Paul's Insights: How retirees can navigate the Covid-19 crisis

No matter whether you have a self-managed super fund (SMSF) or you’re relying on a pension or annuity from a professionally-run fund, chances are your nest egg is spread across a variety of investments. This diversity is your best defence against the recent sharemarket falls.

Tax Office data shows that across SMSFs, listed shares typically comprise less than one-third of the typical fund’s portfolio^[1]. Cash and term deposits account for about one in every four dollars invested by SMSFs.

Among retirees who use their super to purchase a retirement income stream, the overwhelming majority (94%) opt for an account-based pension^[2]. On average, these can have 57% exposure to growth assets such as shares.

So while the recent sharemarket falls will impact your retirement savings, it’s likely you’ll be shielded from the full weight of the market downturn thanks to a diversified portfolio.

Despite being the cause of recent losses, shares still play a valuable role in many retirees’ investment mix. History tells us that sharemarkets recover over time. As I write in mid-April, the ASX 200 Index has already gained 8.10% for the month.

That’s not to say we won’t see further market dips. Volatility is very high right now. But having exposure to a cross-section of equities – which is easily achieved through exchange traded funds, will help your portfolio re-gain lost ground when the upswing gains momentum.

If you’re in the so-called ‘retirement risk zone’ – that is, the years immediately before and after retirement, a run of poor returns can rapidly eat into your super savings. Investors concerned about the potential for large losses in this critical life stage may be tempted to eliminate as much risk as possible by shifting their portfolio into low risk assets to preserve capital.  However, adopting an overly conservative strategy early on can work against you.

At age 55 we can have another 30 years ahead of living, traveling, eating, socialising – all the things that make retirement worthwhile. Three decades is a long investment horizon. Moving your nest egg to conservative assets as a result of Covid-19-induced market falls, can leave you with a lump sum on retirement that is completely inadequate for your long term needs. 

That’s why the key is to maintain a diverse portfolio – and keep an eye on investment fees. You can’t control markets, but by proactively minimising the fees you pay, you can maximise your stake of market gains, and that can go a long way to making your nest egg last the distance.

Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

^[1] https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/SMSF/Self-managed-superannuation-funds--A-statistical-overview-2016-2017/?page=5

^[2] https://cdn.tspace.gov.au/uploads/sites/52/2015/09/Australian-Institute-of-Superannuation-Trustees-and-Australian-Centre-For-Financial-Studies.pdf