That period covers the initial slump in the stock market as global markets reacted to the economic and financial impact of COVID-19.
Between February 21 and March 23, the S&P/ASX 200 Index plunged nearly 45 per cent to 4546 points. It has since recovered and was this week trading around 5800.
Brendan Ryan, principal of Later Life Advice, an independent financial adviser, says it is time for SMSF members and other self-funded retirees to pause and rethink.
Ryan adds: It is pure luxury [for the majority of retirees] to think they can live on investment income. Now is the time to take a laser-like look at the mix of retirement assets”.
Reverse mortgage?
That includes looking at the mix of investment income, some government support and possibly drawing down capitalfrom assets, such as considering a reverse mortgage.
The equity in the family home for an estimated 4.5 million retirees is on average worth four to five times as much as their superannuation savings, which for male Baby Boomers equal about $150,000 and for females around $80,000, according to Household Capital, which specialises in the products.
Paul Moran, principal of Moran Partners Financial Planning, suggests avoiding investment risks and deferring significant costs, such as overseas travel or renovations. He adds: Super strategies need to robust. There are times to grow returns and periods to preserve capital. This is a time to preserve capital.
Other options include considering semi-retirement, which might involve working a few days a week, or months a year, to supplement income.
That way you can use super to top up your reduced work income, Moran says.
“Two or three years of negative returns and volatility will impact your funds in the short term. But if you preserve as much capital as possible you’ll get the benefit when market strength returns.”
According to long-standing estimates from the Association of Superannuation Funds of Australia, the average super balance required to achieve a comfortable retirement is $640,000 for couples and $545,000 for singles (assuming they withdrew super as a lump sum and received a part age pension).
Blue-chips hit
A comfortable retirement includes having access to a range of recreational activities, paying top-level private health insurance, owning a mid-range car and occasional travel.
Strandquist says these lump sums could have provided a comfortable lifestyle five years ago when bank term deposits paid about 5 per cent, franked dividend income from blue-chip bank stocks was around 7 per cent and residential and small commercial real estate investment returns were comfortably above inflation.
But blue-chip companies have deferred or slashed dividends, term deposits continue to fall and rental property income has been hit by new government rules that encourage rents to be renegotiated if tenants are stood down from work.
Banks continue to chip away at deposit rates. For example, CBA has reduced its eight-month term deposit by 10 basis points to 1 per cent, according to Canstar, which monitors rates and fees. Rates on more than 300 term deposits were cut in May, with average decreases ranging from 13 to 26 basis points.
Global investment bank Morgan Stanley is warning property investors to expect a rental-led downturn.
House prices fell by 0.5 per cent in May, the first fall in a year. We expect softness to continue, with turnover and rents more significantly impacted, the bank warns.
Specialist fixed income fund managers, such as Cameron Harrison, warn that cash rates, currently at 0.25 per cent, could take many years to start increasing.
According to the SMSF Association, there are about 560,000 self-managed super schemes and more than 1 million members. More than one in three members, or more than 400,000 individuals, are of retirement age, according to the Australian Taxation Office.
Overall, the nations $2.9 trillion pool of super savings has weathered the worst of COVID-19s financial impact remarkably well, falling just 0.3 per cent in the 12 months to the end of March, says Rainmaker’s Dunnin.
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