It’s soul-destroying to watch the nest egg you’ve painstakingly built up over years unravel – just ask those retirees who watched a chunk of their savings wiped out almost overnight during the 2008 market crash.
However, what many pre-2008 retirees will tell "newbies" is that it’s possible to recover some losses and/or change investment/annuity strategies to insulate yourself against further erosion of your funds.
Those who weathered the 2008 storm also learnt (some the hard way) not to panic; markets move in cycles and recovery is possible. The trick is not to make fear-induced decisions, which may put you on the wrong side of the recovery cycle.
The difficulty, of course, is that the Covid-19 crisis is like no other we’ve experienced in modern history. No one knows how deep this market volatility and economic recession will go or for how long it will run, which makes decision-making incredibly tricky.
Assessing your position
Let’s first recap what’s happened to the two main retirement products over the past three to four months.
If you’re invested in a living annuity that’s weighted more towards equities, your portfolio would have been more vulnerable to recent market losses. However, because your living annuity also includes equity and bond investments, you will be able to benefit from a market recovery, as we’ve seen in April.
If you’re in a life annuity that’s heavily invested in bonds and receiving an income, market changes in bond yields will not really impact you. However, if you are receiving an income from a with-profits annuity, then your future increases may come under pressure. Remember, unlike a living annuity, your income from a life annuity will never reduce and will be payable until you (and possibly your spouse) pass on.
So what are your options now?
Making tough choices
Once you’ve bought into a life annuity, there’s no going back, so the only other option you may have is to look to capitalising on any other investments.
For living annuity clients, the choices you make need to be based on your personal circumstances, such as your age, health, lifestyle and other available investments/sources of income. I cannot stress enough that there is no one-size-fits-all solution here, which is why it’s so crucial to get personalised advice from a certified financial planner.
In general, the options for living annuity clients are:
Ride it out: Don’t get spooked, stay in your current portfolio (even if some of it is high risk) and take the long-term view that the market will recover. For example, March was horrific but April was blissful; we cannot predict how markets will move.
Restructure your risk: Higher risk investments may help you recoup losses more quickly, while conversely moving to lower risk investments may protect against further losses but is unlikely to help replace lost capital quickly. This decision should be based on how far into retirement you are: if you’re newly retired, you have more time to make up for losses, while if you’re further down the line taking risks may not be wise. Also remember that the sequence of investment returns is all-important: for new retirees, experiencing poor returns in the earlier years can be detrimental later in life as the point at which you run out of money (that is, the "point of ruin") may come faster than expected.
Diversify your portfolio: Retirees with a large chunk of their portfolio invested offshore have fared better during this time, so perhaps this is the time to look at moving some of your portfolio offshore. Bear in mind that offshore does not have to be high-cost. Offshore products such as exchange-traded funds (ETFs) provide low-barrier, low-fee options.
Increase your drawdown: Treasury has amended regulations to allow living annuitants to immediately either increase drawdowns (up to a maximum of 20% from 17.5%), or decrease (down to a minimum of 0.5% from 2.5%).
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If approved, this would be a temporary amendment (till end August 2020) to assist pensioners who are struggling with cash flow. Be very careful, though, as an increased drawdown – even for a few months – will incrementally shrink your nest egg. Sticking will the 4% drawdown rule will ensure that you don’t reach the point of ruin.
Cash in other investments: Instead of increasing drawdown rates to make up income shortfall, look to what other cash or near cash investments you could use to make up the shortfall for a few months, or longer.
Switch to a life annuity: If you have no other resources to draw on and your drawdown rate has had to increase to a level where investing your savings in a life annuity could offer you the same income, this could be an option for those who want a guaranteed income for life. Remember, too, that the older you get the less expensive a life annuity becomes, so annuitisng from a living annuity into a life annuity may improve your overall financial position and provide more security of income. This is a huge decision, though; don’t take it lightly or without expert advice.
My last word is that, whatever your situation is, do not take the huge gamble of trying to time the market. It’s a crazy time for markets, with massive swings – some good and some bad, with a few weird anomalies thrown into the mix. No one is capable of timing the markets in conditions like this. Don’t risk it.
* Duane Naicker is Head of Sygnia Umbrella Retirement Funds. Views expressed are his own.