COVID-19 ushers in new period of retirement income uncertainty

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A recent survey of more than 3000 YourLifeChoices members shows that falling equity markets have triggered a rethink about retirement savings.

Based on the first five months of the year, 2020 will be unlike any other. While the immediate impacts of the coronavirus pandemic have been felt by many, the secondary effects of falling world share markets and financial uncertainty have weighed on the minds of respondents to this year’s survey.

The April 2020 Ensuring Financial Security in Retirement survey provides a unique insight into the thoughts, concerns and hopes of retirees across Australia. The resilience of retirees is evident, and it’s encouraging to see they are still feeling confident about their futures, albeit cautiously.

The survey focused on three key areas: the impact of share market falls on savings, where financial advice is sought (and most valued) and, finally, whether retirees have fallen into any common income planning traps, such as over-confidence or aversion to loss.

Key findings
The No.1 financial concern for retirees now is losing their savings as share markets fall
According to the survey, shares were again the best performing investment asset. However, an increasing number of respondents also nominated equities as their worst performer, highlighting fears that investing in shares alone won’t always be enough to fund retirement.

85 per cent of retirees receiving advice from a financial adviser have been happy or very happy with the advice
People value a good financial adviser, and those who use one understand the importance of financial advice. However, almost half of those surveyed did not receive financial advice and were also less likely to value advice from their super fund.

More than 40 per cent of people incorrectly believe that super offers guaranteed income for life
Many believe that superannuation can provide guaranteed income for life, indicating that many don’t understand how super works in retirement. While super is designed to pay income for life, it is highly dependent on markets and drawdown amounts. Only lifetime annuities and the Age Pension can offer a retiree guaranteed income for life.

People are worried about the impact of markets on their savings (after the event)
The market volatility of early 2020 has reminded people that investing is not always a one-way bet. In the April 2020 survey, for the first time, the top fear among retirees was losing their retirement savings because of a fall in the market. It was the top-rated concern across all respondents and a total of 41 per cent said it was one of their top three financial concerns for retirement. Comparatively, in May 2019, market falls was the fifth most common concern.

Figure 1 details the changes in retiree concerns between 2019 and 2020. Worries about paying for long-term care remained relatively high, but the previous concerns over sustaining a comfortable retirement have declined. Broader concerns around living standards have all fallen, possibly as a result of the impact of self-isolation or because people are more worried about the falling market.

Living standards under the lockdown might be challenging retirees’ definition of ‘comfortable’ as they adjust to a ‘new normal’ that likely involves fewer social engagements, recreational activities and holidays.

The sharp increase in concerns over share market losses is reflective of the popularity of shares as an investment and source of retirement income. Share ownership increases with wealth, and a majority of the people who responded, and have more than $300,000 in total savings, reported holding shares. More people have cash accounts, but otherwise shares are the most popular investment.

The popularity of shares was also reflected in a question on the best-performing investment, which is shown in figure 2.

Shares were considered the best-performing asset, just edging out cash accounts, even despite the recent volatility. The responses also highlighted investors’ passion for property. While a smaller proportion (19 per cent) of investors hold investment properties, in part due to the amount of money needed to buy an investment property, they viewed the performance favourably.

Almost three-quarters (14 per cent of the total) of investment property holders rated this as their best-performing investment, compared to 55 per cent (22 per cent of the 40 per cent) of share investors. Maybe that’s why you hear more about property around the barbecue. You don’t usually hear people talk about life insurance options. Only a minority of the small number of life insurance investors rated it as a high-performing investment.

Loss aversion
One of the most intriguing issues of financial behaviour is the impact of loss aversion. The research shows that people dislike a loss more than twice as much as they like an equivalent gain. This aversion was evident in the way people reacted to recent share market volatility.

People concerned about the impact of share market falls, or not earning enough income, were also the happiest with the amount of income they have for retirement. Presumably, this was before the fall in markets, which has made them concerned that their income might not last.

Concerns over market volatility were also related to wealth. People with more savings tend to have more income for retirement and a greater chance of being happy with that income. Loss aversion is highlighted in the fear of losing some of that wealth or income. This has been an issue for self-funded retirees, as the impacts of the COVID-19 pandemic include dividend cuts and low interest rates impacting their income in retirement.

At the other end of the spectrum, concerns about having money for an emergency fell as wealth increased. This concern was greatest for those with more limited wealth.

Retirees who are just getting by are more worried about being able to deal with the unexpected expenses that occur through retirement.

For the full report, and for information about setting up guaranteed income for life to help cover your living costs, visit challenger.com.au or speak to your financial adviser about Challenger lifetime annuities.

Methodology: The Financial Security in Retirement survey was conducted by YourLifeChoices in partnership with Challenger Limited in April 2020. The survey was conducted using SurveyMonkey and sent to YourLifeChoices’ database of 230,000 Australian members aged 50-75 years. The survey received 3007 responses to 41 quantitative and qualitative questions.

Has anything changed for you since we conducted this survey? Have your concerns eased or worsened? Have you had to reappraise your spending?

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RELATED LINKS

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What COVID-19 taught us about investing for retirement income

The ‘Bears' are up against the ‘Goldilocks' to see whose savings perform the best.

How to protect your portfolio when the market turns nasty

Analyst Russell Markham tells how he weathers the storm when the economy tumbles.

Written by Challenger Group



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