We were recently asked by Adviser Ratings to answer a question from one of their readers on withdrawing from their superannuation. Specifically, using super to invest in the property market. Kelly asked;
“I am in my mid 30s and have under $100K in super. If I withdrew $10K of super during the COVID-19 crisis, how could I invest it?”
Hi Kelly, Thank you for your question.
Superannuation is a purpose-built retirement structure and is typically the most tax-effective investment option available in Australia.
So before withdrawing any money, it would be wise to reflect on what super gives you first, to compare it to the alternative.
Besides being highly tax-effective, superannuation offers a wide choice of investments. Depending on the super fund you choose, you can access almost anything that you can personally and if you are going to get a better tax rate of return inside superannuation than out, you’d need to have a very good reason for withdrawing it.
Because of this, there would be very limited circumstances that I would consider withdrawing from superannuation to invest in the property market. Especially when you weigh up the reality that most investments you make are not for your short or medium-term objectives, but will be needed for the long-term goal of self-funding your own income needs in retirement, which superannuation is built to provide for.
One possible reason could be because you intend to invest in property. Given the fact that the property market is expensive to access, a withdrawal could help fund a deposit, which could help you get into the property market sooner. Investing in property also allows you to leverage your investment with borrowing, which could deliver a better return over time because it compounds any positive return you may achieve exponentially.
The other side of this coin however is that it can compound on the downside too.
Considering this, you would need to have a clear understanding of your own personal risk tolerance before you considered this option. Property is a high growth asset and when you buy one, it has a very high purchase and sale costs. So besides needing to view it as a long-term investment decision, for it to be successful, you also need to select an asset that performs well.
This is because the opportunity cost of choosing an investment that underperforms can have a very significant downward compounding impact on the overall return, when measured against the alternative that you could have invested into.
Superannuation by comparison allows you to diversify even a small amount of money into different asset classes and investments, to give a greater amount of flexibility and a likely lower risk-adjusted return overall.
