About to retire? Wondering how Covid-19 will impact your ability to maintain a comfortable lifestyle in the long term? You’re not alone! Global market uncertainty has rendered retiring – an already life-changing event – particularly daunting for many, right now.
It’s tempting for many to abandon growth assets during this time. When surrounded by so much uncertainty, it’s a natural human instinct to want to reduce one’s risk. But, arguably, now’s the time to sit tight. Try not to let panic dictate your actions. Covid-19 calls for a considered response. Knee-jerk reactions may cost you a great deal in the long-term.
Here, I draw on history to give practical examples:
What happens when you retire and disinvest from equities to reduce risk during a downturn?
Since 2002, there were three months with significant negative monthly returns on the JSE: July 2002, September 2008 and October 2008, with returns of -13.44%, -13.24% and -11.65% respectively. What would have happened if an investor retired during each of those periods and disinvested from a medium equity fund, into a money market fund and stayed there, comforted by the fact that they no longer face any risk.
Let’s assume they retire with a R5 million lump sum and withdraw at a sustainable rate of 4% per annum. Here’s what their outcomes would have been, as of 29 February 2020:
If the investor switched to 100% equities in July 2002, then by 29 February 2020, they would have had R60 million. If they’d switched on 30 September 2008, they’d have close to R20 million, and if on 31 October 2008, about R16 million.
In terms of staying invested versus not, if you switched to a money market fund in July 2002, you would have been significantly worse off than staying invested, as of February 2020 (due to the longer time, which means better compounding).
The same is true for the other two dates; in both cases (September and October 2008) your values are higher, as of 29 February 2020, compared to having switched to a money market fund.
In a nutshell? In each one of these periods, if you’d realised your losses and moved into a living annuity consisting of 100% cash, you would have been worse off. You would also have had lower monthly incomes as of today.
That’s not all – staying invested outperforms a cash strategy
When it comes to income growth, staying invested during periods of downturn significantly outperforms a cash strategy over time, in terms of protecting your purchasing power into your retirement years.
What if you still want to see growth?
These examples show what would have happened if an investor had moved into a very aggressive portfolio once in retirement consisting of 100% equities, during these downturn periods. It’s clear that while this is purely a thought experiment, it does show the advantages of having growth assets in your portfolio and warns against the danger of excluding growth assets entirely.
We acknowledge the fact that it is extremely tough but disinvesting from your current strategy into cash is not necessarily the best option. If you have taken a bit of a knock in your portfolio and you are currently in the process of retiring, try and see through the retirement event and continue with the same type of strategy you had pre-retirement. Work with a financial planner to partner with you on this sometimes-daunting journey.
Francis Marais is the Head of Research at Glacier by Sanlam
PERSONAL FINANCE