Will the COVID-19 recession affect your retirement?

If you’re old enough to have lived and worked through both the ‘recession we had to have’ of the early 1990s and the global financial crisis (GFC) in 2008, it’s understandable you might be feeling a bit nervous about the current state of the economy.

Talk of a recession and underlying unemployment above the 7.1% official rate (when taking into account those on the COVID-19 Job Seeker payment)¹ is probably doing little to allay any feelings of uncertainty about the future.

But, as AMP Australia chief investment officer Lakshman Anantakrishnan explains, while the situation we find ourselves in this time around is a little different, the need for those close to, or in, retirement to understand their risk tolerance and financial strategy remains as important as ever.
 

Q. How is the cause of this downturn different to the 1990s recession and the GFC?

A. What drove the economic downturns in the early 90s and GFC were very different to what’s driving this downturn. In the early 90s, the economy was facing growing levels of debt, high interest rates and high inflation, while the GFC was brought on by low interest rates fuelling irresponsible lending in the US housing market, which then went bust. This time around, it’s been an external shock in the form of COVID-19 (coronavirus) that has led to the downturn.

However, the impact on people might feel similar to the early 90s recession, with rising unemployment being one of the most obvious consequences. But the main industries affected this time will be different; it will be tourism, hospitality and education that will bear the brunt.

Q. How is the government response to this downturn different?

A. The response of government to the current downturn is looking very different. In the 90s the government cut tariffs, reformed industrial relations and looked to productivity increases and globalisation to bring about economic recovery. While this time it feels like almost the opposite with a shift away from globalisation possible.

We’ve seen a lot of intervention by governments and central banks, which we also saw in the GFC, although it has happened much quicker in the COVID-19 downturn.

Quantitative easing

Central banks, such as the Reserve Bank of Australia, would typically cut interest rates to stimulate economic growth but with interest rates already at record lows they’re instead buying assets, such as bonds.

This strategy is known as quantitative easing and it means there’s a lot of extra money flowing into investment markets, which is causing prices in investment markets to go up, leading to a widening gap between the underlying state of the economy (which is trending downwards) and asset prices (which are trending upwards).

Q. What impact is this recession having, or will it have, on superannuation and investments?

A. Due to quantitative easing, asset prices are likely to continue to go up – which is what we’ve been seeing in the share market – despite the negative economic outlook. This will probably continue over the short-term, but in the long-term it creates a new risk in the system. Instead of concerns about the level of household debt or corporate debt there are likely to be concerns about the level of government debt.

So, the long-term outlook is a bit riskier, as the reality of the underlying economic situation could kick in at some point if financial markets lose their confidence in the central banks. Total long-term returns are probably going to be lower than they’ve been in recent cycles.

Q. What should people who have recently retired, or are approaching retirement, be considering at this time?

A. A lot of people have had their super in a growth option, which is usually fine over the longer term, but in or nearing retirement your focus should be on how to achieve a stable income stream rather than on the accumulation of capital.

If you’re near retirement, a substantial capital loss now could have a big impact on your lifestyle. It’s extremely important to understand the risks you face and the impact these could have on your retirement outcome. These things should be considered if you are thinking about deferring your retirement until your super levels have been restored.

If you’ve already retired, your expected spending should be re-visited as you may need to reassess your budget for the next five to 10 years.

Re-visit your investment strategy

Because financial market conditions have changed you should re-visit your investment strategy to understand the changes to your expected returns and income, as well as the changes in the level of risk you face and decide whether you’re still comfortable with that risk.

Seek advice

Due the vulnerability of your finances at this time of life, it makes sense to speak to a financial adviser or super fund before making any changes to your superannuation or investments.

1.https://www.ampcapital.com/au/en/insights-hub/articles/2020/june/market-update-190620