Has COIVD ruined my retirement?

A question I’ve been getting a lot from clients in recent weeks is “has COVID has ruined my retirement plans?”

Pleasingly the answer is typically no, but there is an impact. Here are the four key issues.

  1. Diversification has worked.

Australian shares and listed property currently show negative numbers over 12 months, however global shares are strongly positive, and your fixed interest exposure likely produced around 2%. So provided your retirement savings are appropriately diversified, it’s likely your balance is about square over the past year (ignoring drawdowns if you are already retired). Considering we’re in the middle of a global pandemic without a vaccine, and our first recession in almost 30 years, this is a remarkable outcome.

2. An upside for buyers

If you’re still in accumulation phase, every time you contribute to super you are buying assets. Now as a buyer, you’d always prefer to pay less. The market pullback seen since March has meant that your contributions have been buying more units within your fund each month. As per above, your balance is likely about square now, but during the past 7 months of COVID inspired weakness, you’ve bought at some real bargain prices.

3. Reason for optimism

Stimulus measures right around the world have been extraordinary. Locally we’ve seen interest rates cut to previously unimaginable levels. More impactful has been the JobKeeper and JobSeeker payments which appear to have successfully averted considerable household financial hardship and provided consumers with the confidence to keep shopping at Bunnings, Kogan, and friends. Tax cuts have now been granted, businesses given incentives to spend, and indications governments, both state and federal, will embark on an infrastructure building binge as their economies re-open.

All this Provides reason for optimism on the outlook for share and property markets into 2021.

4. But lower returns will have an impact

Whilst for the reasons above we need not be overly panicked by blowback from COVID on our retirement plans, there are longer term implications that warrant a fresh look at your plans.

A key element of retirement planning is considering how long your savings will last. The inputs in such calculations are your starting balance, amount of drawings each year, and the earnings rate.

Interest rates around the world have been on a downward trend for over a decade. But COVID has accelerated that trend. The world is effectively awash with cash looking for a home. As investors realise that their bank deposits are paying less than inflation (particularly after tax), cash savings will move into share and property markets, pushing up prices, but meaning the income yield (dividends or rent) will decline as a percentage return. Returns on bonds, juiced up by falling rates this year, will come back to 1% or less in the year ahead reflecting market rates.

All this means returns on our retirement savings will be lower into the future than we might have anticipated. This necessitates your longevity projections being re-examined. It may be for instance that your financial planner has run the numbers and determined you were in good shape to meet your goals based on an assumed average return through retirement of 6%, a reasonable assumption pre-COVID. It would now be prudent to re-run those projection on returns of 4%, and perhaps lower. Lower returns over 20+ years mean your savings run out sooner. Maybe that means a smaller inheritance for the kids, and perhaps that’s fine. But maybe it means your savings are projected to expire well before you hope to, in which case some changes will be required.