Emergency access to superannuation granted by the Australian Federal Government during the COVID-19 pandemic has triggered a discretionary spending spree for some Australians, who are splashing cash on some shockingly non-essential items - gambling, alcohol, apps, luxury fashion items, and takeaway food.

Roughly 3m Australians withdrew almost $36 billion from their super accounts under the COVID-19 scheme. This is sharply contrasted with what happened in Canada where Canadians continue to be subject to withholding taxes on retirement funds removed from RRSPs unless the funds were taken by home buyers or lifelong learning.

In the USA, the Federal CARES Act, made it easier for Americans under age 59½ to access the funds stashed in eligible retirement accounts – Americans were entitled to take out up to $100,000 from eligible retirement plans without incurring the usual 10% early withdrawal penalty and they were given up to three years to pay the tax liability on the money removed.

While it’s hard to get an official estimate on how much money was withdrawn early, both Fidelity and Vanguard reported that roughly 3% of their customers drew down on their retirement savings due to Covid. Best estimates suggest that roughly 4.530m Americans withdrew something close to $22.65b in retirement savings.

Let’s come back now to a quick summary of what the funds were spent on – and to do that I want to highlight some research conducted by the advisory firms Alpha Beta and Illion. What this research shows is that the overwhelming majority of those dipping into their retirement nest eggs have increased spending on lifestyle items, rather than using the cash as a lifeline for rent, utilities, medical expenses, or groceries.

According to this research, those who drew down on their superannuation (the Australian retirement income scheme) increased their spending in the next fortnight by $2,855:

• Australians used this money to increase their spending, not to maintain prior spending levels
• 14% to repay personal debts
• 64% of spending went on discretionary items such as clothing, furniture, restaurant food, gambling and alcohol
• 40% did not actually suffer a drop in their income so far during the COVID-19 crisis
• 21% saw an increase in their income of more than 10% but drew down anyway
• Men and women spent the funds differently:
  • Men – gambling was at the top of the list
  • Women – fashion items topped the list

Supplied: AlphaBeta/Illion

These statistics are disturbing. They highlight a couple of things:

• On average most individuals did not have enough money in their savings account to sustain themselves (household) more than 2-3 weeks when the pandemic hit
• Australians in particular demonstrated low levels of financial literacy – their decisions to remove money early from superannuation significantly impacted their future retirement savings (by tens if not hundreds of thousands) AND the money was largely spent on discretionary items that were not needed to sustain themselves during the pandemic

While I can relate to the fear factor as 2020 was a highly uncertain and frightening time with Covid 19, it disturbs me that millions of Australians felt they needed up to $10,000 (for whatever reason), and they seemingly:

• had no understanding of how to raise those funds via other means or
• what the actual impact would be on their future retirement savings if the amount were withdrawn early

Bio:

Derek Condrell is the co-founder of mSmart, a world-class software program that projects investment values so that you can confidently determine whether you will have enough income to retire when you want to. Rather than guess, or make bad decisions because you have no idea what the impact of a withdrawal might be, fintech innovators like Derek are working hard to create products that give you a very clear picture, help you make better decisions and avoid disasters just like the one likely to be faced by roughly 3m Australians who stripped money out of their retirement savings because they didn’t know better.

Financial Foreplay® Highlights:

1. Early withdrawal may very well make sense in extreme financial hardship or a medical emergency.
2. Spending varied greatly depending on the age bracket – over 38s tended to use the money more wisely while those under 38 gravitated towards discretionary spending
3. Most people are simply not evaluating the impact BEFORE they actually decide to withdraw and largely that is because there is no easy way to assess the financial impact of the withdrawal on the end lump sum or annual retirement income.
4. Lump sum is a much more dramatic, headline grabbing amount but it fundamentally makes more sense to focus on the impact on annual retirement income – and this should always be done in present day dollars to put some relevance and context around the numbers.
5. Even if you made the mistake of withdrawing early, there are ways to make it up now:
   1. Via over-contributions (which are taxed much lower than your marginal rate)
   2. By shifting the mix of your portfolio from default (which is where most people are) to growth/equity.
6. Please consult your financial advisor as you are much more likely to get advice that is tailored specifically to your needs than if you guess, use Google, listen to a friend etc. Tailored advice is always preferable to generic advice.

 MSmart Example:

Get in Touch:

Email – [email protected]

Website - www.msmart.com.au