Impact of Drawing on Superannuation and Retirement Funds
Like many of you, I was so relieved to discover that the Australian government was allowing us to draw on our retirement and superannuation funds. $10,000 this financial year which ends on June 30 and then another $10,000 in the following financial year starting July 1. Also like you I intend to draw down the entire $20,000 over a couple of months, but was it that going to look like?
Most superannuation funds hold very little in cash reserves, relatively speaking. They are bound to have member’s contributions working for them at all times. With cash interest rates at virtually zero, the only way to get returns for members right now is in stocks and real estate. So assuming that most money is in the stock market as is usual practice, a LOT of money is about to taken out of the stock market to come up with the cash to cover the drawings of members.
Industries most hit, and the superannuation funds associated with them are travel and hospitality. I’m not sure which fund travel uses but I do know that Host Plus is the fund of choice for most hospitality professionals, especially casual workers.
For 2019 Host Plus reported a 6.8% return on investments for its members and this will not be repeated in 2020 due to a number of factors that we have seen in the stock market ourselves, but principally because a lot of money is about to be taken out of the fund, which reduces their ability to make any returns at all.
According to it’s website, Hostplus has $53 billion in assets across 1.2 million members, so let me do some maths as soon as I work out how to put billions into my calculator.
So once I got rid of the ending 3 zeros like they do in the annual reports, I worked out that that’s an average of about $44,000 per member.
Now, let’s say that 50% (conservatively) withdraw their first $10,000 in April, that then reduces members’ average holdings to $33,000 which then reduces the funds assets by $19 billion. Please double check my maths because I do get really confused with all those zeros, but I did it a few times and I’m pretty sure I’m right.
So that’s a huge hit to the fund, but more importantly, it’s a huge hit to the stock market as a whole, with that amount of money coming out, we can expect a huge decline which I mentioned in this article.
This is just ONE fund.
I will be accessing QSuper which is a Queensland government employee fund, which is more likely than not to stay a bit more stable as most government employees are still employed, but then again, there are a lot of people like me who kept their money in that fund because its performance was higher than other industry funds, who have moved on to other jobs and lost them.
So I can assume at this point that the stock market will drop significantly once the funds start selling off assets to have enough cash to cover the withdrawings of its members. When this will happen may be a bit more difficult to time as the initial intent to withdraw has already registered a few weeks ago, but I only just realised last week that I could and registered my intent, so these numbers are going to continue to go up as more and more people either realise they can, or decide that they’re going to access their retirement funds.
So applications are starting April 20 I think, give a couple of weeks for processing and we should see money coming through mid May so I would assume that the market will start to see sell offs around late April early May.
I will be pouring through Host Plus Annual report to see if I can identify which stocks they hold a largish position in and see if I can open a put option in one of them as this amount of sell off will definitely cause share prices to drop. Funds are usually conservative, so I would also assume that most of their holdings are in banks and other top 200 companies so overall there will be considerably more volatility as this money leaves the market and into the hands of members.
What About My Own Retirement Balance?
Overall, in the bigger picture, at age 54 I’m not worried about taking $20,000 in total out of my fund as at the moment my balance is only $70,000 so I already know that I’m probably not going to retire on my fund savings at this point in my life, so I would much rather have some cash now.
However, if you’re closer to retirement and have a significantly larger balance, I still believe that accessing this cash early won’t really affect the final balance. Most accounts have already seen a huge dip because of the latest market volatility so liquidating a small portion now won’t really have any lasting long term affects on the final retirement payout at this stage in the game.
Those under 30 have plenty of time to catch up so accessing early is really a no-brainer in terms of long term impact.
Overall the extra cash in the economy will most likely help things along on the road to recovery and stimulating the economy, but with many sectors still closed to trade (travel, restaurants, leisure) it’s most likely that these funds will go to commodities and healthcare.
What do I Think?
Overall, I think it’s a good strategy that won’t really hurt in the long run and in the big picture in terms of personal finances, but the bigger picture of what it can do to the market is a huge concern because it can begin a downward spiral that may not be able to be recovered from for a long time.
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