Published: 28 Feb 2020
‘The old “super is a long-term investment” line just doesn’t cut it now I’m in retirement,’ commented a frustrated retiree recently. ‘I’m forced to draw down from my investment so how am I supposed to ignore the effects of a bad market?’
When markets become volatile, Australian super funds make a lot of reassuring noises about super being a long-term investment – because it is. Super isn’t a share-trading game; it’s by nature a long-term investment that’s designed to withstand short-term volatility.
Which is okay if you’re in your thirties or forties still earning, with time still on your side, and with a super account that’s still growing – untouched.
Not so good when you’re retired, your retirement savings can’t be topped up, you’re obliged by law to withdraw a minimum from your account every year, and your long-term horizon doesn’t seem so long any more.
Making losses crystal-clear
The negative effects of a sharemarket slide become real when they’re crystallised. This is when money is withdrawn from an investment option – for example, through an investment switch or a pension payment – and the current price is applied. Prices aren’t likely to be at their best in the middle of a sharemarket wobble, so financial advisers and commentators usually advise against withdrawals and account switches at this time.
Makes sense, right? But here we are back at the beginning with our frustrated retiree. With pension drawdowns a must, how can a retiree avoid withdrawals?
Top 3 tips to minimising your loss in a bad market
We asked the financial advice team at ESI Financial Services for their thoughts. They’re happy to share a few tips to get you thinking, but it’s really important that you understand their ideas are general only and might not apply to your personal circumstances.
- Choose a more defensive investment option as the draw-down account
When setting up an income stream, many retirees are asked to consider a more defensive investment option such as cash for their draw-down account. This is designed to take care of short-term cash flow needs and may provide some security when market volatility inevitably strikes. The rest is typically invested to deliver long-term growth and a degree of financial sustainability.
- Suspend pension payments until markets recover a little
Our frustrated retiree reminds us that holders of income streams have no choice but to draw down a minimum pension payment per year. But retirees do have a choice about when and how they withdraw that minimum. Suspending pension payments until the markets recover a little may help to minimise losses by avoiding withdrawals during uncertain times (as long as the minimum is withdrawn in the financial year). You could also think about using other savings such as a maturing term deposit to help with your expenses in the short term.
- Avoid rebalancing, which may crystallise losses
Some pension funds offer the opportunity to rebalance their members’ investment selection after a certain amount of time. This is so that a member can restore their investment selection to their chosen proportions. Suspending any rebalancing until markets recover a little may help to minimise losses that could be incurred when funds are redistributed among investment options as part of the rebalancing process.
A final word (or two) on shares
Market volatility causes some level of angst for most people, but that doesn’t mean shares don’t have an important role to play in a retirement investment strategy – whatever your age. In fact, a sustainable retirement investment strategy is one that actively plans for volatility.
Because although it’s tempting to think cash is safe and free of risk, a greater (and lesser-known) risk is to invest so conservatively that you outlive your savings.
Yes, market volatility is inevitable and unpredictable, and yes it can get scary – but growth investments like shares are important. They help your investment beat inflation over time so you can cover your living costs with some left over to spend as you wish.
If you’re concerned about your investment and want to work through your options, contact us.