What to do if the market tanks and you’re retired, or close to it

Uncertainty is beginning to feel like the new normal for investment markets. No sooner did the global economy put the worst of the Covid pandemic behind it than the Russian war on Ukraine and the crisis in Gaza created a new set of worries.

Add the unpredictability of the second Trump presidency and talk of tariffs and shifting global alliances … to say the outlook for investors is challenging is an understatement. Especially so for anyone trying to put the finishing touches to their retirement plan or living off the income from their investments.

The lessons of history

No one can predict when markets will turn, although history teaches us that markets are cyclical and periodic downturns should be expected. When this happens, the impact can be magnified for super fund members moving into retirement phase.

For members shifting their super savings to a pension product, a number of down months in relatively quick succession will mean they draw down on a smaller pool of savings than they originally planned for.

While the Covid years seem like a distant memory for many, for some super fund members the impact on their retirement savings is still very much present.

As the chart from SuperRatings below shows, the market plunge in February and March 2020 dragged down super fund balances. It gives the example of a member with an account balance of $500,000 in the median Balanced investment option at the end of August 2019.

By February 2020, this member’s balance would have grown to around $527,000. Happy days. Then Covid struck, knocking 13% off their savings to a low of around $457,000 in March. At this point, many people panicked and switched to cash or a more conservative investment option.

If our hypothetical fund member switched to cash in March, by April 2020 their savings would have flatlined to be worth $479,562, still well below their pre-Covid high. If they had switched to the median Capital Stable investment option, their account balance would have recovered to $528,860, line ball with their pre-Covid high. Not much of a return over three years but at least they would have slept a little easier.

However, if they had stayed the course and remained in the Balanced option their account balance would have recovered to $610,259 by April 2023. That’s well above their pre-Covid high and slightly above the next peak of $610,000 in late 2021.

A similar lesson awaited those who lost their nerve during another period of market volatility in 2022. If our hypothetical fund member switched from their Balanced option to a cash or Capital Stable option in September 2022, their balance in April 2023 would have been $571,268 and $590,993 respectively. This is well below the $610,259 they would have had if they had sat on their hands, and well below the pre-Covid and late 2021 peaks. 

Source: SuperRatings

But what would have happened to someone who retired in March 2020? 

Once they shifted from accumulation to retirement phase, they would have been forced to start withdrawing income from their depleted savings. Depending on the size of their balance, they could run the risk that their money would run out earlier than planned.

And if an aversion to risk led them to choose a cash option, they would limit potential future growth in the value of investments supporting their super pension.

This simple illustration highlights three concerns for members close to or in retirement:

• Timing, also referred to as sequencing risk. Learn how sequencing risk affects your retirement
• Choosing the right investment mix for your risk tolerance and stage of life
• Having access to cash for living expenses if the market tanks.

Choose the right investment mix

Experience teaches us that investors often react to a falling market by switching out of shares into cash at or near the bottom of the market. Not only do you risk crystallising your losses, but you also miss out on the upswing that inevitably follows.

While the Covid pandemic wiped 37% off global sharemarkets in February/March 2020, the falls were much lower for well-diversified super funds. Even so, funds reported members switching to cash and conservative investment options throughout March and April that year.

This was a repeat of investor behaviour during the GFC in 2007–08, after which many did not return to their previous investment option for years, if at all. In the long run, they would have been better off staying the course.

According to SuperRatings, the median annual return for Balanced pension funds (60–76% growth assets) was 7.8% in the 10 years to December 2024. The median annual return for Capital Stable pension options (20–40% growth assets) was 4.9% over the same period. That’s an impressive result for a decade of extreme market volatility, and well above inflation, which averaged around 2.7% per year over the period.

Resist the itch to switch

SuperRatings executive director, Kirby Rappell says anecdotal feedback from super funds is that roughly half of those members who switched to cash in March/April 2020 had switched back to their previous investment option by September. Unfortunately, many would have missed the best of the upswing, while members who remained on the sidelines lost even more.

“The challenge is not just when to switch out but when to switch back in. It’s hard to time the markets – if it was easy, we’d all be doing it,” says Rappell.

Research by Fidelity shows the financial cost of missing out on just a handful of the best days for the share market over a given period. 

Take the 21 tumultuous years from October 2003 to November 2024, a period that contains the GFC, Covid, the war in Ukraine and Gaza, and a period of high interest rates and inflation.

A hypothetical $10,000 invested into the ASX 200 Accumulation Index (share prices plus dividends) on 30 October 2003 would have grown to $63,097 by 27 November 2024.

Missing the ten best days during this period would have reduced returns by $25,708 to just $37,389. Ouch!

