How to Manage Lower Investment Returns in Retirement | Consortium Private Wealth Horsham

A period of low investment returns can happen when you least expect it, and at a time when it is most difficult to deal with. One of the more challenging times is when you are approaching retirement, when you have less time to recover from a market downturn, and may soon be drawing money from your investments rather than adding to them.

However, with a combination of investment strategy, spending flexibility and retirement planning, you can reduce the impact of disappointing returns.

Review your investment mix

The years leading up to your retirement are a good time to reconsider your investment mix, both inside and outside super. A market downturn may motivate you to move all your investments into conservative ‘blue chip’ alternatives which usually have less exposure to ups and downs, but they will often come with lower long-term returns. A better approach may be to retain some exposure to growth assets – to keep pace with inflation and your withdrawals – while reducing your overall risk by switching some of your portfolio into safer alternatives.

Build a defensive retirement buffer

The danger of poor investment returns just as you start withdrawing money is called ‘sequence of returns risk’. If you sell shares during a downturn, you sell more assets at low prices, leaving less capital in your portfolio to aid recovery when the market bounces back.

Having a separate buffer in a mix of cash, term deposits and government bonds will preserve a portion of your capital. If you have enough in this emergency fund to cover several years of expenses, you should be able to avoid having to sell your growth assets at depressed prices if the market turns down.

Consider delaying full retirement

Delaying retirement by just a year or two can materially improve your financial position. It will give you more time to receive employer super contributions and possibly make personal super contributions, which can reduce your income tax.

While you are still working, it is easier to pay down debt (such as your mortgage), build a cash reserve and delay drawing down your super. Meanwhile, you are giving yourself time to recover from any investments that are undergoing a downturn at your originally planned retirement date.

You don’t necessarily have to continue in full-time employment. Gradually reducing your hours still provides an additional source of income while decreasing the amount you need to withdraw from investments.

Reassess and reduce your income needs

If your investments are producing lower returns than expected, reducing your required income may be easier than accepting the risk that comes from finding investments with higher returns. Strategies to consider include:

Temporarily reducing discretionary spending
Delaying a major purchase such as a new car or overseas holiday
Paying off high-interest debt
Downsizing your home

Plan your pension type

Once you’re ready to start drawing a pension from your superannuation, you have several options regarding how your income will be paid. If you choose an account-based pension, you will continue to be paid at an amount and frequency of your choosing, unless or until your money runs out. Your balance may decline faster during periods of lower investment returns. Any balance left in your account after your death is paid to your nominated beneficiary.

Alternatively, you could withdraw your superannuation as a lump sum in order to purchase a guaranteed lifetime income stream: a lifetime pension from a super fund or a lifetime annuity from an insurance company or friendly society. This type of retirement income can protect you from running out of money as a result of investment income volatility, but there will be no balance available to a beneficiary unless you die within any guaranteed income period stipulated.

In fact, you could choose to take a partial lump sum to purchase a guaranteed income stream to cover essential expenses, while retaining the balance invested more flexibly in an account-based pension. Talk to your financial adviser to help you decide whether one type of pension or the other, or a mix of the two, is best for you.

Your financial adviser is your retirement planning expert

A practical retirement strategy to counter the possible effects of lower investment returns will not look the same for everyone. It depends on your age, super balance, other assets, any debt you still have, expected retirement income, and spending needs. Consult your financial adviser to help you get the optimal mix of a diversified portfolio, a defensive buffer, a possible continuation of working and super contributions, and the appropriate pension choices.

The information provided in this article is general in nature only and does not constitute personal financial advice. 