Why timing is everything in retirement

Older Australians who are looking to have a fruitful retirement have been advised to carefully consider timing, with a bad year early on in retirement having the potential to wreak havoc on future returns.

According to a webinar hosted by Montgomery Investments founder and chief investment officer Roger Montgomery, an investor who experiences major drawdowns early are significantly worse off than those who feel the pinch later in life.

Using the example of an investor with $2.5 million, Mr Montgomery showed the potential impacts for investors.

The impact of a poor sequence of returns has to be experienced somewhere, and in the above example, it is experienced through income (pension payment). That is, the Scenario A pension payment aggregates to $9.206 million over 30 years (or an average annual payment of $306,851) while the Reversed Scenario pension payment aggregates to $4.384 million over 30 years (or an average annual payment of $146,130). This is a difference of $4,821,451, or an average of $160,715 in annual pension payments.

To mitigate against sequencing risk early, the fund manager highlights cash strategies as well as investing which protects against downside risks.

“We believe mitigating against the risk of loss through the diligent use of cash in a portfolio, by not investing in when the market is expensive, by not investing in high-risk, high-beta companies, by avoiding those risk and investing in cash, we believe it can produce a superior outcome for retirees,” Mr Montgomery said.

Elsewhere in the webinar, Mr Montgomery shared how older Aussies who moved up the risk curve are especially exposed to the coronavirus outbreak.

Using the virus as an example, Mr Montgomery highlighted the importance of sequencing in retirement, with falling returns later in life not having the same impact as early-stage reductions.

“Sequence is essentially the order of returns you receive. What you don’t want is large losses early,” Mr Montgomery said. 

Finally, the fund manager highlighted how effective cash strategies can be used to purchase value in equities when they provide themselves.

Mr Montgomery concluded: “Look at the P/E today for the ASX 200, what you’ll notice it is where it was back in 2019 and where it was in June 2018.

“The alternative of investing in bonds is far less attractive, so we are on the lookout for value in a variety of sectors.”

Article reproduced from Nest Egg by Cameron Micallef

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Zac Zacharia (Managing Director) has been assisting clients to create wealth and secure their futures for over 14 years.

He is also an accomplished presenter and educator

Co-authoring the popular investment book, Property vs Shares.