Investors should brace for the reality of the underlying economic situation to “kick in at some point” – which could have dire consequences for retirees and anyone who is looking to retire in the near term, despite investments and super holding steady for now.
In an article from AMP Australia’s chief investment officer, Lakshman Anantakrishnan, the CIO explained how quantitative easing has allowed a lot of extra money to flow into investment markets, which has, in turn, caused investment market prices to go up.
While it has improved asset prices, it’s also widened that gap between asset prices and the “underlying state of the economy, which is trending downwards”.
According to the investment expert, in the short term, asset prices will continue their upward trajectory, and this is why sharemarkets have remained buoyant.
While this will “probably” continue over the short term, Mr Anantakrishnan warned that “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,” he explained.
This leads to a long-term outlook that’s “a bit riskier”.
Mr Anantakrishnan has cautioned that “the reality of the underlying economic situation could kick in at some point if financial markets lose their confidence in the central banks”.
As a result, total long-term returns are probably going to be lower than they’ve been in recent cycles, he forecast.
So what does this mean for new and soon-to-be retirees?
The CIO acknowledged that many Australians have had super in a growth option, “which is usually fine over the longer term”.
But he advised that for anyone who is in or nearing retirement, “the focus should be on how to achieve a stable income stream rather than the accumulation of capital”.
If you are nearing retirement: “A substantial capital loss now could have a big impact on lifestyles”, Mr Anantakrishnan said.
He highlighted that it’s extremely important for this group of people to understand risks and the impact this could have on retirement outcomes – especially where someone is thinking about deferring retirement until their super levels have been restored.
If you are already retired, you aren’t off the hook.
The investment officer explained how the expected spending of all retirees should be revisited due to the likelihood that budgets will need to be reassessed for the next five to 10 years.
He also advised a review of investment strategies due to changing financial market conditions, and to understand the changes that are likely to occur to expected returns and income.
Risk, and whether as a retiree you are comfortable in carrying such risk, should also be reviewed at this time.
For anyone considering their retirement situation more closely as a result of the COVID-19 crisis, the CIO closed by noting that “as always, and particularly due to the vulnerability of finances at this time of life, it always makes sense to speak to a super fund or financial adviser before making any changes to superannuation or investments”.
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Article reproduced from Nest Egg by Grace Ormsby.
