurt us all

The Federal Government has made superannuation withdrawals easier to ease the hardship caused by COVID-19. Eligible Australians can withdraw up to $20,000 from their retirement accounts to help pay the bills today.

On the surface, that may seem like a good option by giving the hardest-hit Aussies a chance to use their hard-earned money. But if we dig a little deeper, there could be some big implications as a result of the policy.

Lack of compounding returns on a superannuation withdrawal

It seems like compound returns are almost magic. While the maths behind it is quite simple, the sheer power of compounding numbers is hard to comprehend.

For instance, $20,000 in today’s money compounded for 40 years at 5% would equate to $140,799.77 in future dollars at retirement. That is a big number that future you might be shocked by.

Of course, only those experiencing hardship should have access to make the early superannuation withdrawal. Understandably, many Aussies are more worried about putting food on the table now than their retirement plans in the decades to come. 

But this may lead to larger wealth divides in Australia. It’s very hard to catch up to others who are able to leave their nest-egg untouched for many years.

Super funds might not get the returns we’re all after

Financial theory tells us that illiquid assets come with a premium. We can see that in many investment options, such as a 30-year bond yield versus a 10-year yield.

But these superannuation withdrawals may change that. Until now, super funds have operated with a broad investment mandate and a long-term horizon.

That means the Aussie funds could invest in long-term assets and collect a return premium for investors. However, if they have to expect hardship policies and superannuation withdrawals in future crises, that may change the way they invest.

That could be bad news for most Aussies and their retirements. More liquid assets could mean a lower return on investment and reduced retirement balances for all of us.

Foolish takeaway

No one knows what the full impact of COVID-19 will be. Many Aussies will need to make these superannuation withdrawals to help ease the financial stress created by the pandemic and subsequent shutdown.

But as the debate over super fund investments heats up, keep an eye on any potential changes that could impact your retirement plans in the years to come.

One option is to invest in ASX shares yourself through a self-managed super fund (SMSF). SMSFs can be expensive to set up but may give you the freedom you’re seeking in your super.

That could mean buying BHP Group Ltd (ASX: BHP) or other S&P/ASX 200 Index (ASX: XJO) shares without worrying about super fund mandates.

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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.