Pamela Connellan


Top tips to navigate the financial effects of COVID-19

Top tips to navigate the financial effects of COVID-19

Please note: This story covers financial matters but it is general in nature and does not take into account your personal circumstances. Please consult your own financial advisor for more information.

We are living in unusual times and COVID-19 has led to major changes in just about all parts of our life – including your retirement planning. So here, we’re giving you some retirement planning tips to help you find your way through all of these changes.

Many of us have been working for the past couple of decades, saving our super and planning for our retirement, so we can relax and enjoy ourselves. And then along comes 2020 and the COVID-19 pandemic and everything changes. So how can you keep your retirement planning on track?

Let’s take a look at what’s changed so far and how you can keep your retirement planning and finances on track, post COVID-19.

Tips for your retirement income investments

One of the effects of the current economic crisis is the fact interest rates have been cut and this is difficult for those who have long term investments as some of these returns will be cut as well.

Companies have slashed dividends but this seems to be getting better but keep watching what’s happening on the stock market and check the movements here.

It can be tempting to move from equities to other income-generating assets – and many people have turned to drawing down on their super to supplement their income.

But if you’re tempted to sell stocks now, this could have a long-term negative impact on your investment objectives. By moving from a growth portfolio to a conservative portfolio – for example if you move from shares to fixed income assets - at the wrong time, this can affect your retirement savings greatly.

It’s no surprise that if you’re around retirement age, you have the most to lose from this strategy. Financial experts say the best approach for long-term investors is to seek advice, but also to keep the faith and understand that markets – and dividends – will rebound.

When considering stocks for a retirement portfolio, it’s best to take a ‘total return approach’. So, what else can you do in to help your finances during the pandemic?

Tips for weathering market volatility for retirement savings

This year’s market volatility and dividend cuts show how important it is to have a flexible plan for your retirement. While your adviser can tailor a strategy for your individual circumstances, here are some ideas to consider:

Ensure your portfolio is well-diversified

Research shows that if you have diversification across asset classes, local versus global markets, and even alternative investments not correlated to the market, this will help lower the volatility of returns and lessen the impact of any downturns.

If you’re still working, aim to build a buffer of enough cash – or similar investments such as term deposits – to cover at least one year’s worth of living expenses.

If you’ve recently retired and you have some liquid assets you can draw on outside of your super, this will help offset any reduced pension income.

Keep your money in super for longer

If you can afford to, it’s better to leave your money in your super as long as possible because every dollar you pull out now won’t be there to benefit from a future rise in value.

Many Australians have already drawn on their super funds in this economic crisis and it means they’ll be under more pressure later on down the track. If you’ve converted your super into an account-based pension (ABP), you may take advantage of the government’s halving the mandatory drawdown limits until 30 June 2021 and reduce your pension withdrawals.

If you’re in a platform or an SMSF, you have the flexibility to decide how to fund your ABP payment. On the other hand, retail or industry super funds will generally make the decision for you. In either case, speak to your financial adviser to get more advice in this area.

Check how your super funds are faring

Most Australians are investors in the share market through their super. Your super funds could invest in a range of investments including global shares, cash, fixed income, bonds, both listed and unlisted infrastructure, both listed and unlisted property, and private equity. Each of these has its own risk profile so while the market is quite volatile at the moment, there will be a higher risk for some assets.

While you don’t select the assets your super fund invests in on your behalf, you do have control over how your super is invested more broadly by contacting your super fund and choosing an investment option. While the investment options differ from fund to fund, most offer options such as conservative, balanced, growth and high growth.

If you don’t choose an investment option, the default option for most funds is either a balanced or growth option – and around 80% of Australian super accounts are invested in their fund’s default option. This means that for most Australians, while your super may have some exposure to higher-risk assets, this would be balanced by lower-risk assets.

COVID-19 has made the investment market more volatile lately. If you’re close to retirement, it could be a concern for you if your super is invested in higher risk assets. At this time in your life, it could be a good idea to have your super invested in a more conservative investment option so you can speak with your super fund about this and they’ll give you advice – or you can consult your financial adviser.

Consider an annuity

Buying a term or lifetime annuity provides you with a guaranteed income stream over a chosen period, regardless of the sequence of investment returns. While an annuity will give you peace of mind, the returns tend to be lower than other higher risk investments, which may not be suitable for everyone, so take this into account.

Review your spending plans

It’s generally known that new retirees generally spend more than they do later in retirement. Now is a good time to review your spending plans. While COVID-19 is forcing people delay their big trips, any other steps you can take to reduce your spending now will minimise the impact on your retirement portfolio.

If you’re approaching retirement you may be thinking about downsizing your family home. This means you need to sell it and purchase a smaller property or a unit in a retirement village. It could be an ideal time to act on this as real estate prices are at an all time high.

This is a good idea because you can use the extra money you’ll have from selling your home to supplement your super or you could use it as extra liquidity during your retirement.

Also, if you’re on the age pension, you need to be aware when you sell your family home, the money you've gained from downsizing will count towards your means test. Therefore, if you end up with a great deal of extra income, this could result in a reduction, or even the cancellation of your age pension.

If you’re aged over 65 and you’ve lived in your family home for 10 years or more, you can contribute up to $300,000 individually, or $600,000 as a couple, from the sale of your home into your superannuation.

This move can really help you boost the income you can generate in retirement. But before you go down this path, there are some extra eligibility criteria for these large contributions to your super, so you may need to get advice and check if you’re eligible.

Ask your financial adviser about these contributions to your super – usually referred to as ‘Downsizer Contributions.’ These contributions can count towards your Age Pension assets test so check all of this out when you do your planning.

As you can see, downsizing is not as easy as you might first think so it’s best to speak to your financial adviser about the best options for your circumstances.

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