What happens if there is a financial crisis when you retire?

Being of the generation that was finishing university as the global financial crisis hit, I’ll always have the memory scarred into my brain.

It’s been over 17 years since the crisis happened but one thing I can tell you for sure, down markets are common and can happen at any time.

So what happens if you’re retiring and another global financial crisis hits, could it ruin you?

In this blog I’ll address how the financial market works and how you can put yourself in a better position as you approach retirement.

What was the global financial crisis (GFC)?

In 2007, the global financial markets and banking systems started showing signs of pressure. The US had issues with its housing market which was affecting the world’s economy.

From an Australian perspective, we saw a massive slow down in all businesses as people prepared for the worst and as such, share prices dropped significantly.

Between November 2007 and March 2009, the ASX 200 dropped 54.4%. To put this in perspective, if you were about to retire and had $1M in your super, you could have as low as $456k.

It was a terrifying time, particularly for people who were retiring.

So how do you protect against this happening when you retire?

During the early years of your life, it’s generally recommended to invest in ‘high growth’ investments. These are largely shares (which are companies) and property.

These investments have historically grown the most but when things get bad, these are the investments that can drop the quickest.

As you approach retirement however, you need to reconsider this. This is the time where you start thinking about investing in more ‘defensive’ assets such as bonds. A bond is where you lend money to a company or country and they pay you interest.

Whilst the value of a company can go up and down on what people are willing to pay, bonds tend to be more stable as once the bond term is up, your money is given back to you regardless of market conditions.

Is my super fund doing this for me automatically?

Many super funds have introduced ‘lifecycle’ investments. These are investments that change as you age.

During your younger years, they are predominately focused on high growth and as you approach retirement, they reduce the high growth investments and take up more defensive investments.

The problem with these types of investments is they don’t know your personal circumstances.

For some people, it makes sense to move all of their investments to lower growth investments. For others though, it makes sense to keep some in higher growth investments to ensure they last the entirety of your retirement.

In addition, these investments change regardless of conditions in the market. We might be deep in a financial crisis when you turn a certain age and your super fund will automatically sell all of your investments at a loss and buy lower risk investments (almost the opposite of what you likely need to do).

So what should I do?

As you approach retirement, it’s a good idea to get financial advice.

As part of putting together a financial plan, we will work out how much income you require each year, how much you can contribute to super, what your draw down requirements are and offer recommendations about investing taking into account current market conditions.

You can certainly try and DIY this but getting it wrong can have disastrous effects.

So what happens if I do retire and a financial crisis hits?

Hopefully, by the time you retire, you’ve set up a plan which gives you at least a few years of lower risk investments.

This way if you do retire and a financial crisis hits, you have a few years to wait it out before having to sell any investments which are significantly down.

As you move through retirement, you can continue to top up your lower-risk investments at key intervals to ensure you are getting the maximum amount for them.

In all historical financial crises, the investments have returned to and exceeded their previous values (provided you adequately diversified) so a little bit of patience and some time will usually solve the problem.

It’s also really important you have a plan for this when it happens so you don’t panic and sell everything. Many people did this during the GFC and they could have recovered their losses pretty quickly as the market returned.

If you’re approaching retirement and aren’t sure how best to manage the risk of a downturn in the market, then please reach out. We work with clients all over Australia and would love to hear from you.