If investors focus on their retirement objectives and maintain a long-term approach, they should be able to navigate current economic difficulties without “substantial” long-term damage, according to Capital Group.
The federal government announced changes to superannuation as part of its second stimulus package, including the halving of minimum drawdown rates.
In an analysis, Capital Group highlighted the importance of the changes, saying that investors already drawing down from their retirement pot could consider suspending or reducing withdrawals while markets are depressed.
“If you have other sources of income in retirement such as a defined benefit plan, you might be better placed to do this,” the analysis said.
“Review your spending plans for this year; if a holiday or other large event outlays won’t be going ahead in the near term because of COVID-19, you may have more headroom to adjust your drawdown than you realised.
“Remember that taking money from an already depressed investment reduces the potential for recovery in your portfolio.”
The analysis advised investors to check the long-term sustainability of their withdrawal rate, suggesting they review their “normal” drawdown rate and ask if it is realistic.
“History suggests that a withdrawal rate over 5 per cent may be unsustainable in the long term and could lead to you running out of money,” the analysis said.
“If your financial needs mean you simply cannot reduce the withdrawal rate, you might want to consider alternatives.
“One possibility could be to look at an annuity, which could increase your immediate income albeit at the cost of relinquishing your capital.”
It also said investors should consider if their portfolio is skewed towards vulnerable sectors during the downturn and if they should shift to a diversified portfolio with less reliance on a limited number of sectors.
“This might reduce the income you could obtain from the natural yield; a potential alternative would be to supplement natural income with capital gains over time,” it said.
“You may want to consider whether now is the best time to make such an adjustment, as withdrawing capital at this point in the market cycle could negatively impact the overall total return.
“Over the longer term, however, a flexible approach to the sources and level of your income, using both natural income and capital gains and developed in conjunction with your adviser, may potentially offer the best means of enjoying a growing and sustainable income.
“You may also consider different taxation consequences of taking capital gains as opposed to dividend income.”
