Managing the impact of volatile markets on your retirement savings

For retirees, satisfying your income needs today remains a top priority. But equally as important are your income needs for the future.

In times of investment market instability, as we’re currently experiencing due to the impact of Coronavirus on global share markets, it’s easy to lose sight of this.

In this article, we’ll address some areas to keep in mind when your retirement savings are being affected by heightened volatility in share markets.

Review your investment strategy

In uncertain times like this, it’s critical to remind yourself what your retirement investment strategy was originally set up for.

This means being clear about the type of investments that make up your strategy, and how they are expected to perform over the long term.

It’s also important to think about your strategy from a factual perspective, instead of reacting with emotion — particularly in response to short-term market volatility — as it may prevent you deviating from your goals.

Growing your savings

If your plan has been to grow your retirement savings to keep up with the rising cost of living, you may have opted for investments that offer good growth potential over long periods of time—such as shares or property.

As a result, your portfolio is more likely to be experiencing greater volatility due to the impact of Coronavirus on share markets.

Generating a stable income

Alternatively, you may have chosen to structure your strategy to generate a stable income and therefore opted for a more conservative investment approach. In this case, you’re less likely to be experiencing significant volatility in your portfolio.

Separating growth-focused and stability-focused investments

A popular strategy for retirees is to ‘bucket’ short-term income needs in more stable investments, separate from future income needs which are invested in more growth-focused assets. That way, in times of market instability, the longer-term, growth-focused investments can be left untouched to give them time to benefit from any market rebound. Sometimes it can take many years before investments return to previous highs.

Be aware of your risk tolerance

It’s always important to consider how you feel about risk and market volatility.

Risk tolerance depends on how you feel about taking risk and your ability to do so, such as whether you are financially able to wear any falls so you can stick to your long-term strategy to give it time to recover.

By understanding your risk tolerance, you’ll be better able to make decisions about the structure of your investment portfolio in a way that aligns to you personally.

During periods of investment market instability, how much exposure you choose to have invested in different asset classes may change depending on your level of risk tolerance.

Consider diversification to reduce fluctuations

Diversification helps to insulate your portfolio from significant share market movements because it reduces fluctuations in your portfolio.

It follows the concept of not putting all your eggs in one basket by spreading your money across many asset classes, countries, industries and even investment managers.

The advantage of this is that often, when one area of your portfolio is weak and falling, another may be rising. So, if you have money invested across many areas, changes in their values tend to balance each other out.

Consider reducing your pension payments

One way to help reduce the impact of share market volatility on your savings, if you’re accessing it as an income stream, is to adjust your periodic withdrawal amount.

From 1 July 2019 to 30 June 2021, the minimum pension amount has been halved for people of all ages. This means if you’re under 65, you’re only required to receive income payments of 2% rather than 4% of your account balance in a year. For people aged 65-74, it’s now 2.5% as opposed to 5%.

If your pension payments are at least equal to this reduced amount, you can ask your pension provider to reduce or stop any further pension payments for the rest of the financial year.

Seek support from a professional

Working with a financial adviser can help you design a plan to achieve your financial goals. They may also provide you with a better understanding about the risks and rewards of investing and how you can manage risk in your retirement savings.

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