Planning for volatility when you're retired

For retirees living on a fixed income, or those planning to retire in 2022, volatility in investment markets can be especially unnerving. But there are ways to plan for, and manage, volatility.
By · 28 Jan 2022
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28 Jan 2022 · 5 min read
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In 2020, at the start of the pandemic, we saw the Aussie sharemarket plunge dramatically. This was followed by announcements from a number of blue chip companies that dividend payments were being slashed or suspended for the year.

Fortunately, shares have made substantial gains in the aftermath of early 2020. But the experience would have left plenty of pre-retirees wondering how they will manage stock market turbulence during retirement. A number of steps can help to shelter retirees from sudden market movements.

Accept that volatility is a normal part of markets

Volatility is part and parcel of investing especially across more lively asset classes like shares. Over a retirement spanning 20, possibly 30 years, it’s likely you’ll experience a number of bouts of extreme market movements. This means investors should be prepared to remain calm – as challenging as that may be, even during the most volatile times such as those we saw at the start of 2020.

Remember too, risk and reward are inextricably linked for investors. Aussie shares have delivered total returns (capital growth plus dividends) averaging 9.5% annually over the past decade. That’s far above the meagre returns on cash savings – and this is the reward for investors to take on extra risk.

So yes, over the short term, shares (and property too) can gyrate dramatically. But it pays to keep an eye on long term results and stick to your plan even when it can be tempting to bail out of shares or share-based exchange traded funds when markets head south.

Manage risk through a diversified portfolio

Retirement is very much a time to spread your money across different investments. It’s not about just trying to aim for the highest returns possible. A diversified portfolio can also help to protect what you have.

As a guide, the cut in dividend payments in 2020 left plenty of retirees spooked about how they would fill the income gap.  That’s understandable. However, it highlighted the value of holding a variety of investments that can generate income.

Have emergency money 

Having an emergency pool of cash means you won’t have to sell shares at a loss to maintain your lifestyle if the stock market takes a tumble. It also means your shares are still in the game for the next big rebound, which history tells us almost always follows a downturn.

There’s no hard and fast figure for how much you should hold in an emergency fund though the equivalent of three to six months of household living costs can tide you over a serious market dip.

You may also in Paul's article, Budgeting in Retirement.

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.

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