We are half way through 2020 and it has already been an eventful year with the Covid-19 pandemic bringing much volatility and delivering a significant blow to financial markets globally. Close-to-zero interest rates in all major developed markets are adding future economic and social uncertainties. And the long-term implications of these events are yet to fully unfold.

Jack Mak, Head of Retirement Proposition, Wealth & Personal Banking at HSBC. Photo: HSBC

The pandemic has forced people to shift their immediate attention to short term concerns. Yet, there is no escaping the future. For people planning for retirement, and in particular, those who are close to retiring, revisiting your goals and recalibrating your saving and investment decisions can’t be put off for long.

The challenges

For retirees, peace of mind is top of mind. From a financial planning perspective, a steady income stream that will cover your living expenses throughout your retired life, is the minimum foundation for a comfortable retirement. The pre-requisite, however, is that you have saved up a sufficient retirement fund, and have selected an effective vehicle to convert that retirement fund into a steady income stream to cover your retired life.  

Heightened market volatility and uncertain future outlook due to the aftermath of Covid-19 and increasing geopolitical risks can impact the investment returns generated by your retirement fund. If you are close to retirement, increased volatility can add to the uncertainty of how your retirement may turn out, either affecting the quality of your retirement or extending the number of working years before you retire.   

A low interest rate environment makes products such as annuities more expensive and hence become less attractive as a vehicle to convert your retirement savings into a sound income stream. For soon-to-be-retirees, deciding how to invest their retirement fund to generate steady income could be one of their biggest challenges.

The value of a check-in

To navigate yourself out of the mist, you need to where you’re standing. Likewise, to ensure you are on course towards your desired retirement, you need to regularly evaluate how you are tracking versus your original plan. There are many retirement planning tools within your reach to assess your position, based on your current saving habits, your fund pool, and investment strategy.

Stay on course

What to do if there is a gap between your savings and future plan? An obvious option is to save more, or, spend less – both require greater discipline in your money habits. The golden rule is that the earlier you save, the less you actually need to save. So, try to save as much and as early as possible.  

However, this strategy may not always be possible for everyone, especially if you have competing financial priorities and limited resources. In such circumstances, you may need to review your retirement plan and make some adjustments. For example, you may decide to work a bit longer or you may settle for a more modest retirement lifestyle than you were originally aiming for. You may even consider utilizing other fixed assets to supplement your retirement expenses, e.g. releasing the equity value of your residential home through reverse mortgage during your retirement.

Are you investing in the right places?

How you invest your retirement funds makes a big difference to your retirement outcome. Therefore, it is important to set the right investment goals for your retirement savings. Generally speaking, retirement investment needs a long-term approach and you should try to grow your retirement funds as much as possible through investing, subject to market risks you are willing to take.   

For someone who is younger, say in your late 20s or early 30s you may have another 30 to 40 years before you retire and you can afford to take higher risk with your retirement portfolio, e.g. by investment in equities. Having said that, given the market uncertainties, you may still want to spread that risk out a bit through diversification, for example, between different asset classes, different industries and different geographies.

On the other hand, if you are already close to retirement, it is possible that you may take a more risk-averse approach, given you will start drawing money from your retirement fund soon. It should be noted that your retirement may last for 20 to 30 years (or more) as life expectancy around the world has increased steadily. Therefore, even whilst in retirement, your money should remain invested in assets with some growth potential such that the purchasing power of your retirement fund can be protected against inflationary erosion over the remaining course of your retirement.   

Seek protection against the unexpected

One thing that Covid-19 has reminded us, is that we can be vulnerable when faced with unexpected circumstances. As we age, the risk of running into illnesses that requires expensive treatments, such as cancer, become higher and your retirement savings can deplete very quickly should you come across such adversities. Therefore, as part of your retirement planning, you may also consider the need to obtain optimum insurance coverage to provide you extra peace of mind and additional security for your family.

Retirement planning is a life-long journey and you should constantly review where you are and adjust the course as and when needed, to ensure that you are homing in to a retirement that you desire.

Jack Mak, Head of Retirement Proposition, Wealth & Personal Banking at HSBC.