Have you ever considered using your superannuation to help fund your next big investment? For many pre-retirees with healthy super balances, the temptation to draw down on super at 65 to fund investments such as property can feel like a no-brainer. It’s a tempting option, and as with all complex financial decisions, it’s crucial to weigh up the potential impacts before diving right in. Our team have this conversation with clients often, so before you set the wheels in motion, ensure you’re on the path to success by taking a closer look at how compounding is working for you.
Compounding: the investor’s best friend
How you spend your post-work life is often highly correlated to your superannuation balance and performance. That’s why any temptation to draw down on it to fund a large expense needs to be well thought through. Large investments, like property, can significantly reduce retirement savings, which may affect your long-term financial certainty. One way to evaluate the impact is by examining the concept of compounding.
Compounding is the effect of earning returns on your initial investment and on the returns earned in previous periods. Compounding is the closest thing to a free lunch you can get, but in order to benefit from this game, you need to stay on the field. Both superannuation and property investments can benefit from compounding, but the way they compound is different. Let us explain:
Superannuation investments typically benefit from compounding because they are invested in a diversified portfolio of assets such as stocks and bonds. These assets have the potential to earn returns over time, and those returns can be reinvested to generate more returns.
The longer you leave your money in superannuation, the greater the potential for compounding (returns on returns) to work in your favour, hence the investor’s best friend.
In contrast, the property market can also experience growth over time, but it typically doesn’t have the same compounding effect as superannuation investments. This is because the growth in the property market is usually driven by capital appreciation, which means an increase in the value of the property.
While capital appreciation can result in significant gains, it doesn’t have the same compounding effect as superannuation investments because the returns aren’t reinvested to generate further returns.
What does this mean for you?
While the above examples paint a rigid picture, only delving into your financial house can be a true indication of what will work best for you come to light.
What we know is that drawing down on your super early can cause many missed benefits of compounding. So, while accessing your super may provide a short-term boost for a property purchase, it’s crucial to consider how much you already have invested in assets like property. Consider your goals for retirement. What’s on your bucket list? Do you have a legacy plan? Do you have philanthropic intentions? These are the questions and discussions worth embracing.
It’s never too early to begin retirement planning, especially when it involves big decisions. Withdrawing your super to fund investments such as property is one such complex decision. It’s a decision heavily dependent on your individual situation, values and priorities and deserves adequate time to be explored holistically in the context of your bigger retirement goals. Whether you go it alone or engage expert support, education will always be the most important starting point. If it’s reassurance from experience you’re after, reach out. Our team assists hundreds of West Australian families to support their goals and safeguard their financial future.