The current volatility of the Australian sharemarket has many individuals saving for retirement feeling, quite justifiably, just that little bit anxious about their superannuation savings. For those who are about to cash in their investment pot in exchange for a pension income, are there any steps they can take to protect their pension value?
Craig Higson, business stgelopment manager at Russell says: “It has long been accepted practice for retirees to hold a cash buffer in their pension fund to provide for income payments. This will commonly be one or two years worth of payments, and will see a client through precisely the sort of volatility we have experienced in the last six months.
“If pension payments are being drawn from a cash fund, them more growth-oriented investments [such as Australian shares] are not being sold and the investments will remain in place to catch the inevitable market recovery.”
Aqua Private Wealth financial adviser Dion Smith agrees, saying: “We commonly recommend a cash reserving strategy when commencing a pension. This involves investing one or two years’ income requirements into cash within the pension, which means that retirees are not forced to sell declining growth assets when they are most vulnerable at the commencement of a pension.”
For those individuals already in pension income phase, the situation is even more critical. Financial planner Ray Griffin notes: “Presently, super pensions are being paid on 30 June 2007 balances, which could mean that the rate of pension is actually drawing down on capital. This may or may not be a problem. It all comes down to three things: life expectancy, account balance and the actual amount of pension paid.
“If we start from the reasonable assumption that a well-balanced superannuation portfolio can generate around 5% of income, then it becomes evident that a person taking a pension payment from the super fund which exceeds this amount will be drawing on capital to do so.”
“At times like these, retirees have to invest in retirement, and not retire from investment,” says Russell’s investor service director Patricia Curtin. She explains: “Now it is even more important to speak with a financial planner and ensure that the plan you put in place for retirement is a plan for all environments, with diversification across asset classes and, where possible, across managers. Not all managers can weather the bad storm, thus thinking of diversification across all levels is critical.”
Pre-retirees facing the stress of watching their super balances fall in value should also be wary of making any knee-jerk investment decisions and reducing their exposure to Australian and international shares. “From what I have seen with our clients who mostly run our balanced portfolio model, the falls have been far less dramatic than what some headlines would lead us to believe,” says Griffin. He adds: “I would be reluctant to shut that gate unless the portfolio is heavily weighted to international markets.”
Curtin says now may be a good time for pre-retirees to batten down the hatches. She explains: “Your portfolio should have a rebalancing strategy which ensures your investments are rebalanced on a regular basis back to the risk profile that you are comfortable with. By rebalancing, your portfolio will not drift outside a risk profile you are not comfortable with. In some cases, this may result in your portfolio taking advantage of the opportunity to sell high and buy low.”
Pre-retirees should also now take the time to gain a greater understanding of their super fund’s asset allocation, says Griffin. “Aggressive exposure to Australian and international shares would concern me and so too would exposure to property assets which are heavily weighted to US properties. “Markets will recover in time but this time around expectations of a quick recovery are unrealistic – the recovery from this downturn will be measured in years not months.”