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Retirement and uncertain times – how to manage your nest egg

September 2020

The COVID-19 pandemic has led to much fear and uncertainty, especially among retirees and those thinking about retiring, who are focused on ensuring their money lasts. With the added complexity of the coronavirus, it’s more important than ever to have well-managed investments to help preserve your quality of life. But what else can you do?

A visit to your financial adviser when experiencing any concerns is recommended. Simon Hodges is a senior financial adviser with Secure Wealth Advisers. He says many of his clients, including retirees and pre-retirees, are very nervous at the current time but this nervousness is usually allayed after their regular review meeting when they go through their situation and objectives.

“Once we do this, they generally find that what’s been happening hasn’t really affected their long-term position,” he says. “The nervousness tends to come from the fear of the unknown.”

Specific retiree risks

All investments are subject to certain risks – such as macroeconomic and market risks. Returns vary from year to year and such movements can impact the value of investments. Market risk is especially relevant during the final few years preceding retirement because this is when investors switch from building their nest egg to drawing it down. It is during this period that investors are likely to have generated their greatest wealth so a poor investment return will have the greatest impact on their savings.

In addition to these risks, retirees are particularly vulnerable to longevity and sequencing risks. Sequencing risk concerns the unfavourable order and timing of withdrawals from investments (i.e. drawing down when the value of investments is at a low), resulting in less money during retirement. Poorly timed withdrawals can result in longevity risk, which is the risk of outliving one’s capital.

COVID-19 is likely to have brought these risks to the fore for those about to retire. Ways that can help to counteract it include working longer so you can build up more assets, ensuring you have a diversified portfolio, and adjusting your asset mix in line with your risk profile. If you are already retired, you may look to take advantage of the recent changes to drawdown rates.

Changes to drawdown rates

Retirees seeking to manage their money better should also be aware of the changes to the allocated pension minimum drawdown rates. The significant losses in financial markets as a result of the COVID-19 crisis have had a negative effect on the account balances of super pensions and annuities. To assist and mitigate some of the sequencing and longevity risks mentioned previously, the federal government legislated a temporary reduction in the drawdown rates that pensioners must withdraw from their pension.

Members receiving a super income stream must draw down a minimum amount from their pension each year expressed as a percentage or “drawdown rate”, and for the 2019/20 and 2020/21 financial years, the drawdown rates have been reduced by 50%.

Hodges says if, because of the virus, people are stuck at home and spending less, then it is an opportune time to draw down less, as over time their money would likely be better left invested rather than in a bank account earning little interest.

How needs differ throughout retirement

Retirement can last for many years, so rather than viewing it as say, one 30-year block, Hodges says it’s better to break the time period up into segments. “If retiring at 65, the first 10-15 years are when most tend to travel and live the quality of life they have been looking forward to; the second period from mid-late 70s to late 80s is when they think about downsizing, or going into a retirement village, while later in life, it’s more about aged care,” he says. “These are very broad generalisations and there are many exceptions to this timeline.”

He adds he tries to get people to think about retirement in this context and to look at the cost-of-living requirements for each segment – as each is different. “However, the first segment is the only one they can accurately address with regards to costs, given the length of time and future uncertainties we must consider,” he adds. “It is not really until people are six to nine months into retirement that they get their head around the amounts they’re spending: some expenses will go up in retirement and some will go down.”

What else can you do?

Spending is likely to be higher in the first few years of retirement as retirees travel, pay off their home loan or buy a new car. But it is possible to save money by reducing expenses or taking advantage of government benefits and subsidies. The Association of Superannuation Funds of Australia provides this guide, which provides a detailed budget breakdown to help with planning.

Some ways to reduce expenses include:

  • compare utility providers rates and see if they have a seniors’ discount
  • entertain more at home
  • sell a second car and make use of the senior concessions on public transport
  • be aware of government benefits and concession cards
  • put your financial needs before your children’s
  • consolidate any debts into one loan that has the lowest interest rate
  • adjust your plans as your needs and priorities change

Seek certainty from uncertainty

The current pandemic is creating nervousness among investors so a well-thought-out plan and a sound portfolio is essential. If you have any questions or concerns about your investments, or your circumstances have changed, contact your financial adviser.

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