Would-be retirees might have to work longer because of the pandemic

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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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Written by Will Brodie


Total Comments: 8
  1. 0

    Regardless what funds one may have to retire,issues such as covid panademics can reduce your travel opportunities, I viewed that between 70 and 80 was our travel period given health etc.So whilst there are no planes flying,the chances of seeing what I planned to see are dying.Might have to settle for fishing carp at the local lake.At least that wont affect the local fund manager.

    • 0

      Good luck with the carp, tried to eat the catch in Vic 43 years ago – terrible taste but it would do. Give me that lovely mountain trout in Vic country areas. At the moment I eat Tassie salmon.
      Had all the travel planned for 2 months in Europe this year, next year?? – the airline is holding the money, maybe. The way Europe looks Covid-wise it is not likely we can go there. Keep smiling.

  2. 0

    Retired 6 months before the GFC. Promptly lost $235’000 in the portfolio, things looked crook but hey – we are still alive! Getting more on age pension ( that is there for situations like that) so if Covid did that to you look at the bright side. Believe me you sleep well if you just get rid of the fear of losing. Good to say now but was not easy at the time. This crisis is only the start.

  3. 0

    Why are commentators preaching so much doom and gloom? My super is up about 9% so far this financial year, after about 0.5% last financial year. That gives a pretty good return on average, specially after 8% returns on average over the last 5 years.

    This has been a golden age for super, and a poor return last year was the first for a long time.

    There is currently very little inflation, and at least some of us have found that we can get by with less discretionary spending. Add in the government stimulus measures, and most of us are actually doing OK.

    Seems to me that some commentators, aided and abetted by a self-interested rent-seeking industry, are living off inaccurate, depressing and sensational clickbait headlines.

    • 0

      Doom and gloom might come from the fact that a lot us missing out of the things we thought we might do in future – it is not the money, dividends and share prices but the time that is running out. We are sitting at home instead of doing what we wanted to to in our sunset years. Personally I have more money this year than I had previously since I cannot spend it the way I intended. However I shall I find a way and the local tourist industry will get most of it.

    • 0

      You’re quite right, Mariner, this virus has had a big health, lifestyle, family and relationship effects. Also, for those workers, usually younger, in the “gig” economy who have really felt the pain. However, this article is about financial impacts on retirees, and I just can’t see it.

  4. 0

    It looks like most ‘balanced’ super pensions seem to be back on track after the
    big dive back in March. Add to that a fair bit of saving from non travelling and very low inflation, reduced deeming rates, it might see a fair few actually ahead. Now, if only we could travel again!

  5. 0

    Well, I guess it will be the Unemployment benefit for me, so I guess I’ll be going hungry & cold (not usuing power to run a heater, etc)> I’m 59 & too young for OAP unfortunately. Super is a myth I think & younger generation will be lucky to even see any of that money themselves as every other greedy bastard wants to get their hands on it (Admin, Investment Fees, taxes, etc etc)- it’s disgraceful!



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