Navigating your superannuation through retirement and a crisis.
Under normal circumstances it can be a nerve-racking time if you are in the ‘approaching retirement’ cohort, as you transition from working for a salary, which you feel in control of, to depending on a portfolio of investments for income, which is something you are not experienced with.
And now, there is understandably a heightened level of anxiety given we are in the midst of a once in a lifetime pandemic.
The emotions, as you embark on your golden years, could range from disappointment to anxiety and wondering what to do now?
Can you still meet your retirement goals?
Should you cash in?
Will things recover?
You might be concerned that your retirement plans are impacted and that you’ve ‘lost’ money on the sharemarket. Because, by default, even if you have paid no attention to your superannuation in your working years, you will be exposed to the sharemarket through a ‘balanced’ investment (which is the default most Australians are invested in). On average, balanced funds are down 20-30% since the start of the year.
I’ve put together some key points below for you to consider that I hope will help you on your journey.
What should I do now?
It is very uncertain times right now, but it is not time to react to the panic, it’s time to stay calm and continue to maintain a long-term rational view.
Emotional decisions, such as panic, fear and anxiety can lead us to be counter-intuitive to our longer-term goals and needs.
Long term, really?
Ultimately, you invest in growth investments to get just that, growth. But to get greater returns, you take on greater risks. They go hand in hand. Having exposure to these types of investments (e.g shares or managed funds), you need a long term time frame (usually 5 years plus) so that you can ride the market volatility in the pursuit of the growth.
Now, let’s say you are 65, your average life expectancy is about 20 years (19 for Males and 21 for Females). If we think about this as your investment timeframe, I would definitely consider that a long-term investment horizon and hopefully you’ll even live beyond that. So yes, you’ve still got the ‘long term’ on your side and time to weather storms.
What have you lost?
It’s important to know that you don’t lose anything until you sell something.
So if you are still invested, your losses are only on paper. In an ideal world, you don’t want to ever be a ‘forced’ seller. Having control and choosing when to sell any investment (or part thereof) is very important.
If your superannuation is already in pension mode (paying an income stream to you) and your fund is selling ‘units’ each month to pay you a pension, then you really need to pay attention below – you are selling at a loss, which is an undesirable position.
What is important to consider with investments in retirement years?
Having a well structured, long term investment strategy that is reviewed and rebalanced regularly is very important.
Diversification is a key element to reducing risk, this means different asset classes such as Cash, Fixed Interest, Australian Shares, International Shares, Property, Infrastructure all have a place in a portfolio. Especially if the objective is income and growth.
Superannuation is a structure, not an investment – there are plenty of choices and options in regards to how your superannuation can be invested. It might depend on who the provider of your super fund is therefore it’s important to do your research and understand your options.
Superannuation is an incredibly attractive tax haven for retirees – make the most of it in the lead up to your retirement and in retirement. No other structure has the tax concessions like those that are available in superannuation. A good adviser can help you navigate this.
What to be wary of?
Beware of ‘balanced funds’ or any other ‘pre-mixed’ type funds for providing a pension.
These models usually sell units (part of your investment) each month, so in a market down-turn like we are experiencing right now, you would be selling a greater amount of units to fund your pension drawdown each month. Selling these units reduces your balance at a greater rate meaning that you have less funds to participate in the market upswing when it happens.
What’s the best way to get an ‘income-stream’ from my superannuation or investments?
Retirees should consider adopting a ‘3-bucket’ approach to their investment strategy in retirement years:
Ultimately, this is an investment strategy that is set up with the aim of producing income and growth, which are two very important elements for your assets in retirement years.
The income, or cashflow (interest, dividends, distributions), generated from your investments is used to support the pension payment you draw for yourself (by law, you have to draw a minimum ‘pension’ from your superannuation in retirement, based on your age), and the growth is needed to sustain the income stream over the long-term timeframe of your retirement years.
Breaking your investments into 3 notional buckets (within super, for example) does three keys things:
Sets you up for ‘cashflow’, having the cash bucket collect all investment earnings from all other investments, that in turn support your income stream (pensions) you live off
Quarantines your ‘growth’ investments (such as shares or managed funds) and allows them to do their ‘long term’ thing
Provides cash reserves to see you through uncertain times
Not only does this model provide you cashflow to support your pension/income stream, it importantly provides you ‘back-up’ cash reserves so that you can avoid the need to be a ‘forced-seller’ in unfavourable markets.
During the Global Financial Crisis I was personally looking after over 100 pre-retirees and retirees – they weathered the storm and their retirement income was barely impacted. It made me very proud and cemented my belief and passion for good financial planning and advice. While I run my own business now, I’m supported by a much bigger company (not one owned by an institution, which is important to know!) and the philosophy I deliver today is the exact same one we were delivering 12 odd years ago, the last time a serious crisis hit.
When to get advice?
It’s never too late and the sooner the better!
A good adviser can help you navigate your options and ensure you are making the most of what is available to you. Firstly, it’s important they understand what is important to you and they can devise a strategy that is appropriate for you and your circumstances. This is very important.
By structuring your affairs in certain ways you may be better off from a tax, cashflow and Centrelink point of view – good advice will add value in these spaces, not to mention give you peace of mind and clarity.
When seeking advice, you should take note on whether the person you are seeking advice from is aligned to a ‘fund’ or an ‘institution’…these associations could have an impact on their approved product lists, which will impact what options they give you.
If you’d like to discuss your retirement with me, I’d only be too happy to help, I offer no-obligation, free discovery meetings to see how I can help. And importantly, please don’t act on any of this information without having your personal objectives and situation taken into account.
Please feel free to get in touch.
Money Mode Advice Pty Ltd (ABN 29 627 492 791) is a corporate authorised representative of First Financial Pty Ltd (AFSL 481098, ABN 15 167 177 817)
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This presentation provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.