Of course, most super members are invested in a well-diversified fund which dampens the effect of a big fall in any one asset group, such as shares. This is another reason to be cautious about making impulsive decisions to shift your super to cash after a share market fall. As the saying goes, act in haste, repent at leisure.

So what is the potential cost to your future retirement income of switching your super to cash during a period of market turmoil and not switching back for some time, if at all?

The long-term cost of switching

Modelling by Willis Towers Watson found that switching from a Balanced investment option to cash in March 2020 and not switching back for ten years had a greater impact on retirement outcomes than taking $20,000 in early release payments or being unemployed for three years.

After modelling outcomes for hypothetical individuals of various ages and income levels, the study found that switching is particularly damaging for older members on middle incomes. This reflects the impact of investment returns in the ‘retirement risk zone’ in the years immediately preceding and after retirement.

As the table below shows, someone aged 60 on a middle income was on track to have retirement income equivalent to 94% of the ASFA comfortable standard to age 90 pre-Covid. But switching would reduce this to 76% of the comfortable standard. (ASFA’s estimated budget for a comfortable retirement is currently around $73,000 a year for couples and $52,000 for singles.)

By comparison, members aged 30–40 would exceed the comfortable retirement income standard despite switching, while a member aged 50 would achieve around 96% of their retirement income target.

Impact of switching on achieving a ‘comfortable’ retirement

	Age 30	Age 40	Age 50	Age 60
Pre-Covid	117%	107%	102%	94%
Post-Covid (after switching)	111%	103%	96%	76%

Source: Willis Towers Watson, modified by SuperGuide

While higher income earners have more to lose in dollar terms by switching, their greater super balances mean they would still easily meet the ‘comfortable’ retirement standard. Whether this would be acceptable to wealthier individuals is debatable.

Lower income earners have less to lose in dollar terms and overall impact on their retirement income thanks to the Age Pension. For example, a 60-year-old low-income earner would have been on track to achieve 68% of the comfortable retirement standard pre-Covid, and 63% post-Covid after switching from a Balanced option to cash.

Know your risk tolerance

Financial adviser Russell Lees, founder of independent advisory firm Kauri Wealth, says investors should ensure their portfolio is aligned with their risk profile.

This is always the case but doubly so for anyone who is invested for the best of times and would find the worst of times difficult to tolerate.

“Be aware of your risk tolerance and check that your asset allocation is appropriate, so you are not exposed to emotional decisions at the wrong time. Choose good-quality investments with heaps of diversification and be prepared to make changes to your asset allocation when needed,” he says.

Be prepared to adapt

While constant tinkering with investments is not recommended, that doesn’t mean you shouldn’t adapt to change.

Generally, knee-jerk reactions after a big market fall are a mistake, but there may be times when it makes sense to alter your asset allocation or rebalance your portfolio.

For example, after a period of strong returns in one asset class, your target asset allocation may be out of whack, so it may be prudent to take some profits from your top-performing asset class if it’s now overweight and reinvest the funds in underweight asset classes. This also ensures you sell high and buy low, instead of the reverse.

Even in the best of times, many people move to a more conservative investment option as they near retirement. While this is a widely accepted strategy, it’s important to maintain a significant portion of your retirement savings in growth assets to ensure your money lasts the distance.

Assess your liquidity needs

For retirees, another lesson from Covid and the GFC before it was the importance of having enough cash to cover living expenses during a prolonged market downturn. Failure to do so may mean you have to sell assets at rock-bottom prices.

So work out what your living expenses are likely to be for the next year or two and set this amount aside in cash and other liquid investments. People with their own self-managed super fund have more flexibility to create their preferred asset mix and allocation to cash.

Members of public offer funds may be restricted to choosing from a menu of pre-mixed options, although some funds allow you to hold investments in cash and term deposits.

Some super funds offer a pension option that holds a portion of your account balance in cash so pension withdrawals can be made from your cash account. You can then leave a high proportion of your pension account in a balanced option which can be left to grow over time and still sleep at night.

This approach is often referred to as a ‘bucket’ strategy.

Plan to plan

The best plan for a market downturn is to have a plan you can stick to. Choose an asset mix that reflects your risk tolerance and, if you are in retirement phase, make sure it provides the short-term cash and longer-term growth you need to live well for years to come.

If the market tanks when you are close to retirement, you may need to adjust your plans to the new reality. Depending on your circumstances, you could choose to:

• Retire on a slightly lower income if you have more than enough super and other financial resources for your needs
• Make additional super contributions to rebuild your balance within your annual contribution limits
• Work a few years beyond your preferred retirement date, or continue working part time, if that is feasible.

These are complex financial and lifestyle decisions. If you feel you need advice, then look for an independent financial adviser.