How do I protect myself against market falls in retirement?
Protect yourself against market crashes and get good returns.
Falls in investment markets are never good news but they can be disastrous in retirement. The key to getting through market crashes is to protect smaller parts of your portfolio whilst investing for better returns on the rest of your portfolio to lift the overall average return.
With advances in medicine and better health awareness people are living longer than ever. The old adage of 3 score years and 10 (3 x 20 +10 = 70) as a life expectancy is long gone. Most retirees are now expected to live into their 80’s and even their 90’s if they’re reasonably active and don’t have chronic health issues. Nowadays you need to plan for a 30 to 40 year retirement. Your 60’s and 70’s being your active years, life slowing down in your 80’s and assisted living being more important in your twilight years.
Unless you are one of the fortunate few who have built up significantly more capital than required to fund your income needs, the option of only investing in secure cash and fixed interest investments in retirement won’t cut it. The lower returns will see your capital running out too soon. No one wants to have to rely on the government or family in your 80‘s and 90’s. For your money to last 30 years at fixed interest returns, you need around 25 times your annual income requirement in the starting pot. Most retirees are starting with 10 to 20 times their annual income requirement so earning a good return on your investment is paramount. Have a look at our How much do I need to retire? video for more on this topic.
“Drawing out $50,000 per year with $600,000 in the pot you can expect the money to run
out after 13 years if earning 3%. At 7% the money lasts around 24 years.”
If you don’t have enough money built up to get by with low risk returns, you need to take some risk. The key to getting through market crashes is to protect smaller parts of your portfolio whilst investing for a better average return on the rest of your portfolio. History proves that diversified portfolios of good quality investments like blue chip shares and commercial property in major cities produce the best long-term average returns. They have always bounced back from large falls in value, if given time. Check out our Investment Basics video for more info on investing.
Let’s use Commonwealth Bank shares as a simple example. Before the GFC in 2007 they were over $60 per share yet at the depths of the GFC falls in 2009 they were under $24 per share, a 60% fall. If you didn’t panic and didn’t sell any shares, you would have been well rewarded as they recovered to over $90 per share in 2015. Plus you received dividends every 6 months along the way. That’s fine if you’re working, living off wage income and can hold onto all your shares and maybe even buy some more at a discount. In retirement, you can’t just stop drawing on your investments for a several years. You rely on regular monthly investment income to put food on the table and enjoy your leisure years. Time is the key issue here and building portfolios that protect and can buy you time if required is the key.
One strategy that sounds appealing is selling out of the market when it is high and then buying back in when the market is low. This sounds easy but no investors, professional or amateur, throughout history have demonstrated they can do this consistently any more than half of the time. The costs of selling and buying and lost gains mean they end up going backward. Timing the high points is easy looking at a historical graph but near impossible looking forward. If your strategy to protect your portfolio is to ‘time the market’ you need to get another opinion, give us a call.
At Eclipse we have always advocated splitting your retirement investments into three tiers or buckets with our ‘Three Bucket Strategy’ to protect against market crashes. Since the 1990’s our advisers have worked with retirees to ensure they keep 3 years’ worth of the annual income required in cash-based investments. Whilst this ‘Cash Bucket’ won’t earn very high interest it provides a safety net to fund income for the first 3 years if there’s a major crash on investment markets. We advocate having another 2 years’ worth of annual income in a second tier invested conservatively. This ‘Conservative Bucket’ should average slightly better returns than the Cash Bucket and buys us another 2 years for 5 years overall protection against selling undervalued investments during a major crash. The remainder of the portfolio should be invested into more growth orientated assets according to your personal risk profile. This ‘Growth Bucket’ should provide the highest long-term average returns. With the first two buckets in place and providing security, you’ve got a strategy should the Growth Bucket fall in value to allow time for it to recover whilst still drawing your regular income from your portfolio.
As always, the devil is in the detail with complex financial matters. Give us a call or have an online meeting with an appropriately qualified and experienced person as the DIY approach can lead to disasters.
Retirement planning is all about maximising your returns to make your money and lifestyle last whilst having a protection strategy for when the inevitable market volatility comes around. Get in contact if you’d like a free discussion about your personal situation.
This piece is general in nature and should not be acted on without reference to a qualified Financial Planner to assess suitability for your individual situation.