Rabobank’s Financial Health Barometer has reached its 10th year, surveying 2,300 financial decision makers aged between 18–65 each year since 2010 about their attitudes and habits towards finance.
This data gives us a rich understanding of the trends in Australians’ finances and has garnered some key insights on people’s habits pre-retirement.
Baby Boomers and those heading towards retirement have a mix of assets that they will tap into once retired including shares, savings, property and superannuation. However, our past figures have shown that many Aussies will have to save more ahead of leaving the workforce to have enough to affordably enjoy their retirement¹.
Glenn Wealands, Head of Client Experience at Rabobank, highlighted that this need to have more money saved in the current climate, coupled with the rise in volatility on the share market was likely to be causing uncertainty for investors at all levels.
“Coronavirus (COVID-19) has led to extreme market volatility, with the ASX200 posting its biggest fall on record in March, down 30 per cent from its peak posted two weeks earlier on February 20 – which has been challenging for even the most seasoned financial experts,” he said.
“However, it puts particular pressure on those looking to retire in the not too distant future, as they make moves to secure their savings now.”
With this in mind, Rabobank is providing tips and insights from experts on how everyday Aussies can both weather this storm, but also ensure their savings are working hard during this time.
Keep calm and take a long-term view
How do you stay on the course in a market downturn, like the one we’re in right now?
We spoke to Nerida Cole, Managing Director, Head of Advice, Dixon, about the keys to ensuring you’re on track in the current climate.
“If you’re feeling like your portfolio has not performed as expected, it’s important not to make emotional decisions based on market volatility. Having a diverse portfolio of assets will see your investment smooth out over the long-term, with some assets performing better than others,” she said.
Some tips to keep in mind:
- Check in on your strategy. Adjust as needed to make the most of any opportunities that arise, but don’t be blinded by stock market deals that may not align with your goals – don’t risk it all now!
- It’s important to keep calm and not panic. Investors should avoid throwing their strategy out the window and stick to their long-term plan. Yes, there are risks and challenges in the current environment, but there are also some opportunities that will arise.
- You need an allocation of defensive assets and cash, which is important in helping you weather the ups and downs of the market like the current environment.
“Even in retirement, you need some shares and exposure to growth assets, to help your capital last but balancing protection of capital versus growing capital should, by and large, be in favour of protection,” added Nerida.
What are some key tactics for people in the pre-retirement phase?
The key to preparing for retirement is to assess how much money you will need.
We are all much healthier and living longer than ever before, the average Australian now lives until they are at least 85 years old. This means we need our capital to last for a lot longer, as well some peoples income may have been impacted by COVID-19 through changes in employment and also share market volatility.
The aim for those heading into retirement should be to have:
- A plan to pay off any debt you’ve got – research from the Australian Bureau of Statistics last year showed that the number of mature age Australians carrying mortgage debt into retirement is soaring. So that might mean building liquid assets like cash within your super account that can be drawn out at retirement.
- Enough assets to drive income to cover your living expenses – ASFA estimates that to live comfortably for a single person for a year you’ll need $43,601 and for a couple $61,5223.
- A rainy day fund – In addition to your day to day costs, you may also need a portion of your assets held in cash, such as for renovations or other big purchase like a car or retirement holiday plus any surprises that come up.
“The pre-retirement phase can be a tricky time, with people often being told to put all their money into superannuation, while at the same time told to hold cash as a safe option separate to their super,” said Nerida.
“Keeping the bulk of your super investments in a well-diversified portfolio either in an SMSF or a balanced fund portfolio – shares, bonds, property etc is generally wise. But rather than selling investments at retirement to fund debt repayment and those first 2-3 years of retirement – start directing some of your regular pre-retirement savings into cash.”
Nerida also recommends having a healthy cash reserve outside of super to cover emergencies because whatever you do put into super is locked away until retirement. This applies to current environment where COVID-19 is causing a lot of market volatility.
“Having a combination of term-deposits and high-interest saving accounts can help you get the best of both worlds,” Glenn Wealands, Head of Client Experience at Rabobank.
- Short-term you may need cash on hand, so it’s important to have access to savings that are liquid.
- If the market does downturn, your cash investments will be stable, so you have a buffer against the market fluctuations.
- If markets happen to fall at the point of retirement, having a portion of your super in cash reduces the risk you are forced to sell investments to repay debt and cover income, when they are not at a good price.
- If you have a pot of cash, you may be able to take advantage of investment opportunities that arise – such as to buy good quality shares if they temporarily trade below their true value.
- It’s always really important that you never to put your full capital at risk and only invest a small amount in any one investment.
- It’s also important for pre-retirees to set realistic return expectations and not assume a quick bounce in share prices to pre-crisis levels. As an example it took the S&P/ASX 200 Accumulation Index (i.e. including dividends) approximately 5 ½ years to return to pre-GFC levels. High quality companies, with strong future prospects, held for the long term tend to provide a good mix of risk and return.
What are the options?
Glenn said that within cash, it is important to maximise the savings you’ve got while you’re not using them.
“Having a combination of term-deposits and high-interest saving accounts can help you get the best of both worlds,” he said.
“A portion in a High Interest Saving Account will allow you to get a return on your cash that you can access easily and immediately if needed. While a portion in term-deposits will maximise your returns and gives you security around the income you’ll have coming in over the term you select for say the next 6 months to 5 years.
“And if you bank with an authorised deposit institution (ADI), the Government guarantees deposits up to a cap of $250,000 per account holder per ADI.”
Rabobank offers a few good options here:
- Its award-winning High Interest Savings Account that has an introductory variable rate of 2.25% p.a for the first 4 months up to $250,000, and its SMSF HISA offers an introductory variable rate of 2.15% p.a for the first four months up to $250,000.
- Its Term Deposits for personal accounts and SMSFs offer competitive fixed interest rates with the choice of one month to 5-year terms. The Term Deposits can offer up to 2.25% p.a fixed interest on a 5-year Term Deposit with as little as $1000 to start.
(It’s also worth noting that as well as ensuring your cash will be working harder for you in these accounts, when you bank with Rabobank you’re growing your savings with the bank that helps Aussie farmers grow).
In the current environment, advice from Nerida is to be patient and keep perspective.
“Get involved with your finances and set some six monthly goals – review your investment strategy, make sure it’s on track, make any adjustments as needed, seek out a professional adviser, and make sure your cash is working hard for you,” she said.
It’s important in the pre-retirement and retirement phase to get advice and set up a portfolio that you understand and feel comfortable with. These phases are critical for people, as the window of opportunities to replenish their investments gets smaller– and their tolerance to risk and volatility often changes at these stages.
There are a lot of free online tools for education and updates on what’s available that are worth reviewing, it’s important to be across those for background, a good place to start is at MoneySmart.
If you’re concerned about the impact of COVID-19 on your investments and what this may mean for your retirement and the life you want to live, talk to your adviser, as there maybe things that you can do to reduce volatility and to set you up for a smoother ride ahead.
In retirement, you will have the time to do all those things you’ve always wanted, so we want to make sure you plan appropriately so your finances don’t end up holding you back!
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1. Financial Health Barometer research 2017 found the average gap between retirement expectations and needs was $353,125 for everyday Australians
- The issuer of the product is Rabobank Australia Limited ABN 50 001 621 129 AFSL no. 234700. Consider the relevant terms and conditions for the High Interest Savings Account and Term Deposit along with your personal objectives, financial situation and needs before making any financial decisions relating to the matters discussed in the article.