- 15 April, 2020
What does Coronavirus mean for my retirement savings?
If we look back over the past 30 years or so, there have been a number of occasions when the sharemarket has taken a tumble resulting in the retirement savings of many Australians looking rather shabby, at least for a while.
The more notable events in recent times include Black Monday in October 1987, the bursting of the Dot-Com Bubble in 2000, and the fallout from the Global Financial Crisis in 2008.
Any then, of course, there is the current downturn where the market started to falter in March 2020 as a consequence of the Coronavirus Pandemic (COVID-19).
While these market downturns don’t occur at regular intervals, they certainly do occur with some regularity, often driven by unique economic and market circumstances of the day.
But, what does a sharemarket downturn mean for my retirement savings anyway?
Most, if not all workforce participants, and many recent retirees, have superannuation. In fact, compulsory superannuation has existed in Australia in one form or another since the mid-1980s.
In addition to compulsory superannuation, many public sector employees and those working for large companies generally enjoyed superannuation arrangements that were more generous than the basic compulsory superannuation we know today.
A significant proportion of people who have already retired, and who will be retiring in the coming years, will rely on the Government’s age pension to provide for at least a part of their income needs in retirement.
However, with an increasing number of retirees having at least some superannuation, it is expected they will use this to supplement their age pension, thereby contributing to a higher retirement income.
And of course, there are many retirees that have accumulated sufficient wealth to be self-funded in retirement and will not be eligible for the Government age pension.
But, what has all of this to do with the Coronavirus?
Simply, superannuation funds invest billions of dollars of retirement savings on behalf of their members. In fact, as at the end of December 2019, there was an estimated $3 trillion held in the various types of superannuation funds in Australia, including self-managed super funds.
Superannuation funds invest their members’ retirement savings in a wide range of investment asset classes including cash, fixed interest securities, property, infrastructure, and both Australian and international shares.
As a result, the rise and fall in the value of our superannuation savings will reflect the positive and negative movements in the underlying investment markets.
Therefore, when the sharemarket declines, we will generally experience a decline in the value of our super. The extent of the decline will depend on our super fund’s exposure to shares.
And the same occurs if there is a decline in property values, fixed interest securities and other types investments. The only asset class that will generally be immune to a decline in value is cash.
As resulted in past declines in sharemarket values, the value of superannuation savings had a corresponding decline. However, each time, the values increased again over time to surpass the previous highs.
I have no doubt that the same thing will occur again this time.
The question is: “how long will it take to recover?”
Unfortunately, I don’t know the answer to that question – only time will tell.
As a result of the current economic situation, many Australians will have seen their superannuation savings decline. So, what should we be doing about it?
The answer will depend on where a person is in their journey.
For those that have already retired, it is a little harder because that are already drawing down on their super.
Perhaps the important thing is not to be cashing out of their share-based investments at the current time. This will only crystallise losses. Allow time for the investments to recover and then consider if it is prudent to re-weight their super fund investments towards more conservative assets.
Retirees, and for those approaching retirement, the concept of holding a couple of years of income drawdowns in cash and conservative assets is worth considering. This is sometimes referred to as the “bucket strategy”. This means that in the event of an economic downturn, any retirement savings that are invested in growth assets (e.g. property and shares) don’t need to be sold to fund income drawdowns and can have time to ride out the downturn.
On the other hand, for those who are still accumulating superannuation, time is on your side. The markets will recover.
This is a good time to consider, where personal circumstances permit, to contribute even more to superannuation. And for some, continuing to work and deferring retirement for a year or two may allow more time for superannuation savings to rebuild.
Times of market downturns, like we are experiencing at present, can be very disturbing and unsettling. However, past experience has demonstrated that markets do recover over time.
It is time to take stock of your super, and other investments but it is not a time to make rash decisions.
As always, having a good financial planner on your team can assist by providing comfort and a level head.