Share markets around the global are volatile thanks to the coronavirus pandemic and the cloud of uncertainty it brings with it is scaring Aussies, particularly those approaching or very recently retired.
In times of crisis such as this, it’s typical for central banks, such as the Reserve Bank of Australia, to cut interest rates in order to stimulate economic growth. But with interest rates already at record lows, they’re instead buying assets such as bonds.
This strategy is known as quantitative easing and it means there’s a lot of extra money flowing into investment markets, which is causing prices in investment markets to go up, AMP Australia chief investment officer Lakshman Anantakrishnan explains.
This then leads to a widening gap between the underlying state of the economy (which is trending downwards) and asset prices (which are trending upwards).
Great, but what does this mean for superannuation?
Well, because of quantitative easing, asset prices are likely to continue to go up despite the negative outlook, Anantakrishnan said.
“This will probably continue over the short-term, but in the long-term, it creates a new risk in the system,” he said.
“Instead of concerns about the level of household debt or corporate debt, there are likely to be concerned about the level of government debt.”
“So, the long-term outlook is a bit riskier, as the reality of the underlying economic situation could kick in at some point if financial markets lose their confidence in the central banks. Total long-term returns are probably going to be lower than they’ve been in recent cycles.”
CommSec’s chief economist Craig James agrees that given superannuation is a long-term asset, there will be periods when returns outperform long-term averages and times of underperformance. But assumptions on returns should be made on long-term averages.
“The implications for your superannuation nest egg and returns always vary with your proximity to when you want to use the funds. The closer you are to retirement, the more you are likely to focus on liquidity and capital preservation,” he told Canstar.
“The sharemarket is already focussed on economic recovery and share prices have bounced from lows. But as we stress, much is dependent on preventing a ‘second wave’,” he added.
I’m approaching retirement. Should I be worried?
The coronavirus recession and impact on superannuation and quickly and unexpectedly affect Aussies approaching retirement and those already retired and looking to live off their nest egg.
“For members shifting their super savings to a pension product, a number of down months in relatively quick succession will mean they draw down on a smaller pool of savings than they might have anticipated,” SuperRatings executive director, Kirby Rappell explains.
Okay, so what should I do?
In short, not very much.
Anantakrishnan said Aussies who have their retirement approaching should focus on how to achieve a stable income stream rather than spend too much energy trying to accumulate capital.
“If you’re near retirement, a substantial capital loss now could have a big impact on your lifestyle,” he said.
“It’s extremely important to understand the risks you face and the impact these could have on your retirement outcome. These things should be considered if you are thinking about deferring your retirement until your super levels have been restored.”
In the meantime, given the financial market continues to change, Anantakrishnan urges Aussies to re-visit their investment strategy to understand how the changes will affect your expected returns and income.
‘Barefoot investor’ Scott Pape also agrees that Aussies should concentrate on reviewing their risk strategy and making sure they have the appropriate risk for their age and risk tolerance.
But he also urges that investors should ensure they aren’t paying too much in fees.
“They’re one thing you can control,” he told Choice.
Because a minor 0.5 per cent increase in fees can cost a typical full-time worker $100,000.
As a rule of thumb, you should look for total fees of 1 per cent or under for your super. This will have a major impact on how much you end up within retirement, coronavirus or not,” Pape said.
If you’ve already retired it’s important to stay focused on your long term strategy and revisiting spending as you may need to reassess your budget for the next five to 10 years.