Approaching retirement in a volatile investment environment
Since the beginning of the year, global financial markets have seen their worst declines since the 2008 Global Financial Crisis. Major stock exchanges around the globe have fallen in excess of 25%, signalling the end of the longest bull market that the globe has experienced on record.
While slowing global growth has been a feature of markets in 2019, two main events appear to have been the catalysts for the current market rout; the impact of the global Coronavirus (Covid 19) outbreak and the oil price stand-off between OPEC member Saudi-Arabia and Russia leading to drastically falling oil prices.
The resulting fall in asset values has been a nightmare for clients nearing retirement, leaving them grappling for answers. Imagine the situation of clients having to retire at the end of March this year after diligently saving for their entire working career. How will the recent market downturn have affected their retirement plans? Will they still be able to secure the retirement income they need?
The most important lesson is not to panic, now is not the time to discard a retirement plan completely and starting from scratch. It has been my privilege to be part of the team analysing the results from our regular Sanlam Benchmark Survey for many years. When considering the responses of pensioners who have achieved a successful retirement outcome, it is clear that they saved and stuck with a plan, irrespective of their salary levels. As one pensioner succinctly put it: “Hope is not a plan!”
Unfortunately a client’s retirement decisions are all once-off events, it is not something a client can practise and gain experience in – i.e. few, if any, can retire a few times to try it out before doing it properly. This place immense pressure on the financial advisors to develop a realistic retirement plan with their clients and ensuring that clients stick to it.
In most cases a client’s financial advisor already took into account that markets will always encounter volatile periods. Retirement plans need to be sufficiently robust to allow for a downturn just before retirement. A good retirement plan should not only focuses on a client’s level of contributions and retirement date, but also selecting an appropriate investment strategy as they approach retirement.
A client can continue with a fairly aggressive investment strategy over their working lifetime and into retirement (if they opt for a living annuity), but this no-holds barred approach exposes a client to a possibly nerve racking journey through market ups and down as well as a sequence of return risk in retirement. A popular alternative is to rather de-risk clients as they approach retirement, reducing the risk of market downturns ruining their retirement. But how does one balance good long term returns with reducing the variability of returns, especially close to retirement?
A practical solution would be to utilise a smooth bonus portfolio, either on its own or in conjunction with a client’s other investment portfolios. These portfolios, such as the ones offered by Sanlam, provides stable, predictable returns while the underlying portfolios still have a significant allocation to growth assets.
These portfolios have continuously shown their worth especially in volatile and uncertain markets, as is currently the case. Over the last three months I have spoken to many concerned retirement fund members about to retire, who take great comfort that their retirement nest eggs have not reduced at all due to the immense market turmoil.
At Sanlam we believe that smoothed bonus portfolios remain a relevant and important investment option before and after retirement and are often under-utilised by financial advisors. These portfolios have successfully withstood countless market downturns, political upheaval and other disasters, enabling your client’s financial resilience.