How to prepare your clients for the next market correction

Sequencing risk can have a big impact on clients entering retirement. Fortunately there are ways advisers can help.

The COVID-19 outbreak delivered a serious wake-up call to investors last year, particularly for anyone nearing retirement. And while markets look to have recovered much of the ground lost, we’re still working through the longer-term impact of the global pandemic.While we can’t predict the next significant market fall, we can agree there will be one. So it’s important to consider the impact it could have on your clients entering retirement and how you can structure their investments.A significant market correction will probably mean a change of plans. Do your clients: 

• delay retirement (if they can)
• look to part-time work to supplement income
• accept a more modest lifestyle in retirement
• consider downsizing to replenish their capital (if they can)
• roll the dice and take on more risk in the hope of a short-term recovery?

Time isn’t on their side

For clients most exposed to this sequencing risk, it’s the order of returns that’s important, not the average return. A market fall simply has more impact on investors who have accumulated more wealth. A 30-year-old who has accumulated $50,000 in superannuation and experiences a market fall of 30% would see a reduction of $15,000. And time is on their side. They have 30 plus years of contributions and market growth to recoup this loss. 

A pre-retiree with $750,000 would see $225,000 wiped from their super. Contributions are no longer an option and as they’ll soon be drawing down on their capital, they can’t wait for markets to recover.Let’s say a client retires on $750,000 and needs $37,500 to live on, equating to a 5% drawdown. If there’s a market fall of 30%, they would need to draw down 7.15% of their retirement savings. This means they would eat into their capital more quickly, reducing the time they have either to wait for a market rebound or take on greater risk with their remaining wealth.

Changing the conversation

In the accumulation phase we’re used to advising clients to maximise risk to build their wealth. But we need to start asking clients some new questions when they’re moving into retirement.

• How does their wealth provide a stable income and what level of risk will deliver this income? What are their spending habits in retirement? What does a comfortable retirement mean and could they accept a lower income?
• What’s their health like and how long can they expect to live for? How long will their income need to last and will they need to make significant withdrawals in the future?
• How are they structuring their investments? What assets are supporting their short- to-medium term needs? How are they managing their risk to isolate growth assets so they have time to recover losses from any market correction? Are they maximising access to government assistance?

At what can be a challenging time in clients’ lives, they need advice and advisers need retirement solutions to support that advice. By working together we can map a way through the complexity to help Australians live their best life in retirement.

MyNorth is an investment in you and your clients

MyNorth offers you a range of investments, tools and guarantees that can help support your clients’ retirement needs. For information, visit northonline.com.au/adviser/products/retirement.