Financial markets have taken a hit in 2022. We have seen the Bond market (generally a safe asset) have one of its worst years in history and some share markets fall into a bear market (a decline of 20 percent or more).
Why is this occurring? The main reason is inflation. For a country to tame inflation it must increase interest rates which generally has a negative impact on most asset classes. Interest rates significantly influence how an economy performs. When rates rise, the cost of money increases, which reduces borrowing and investment, and consequently slows business activity.
While Central Banks have been rapidly increasing interest rates to combat high levels of inflation, financial markets have been pricing in the next concern for the global economy. It is widely speculated that a global recession is looming and may hit in 2023. If current levels of inflation are persistent it will increase the likelihood of recession. This could see financial markets continue their downward trend.
When you are near, or in, retirement protecting your super balance becomes equally, if not more important than chasing high returns. Understanding how your super is invested is crucial, especially in the current environment. On average, most Aussies are invested in default balanced investment funds which hold approximately 70 percent of your money in growth assets (risky) and approximately 30 percent in defensive assets (safe). To some people this mix of growth and defensive might be too risky. The more you have invested in growth assets, typically the more volatile your portfolio will be.
Equally important as reviewing your investments, is having a plan to fund your income in retirement. History shows that recessions have been short lived, with the average life of a recession being one year or less.
In most cases, money inside super will be invested in assets that are subject to volatility. In times of economic downturn some assets will fall in value. If your super balance falls and you need to draw income from your super, it can have adverse impacts on your balance long-term.
This is because when your super fund sells assets to fund your regular income, it must sell down a larger portion of assets to fund the same amount of income. This results in your balance reducing faster than expected over time. However, it can be avoided. Isolating a portion of your balance in a cash option will remove the volatility risk for that portion of money.
Some superannuation providers offer cash accounts which can be a very useful tool in times of economic instability. When retired, or approaching retirement, a cash account can be used to store future income. This means that instead of your super fund selling your assets at a low point, income can be withdrawn from a cash account instead. This will not only give you certainty of income, but it will also reduce the risk of depleting your balance if financial markets continue to fall.
Recession is the last thing pre-retirees and retirees want to experience, so it is understandable if you’re re-thinking your retirement plans or are nervous about what the future holds for financial markets. Receiving professional financial advice in times like this is invaluable, not only to help protect your money, but also to provide certainty and a sense of direction.
Information in this article is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
