Retirement is a life-changing event at the best of times, but during market uncertainty it can become even more daunting. Francis Marais, Head of Research at Glacier by Sanlam, is here to help.
Times like these are tough for everyone – but if you're facing retirement, times are even tougher for you. So, what to do? Some investors seem to want to abandon growth assets completely – and who can blame them. But is this the right thing to do? A quote often attributed to Mark Twain says that "History never repeats, but it often rhymes." So let's take a look at history to help us understand better how to navigate now, and the coming months.
What happens when you retire and disinvest from equities to reduce risk during a downturn?
Since 2002, there were three months with significant negative monthly returns on the JSE: July 2002, September 2008 and October 2008, with returns of -13.44%, -13.24% and -11.65% respectively. What would have happened if an investor retired during each of those periods and disinvested from a medium equity fund, into a money market fund and stayed there, comforted by the fact that they no longer face any risk?
Let's assume they retire with a R5 million lump sum and withdraw at a sustainable rate of 4% per year. Here's what their outcomes would have been as at 29 February 2020:
In each one of these periods, if you'd realised your losses and moved into a living annuity consisting of 100% cash, you would have been worse off. You would also have had lower monthly incomes as at today.
That's not all – staying invested outperforms a cash strategy
When it comes to income growth, staying invested during periods of downturn significantly outperforms a cash strategy over time in terms of protecting your purchasing power into your retirement years.