By Damian Gibson
Financial Adviser, Elevate Wealth Solutions
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.
Futureproofing your income (and balance)
Most retirees 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.
An incorrectly structured portfolio may result in the need to sell these assets to fund your regular income.
Utilising a cash hub in your super can ensure that sufficient secure liquid assets are held to fund one or two years’ worth of income in a cash account.
This will not only give you certainty of income, it will reduce the risk of needing to sell investments at a loss 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, this ranges from four per cent to 14 per cent, depending on your age.
Responding to the recent economic downturn the Australian Government has announced a temporary 50 per cent reduction in the minimum annual amount that you must withdraw from your super income stream.
If your cash flow permits drawing less from superannuation it may help to preserve your balance during volatile periods.
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
Centrelink’s Age Pension plays an important role to help meet income needs for many Australians.
The amount of Age Pension you receive is determined by an asset test or income test.
In both 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 changes.
If you haven’t provided Centrelink with an update of your financial assets (superannuation included), I recommend you do so, as your age pension just might increase.
Review your risk
When you are nearing retirement or in retirement, protecting your assets becomes equally, if not more important than trying to chase high returns.
Understanding how your super is invested is crucial so you know how much risk you are exposed to.
Most commonly, the money in your super is invested in a mix of growth (risky) assets and defensive (safer) assets.
On average, most Australians are invested in default balanced investment funds.
Generally, a default balanced fund invests approximately 70 per cent of your money in growth assets and approximately 30 per cent in defensive assets.
To some people this mix of growth and defensive might be too risky.
It is vital 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 and 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.