Recession Proof Your Retirement
RECESSION - It is the last thing pre-retirees and retirees want to experience. But, what does it mean for you, and more importantly, what measures can you put in place to protect your retirement savings that you’ve worked so hard for?
Recession Proof Your Retirement
RECESSION, it is the last thing pre-retirees and retirees want to experience. But, what does it mean for you, and more importantly, what measures can you put in place to protect your retirement savings that you’ve worked so hard for? Firstly, it is important to understand what a recession is. A recession is caused by a reduction in economic activity over a period of time, generally defined by two negative economic quarters of growth in a row. Here we will discuss some measures that can help protect your precious retirement savings.
Future proofing your income (and balance)
Recessions are generally short lived. History indicates that on average recessions last for one year or less in duration. Using this information can help future proof your retirement income and your balance during a recession and beyond.
Most retired Australians use their superannuation to help meet income needs in retirement. In most cases, the money inside superannuation will be invested in assets that are subject to volatility. In times of economic downturn these assets will generally fall in value. Therefore, when your super fund sells assets to fund your regular income, your super fund is having to sell down a larger portion of assets to fund the same amount of income which will see your balance reduce faster than expected. This can be avoided. Some superannuation providers offer cash accounts which can be used to hold your future pension payments. Instead of your super fund selling your assets at a low point, your income would be withdrawn from a cash account instead. Depending on your income needs, holding one or two years worth of income in a cash account will not only give you certainty of income, it will reduce the risk of depleting your balance during tough economic times.
Reduce your super income stream
When your superannuation is in pension phase you are obligated to withdraw a minimum amount of your balance per year. The amount you have to draw is based on your age and ranges from 4 percent to 14 percent.
During an economic downturn it is likely your super fund will sell down more of your investments to fund your regular income. This can result in your balance eroding quite quickly. Responding to the recent economic downturn the Australian Government has announced a temporary reduction in the minimum annual amount that you must withdraw from your super income stream. The range is now 2 percent to 7 percent. This is particularly helpful if you have surplus cash savings which can be used to supplement your income while reducing the amount your draw from superannuation to help preserve your balance during times like these. By preserving more of your balance now, you will have more money working for you to catch an upswing in the market when it occurs.
Boost your Centrelink
For most Australians in retirement, the Centrelink Age Pension plays an important role to help meet income needs. The amount of Age Pension you receive is determined by an asset test or income test. Both tests assess the value of your superannuation. In most cases, if your super goes up in value, the amount of age pension you receive will likely reduce. The good news is that it goes the other way as well. If your super has dropped in value during the last month, there is a high chance you are entitled to more age pension. For this to happen, Centrelink must be aware of the change. Centrelink do data match the value of your super to make sure you receive the correct amount of age pension, but this only occurs twice a year and it might be too late by then. The sooner you update Centrelink of your balance the sooner your age pension might increase.
Review your risk
When you are nearing retirement or in retirement, protecting your balance becomes equally, if not more important than trying to chase high returns. Understanding how your super is invested is very important, especially in times like now. Most commonly, the money in your super is invested in a mix of growth (risky) assets and defensive (safe) assets. On average, the majority of Aussies are invested in default balanced investment funds. Generally, a default balanced fund invests approximately 70 percent of your money in growth assets and approximately 30 percent in defensive assets. This means if you have a super balance of $200,000, approximately $140,000 of your balance will fluctuate up and down and approximately $60,000 will generally remain steady. To some people this mix of growth and defensive might be too risky. It is crucial that you review and understand how your money is invested and that you are comfortable with the level of risk you are taking.
Over the past month Australians have gone through a tough economic downturn. Unfortunately, nobody knows when things will start improving. It isn’t too late to make sure your money is protected. Receiving professional financial advice in times like this can be invaluable, not only to help protect your money, but also to provide a level of certainty and sense of direction.