Not surprisingly, COVID-19 may be changing people’s approach to retirement.
Robin Bowerman, head of market strategy at Vanguard Australia, says people who have lost their jobs or had wages cut can’t contribute as much to their retirement savings, likely “throwing retirement plans off course”.
“This is compounded by more volatile and lower forecasts for investment returns,” he wrote for AFR.
He says the Reserve Bank’s interest rate cuts, intended to bolster the economy, “also had the effect of shrinking the interest being paid on savings vehicles like bank term deposits, a staple in most retiree portfolios”.
Company dividends are also down, compromising the bottom line of prospective retirees.
And many Australians availed themselves of the early access to superannuation savings scheme opened by the government soon after the pandemic hit, further reducing retirement savings.
He thinks this may see more people work longer.
Alex Joiner, chief economist at IFM Investors, agrees.
“Many may have to work longer to achieve the retirement incomes they desire.
“The super system will continue to play a crucial role for retirement. That’s why government measures to encourage transparency, reduce costs and maximise returns for fund members are welcome. Increasing the compulsory super guarantee would also serve people well, giving them a more certain path to build a retirement nest egg.”
Of course, many people do not have the choice of when to retire, with redundancies rising due to the coronavirus recession.
Faced with the prospect of having to make savings last longer, what should retirees do?
Mr Bowerman suggests getting “back to basics” with household budgeting.
“Reduced circumstances may require some cutbacks in lifestyle terms but people heading into retirement can take comfort that living expenses are typically lower in retirement – some actuarial studies have put it as low as 35 per cent of your salary.”
Author Steve Vernon, a research scholar at the Stanford Center on Longevity, offered retirement planning mistakes to avoid during the pandemic.
He says don’t retire too soon. “You can significantly increase your ultimate retirement income by delaying your retirement, even if for a year or two.
If you are laid off, try to get any work you can, even if it is part-time, to delay when you tap into your retirement savings.
Mr Vernon also urges patience with investments. “It’s easy to get swept up in the fear of stock market crashes or the fear of missing out on future stock market gains. Instead of focusing on your fears, design an investment strategy covering your basic living expenses with guaranteed sources of retirement income that won’t drop if the stock market crashes.
“Then, before you make any investment decision, estimate the proportion of your total retirement income that’s risk protected. If the proportion is high, you could justify taking calculated risks by investing in the stock market to generate the rest of your retirement income, which you should use to cover your discretionary living expenses, such as travel, hobbies, and spoiling the grandchildren. These are expenses you could reduce if the stock market drops.”
The Australian experts insist understanding sequencing risk is vital for would-be retirees.
Perpetual.com.au explains the concept: “When your assets are at their peak, so is their exposure to market fluctuations. If you’re nearing or in retirement and this coincides with the end of a long market rally, this can be bad news.
“Significant negative returns in the years around your retirement can have a big impact on your future finances. That’s because you have to sell more shares to get the same income. When the market does recover in the future, you have fewer shares to benefit from the rebound.”
Mr Bowerman says: “Declines early in an investing lifetime can be recovered but the same magnitude declines at retirement can be devastating.”
However, it’s not all doom and gloom.
“The OECD says downturns that affect the value of retirement savings have taken about two years to recover in past crises, meaning, so long as people do not sell, their portfolios eventually recover and return to growth.”
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