Focusing on retirement in the current environment

The COVID-19 pandemic has shaken the entire economic, social and business environment and has laid bare its fragility as it becomes the biggest challenge for the new generation of investors in retirement.

Making investment decisions that don’t match the current circumstances and personal goals may lead to a difficult financial situation and reduced lifestyle opportunities moving forward.

Staying focused on long-term goals can be challenging. However, maintaining a long-term lens may help navigate the current complications without substantial long-term damage.

While each individual’s needs, income source and the amount required to support a retirement lifestyle is different, here are the five basic tips to help maintain focus during the pandemic:

Tip #1: Keep a long-term perspective

Instead of panicking during periods of volatility, stick to the plan that is based on long-term investment objectives and align actions accordingly.

It is important to understand that any dramatic changes to the current investment strategy in the current environment are likely to be costly. Where possible, waiting for more stability may be an option. Given the possible long-term consequences, it is easy to be influenced by market sentiment, which can make decision-making particularly difficult.

Liquidity can be poor in turbulent economic conditions like we are currently experiencing as the number of buyers wanting to trade at this time has most certainly reduced. It is also easy to have investment decisions influenced by market sentiment, which makes unbiased decision making about long-term goals even more difficult at times like this.

Below is a line chart that shows investor emotion through a market cycle:

Focus on retirement - 1

Tip #2: Diversify investments

Diversification is not a new concept. It is an investing strategy you need to minimise investment risk. Since the current environment has led to more uncertainties and changes, diversifying investments should absolutely be considered at the very beginning of an investment strategy.

There are different diversification strategies but one thing in common among these is buying investments in a range of different asset classes. It aims to maximise returns by investing in different areas that should each react differently to changes in market conditions. This can be likened to not having all of your eggs in one basket – no matter how confident an investor is in picking the best performing areas, it is invariably better to have a spread of investment exposure across asset classes, suitable for your long-term goals. This provides some protection should one investment fall more than others. In the case of a portfolio not being appropriately balanced, we recommend the investor seeks advice, as rebalancing during volatile times can be challenging

Tip #3: Review income generation options

Once the effect of COVID-19 on the share market and market volatility has subsided, take some time to review your portfolio.

It is possible that expected income levels from the portfolio may alter due to bond yields changing and future dividends from equities may reduce (even temporarily).

Tip #4: Consider changes to drawdown amounts

Reviewing future spending plans ahead of time may open opportunities to save, such as an overseas trip which is likely to no longer take place.

Investors who are already drawing down from their retirement savings could consider suspending or reducing withdrawals while markets are low. Withdrawing from a depressed investment can reduce its potential for recovery in your portfolio.

Tip #5: Maintain investment discipline

If you are yet to make the change from working to retired and are still building your nest egg, you may choose to keep doing so.

Looking at historical market shifts, the market usually recovered, given time, and it has the potential to do so again after this crisis. When markets are down, regular investment contributions may buy more shares or bonds. Changing contributions in response to current volatility may run the risk of missing out on long term growth potential.

Want to know more?

Thinking about retirement in the current environment is a challenge. But how do you invest and plan when tomorrow seems to be uncertain?

Banks Group remains committed to your financial confidence. If you have questions or are not sure what action to take during times of market volatility, book an appointment with a Banks Group professional.

Remain focused on achieving your financial goals. Watch and learn from the Banks Group experts as they share their insights on how you can plan and protect what’s important for you and your future. 

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Disclaimer: Past performance is not an indication or guarantee of future performance. The ideal investment vehicle for an investor is dependent on personal outcomes. It is vital to obtain tailored advice specific to your circumstance before taking action. While we try to ensure that the information we provide is correct, mistakes do occur and we cannot always guarantee the accuracy of the material.

This article is intended for general discussion and is not intended to represent specific advice. BG Private Clients shall not be responsible for any entity that acts on any of the comments in this article without first obtaining specific advice from BG Private Clients. For further information, please click here.

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