My retirement plan's off-track

DIANA: Welcome to the ‘Q&AMP: Understanding retirement’ series, focused on superannuation and retirement. I’m Diana Mousina, senior economist at AMP Capital. As COVID-19 is changing elements to your superannuation and retirement, my colleagues and I are here to answer some of your questions.

Today I’m joined by technical strategy manager John Perri, to look at whether now is the right time to retire, or whether it’s better to defer these plans. So John, what are some of the factors people should consider before deciding to retire?

JOHN: Thanks Diana. There's a variety of lifestyle and health factors that people need to consider, but of course finance is an essential part, too. As a result of the current health crisis, many people would've seen a significant reduction in their superannuation balances over the past couple of months.

For those close to retirement, it’s not unusual to see their super values fall back to levels of two or three years ago. They may decide to postpone their retirement, to get their superannuation levels back up.

We also believe it’s important to be mortgage-free in retirement. If your ability to pay off your mortgage before retirement is compromised due to job loss or reduced income, this is a signal to consider deferring your retirement.

DIANA: You mentioned the idea of postponing retirement until super levels can be restored.

Does this mean that someone might need to work full-time for two or three more years to get their super levels back up to where they were?

JOHN: Not necessarily, Diana. They might choose to defer their retirement for now, but gradually transition out of the workforce by reducing their hours, rather than continuing to work full-time.

For many people, the massive impact on business across the economy may also result in job losses through redundancy. For those who are close to retirement, a redundancy package has the potential to provide a lump sum amount that may compensate for the reduction in their super balance, helping to keep their retirement plans on track.

DIANA: For those who are in a position to be able to top up their super in preparation for retirement, is now a good time to do this?

JOHN: In an environment of declining markets, reduced consumer confidence and rising unemployment, it’s understandable that many people may be reluctant to contribute extra to super. However, there will be some people who will seek to take advantage of the fall in the market to make extra contributions to super now or who plan to top up their super down the track.

There are a couple of ways of doing this:

• If you’re employed, you can consider making extra salary sacrifice contributions into super on a regular basis, or you can make a personal contribution to super and claim a tax deduction.
• If you’re self-employed, you only have the personal contribution option. You can also make additional contributions to super in the form of after-tax contributions.
• People should be aware that there are caps on how much you can contribute to super, so it’s best to get advice before doing so.

DIANA: For those people who are approaching retirement and concerned about the balance of their super fund, is now a good time to look at the investment strategy of their super fund and perhaps move into a more defensive position?

JOHN: If you’ve seen the value of your super fall dramatically, then it’s only natural to think about switching to cash. However, this can lock in losses that have been suffered and might make it more difficult for your super to recover when the markets recover. For some people, the best thing to do right now may be nothing – you always have the opportunity to maintain your current investment strategy and ride out the current volatility.

It’s useful to remember that markets have experienced at least four major downturns in the past 20 years, and they’ve always eventually recovered.

DIANA: Once these factors have been taken into consideration, if someone decides to go ahead with their retirement as planned, what are some of the impacts of having a smaller super balance on these plans?

JOHN: Given that super is a major source of income for people in retirement, this means that they’ll either face a reduced income in retirement, or they’ll find themselves in a situation where their money may not last as long as they originally expected.

DIANA: Thanks, John. Some great insights. Let's do a quick recap:

• As a result of the current health crisis, many people have seen a significant reduction in the balance of their super fund over the past couple of months. This drop in value could have an impact on income received during retirement and needs to be considered for those who are deciding whether to postpone these plans.
• It’s possible to top up the value of your super with personal contributions, either now or after the current crisis has passed.
• Although many super accounts have seen a drop in value, it might be a better idea to simply stick to your current investment strategy and ride out the current volatility.