Approaching retirement in the time of Covid-19

approaching retirement

Approaching retirement in the time of Covid-19

Your bucket list was beckoning and retirement was just round the corner. 2020 was going to be the start of a much-anticipated new phase of life. Instead, you’re now worried about the robustness of your retirement planning in the light of Covid-19 market turbulence.

Your final working days have been upended, but that’s actually the least of your worries. Your pension fund value has dropped 10%. Will you have 10% less income than you budgeted for the rest of your life? What about your tax-free lump sum, earmarked to settle your bond or other commitments but now less than you expected? If you leave the funds invested to allow the investments to recover, where can you free up some cash?

It’s counter-intuitive, but you need to … breathe

Change is stressful and retirement is an upheaval in itself. Add to that the current financial market and economic situation and you have the perfect storm. But more than ever your financial decisions need a cool head because they need your purposeful and deliberate attention. Your financial future depends on it, so don’t make hasty or emotion-driven decisions. It may take a while, but you need to allow your investments time to recover.

A recap on the mechanics of retirement

When you retire, you have the option to withdraw a portion of your retirement fund in cash. Some or all of it will be tax free. Once that is done, the balance of your retirement fund is transferred to a new account, which needs to provide you with a monthly income.

How to avoid locking in Covid-19 losses

A good pension fund investment is diversified to reduce the overall risk, so it consists of different types of investments. Because of this risk-mitigating strategy, some underlying components of your total pension fund will have fared better than others in this time of market volatility. To avoid taking cash from investments that need time to recover, consider taking a ‘carve out’ of the low-risk portion of your fund that has held up (e.g. cash). Adjust how you invest the balance of your pension savings within your living annuity to exclude the allocation to cash that you have just withdrawn as your tax-free lump sum. Then you can maximise the other investment allocations’ recovery opportunities.

You can use a similar approach, where appropriate, to source the monthly income you need for your retirement once the balance of your pension fund has been transferred. Drawing your income from appropriate sections of your portfolio will allow the other sections time to recover without forgoing your monthly income.

Retirement investment portfolio planning – the process

A superficial ‘spray and pray’ approach is never advisable when securing an income stream that you plan to rely on. Now more than ever, ‘looking through’ each fund to see its constituent investment components so that you achieve the desired outcome when investing your retirement savings is more work, but entirely appropriate.

Risk vs return and retirement

On retirement you move from accumulating to spending, so it’s routine to decrease the risk/return profile of your investment portfolio. If, however, you didn’t get around to doing that before the latest market compression, don’t reduce it right now. Rather consider delaying that shift and allowing your portfolio to recover, and then make the change later.

A cool head and a sensible strategy will still help you navigate this time of uncertainty without feeling you have to ‘time the markets’ or predict the future.

Download PDFPrint Page