Canny View: Pre-retirement can be a vulnerable time

With good planning, some retirees may already be handling their new circumstances in a good way. Photo / Supplied

The phone calls from retirees and pre-retirees have started. Not many, but enough to get our attention.

As we are going to have to find a way to co-exist with the coronavirus, it will continue to change lives, goals and plans. The financial media is completely disinterested in the performance of an index portfolio with its construction split between various asset classes, their focus has primarily been on self-funded retirees, specifically on those with self-inflicted woes.

And why wouldn't they focus on this subject? Most of their readers are people who pick stocks, buy the latest listing and chase last year's winners. Every day media can write a new story about this stuff. When it derails, they can write a story about those affected. It's the classic storyline mastered by Herodotus 2500 years ago.

With good planning, some retirees may already be handling their new circumstances in a good way. Staying home may have resulted in spending less, especially if they're travellers or have active social lives.

Market falls aren't welcome, but with an understanding they happen, along with a portfolio built to withstand them, there can be good results.

The Wall Street Journal looked at this issue and covered a couple of real-life stories. A 62-year-old ophthalmologist, Dr Sklar, who had been hoping to retire in a few years, decided he couldn't risk seeing his portfolio take a bigger hit with Covid-19 impacting the share market.

When the pandemic hit, the value of Dr Sklar's investments tumbled. So did his income from his private practice in Connecticut, which was forced to furlough staff and dip into emergency loans to keep its doors open.

He sold much of his stock holdings at a loss between February and early March. He said, "I don't have 10 to 15 years left to recover my losses. At some point, I'll need my cash to live on."

He still owns some stocks but now has more cash as a percentage of his portfolio than he has in decades.

Since then, the share market has clawed back its losses and risen to before unseen highs.

According to global giant Fidelity Investments, of the 7.4 per cent of investors aged 65 and above who made a change to their portfolio between February and May, nearly a third moved some money out of stocks.

Also, of the 6.9 per cent of investors across all age groups who made a change to their portfolio between February and May, 18 per cent moved some money out of stocks.

Nick Stewart

Based on those figures it doesn't seem like a lot made changes, but every portfolio change is a human story. A response to a threat – perceived or real.

When someone sells in response to a downward market move it generally tells you one thing: their allocation to stocks was too high. It's a broad statement, but it may come from a range of scenarios – like not having a true understanding of risk, to life changes not being reflected in their portfolio.

When it dawns on investors that they have a mismatch, it's not that the asset has changed, the investor has simply awoken to realise their true appetite for risk and volatility.

The other story featured by the Wall Street Journal details someone in a different dilemma.

Mr Eberlin owns a woodwork-restoration business, he is 66 and hasn't worked since late March because the pandemic has dented demand for contract work in Chicago residential buildings.

Eberlin didn't sell his stocks because he didn't have any. Why?

He missed out on much of the market's stunning recovery after the global financial crisis (2008-09) because he never figured out a time to move more of his money back into the stock market.

In both cases we can see the most ruinous decisions made. Selling at the bottom and spending a decade in term deposits because you can't decide on the right time to enter.

There is a common theme across the stories above. While it may not be obvious and many of us may not be able to guess, the similarity is that there is no mention of an adviser anywhere.

Statistics New Zealand's most recent figures show that the average life expectancy at 65 is 19.6 years for males and 21.7 for females. That means if you make it to 65, you're projected to, on average, live to 84-86 years old.

Christine Ormrod, leader of the group of actuaries who authored the report Income Streaming in Retirement, said, "The average lifespan for a 65-year-old woman today is expected to be 89 years, but one in five is expected to live until at least 95. For a man of the same age, the average lifespan is 86, with one in five expected to live until at least 93."

No matter how much you tease the data, the statistics above highlight why there is a need for some appropriate portfolio construction and guidance in navigating the turmoil in the above two scenarios. We're living longer now, far past the peak of our cognitive abilities, having the right support from advisors who have years of experience does matter.

Pre-retirement can be a vulnerable time. Plans may be on hold or even cancelled for various reasons. Pre-retirement as Covid-19 still hangs around will require a clear head along with flexible decision making. Goals may not have changed, but the ability to reach them may have.

The best approach is determined by sitting down with a financial adviser who can analyse your situation and present appropriate options based on your short/long term financial goals. If you don't have an adviser, consider engaging one.

· Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.

· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz