Hot Issues
spacer
State and Federal COVID-19 support
spacer
ATO extends COVID-19 relief for SMSFs
spacer
Three ways to keep market uncertainty in perspective
spacer
SMSFs, employee share schemes & NALI
spacer
Low interest rates require a strategic rethink
spacer
Greenhouse gas emission by country since 1880
spacer
SMSFs can face situational traps affecting related-party transactions with former spouse
spacer
The right way to rebalance your investment portfolio
spacer
Lockdowns and mental health
spacer
The rise of the female investor
spacer
ATO flags availability of COVID-19 early release super recontribution
spacer
World's largest armies 1816 - 2020
spacer
Retirement can be risky business
spacer
A proven way to build wealth
spacer
Two AAT decisions on what constitutes business real property
spacer
ATO zeroes in on SMSF lifestyle assets
spacer
SMSF scams are on the rise: Here’s how to fight back
spacer
Four steps to plan for a better retirement
spacer
‘Mammoth consequences’: ATO’s NALI ruling draws ire from professionals
spacer
Videos and other resources for our clients
spacer
SMSF members highly satisfied with funds
spacer
6-member SMSF registration availability to begin mid-August
spacer
SMSFs go for growth
spacer
Tax time: calculating investment income and deductions
spacer
ATO extends Division 7A relief
Retirement can be risky business

 

Retirees face a variety of risks in retirement including market risk, inflation risk and longevity risk. Here are some strategies to help mitigate them so you can achieve financial peace of mind.

 

 

Anyone with a healthy superannuation balance heading into retirement in February 2020 would have felt relatively confident that they were both mentally and financially ready for the next chapter in life. But fast forward a few weeks and that confidence might have been shaken somewhat as financial markets dipped into negative territory overnight.

Few forecasters could have foreseen the impact of COVID-19 and the rapid drop in markets, leaving most investors with losses that diminished almost a third of their investment portfolio. And without a regular pay check to contribute to an investment portfolio and make up for losses, retirement can indeed seem to be a risky business.

But it does not have to be so.

At Vanguard, we are very fond of reminding our investors to stay the course, particularly during a market downturn. And for good reason. While staying the course might sound like doing nothing to many, that actually isn't the case. On a practical level, staying the course means sticking to the investment plan that you put in place pre-retirement, and periodically re-evaluating your asset allocation to ensure that it is aligned to your goals, time horizon and risk appetite.

And while past performance is no guarantee of future results, hindsight has time and again taught us that those who moved to cash immediately after the March 2020 market crash then missed the subsequent rebound a month later. Investors might have experienced relief at having exited the market's volatile swings, but that temporary emotional reprieve would have locked in those paper losses and then barred the investor's portfolio from experiencing the ensuing market recovery, forfeiting the opportunity portfolio values to be restored.

At the time of writing this article, the ASX has well and truly recovered from last year's low and is currently breaking all-time records. But rather than resting on your laurels and assuming that everything is back to normal, now is the time to think about the risks that retirees (or those about to enter retirement) face and seek out strategies to mitigate them.

Market risk

As a retiree without a regular income to help make up for capital losses, market volatility undoubtedly delivers a heavier punch. But this is where rethinking discretionary spending could help. While it isn't an ideal solution, in a situation where you can control neither the market nor what it returns, your spending is an aspect that you can control. Reducing your spending slightly in step with your reduced portfolio balance might help ease financial stress and help navigate through the crisis. Once markets settle then spending plans can be revisited.

Inflation risk

With the prospect of rising interest rates on the horizon, inflation is a quite a hot topic in the financial news at the moment, but inflation risk is nothing new. Assuming that the cost of living increases by 3% year on year for the next 30 years, your expenses will double in that time frame. As such, planning for inflation as part of your investment strategy and using 'real returns' rather than 'nominal returns' when looking at investment returns is key.

Longevity risk

As medical advancements and technology improves, so has our quality of life and life expectancy. The average Australian can now expect to live to their mid-eighties and if you're lucky, until 111 like Australia's oldest person, Dexter Kruger. Knowing this, factor in that if you retire at 67, your retirement savings may need to last you a minimum of 16 years and possibly up to 30 years and more. And to adjust your time horizon accordingly if you're retiring before you turn 67. Also, you should plan for the possibility of health issues as you age, and direct discretionary expenses previously allocated to hobbies and travelling towards healthcare expenses.

Emotional risk

As mentioned earlier in the article, the best course of action during periods of market volatility is to tune out the noise of everyday headlines and staying the course. If the March 2020 volatility was too much for you to bear, perhaps your tolerance for market risk is not as high as you thought. Now would be a good time to reassess your risk tolerance and consider a tilt towards more defensive products such as bonds, to help protect your portfolio from the next inevitable dip.

And if doing this on your own sounds too hard, consider seeking out the advice of a financial adviser. The value of a good financial adviser is most evident during periods of market volatility and not solely because of your portfolio returns. The emotional support provided during a period of anxiety is invaluable and should not be measured purely in dollar terms.

Finally, with the prospect of low yields and muted returns for the foreseeable future, it can be tempting to allocate more of your investment portfolio to equities, in a bid to meet your spending needs. But consider that you will be greatly elevating your portfolio risk at what is probably the most conservative phase of your investment journey. Instead of tilting your portfolio towards value stocks, perhaps consider the use of a total returns approach instead of relying on dividends to deliver income.

2020 rewarded disciplined investors for remaining invested in the financial markets despite troubling headlines and a challenging environment. It would be prudent to maintain this discipline and long-term focus for the years ahead.

 

 

Robin Bowerman
Head of Corporate Affairs
23 Aug, 2021
vanguard.com.au

 
Pattinson Financial Services Pty Ltd ABN 17 121 851 376 is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd
ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523

Tel: +61 2 8850 6888 | Fax: +61 2 8850 6407 | Toll Free 1300 466 637 | PO Box 6253 Baulkham Hills BC NSW 2153

site By PlannerWeb